From Digital Sales Cheer To Consumer Spending Fear

Holiday movie puns aside, this year’s biggest shopping season brings cautious hope across the industry. Merchants head into Fall optimistic about holiday sales, even as they remain concerned about consumer sentiment and profits.

Sales Love, Actually

They’ve gone through their ups and downs, but most merchants and their sales numbers are up compared to pre-pandemic levels. Compared to 2019, 71% of Merchants predict their holiday online sales will be better this year (see Chart 2 below).

When asked how total retail sales in 2022 will compare to 2021, the response is less full of holiday cheer. But, this isn’t surprising. 2021 was already a record year for most — to grow sales on top of that would be a tall order. To expect to do the same or better than a record year (as 70% do) is quite a win in this inflation-riddled turbulent year.

Responses on expected profits and margins appear more pessimistic (see Chart 2), but looking at the whole picture reveals perfectly sound reasoning for 53% reporting profit loss.

As discussed next, a new set of concerns around discounting competition and consumer behavior means profits likely shrink. Furthermore, promotions will claim a much larger role in acquisition strategies this year compared to last year (see Section II), cutting into profits.

As Kodali of Forrester sums up, “Last year, the issues were about supply chain and nobody was discounting because everyone was short on inventory. This year is all about being competitive, but retailers’ COGS [costs of goods sold] are going up because of inflation and you can’t always pass that onto consumers.”

A Consumer Confidence Christmas Story

Like the famed Ralphie, doing everything in his power to get to his goal, merchants are charting how to overcome the current slump in consumer confidence and anticipated decrease in holiday buying.

Concerns this year are completely flipped from last year. In 2021, merchants’ top named concerns were: supply chain, late deliveries, and labor shortages. With major global manufacturers now projecting further easing of the supply chain in the latter half of 2022, merchants are focused on a new batch of anxieties: the direction of consumer spending, marketing ROI, and meeting promotional expectations (see Chart 3).

Falling gas prices and rising job optimism may keep consumers riding high into the holidays, but inflation, a year of declining consumer sentiment, and the looming recession are keeping merchants skeptical about profits this coming holiday season. In addition, two other factors are causing merchant concerns: 1) many merchants are over-inventoried (having expected a continuation of pandemic-fueled growth) and are now having to discount to clear out inventory; and 2) privacy changes are impacting retailers’ ability to target customers and generate the same marketing ROI from advertising.

Some of our merchants’ predictions are certainly merrier than others, but with so many macro economic and marketing factors still at play, we’re encouraged to see most believe they will maintain their 2021 gains. In the next section, we uncover how merchants are planning to get to those gains.

What a difference a year can make strategically. Promotions are making a comeback, affiliate marketing is becoming a cornerstone of acquisition strategy, and SMS is gaining in retention marketing share while direct mail gets more air time. And, while merchants are split on their preferred shipping incentives, we’ll be watching to see which delivery promotions win the most consumers in a shopping economy free of supply chain and Covid demand surges.

Flying Early Off The Sh-Elf

Savings are coming, we know it, we know it!

Consumers are looking for deals — early — and, this year, merchants are willing to accommodate. Topping promotions, the number one strategy this year for 45% of merchants is encouraging consumers to shop earlier (per Chart 4 below).

Last year, half of consumers started shopping earlier than ever, not even holding out for the famed deals of Thanksgiving weekend and Cyber Monday due to well-publicized supply chain issues and logistics delays. Even though we don’t have the same issues in 2022, merchants are adhering to and programming around this enduring trend, as shoppers look for deals and try buying before inflation surges higher.

And the plot thickens. Whereas in 2021, 50% of respondents reduced promotions and only 13% increased them, this year’s responses flip flopped: 32% are increasing promotions and only 10% are decreasing (per Chart 4 above). A third of merchants surveyed will expand the volume of promotions this year (see Chart 5 below), more than doubling the amount of merchants who said they would promote more in 2021.

How The Affiliate Stole Christmas

Most marketers’ bags of acquisition goodies are still filled with traditional paid search (76% of larger companies and 68% of smaller). Yet, in a turn of events affiliates and partnerships have risen to second most used acquisition strategy in 2022, besting paid social which has traditionally held this mantle (see Charts 7 and 8).

According to Shopify, affiliate marketing has grown over 50% in the last 5 years — it’s no surprise to see its rise on this ranking. Nor is it a mystery as to why paid social fell in rank. Paid social has been plagued by measurement challenges since privacy changes have limited cookie effectiveness. In a world of last touch ROAS, targeting and measuring paid social becomes more difficult. Combine this with higher pricing, and you have a channel that no longer delivers the cheap customer acquisition of years past.

In CommerceNext’s annual benchmark survey of top retail executives, we learned 86% of merchants still use last touch ROAS (see Chart 9 below). Fifty-two percent of merchants use last touch ROAS exclusively, meaning they don’t use incrementality testing or media mix modeling (MMM) to see the true impact of their full funnel marketing efforts. Some may use multi-touch attribution; however, this strategy doesn’t work well in our new cookieless world.

Even though so many still rely on last-click, Kodali predicted paid social would fall and is waiting for last-click to follow suit:

It’s A Wonderful Subject Line

Our retention angel remains email, but SMS continues to gain popularity. Nearly all respondents will keep relying heavily on email marketing for the holidays, and smaller companies even more so, per Charts 10 and 11 below.

SMS marketing continues its steady gain in popularity for engagement. Nearly two thirds of merchants will rely on their SMS programs to beef up their holiday sales, up from 58% as reported in our annual benchmark survey fielded earlier in 2022.

Brian Walker, Chief Strategy Officer at Bloomreach, describes the beauty of the current email and SMS landscape:

While You Were Shipping

Merchants aren’t falling in love with any specific shipping offer this year.

However, the majority have already determined their standard shipping commitments, as well as their pre-Christmas cut-off dates for standard shipping:

• Fifty-six percent of respondents will require customers to purchase before December 15th to avoid expedited shipping costs (see Chart 12).
• More than a third (37%) of respondents will offer a standard shipping plan of 3 days or faster (see Chart 13).

Understandably hesitant of committing to anything after the last two years of unexpected increased digital demand and supply chain failures, merchants are also keenly aware that many consumers (75%, according to Shopify ) say free shipping incentives influence their buying decisions. Yet, 16% are already drawing a hard line and saying no to free shipping entirely, while half haven’t yet decided, as they wait to confirm inventory and other promotional offerings (see Chart 14).

In the holiday spirit of coming together, we’re closing with a few of our favorite predictions and holiday tips from our community. Here is what you said would happen this holiday:

Consumers will shift back to product purchases in Q4:

Consumer spending will shift from services in and travel Q2 and Q3 back to products for Holiday in Q4, but competition will be high as many brands will be over-inventoried. Many retailers are expecting wholesale partners to cut back on Fall orders which may drive more shoppers to shop brands directly.

Authentic brands will gain market share:

Brands that embrace authenticity (micro-influencers to amazing customer service) and innovation (tech betas to integrated dashboards of inventory) will gain market share in this mercurial time.

Fast shipping will drive sales:

Optimize for conversion by offering competitive, fast, and affordable shipping options that meet customer expectations, such as 2-day or free shipping with a minimum spend threshold that’s above your average order value (AOV).

Financial pressures will accelerate adoption of marketplace & dropship:

The rising cost and risk of buying & holding inventory will become untenable for retailers, who will partner with third party suppliers to optimize for both margin and profitability. Brands that use dropship and marketplace will be able to refine their assortment strategies, keeping high-margin and core categories in owned inventory, while the rest will be served by partners.

Ultimately, time will tell which of these pan out, but we certainly hope that consumers will lean into holiday shopping this season and that all of you have a holly jolly holiday.