NEW YORK, United States — After a tumultuous 2017 with a record-breaking number of store closures and bankruptcies in the US, retail’s great transformation is anything but over. However, end-of-season markdowns — which accelerate the offloading of leftover inventory — offer a boost not only to those that are struggling, but also to those making some headway.
In November 2017, US retail sales were $492.7 billion, up 5.6 percent from a year earlier, according to the Department of Commerce. The jump was spurred by holiday shopping’s brisk start online. On Black Friday alone, e-commerce sales hit $5 billion, a 17 percent increase year-over-year, beating records.
But while the industry has long relied on aggressive markdowns to boost holiday shopping, overdoing discounts may sacrifice long-term margins and dilute brand image.
Retail analytics company Edited, which analyses online sales of over 11,000 fashion brands and retailers, found that the US luxury industry experienced the highest volume of discounts on Black Friday, with 46 percent of products discounted. (Almost a quarter of those goods were discounted by 40-to-50 percent.)
The US luxury industry experienced the highest volume of discounts on Black Friday, with 46 percent of products discounted.
In the mid-priced market, 24 percent of items were discounted, while only 20 percent of mass-market items were marked down. The top five biggest retailers by number of products discounted by 40 percent or more by the first week of December were Bluefly (an off-price outlet), Farfetch, Saks Fifth Avenue, Neiman Marcus and Ssense.
Traditionally, retailers prefer to hold off on markdowns until later in the year, as discounting too early and too deeply can shrink already squeezed profit margins. Sometimes, it can also cheapen the perception around a brand or retailer. However, for the past decade or so since the financial crisis, post-Thanksgiving discounting has become commonplace.
This year, many retailers — including luxury department stores Neiman Marcus and Saks Fifth Avenue, and e-tailers Net-a-Porter and Moda Operandi — began discounting in the days leading up to Thanksgiving. Brands including Balenciaga, Tom Ford and Prada were already reduced on Black Friday via their own websites and e-commerce sites alike, according to Edited. Michael Kors was the brand with the most products discounted by over 50 percent by the first week of December. The company did not immediately respond to a query regarding the differences in markdowns.
Brands including Salvatore Ferragamo, The Row, Fendi and Stella McCartney were not marked down until the first week of December, Edited reported. A few brands, including Gucci, remain full price, with products selling out anyway.
Early discounts are “generally not a positive sign,” said Robert Burke, founder and chief executive at Robert Burke Associates. “The retailers would want to sell full prices as long as they could, meaning merchandise is moving well at full price.”
Sometimes, early discounts reflect overall malaise at a retailer and have little to do with individual brands. And other times, the store buyer has simply made a bad call about a specific style. “That is the nature of buying. No one has a crystal ball,” Burke said. “You certainly make some mistakes, but those are generally gaged.”
Labels with good sell-through and limited distribution can take a hard stance on markdowns, negotiating up front when their products are permitted to be discounted during the sales season.
While the ultimate goal is to remain full-price for as long as possible, “What we see happen more often now is that brands are being selective about what products they put on sale,” Burke said. If a piece has sold well, it will be kept at full price. Take, for instance, Balenciaga’s Bazar Python Shopper XL, which is reduced by 50 percent on the brand’s site, while Graffiti and leather shoppers remain at full-price. The brand did not immediately respond to a query regarding the differences in markdowns.
The ultimate goal is to remain full price for as long as possible and to train the customer to not buy on sale.
“Whether there was a poor performance and excess of stock, or it was a great performance, there’s always a discussion with [department stores and] brands about when to break sale,” Burke said. “A retailer can’t be shortsighted in the sense of a quick markdown in the risk the brand may not sell with them going forward.”
The case certainly holds true for brands like Saint Laurent and The Row, which both went on sale on e-commerce site Net-a-Porter on December 1 and 2 respectively, while Prada and Miu Miu were marked down on Thanksgiving, and Fendi, Marni and Balmain followed the subsequent week, according to Edited.
Of course, positive gross sales generated by holiday season discounts don’t necessarily equal high margins. While retailers saw a 36 percent lift year-over-year in the number of items that sold out at first discount on Thanksgiving Day through Cyber Monday, the effects on retailer margins were negative. The average price of luxury products sold in November 2017 was $661, compared to $780 in November 2016.
Is there a sweet spot between Gucci’s non-markdown stance and desperately deep discounting? “The ultimate goal is to remain full price for as long as possible and to train the customer to not buy on sale,” said Burke. “What Gucci is doing is such a bold move, and they’re in a position to do it. They’re a highly desirable brand, and have differentiated.” But for the rest, a combination of scale and approach — that is, being selective with marked-down items and avoiding early sales — is key.