Hooked on discounts

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Hooked on discounts
Hooked on discounts

Online commerce led the charge during holiday 2010, as both e-tailers and traditional retail merchants laid on the offers. Online sales growth had been outpacing those of most retail categories throughout the year, as the sector continued to grow its share of the retail marketplace, and e-commerce clearly influenced both marketing efforts and shopper behavior during the year-end selling season.

There were still plenty of shoppers shivering in the pre-dawn cold at mall parking lots, waiting for the early-morning sales on the day after Thanksgiving, but this past Black Friday, many also checked their smartphones and iPads, looking for a better deal online — if they hadn't done it already the day before.

“It's kind of escalating warfare, if you think about it,” says Sherif Mityas, a partner of retail consulting firm A.T. Kearney. “Good news for the consumer, because online retailers are really driving very aggressive promotions and activity. That's causing all retailers to have to up their game.”

The barrage of offers — sent by e-mail, newspaper circular and direct mail — was constant during this holiday sales season. Retailers pulled out all the stops to coax still recession-wary consumers to spend on gifts.

E-commerce jewelry site Blue Nile offered “Holiday Exclusives” up to 44% off every day from the Monday after Thanksgiving until the day before Christmas Eve. At the other end of the price spectrum, Toys “R” Us provided deals online and in store every day from the release of its annual “The Great Big Christmas Book” on October 31 (also produced in an iPad version for the first time last year) until the week before Christmas, says Greg Ahearn, SVP of marketing and e-commerce at Toys “R” Us, Inc.

The toy retailer added several new digital capabilities to its holiday marketing plan including coupon barcode scanning, a mobile messaging program and social media efforts, he says.

Discount mastery

Despite a seemingly nonstop deal-of-the-day bonanza this past holiday season, retailers remained careful in determining how to position price cuts. Click to read more.

Retailers' marketing strategies worked. Holiday shoppers broke their two-year frugality streak and spent $584 billion on gifts in November through Christmas Eve — 5.5% more than the same time the year before, according to MasterCard SpendingPulse.

“2009 was a year of gaining some stability; 2010 is really a step towards growth again,” says Michael McNamara, VP of MasterCard SpendingPulse, which tallies sales by credit cards and other payment forms.

But the retailers' intensive online marketing and shoppers' new frugality have changed the environment since the start of the recession. Shoppers have become savvier about sifting through offers — thanks to online comparison shopping and research, even on offline purchases — and have been trained by the constant flow of sales to wait until the last minute to get the best deal on gifts, knowing retailers will oblige.

Merchants say they won't give up those habits even as the recession eases, while analysts caution that this tactic is blunting the effect of discounts to motivate shoppers and increasing the pressure on merchants to find other ways to goose sales beyond price cuts. They argue that this past holiday season could mark the peak of one-day sales and doorbusters as holiday marketing tools.

“The question is whether Black Friday and Cyber Monday become a dead issue after this year,” says Bradley Honan, SVP of StrategyOne, an Edelman unit that carries out strategic research and polling.

Season of discounts

It was a heavily promotional holiday, indeed, led by the online and multichannel retailers. After years in which Black Friday was the alpha and omega of holiday promotions, merchants inundated consumers with one-day sales and other enticements in 2010.

Cyber Monday, the online sales promotion on the Monday after Thanksgiving, begat Free Shipping Day, a promotion on December 17 where hundreds of retailers offered free shipping on items ordered online, guaranteed to arrive in time for Christmas.

This year, CashStar, an online gift card platform, declared “Click it to Gift It Day” on December 23, the zero barrier for ordering electronic gift cards online in time for the Christmas holiday. Nearly 50 retailers including Gap Inc., The Home Depot and Williams-Sonoma participated in the promotion, offering deals such as discounts, charity drives and other perks.

In many instances, online retailers and the websites of multichannel retailers were steering the overall pace and shape of holiday promotions. Witness the wealth of early Black Friday deals on Thanksgiving Day, and the number of merchants such as Macy's, Wal-Mart and Sears that chose to open all or some stores on that day, after seeing the sales totals their websites racked up last year by offering early doorbusters on the holiday.

“Online [commerce] — because it's open 24 hours a day, seven days a week — really gives you a signal as to what your customer wants to do and is doing,” says David Friedman, president of marketing at Sears Holdings Corp. “When you see people shopping online on Thanksgiving Day, that tells us that they'll be interested in shopping in stores as well.”

Sales on Black Friday were relatively flat over last year, but the holiday weekend beat expectations, with sales of $45 billion, thanks to an increase from sales on Thanksgiving, according to figures from the National Retail Federation.

“It wasn't Black Friday that was the big shopping deal this year; [retailers] started promoting deals all week, even the weekend before,” says Nikoleta Panteva, retail analyst at consulting firm IBISWorld. The pace continued throughout the holiday season, with e-commerce leading the brick-and-mortar retailers into more discounts, she says.

“The fact that deals are available online is a huge, huge driver,” Panteva adds.

The retailers say the numbers speak for themselves. According to MasterCard SpendingPulse, Americans spent $36.4 billion online during the period of November through Christmas Eve, a 15.4% growth rate over the 2009 holiday season. More significantly, McNamara says this is real growth, not due to easy comparisons to a depressed year-ago period, as in some brick-and-mortar sectors.

E-commerce is fullfulling its potential, explains McNamara, who notes it racked up 17% to 18% of retail market share during the holiday season.

“It's almost like going back to the future,” he adds. “You're seeing some of the realization of the dreams of the late ‘90s.”

Shoppers did respond to each of the holiday promotions: comScore data shows online sales on Free Shipping Day were up 61% over the year before, Thanksgiving sales were up 28% and Cyber Monday was up 16%.

‘Sell it or eat it'

Some observers fear a backlash against the barrage of one-day sales, buy-one-get-one and other promotional offers retailers tried.

They argue retailers are training consumers to hold off on purchases until they see sharp discounts, and are damaging profit margins.

“E-commerce [merchants] have been very successful. They've created a real problem for the brick-and-mortar stores,” says StrategyOne's Honan.

In a poll taken in early December, StrategyOne found 69% of shoppers were still waiting to find better deals on holiday gifts.

“It's a game of chicken,” says Eric Karson, associate professor at the Villanova School of Business.

The shoppers know the retailer will usually cave in, he says, because if the inventory doesn't sell by December 25, it will get marked down for clearance the day after.

“The retailer is going to blink,” Karson adds. “It's sell it or eat it.”

Shoppers are much savvier now, and are using their pricing power, say experts. The International Council of Shopping Centers found total retail receipts rose  0.5% during the week of the Black Friday sales, then dropped 2.1% the week after, once the sales were over.

“The retailers, by discounting so aggressively so early on, are playing into consumers' hands and consumers are saying, ‘We're not going to fall for this so early on in this season,'” says Honan. “What consumers are saying is there is discount fatigue.”

StrategyOne's survey found more than half of holiday shoppers had held back on buying something in early December because they didn't like the price.

“The whole concept of the deal is it has to be exceptional,” says David Mamane, president and CEO of online jeweler MyJewelryBox.com. “Is it exceptional if it's every week?”

Now that shoppers are trained to seek out the big sales, they will shop on those big events and ignore others, he adds.

Mamane experienced that phenomenon this past holiday season, when MSN offered his company an attractive rate on an advertising package as a test on the Friday before Black Friday. He decided to run an early Black Friday promotion, but the deals did “terribly.” Exactly a week later, the company set a one-day sales record with the exact same items, beating the previous sales record by 25%.

“It just made us understand a little bit more what Black Friday is,” he says. Shoppers just weren't tuned into those deals a week earlier, he adds.

“I think customers are much smarter than retailers give them credit for,” explains Mamane. “There's so much nonsense and BS out there, with people saying 50% off, 60% off and 70% off. If everybody was doing that, nobody would be in business.”

Some see this as a welcome evolution, where retailers will have to find new ways to entice customers beyond e-mailing them an offer with low prices that can be easily matched. Merchants haven't done themselves any favors there, says Honan. 

“Consumers are still looking for the best deal for the most part,” says Mityas. “But because price is so transparent [retailers] have to add other bells and whistles.”

Indeed, a survey from Deloitte found nearly half of holiday shoppers say they were smarter about prices because they comparison shop online. The survey also found that of the one in five consumers who used smartphones for holiday shopping, 56% used them to check prices. 

Driving post-sale loyalty

Multichannel merchants are adapting. Friedman points to Sears' Sunday circular on the day before Cyber Monday, which included a wrap using quick-response (QR) barcodes that could be scanned by smartphones to order some of the items online.

“My smartphone has a barcode scanner and I can tell it to take me to the Web to find a better price. How do you compete with that?” says Karson.

“Marketing is capitalizing on information dissymmetry,” Karson adds. “Now everybody has the information… I can go in my computer and get the information for 10 retailers in seconds.”

That's already spurring growth in loyalty programs and social-media-based campaigns aimed at stores' most fervent customers. During the past holiday, some merchants chose to offer rewards such as free shipping or other perks just to their social media followers, rather than discounts, says Panteva, the IBISWorld analyst.

Lands End, for example, ran a “12 Days of Twitter” campaign where it offered daily giveaways and advice from personal shoppers to its Twitter followers every day from Cyber Monday through December 11. 

“It's just targeted marketing, being able to get your message to consumers who are going to give you a return,” says Panteva. “Rather than getting people through the door, they're trying to get the right people through the door.”

Shoppers respond to loyalty programs — often better than they do to discounts, according to some marketers. A survey from Epsilon Targeting found 71% of holiday shoppers were users of loyalty rewards programs, and 11% used rewards, mostly to save on gifts.

“It provides value for customers to concentrate their shopping with one retailer, as opposed to cherry picking from all the e-retailers out there the one item they have on a good deal,” says Friedman.

Sears' Shop Your Way rewards program awards points per dollar spent in store or online at either Sears or Kmart and points are redeemed for discounts off future purchases.

With some merchants already preparing for the next holiday season, buoyed by the growth they experienced in 2010, retail observers are not forecasting the end of the holiday sale.

Yet, the move toward more efforts built on customer relationship management and less on price cuts will continue, they say, because shoppers won't be sold so easily anymore.

“Consumers are clearly conditioned to seek out and search for the best deal, and they have almost perfect information now,” says Mityas.

“Now they can see every store — online and brick and mortar — and all the deals, from the comfort of their living room,” he adds. “It creates pressure on retailers to differentiate their offerings besides price.”

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