Retail sales during the Christmas holiday season can be a significant contributor to overall annual sales for many retailers. According to the National Retail Federation (NRF), holiday retail sales in the United States, which include the months of November and December, account for as much as 30% of annual sales. This is a representative benchmark for other markets in many sectors. The retail industry is subject to change based on several different factors such as the economic conditions, consumer spending habits and the impact of pandemics or other events that could affect the retail sales.
Retail sales can be impacted by a recession, as a decline in economic activity can lead to a decrease in consumer spending. Moreover, during a recession, consumers will have less disposable income and may be more cautious about spending money on non-essential items. This can lead to a decrease in demand for goods and services, which will negatively affect retail sales too.
The Christmas sales period, which is made up of the six weeks leading up to Christmas Day, for the UK and six of the largest European markets in terms of retail sales, is expected to see a drop in sales for six of the seven markets. This represents a reduction in sales of around €4.5 billion (source: Statista). Only the Netherlands is expected to see a minor increase in sales over the Christmas holiday period– see Figure 1 below.
Retailers may also see a decline in sales due a decrease in consumer confidence. When consumers are uncertain about their financial future, they may be less likely to make big-ticket purchases or spend on luxury items.
Retailers may respond to a decrease in sales by cutting costs, such as reducing inventory, closing stores, or focusing on reducing their operational costs. For consumers, retailers may also focus on offering discounts or promotions to increase footfall. It's worth noting that some retail sectors may be more affected than others during a recession. Luxury goods and non-essential items, such as clothing and electronics, may see a greater decline in sales compared to essential goods such as food and healthcare products. Interestingly, healthcare products and fitness equipment are rarely discounted during the January sales as many consumers, who are looking to follow their New Year’s resolutions by starting a new fitness regime, are more likely to pay the recommended retail price.
Equally, the retail conversion rate, which is the percentage of visitors to a store or website who make a purchase, may be impacted as consumers may be more cautious about spending money and less likely to make impulse purchases. The retail conversion rate during Christmas can vary depending on several factors, such as the retailer or retail segment, the products being sold, and the economic conditions. The Christmas holiday season is considered a busy shopping period and retailers can see an increase in sales during this time. An increase in conversion rate will lead to an increase in sales, as more visitors to a store or website make purchases.
Based on EDC experience there are five areas where retailers are currently focusing their operations to alleviate the challenges of the economic downturn and increase retail sales. These are summarised as:
1. Organizational Structure
2. Customer Experience Design
3. Payment Mix
4. Brand Heritage
1. Organizational Structure
Payment acceptance is a critical component of a retail organization, as it is necessary for completing transactions and receiving payment for goods and services. In many retail organizations, payment acceptance is handled by the point of sale (POS) system and the website. Today it is far more complex, involving multiple channels that need to talk to one another. The concept is known as omnichannel strategy and is designed to be able to respond to an ever-evolving behaviour of digitally connected consumers. Retail organizations must stay up to date with these changing consumer preferences and trends if they are to meet their customers' needs.
The payment acceptance function is generally integrated into the overall operations and customer service strategy of a retail organization. It is often overseen by the finance or accounting department and often involves regular coordination with other departments such as IT or customer services. In an e-commerce context, payment acceptance is integrated into the website and a mobile application, and often handled by a payment gateway or merchant service provider. It's worth noting that the payment acceptance function is also subject to compliance and regulatory requirements. Retail organizations must ensure that they are following laws and regulations related to payment processing and data security. In summary, Payment acceptance is an integral part of a retail organization and is typically handled by the point-of-sale system, overseen by the finance, treasury, or the accounting department, and is subject to compliance and regulatory requirements. Payment acceptance is not a backroom function, it is strategic and front-and-centre of the world’s leading retailers.
Unfortunately, payment acceptance is often overlooked in a retail business for several reasons. One reason is that it is seen as a basic function that is necessary for completing transactions, but not necessarily a strategic or differentiating factor in a retail business. This can lead to a lack of attention and resources being allocated to the payment acceptance function. Another reason is that payment acceptance can be viewed as a technical issue and may be handled by the IT department or an outside vendor. This can lead to a lack of coordination and integration with other parts of the retail business, such as customer service or marketing.
Finally, in some cases, retailers may have a legacy system in place and don't see the need to update or upgrade, particularly when sales are slumping. This oversight can cause resources to not be allocated to the payment acceptance function. Investing in new ways to integrate digital technologies such as artificial intelligence, big data, and the Internet of Things (IoT) into business models is even more important in a time of economic downturn than economic growth. This should be part of the payment strategy and embedded in the retailer’s organisation.
An organisational structure that is designed to support the business’s payment strategy (not just for acceptance but also for issuing consumer payment products) is fundamental, yet so many retailers are so focused on sales they don’t have time to step back to assess whether they have the right talent in the right place.
2. Customer Experience Design
During an economic downturn, the importance of customer experience design can be even more critical for retailers. As consumers may be more cautious about spending money and looking for deals, retailers need to find ways to differentiate themselves and attract customers. By providing a positive and seamless customer experience, retailers can create a sense of value for the customer and increase the likelihood of a purchase. This can include elements such as easy navigation on a website, helpful customer service, and a convenient and efficient checkout process.
3. Payment Mix
A good payments acceptance strategy for retailers involves offering a variety of payment methods to customers to accommodate their preferences and increase the likelihood of a successful transaction. These include credit and debit cards. Accepting all the major credit and debit cards is essential for most retailers, as they are the most used form of payment. Mobile payments such as Apple Pay and Google Pay are also important to accept, as these forms of payment accommodate customers who prefer to use their mobile device for transactions – both in store and online. Some customers may however prefer to use e-wallets such as PayPal, Alipay, or Venmo when shopping online. Offering these options can improve convenience for customers and increase the likelihood of a successful transaction. Gift cards and store credit can be a good way to attract repeat customers and increase sales. Cashless payments in store have become the new norm since the COVID-19 pandemic. Many retailers are going cashless, to avoid contact, increase safety and reduce shrinkage (not to mention the cost of counting, securing and transporting cash).
Many retailers are offering Buy Now Pay Later (BNPL) payment options, such as AfterPay, Klarna and Zip, just to name three of a very long list of BNPL providers. These options can be especially useful for larger purchases or for customers who may have a more difficult time obtaining credit.
As payment methods and technology are constantly evolving, it can be difficult for retail businesses to keep up with the latest trends and compliance requirements. This can lead to a lack of attention to payment acceptance and may result in a lack of security or non-compliance with regulations. It's worth noting that the best payment acceptance strategy will depend on the specific needs and preferences of a retailer's customers. Offering a variety of payment options and testing which options are most popular can help a retailer determine which options to prioritize. This will have implications for the retailer’s organizational structure as described above.
4. Brand Heritage
Retailers are using customer experience design to create an emotional connection with customers. This can include elements such as storytelling, creating a sense of community and personalization. In a recession, customers are more discerning about what they buy. To mitigate against a reduction in sales, emphasis can be placed on a product’s brand heritage. This may involve describing the history of a brand in a bid to highlight how long it has been in business, the journey it is on and the values, philosophy, quality of workmanship, materials used and reputation. The Swiss army knife company, Victorinox, are building on their 125-year history and offering its customers the opportunity to personalize their products. The provenance is important, and it matters to consumers. Transparency of product supply chains is now more accessible than ever before. The brand's heritage or history can be a major advantage over competitors because it provides trust and emotive connection for consumers. Retailers are investing time and money in this area as well as reference to sustainability of their product supply chains, etc. Some of the relatively older American brands are very effective at building on and capitalising from their brand heritage, such as Danner, 100 years old, Trek, almost 50 years old, and Leatherman, almost 40 years old. All three of these US brands have recently launched personalization, allowing consumers to customize their purchases, an effective up-sell, providing incremental sales value in a challenging market. Finally, when it comes to building on brand heritage, there are some very famous and older British retailers, such as Fortnum & Mason (1707), Hunter Boots (1856), just to name two and one of the world’s largest toy brands, the Danish firm, Lego, just over 90 years old.
In an economic downturn, retailers may have to adjust their inventory and product offerings to align with the changing needs and budgets of consumers. This may simply involve stocking a greater proportion of cheaper items relative to expensive ones. Put differently, retailers can remain relevant to consumers and protect profitability by stocking items that their customers are more likely to purchase. Doing so may also allow buyers to feel as though they are of greater value to the retailer.
Importantly, retailers must find ways to collect and analyse payment transaction data and non-payment data, such as consumer’s browsing habits and the nature of abandoned shopping carts, etc., to make better decisions and improve inventory management. This in turn, means retailers must manage their supply chain more effectively to ensure that they have the right products in stock at the right time, while controlling costs.
In summary, retail organizations face a wide variety of challenges including competition, changing consumer preferences, complex payment acceptance infrastructures, supply chain management, e-commerce and digitalization, logistics and delivery, data and analytics and cost management. Retailers must find ways to adapt to these challenges in an economic challenging period to remain competitive and meet the needs of their customers. EDC has decades of experience of establishing strategies, for leading merchants around the world, that serve to optimize payment acceptance, payment processing and payment product innovation.
The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).