Black Friday, the promo bonanza imported from the U.S., threatens to squeeze margins of UK retailers for another year, after they scrambled just weeks ago to keep consumers kept shopping after the Brexit vote.
Traditionally Black Friday, the day after Thanksgiving, is one of the busiest days for US retailers. In the last 6 years, this tradition has crossed the Atlantic and is now a feature of the retail year as much in the UK as it is in the US.
However, this year there have been some concerns about the impact it could have for the key retailers’ bottom lines as we start the festive shopping season. A few retailers are starting to question the wisdom of discounting during their busiest periods. Take Asda, owned by US retail giant Wal-Mart, it is avoiding Black Friday promotions altogether, saying it offers enough promotions throughout the year. In contrast, Amazon has shifted the scope of Black Friday, incorporating Cyber Monday and a Black Friday Deal Store, which runs until December 22nd. Thus, the impact of Black Friday’s sales may not be as large as it once was.
Perhaps more worrying for some retailers is the evolving shopping habits of millennials, a key demographic cohort for the retailers ranging from their mid-30’s to the teens. There have been reports that millennials, who tend to shop online and on their phone or tablet, sometimes impulsively, don’t hold Black Friday in the high regard it was once met with. Take electronic goods; due to the competitive nature of this market and price comparison websites, you can often find promotions on big ticket items like electrical goods all year round.
Also, some question the wisdom of Black Friday. Some consumers may hold off from making a purchase until Black Friday, which is traditionally a low margin day for retailers. Thus, although Black Friday is often noted as a major day for the retail sector, it can cause more harm than good. With retail sales already bouncing back strongly in the UK, last month sales rose by 2%, it appears that Brexit fears and concerns about a future rise in inflation have not impacted the UK consumer yet. Instead, the biggest impact from Black Friday could come in the form of inflation. If some retailers are holding weeks of deals, like Amazon, could this weigh on inflation down the line? Considering CPI fell back from 1.1% to 0.9% in October, further downward pressure on inflation may build into the final months of the year.
One thing that could help retailers this Black Friday, especially on big ticket items that are heavily reliant on imports, like electrical goods and cars, is the dramatic decline in the pound since the EU referendum. The price of imports for some of these goods is likely to rise as we move into 2017, which could persuade some consumers to make purchases in the coming days, rather than wait for January sales that may not materialise.
Overall, we think that this Black Friday is unlikely to have a major financial market impact, as the evolving nature of the retail industry along with consumer spending habits blunts the impact of a one off shopping event. However, it is still worth keeping your eye on some major retailers in the UK in the coming days, as a good or bad Black Friday could materially impact their Q4 performance. Below we take a look at who to watch including Tesco, M&S, Dixons Carphone and AO online.
Black Friday, the promo bonanza imported from the U.S., threatens to squeeze margins of UK retailers for another year, after they scrambled just weeks ago to keep consumers shopping after the Brexit vote.
And whilst British shops have largely contained the hit from the one section of the economy that’s already been dented following by the referendum—prices manufacturers pay—retail mania, even just for a day is something many of them say privately they’d prefer to avoid.
This shift started last year when record revenues were seen but store-based turnover was weak or even lower year-to-year, as shoppers were put off by bad weather and bad memories from 2014.
Key forecasts for this year from PwC:
• PwC sees total UK Black Friday revenue growing 38% to £2.9bn.
• Adult shoppers intending to buy something over the weekend: 27%
• Average spend planned: £203
• Online purchases planned: 77%
• In-store purchases planned: 17%
If anything like a reflection of how the weekend pans out, the profile would favour retailers with strong online operations and could even enable them to retain reasonable margins on the day given the implied lower overheads of web sales.
Dixons Carphone has notably said for the last few years that it carefully plans and targets promotions with global suppliers, enabling wholesaler and retailer to achieve a sales boost while maintaining profit margins. And some of its rivals are following suit. Additionally, Dixons Carphone, Argos (owned by Sainsbury’s) Tesco, and others have indicated they will stretch promotions over a week or two to smooth demand and ease supply and distribution pressures.
Given Black Friday lends itself particularly to certain retail categories more than others it makes sense to focus on certain key groups.
Dixons is the main one in the consumer electronics space and it can be expected once again to outperform Argos on margins. Fast-growing online rival AO Online will be a threat on Black Friday though, however, a strong performance on the day may not be enough to offset only modest like-for-like sale growth by the group as it pushes ahead with an aggressive European expansion, complete with ‘investment in price’.
Troubled Marks & Spencer, which this month said it would begin closing stores in an extensive savings programme aimed at stemming years of declining sales at its Clothing and Homeware division, will also be one to watch, given repeated logistical missteps over the festive period.
Game Digital will be eyed too as its stock has suffered following Black Friday’s of the last few years due to intense competition in the electronic games space of which Game is one of the few outlets with bricks ‘n’ mortar baggage.
Thus, as the impact of Black Friday on the UK retail landscape evolves, we may not see much of an impact on the retail sector’s share prices in the short term, but their Q4 trading statements could be a major cause of volatility, potentially to the downside, if retailers complain about the negative impact of Black Friday on revenues once again.
