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Does Anyone Expect to Pay Full Price Anymore?

Post-recession, retailers started discounting as a way of winning over a more cautious consumer. As Black Friday caps off a season of slow sales, BoF asks, is discounting bad for business?
Source: Shutterstock
  • Helena Pike

LONDON, United Kingdom — You're in the middle of a Black Friday sale and you just snagged a bargain on a party dress. Your heartbeat quickens; your awareness is heightened. Although you can't see it, your brain has begun releasing neurotransmitters, such as serotonin and dopamine, triggering a euphoric, adrenalin-like rush.

Fashion consumers are discount shopping more than ever. And while it was retailers that first encouraged them along this path, with retail margins and full-price sales now suffering, those same businesses may have shot themselves in the foot.

In the US, in particular, the run up to this year's holiday season has not been happy. Many major department stores have seen their shares plummet, after announcing consistently disappointing sales. Shoppers, some say, are holding out for Black Friday, the day following Thanksgiving when retailers traditionally offer large discounts. “Does anyone really expect to pay full price for anything anymore?” asks Andy Mulcahy, editor of IMRG.

Heavy discounting: the dangers

Heavy discounting can be a downward spiral for retailers. By continually lowering prices, retailers risk falling down a rabbit hole, as consumers become conditioned to shop only during sales. “Consumers get trained to expect really significant reductions,” explains Kit Yarrow, consumer psychologist and professor of psychology at Golden Gate University. Nowadays, “a lot of consumers put off purchases like winter coats or electronics until this time of the year, because they feel like they’re going to get a better deal.”

“It is a dangerous tactic,” agrees James Lovell, European retail commerce solutions executive at IBM. “If I’m going to start to condition my customers to only shop on a four-day window in the run up to Christmas, because it’s discounted, then I run the risk of eroding margins at what should be the most profitable time of the year.”

Indeed, this was exactly what happened to retailers in the UK last year, where Black Friday launched for the first time, triggering a sales drop in the weeks preceding it, a period in which retailers traditionally expect the uptick of the Christmas shopping period to begin. When retailers started communicating to consumers that Black Friday discounts were on the way, “What they did was say to people, ‘Don’t shop with us now, shop with us on Black Friday,’” says Mulcahy. “Inadvertently, they stopped sales.”

Panicked, many actually ended up offering even greater discounts, further diminishing their margins. “People sold quite a lot of stock, but they weren’t getting the kind of mark-up that they would have liked,” explains Mulcahy.

A similar picture is emerging this year. Full-price trading for the Autumn/Winter period has been “drastically shortened,” as customers defer purchases and sales start earlier, says Roberta Benteler, founder and managing director of London-based luxury etailer Avenue 32. “The fourth quarter is virtually unrecognisable from the same trading period five years ago,” she says.

The origins of Black Friday

Before the recession, sales were generally bi-annual, end of season events, a way for retailers to clear stock before new collections arrived. Stores supplemented this strategy with additional promotions, but it was only after 2007 that sale days like Black Friday began in earnest.

“It is really a hangover from the recession,” explains Philip Benton, senior retail analyst at Euromonitor, who says that consumers suddenly became more prudent with their purchases. “The whole global meltdown actually made them think again about how they spend,” agrees Tsivrikos.

“A lot of retailers that are around today experienced a huge scare during the recession,” says Yarrow. “They were really fighting to stay alive.” In an effort to increase footfall and shift excess inventory, they slashed prices — and have been doing so ever since.”

The rise of the savvier shopper

Post-recession discounting also helped create a savvier shopper. “We’ve witnessed a new wave, almost a new breed of consumers,” says Tsivrikos. “They want to be good with money. They want to actually know how selling works.”

This change in consumer mindset was further compounded by the emergence of online shopping, as e-retailers like Amazon not only gave customers access to discounts all year round, but also enabled them to  shop around for better deals. “We started shopping online, driven by discounts,” says Martin Coedo Mestre, commerce strategy leader at IBM. As a result, the balance of power between company and consumer began to shift. Now, “people are in command,” Mulcahy says.

There was also a growing off-price retail sector — made up of outlet stores, discount retailers and companies dedicated to selling old or surplus stock at discount — to compete with. In the US, sales of off-price footwear and apparel have increased 40 percent since 2009, according to estimates by RBC Capital Markets. In an increasingly crowded, increasingly discounted market, retailers wanting to compete for custom had to offer more for less. “Five years ago, luxury companies would not admit that they sold online or in discounted, flash-sale stores. Now, they do it pretty openly,” says IBM’s Coedo Mestre.

Psychology of sales shopping

So what is the allure of going on sale? Retailers are well aware that shopping in sales feels good — and not just because you’re saving money. David Lewis, a neuropsychologist and the chairman of Mindlab, a neuroscience and communications insight firm, says that, for some shoppers, getting a good deal can feel like “a kind of buzz on steroids.” Sales seize on what Lewis describes as “fun fear” — the fear that you might miss out on a bargain — followed by a “pleasurable swell of excitement” at the moment of purchase.

Shoppers often unconsciously approach sales from “an evolutionary perspective,” says Dimitrios Tsivrikos, consumer and business psychologist at University College London. “They’re becoming hunters and gatherers again… fighting for resources, wandering around taking everything off the shelves.” To tap this fear of missing out, retailers heavily promote Black Friday as a “one-off” opportunity to get better-than-ever discounts. But are the risks of discounting really worth it?

Black Friday: golden opportunity or vicious cycle?

This year, a few retailers have turned their backs on Black Friday. In the US, outdoor clothing chain REI will keep its doors shut and stop processing online orders, but still pay its staff. President and chief executive Jerry Stritzke told press that he wanted to encourage REI’s workers to “be outside,” a decision he said was more authentic to the brand. Walmart-owned British supermarket Asda, where, last year, fights broke out amongst customers in some stores over discounted merchandise, also announced it was pulling out. (Macy’s and Kohl’s, conversely, will open for Black Friday shopping at 6pm on Thursday.)

Other brands have found ways to create buzz around Black Friday, without actually discounting. “Obviously, when there’s a lot of traffic in stores, it’s important that our brands capitalise on that opportunity,” says Chris Good, president of the Estée Lauder Companies UK & Ireland. Brands owned by the company — such as Jo Malone, Bobbi Brown and Crème de la Mer — use incentives like personalised engraving and illustration on packaging, limited edition products and gifts with purchase, to create a sense of value. “We are offering the consumer something that’s very differentiated to the normal experience you would have,” says Good.

However, many find themselves in a catch-22. “Sales are so much more common, even throughout the year, that people are having to compete,” says Euromonitor’s Benton, who explains that retailers are worried “about where the consumer is going to spend their money, because there’s much more competition and choice.”

Indeed, now that customers have learned to expect large discounts on Black Friday, it is very difficult for stores to break the cycle of sales. Retailers "can try and rationalise in terms of discounts — to try and bring them down a bit," says IMRG's Mulcahy. However, "If your lead competitor says, 'We're going to do 30 percent off and were going to do it on everything,' then it puts a lot of pressure on you to do it yourself."

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