As we enter the spring retail season, retailers are continuing to re-engineer their customer-centric strategies based on the lessons they learned last year.
According to the new Retail Index: 2017 Year-in-Review and 2018 Outlook report conducted by DynamicAction, European retailers held steady on promotions and lessened their reliance on margin-eating markdowns in 2017, with orders using a promotions label shot up on an average by 2%, while orders using a markdown were down on an average by 27%.
As a result of promotions, retailers in Europe saw sales increase by 5% last year, whereas markdowns brought margins down by 34% in 2016.
This means that margins were impacted more in 2017 by promotions such as buy one, get one free (BOGOF), gift with purchase, site-wide sale and less by markdowns including product discount, price reduced from £100 to £60 in comparison to the previous year.
The report reveals that in 2016, European retailers continued to increase marketing spend in an attempt to attract new customers and retain existing ones. Yet, retailers have not seen a fruition they anticipated.
In fact, marketing cost grew by 57% in Q1 2017 in comparison to Q1 in 2016, with weeks as high as 142% shot up early in the year. Retailers ended last year at an average of 5% growth in marketing cost for the year, largely counteracting high early spending with a marked decrease at the end of the year; 15% down in December vs 2016.
New customer orders last year dropped on an average by 2% and shoppers converting from first to second-time buyers were down by 9% in 2017.
Conversely, despite a reduced number of new customers, first-time buyers were the most profitable segment of buyers for European retailers last year. They were on average 10% more profitable for retailers than 11+ time buyers.
When it comes to returns and shipping strategies, last year saw European retailers rush to keep up with consumer expectations. Some of the costlier shifts in consumer expectation show a need for a better logistics and shifted retail economics.
Thus far, returns are impacting European retailers more than ever, with the value of returns raised by 33% in 2017. Whereas, the consumers’ expectation to receive free shipping has continued to rise, with an average of 9% growth in orders shipped free last year.
To prepare for ever-demanding clientele, last year, European retailers braced themselves with more inventory than in 2016, with a 25% expansion of product inventory in 2017.
This year, retailers have started 2018 with a significantly higher level of inventory than last year, with a 65% increase in inventory value thus far.
“As we analysed the results of 2017, it’s clear that in order to boost profits, maintain industry strength, and satisfy customers’ true expectations, retailers and brands must recognise shifting consumer behaviour and adapt accordingly. Shoppers have come to expect discounted merchandise as the new ’full price standard.’ If it isn’t at least 30% off, they don’t consider it a good deal," says Michael Patterson, managing director – EMEA at DynamicAction.
He adds: "In Europe, the average percent of online orders bought on promotion or markdown during the 2017 festive season was 26%, an increase over 2016, indicating that promotions are steadily climbing each year in Europe as retailers engage in traditionally American promotional efforts like Black Friday and Cyber Monday. However, North American retailers’ woes demonstrate that chasing them down the promotional path is not the way to protect margins. Moving forward in 2018, it’s essential that European retailers reconsider which customers are truly their ‘best customers’ through the lens of profitability, balance inventory levels to focus on those products customers are actually viewing and purchasing, and develop strategies for effective markdowns."
Patterson concludes: "Increasing retail returns and consumers’ expectation for free shipping offerings result in costly logistics advancements and shifted retail economics. A core driver of retail success in 2018 will be leveraging connected customer data to understand who the most profitable customers are, what their true desires are and adjusting product offerings and promotions accordingly.”