Last year, retailers faced many supply chain issues. Their inventory was constrained at the same time as consumers unleased strong pent-up demand. As a result, retailers had a unique but powerful opportunity to pull back on aggressive discounting, so they entered 2022 with lower promotional levels than in the previous year. However, as inflation reached a 40 year-high, retailers were dealing with weak consumer demand and high inventory levels in the first half of 2022. This has forced retailers to become more promotional to get rid of excess inventory.
Now, 40% of the online merchandise for U.S. retailers is on sale as we enter Black Friday week of 2022 (Exhibit 1). Refinitiv discovered this in a collaboration with StyleSage, which analyzes retailers, brands, online trends and products across the globe.
The current discount penetration (how much of the assortment is on sale) is 40%, and is also above the YTD average of 35%, but slightly below the pre-pandemic levels, when the average discount rate was 42%.
Meanwhile, the average percent discount in November is 36.3%; this has come down from the YTD levels of 37.6% and is significantly below the pre-pandemic levels. This means that retailers are offering a wider amount of merchandise on sale, but the average discount is less than usual in order to protect margins.
Still, there are some sectors that are more promotional than others.
Exhibit 1: U.S. Online Retail: Discount Penetration and Average Discount –2019 – Nov 2022
Source: StyleSage Co.
U.S. mall stores
U.S. mall stores have been struggling with high inventory levels in 2022. Accordingly, they became more promotional to move and clear inventory ahead of the holiday season. About 44% of the online merchandise for U.S. mall stores is on sale this week. This discount penetration is slightly higher than it was during Black Friday last year (42%).
The current U.S. mall average percent discount (16%) is also slightly higher from one year ago (15%). This means that this category is more promotional than last year.
Exhibit 2: U.S. Mall Stores Discount Penetration and Average Discount 2016 – 2022
Source: StyleSage Co.
Mid-tier department store sector
Department stores were struggling even before the pandemic. In previous years, this has been the most promotional-driven sector throughout the year.
This year, Kohl’s is driving the spike in promotional activity in this sector. The department store recently reported Q3 earnings and said it experienced a slowdown in sales in October and November. Due to the uncertain economic environment, the retailer will be more promotional.
As a result, this sector has experienced an increase in discount penetration — 73% this year from 64% in 2021. This means that more than half of its inventories are on sale. That’s extremely high and the question is how long this sector can maintain these high discount levels, which come at the expense of margins.
The average discount is slightly lower from pre-pandemic years – 26% in 2022, compared to 28% in 2019.
Exhibit 3: Mid Sector Discount Penetration and Average Discount: 2016 – 2022
Source: StyleSage Co.
Specialty sector
The specialty sector is the second highest promotional sector. Last year, the discount penetration rose to 65% on Black Friday week, with an average discount of 24%. Since then, both averages have decreased. In this week of Black Friday, 50% of the merchandise in this sector is on sale, with an average discount of 20%, which is still higher than pre-pandemic levels.
Exhibit 4: Specialty Sector Discount Penetration and Average Discount 2016 – 2022
Source: StyleSage Co.
At the category level, average discounts have gone up the most across a variety of shoes, including heels, boots, slippers, followed by athletic shoes and sandals (Exhibit 5). On the flip side, suits and casual jackets have gone up in price as people return to the office.
Exhibit 5: YOY% Change in Average Discount within the Specialty Category
Source: StyleSage Co.
Sold-out rates
Despite higher inflationary prices, high promotions in the specialty sector are helping some of the merchandise to fly off the shelves.
However, at U.S. mall stores, notice that the number of products sold out in November 2022 so far, compared to the holiday shopping season from last year, decreased to 11% from an average of 15% (Exhibit 6). The same can be said for the premium, and department stores. Meanwhile, there’s been a slight up-tick in beauty.
Please note, “sold out” includes items that went completely out of stock at any point during that period, even if they were then restocked – it is still counted as sold out.
Of all the categories, the Specialty group remains unchanged and saw the biggest percentage of sold-out rates at 19%. This is also one of the sectors with a high average discount penetration and average discount.
Exhibit 6: Sold Out Rates By Sector 2019 – 2022
Source: StyleSage Co.
Among the top sold-out categories are jumpsuits & rompers (15%), dresses (14%), and skirts & skorts (13%) (Exhibit 7). They have all come down considerably from last year’s levels.
Exhibit 7: Top Sold Out Categories, November 2022
Source: StyleSage Co
Premium sector
The amount of discounting among luxury retailers spiked during the 2020 pandemic — the highest levels seen since 2016. This year, however, it’s the opposite story as both the average discount and the discount penetration dropped to their lowest Black Friday levels. Currently, both metrics continue to decline going into the holiday season. The discount penetration level is presently lower (17%) this year than last year’s (23%). The average discount is 8%, below last year’s 9%.
Exhibit 8: Premium Sector Discount Penetration and Average Discount: 2016-2022
Source: StyleSage Co.
Moreover, luxury retailers have also been raising their prices in the face of higher inflation. The average price for the Burberry Women’s Long Chelsea Heritage Trench Classic Coat has gone up 25.1% from $1,990 to $2,490 over the past two years (Exhibit 9). It has consistently sold this item at full price. Still, despite raising prices, the high-end retailer steadily posts double digit revenue and earnings growth rates, suggesting inflation is not affecting the high-end consumer.
Exhibit 9: Burberry Women’s Long Chelsea Heritage Trench Avg Price, Avg. Discount
Source: StyleSage Co.
Beauty sector
This sector also usually discounts fewer items, at lower average discounts than the apparel and accessories industry. Last year, the discount penetration rose to 13% on Black Friday week. In this Black Friday week, only 9% of the merchandise in this sector is on sale, with an average discount below 2%; this is still in-line with the long-term average discount.
Exhibit 10: Beauty Sector Discount Penetration and Average Discount 2016 – 2022
Source: StyleSage Co.
Refinitiv holiday sales forecast
Looking forward to Q4, the Refinitiv U.S. Retail and Restaurant index is expected to show a 4.5% revenue growth over last year’s levels. However, the estimated earnings growth rate is expected to decline 19.9%, due to rising cost pressures.
Our metrics show that 10 of 11 consumer-related industries have turned negative (Exhibit 11). Of the 204 retailers tracked by Refinitiv, the Hotels, Restaurant & Leisure sector is headed for the highest earnings growth rate in the third quarter, recording a 249.1% surge over last year’s level.
In fact, it has been the strongest-performing sector this year. These firms have been benefiting from the fact that consumers feel more comfortable traveling, staying at hotels and eating out.
Exhibit 11: The Refinitiv Retail Earnings Growth Rate – Q4 2022
Source: Refinitiv I/B/E/S
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