Director's Cut

Director's Cut: Don't Enter the Race to the Bottom

By Jackie Greene on November 13, 2018

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Jackie Greene

Jackie is the Vice President of Economics at ITR Economics, and oversees forecasting and applied research.

We’re quickly approaching Thanksgiving, and with it, Black Friday. Ah, Black Friday – that magical day when retailers battle to capture a portion of the consumer’s holiday spend.

But are retailers gaining share at the expense of profitability?

There is no denying that there is a lot on the line this upcoming Thanksgiving weekend – billions, in fact. In 2017, the average per-person spending for the holiday weekend was $335.47, up 16.0% from the prior year. And retailers thank the 174 million Americans that contributed to that total.

Online sales, as we all know, account for a growing percentage of the shopping trend. Thanksgiving Day combined with Black Friday in 2017 totaled $7.9 billion in online sales, up 17.9% from 2016, and that number will likely rise higher this year. However, competition is tough, with retailers continuously trying to best each other in their attempts to secure consumers' funds.

In years past, we’ve seen retailers opening their stores earlier and earlier to drive foot traffic. Online retailers are offering their own incentives. This year, Amazon and many other major competitors have announced that for the first time they will be offering free shipping with no minimum purchase this holiday season.

Over half of all 2017 Black Friday online transactions were through Amazon, and it looks like the company is trying new tactics to avoid losing any of that market share. But with general freight trucking costs up 9.2% from last year, are retailers going to pass this cost on to consumers another way or eat the cost? There is no one-size-fits-all answer, but one thing is clear: Forgoing profits for the sake of market share is a dangerous path on which businesses can quickly enter into a race to the bottom.

When considering your own online presence, do not get caught in this trap. Furthermore, this topic is not specific to just a particular weekend or season, but impacts your bottom line throughout the year. Do your customers know why they should spend with you over someone else? What value do you bring them better than anyone else? Do your customers value the speed of delivery, or the safety of purchasing from a known and trusted source? Market research is key to being able to avoid competing solely on price, particularly during the next few quarters as we see prices rising for consumers and producers.

Finally, do not underestimate the power of millennials. Older millennials aged 25 to 34 in 2017 spent more than any other age bracket and nearly 25% more than the average during that holiday season. Given its size as well as the fact that it is maturing into a stronger purchasing position, the millennial generation, as well as its preferences, should be a planning factor for any business not specifically tailored to older demographics.

Jackie Greene
Director of Economics

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