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Back to Black: what slimmer holiday discounts taught us about the state of U.S. retail

Jharonne Martis
Jharonne Martis
Director, Consumer Research, Refinitiv

Even though shoppers love a Black Friday bargain, supply-chain inflation has affected the size of discounts retailers offered this year. However, our analysis suggests shoppers were happy to spend after being hampered a year ago by COVID-19.

  1. Retailers have been hit by supply chain shortages following the COVID rebound and have pared down Black Friday offers.
  2. The average promotional discount was 33.4 percent – lower than the YTD average and below the 37 percent mark seen since September.
  3. But the latest e-commerce retail sales numbers show that Q3 2021 online spending as a percentage of total retail sales has come down, therefore suggesting consumers spend more at brick-and-mortar stores.

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Earlier this month U.S. discount retailer Dollar Tree abandoned its one-dollar pricing strategy and hiked prices to $1.25 on average.

It’s an example of how the post-COVID-19 supply chain shock has hit retailers’ bottom lines. As the busiest weeks for shoppers loom, how did inflation affect the discounts traditionally unveiled on Black Friday?

To find out, we collaborated with StyleSage Co., which analyses retailers, brands, online trends, and products across the globe.

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Black Friday discounts weaken

The data showed that the Black Friday average promotional discount was lower than in previous years. It is also lower than it was two months ago and its YTD average, as per the StyleSage data.

For the week ending 21 November, the average promotional discount was 33.4 percent, compared with two months prior at 37 percent. This level of promotional discounting was also lower than the YTD average of 38.2 percent and is traditionally higher among U.S. retailers, entering the holiday season.

Additionally, as retailers reported Q3 earnings, they noted a spike in cost of goods sold (COGS) and a drop in gross profit margins from a year ago.

The data also illustrated that despite the increase in price, retailers are seeing higher sold-out rates, suggesting that inflation is not holding back consumer spending.

Cost of goods hitting gross profit margins

Retailers are already battling higher COGS. In Q3, earnings reported to date, 111 retailers mentioned inflation worries, and 142 mentioned the supply issues.

The Big box retailers that reported Q3 2021 earnings saw a spike in COGS from a year ago, most likely due to inflation and the supply crisis (see Figure 1). Home Depot and Lowe’s were the only two on track to see a decline in COGS, as general inflation was mostly offset by lumber price deflation.

For the holiday season, most retailers’ COGS are expected to rise even further than the previous quarter. Macy’s COGS is expected to see a jump of 69.2 percent from Q3 to Q4 2021. Meanwhile, Kohl’s, Target, and TJX are also on track to see double-digit growth from Q3 to Q4 2021.

This rise in COGS is also expected to cause a fall in gross profit margin this holiday season.

The Q4 2021 gross profit margin estimates for the most part show a decline from Q3 2021.  Higher cost of goods sold and lower margins might not entice retailers to offer the traditionally high discounts they have offered in the past.

Figure 1: COGS and gross profit for Q3 2019 – Q4 2021 estimates

COGS and gross profit for Q3 2019 – Q4 2021 estimates
Source: Refinitiv I/B/E/S

How have sold-out rates been affected?

Higher prices and less discounting does not appear to have hampered sales. A combination of supply-chain constrained inventories and post-lockdown pent-up consumer demand gave retailers a unique but powerful opportunity to pull back on aggressive discounting.

The research shows that the number of products sold out in November 2021, compared with the holiday shopping season from previous years, increased considerably to 15 percent from an average of 4 percent in the previous two years (see Figure 2).

Please note, “sold out” includes items that went completely out of stock at any point during that period, even if they were then restocked.

Figure 2: Sold-out rates by sector 2019-2021

Sold out rates by sector 2019-2021
Source: StyleSage Co.

Among the top sold-out categories are jumpsuits & rompers (24 percent), dresses (24 percent), and backpacks (22 percent).

U.S. mall stores have been struggling for some time, even ahead of the pandemic, including department stores.

Less than half (41 percent) of the online merchandise for U.S. mall stores was on sale this week. This discount penetration (how much of the assortment is on sale) is below where it was during Black Friday last year (59 percent). Moreover, it is the lowest Black Friday discount penetration ever, since StyleSage started tracking this data in 2016.

The current U.S. mall average percent discount (15 percent) is also down from one year ago (21 percent), and it’s also the lowest Black Friday discount level since 2016.

Refinitiv holiday sales forecast

The holiday season is in motion, and analysts polled by Refinitiv are becoming increasingly more bullish on the season.

The Refinitiv Same Store Sales Index is looking at a 7.1 percent growth estimate for Q4 2021, below 10.4 percent Same-Store Sales (SSS) growth last year. Despite difficult comparisons from a year ago, the discounters, home furnishing and home improvement are expected to post the strongest SSS growth at 7.3 percent, 5.4 percent and 3.3 percent, respectively.

Figure 3: Same store sales sector estimates – Q4 2020 vs. Q4 2019

Same store sales sector estimates – Q4 2020 vs. Q4 2019
Source: Refinitiv I/B/E/S

Figure 4: Retailers facing difficult SSS comparisons – Q3 2020 actual vs. Q3 2021 estimate

Retailers facing difficult SSS comparisons – Q3 2020 actual vs. Q3 2021 estimate
Source: Refinitiv I/B/E/S

Due to store closures last year, many retailers are facing easy comparisons from a year ago. As a result, most retailers are expected to report double-digit comps, which are not a true indication of organic business growth.

Figure 5: Retailers facing easy SSS comparisons – Q3 2020 actual vs. Q3 2021 estimate

Retailers facing easy SSS comparisons – Q3 2020 actual vs. Q3 2021 estimate
Source: Refinitiv I/B/E/S

For more on inflation’s impact on other sectors, download the report – LINK?