The impending holidays signal a host of seasonal staples, among them retail promotions and sweet desserts. While these might not initially seem related, they actually share many commonalities. Just like sugary treats, retail promotions are hard to resist, habit forming and indulgent. If used correctly and in moderation, both have the potential to bring happiness this holiday season — for retailers and consumers alike. However, to ensure both parties reap the benefits of retail promotions, brands must employ technology to ensure they avoid common promotion pitfalls.
A constant stream of retail price promotions is becoming the new norm — and this proves especially true during the holiday season. Along with planned promotional activity, sales and high-profile competitor deals seem to light the promotional fire. With this newly adopted “hyper-promotional” activity, as Retail Systems Research defines it, retailers need to understand the role technology plays, to avoid the hidden cost of retail promotions and ensure they’re maximizing profitability while providing a satisfying deal for the consumer.
Inventory: The Largest Hidden Cost Of Promotions
If executed correctly, promotions can lead to profitability and happy customers. But without the right technology, unanticipated hidden costs can reduce that profit — often resulting in a decrease that won’t appear in final measurements. One of the most widely used measurements of profitability is gross margin, a metric that doesn’t always pick up on hidden costs incurred.
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Quite possibly the largest hidden cost of retail promotion proves to be inventory costs. Promotions call for higher inventory levels, leading to substantial inventory carrying costs. These costs account for shrinkage, obsolescence, storage and interest on borrowed money. Carrying costs also include opportunity costs that arise when retailers have less money to spend on more productive investments, such as building stores or investing in e-Commerce expansions. If a retailer lacks the technology to correctly forecast for promotional demand, hidden costs have the potential to offset any revenue earned through promotional activity or, in some cases, even cost the brand money.
Supply Chain Execution Can Make Or Break Profitability Of Promotions
In today’s e-Commerce-driven environment, forecasting for inventory is critical to preparing for promotional activity. If proper inventory planning does not take place, retailers run the risk of customer disappointment from out-of-stock merchandise, in addition to lost revenue and gross margin.
Excess inventory at the end of the promotion will also create storage and clearance problems. Inventory carrying costs will increase, and total profits will suffer in ways that, as stated above, are unlikely to show up in gross margin results. Excess inventory also raises labor and handling costs, possibly requiring markdowns to clear it away. This scenario is especially problematic for seasonal goods because demand fades fast when the season ends.
Preparing For The Changing Promotional Landscape
In the past, brands could anticipate and plan for promotional campaigns weeks or even months in advance. They could be granular and detailed in their planning — for example, making lists of items to promote or strategically targeting subsets of stores in an area. Companies estimated how many units they were going to move and took the time to project their gross profit. At that point, marketing teams would print ads, coupons and displays.
In today’s vastly different landscape, promotions occur almost any time and on short notice. E-Commerce eliminates traditional elements of promotions, such as the isolation of specific items, merchandise categories, channels, locations or times. Secondly, nearly everyone, including customers and competitors, can see details about new promotions right away, such as through email or on social media. Traditional elements of promotions have a difficult time keeping up with the speed that e-Commerce enables.
Forecasting And Buying: Creating Healthy Habits For Better Profitability
Forecasting and buying are two sides of the same promotional coin, and like so many things in retail, balancing the two involves both art and science. On the forecasting side, with the ability to correctly predict the effect an individual promotion has on inventory, educated assumptions can be made. When promotions are running simultaneously and across multiple products, these predictions become more challenging.
Most often, retailers can’t clearly associate a sale with a specific promotion; therefore, the approach to forecasting becomes much more complex and sophisticated. Considerations must be taken to understand both the individual promotion as well as the impact of the overlapping promotional events. With modern forecasting approaches, more accurate predictions of lift can still be achieved; however, retailers must still apply their expertise to ensure the cumulative promotional impact is on track with expectations.
Trimming Promotional Costs For A Jolly Holiday Season
Trimming costs requires an appreciation of the operational effects that inventory has on the bottom line. For example, consider a buy one, get one promotion on costumes at the beginning of Halloween season, which can assume a run on costumes, requiring delivery of all of the merchandise from the warehouse at once. However, processing all of this inventory in one sitting increases both labor hours and overtime pay. An alternative option could be to buy and take delivery of items in waves, shipping items to the distribution centers in stages. This helps even out the operational impact of labor and storage over time.
To combat the issues associated with the hidden costs of promotions and to maximize profitability, retailers must pay close attention to their supply chain execution before, during and after a promotion. By doing so, they’ll have the vision to steer away from temptations and toward a healthy growth and sustained performance for many holiday seasons to come.
Scott Fenwick is senior director of product strategy for Manhattan Associates, a supply chain solutions provider.
