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Cooldown in Black Friday fever leaves FDs with stock concerns

BLACK FRIDAY is still regarded by the UK with a degree of wariness, sense of novelty and confusion. Its name suggests the solemn remembrance of a historically significant atrocity, while its first appearance on the British retail landscape in 2014 provoked scenes of greed as adults brawled over cut-price espresso machines.

Having long been a fixture in the American shopping calendar – nicely rounding off Thanksgiving – WalMart decided to introduce it to the British market through its UK affiliate Asda. The move prompted other retailers to do the same, leading to the frenzied scenes.

Yet having pioneered Black Friday in Britain, Asda this year scaled back its activities by restricting its opening hours and increasing crowd-control measures. Tesco, too, took similar steps as 2015’s Black Friday took on a rather more subdued air.

Indeed, figures from KPMG and the British Retail Consortium show sales in November at stores open for more than a year fell 0.4% from the same month in 2014. Total sales across all stores increased by just 0.7%, compared with a rise of 2.2% last year. However, online sales of non-food item outperformed last year, up 11.8%.

Scarcity mindset

For finance directors and CFOs, Black Friday is a day that presents a slew of issues, some of which can ultimately hurt the third quarter’s bottom line and – by extension – go some way toward explaining why major retailers scaled back their participation. Chief among them is the impact on stock of a “scarcity mindset” in customers, which encourages speculative purchasing habits.

“The very nature of it makes returns go through the roof,” explains Vicky Brock, CEO of retail technology firm Clear Returns. “We already know the scarcity mindset – especially online – causes shoppers to buy now and choose later, so instead of making a selective choice in-store limited to what they can carry, they will make a speculative purchase: buying what’s available to them and once it’s delivered, they’ll make their decision on what they’re going to keep.”

That, Brock explains, means “a hell of a lot more” stock goes out at a far greater cost to retailers than will be retained by customers. In fashion, for example, this has led to return rates online of between 30% and 35%, Brock says. A typical women’s fashion store on the high street will see return rates of about 5%. The result is businesses frequently face a period of time in which they are short of stock while it is out in the supply chain or being considered by customers.

“The challenge with Black Friday is where it sits in the year – that final weekend of November. Typically, the cycle of returns becoming available to sell again is 15 to 21 days, so that stock, if everything went well, would just about be re-available to the retailer to sell on 20 December – past peak Christmas trading,” Brock says.

It’s a phenomenon that presents the CFO with a quandary: either over-buy to cover demand – an expensive ploy which can have little return on investment – or go out of stock on about 12 December, when demand is still cranking up toward the Christmas peak. By the time stock is back in on around 17 December, there’s every chance you’re selling items at a higher price than you were on Black Friday, sabotaging your traditional peak Christmas sales. All told, it can hurt the bottom line by as much as one or two percentage points by the end of the quarter.

Black Friday chart

The Boxing Day of US culture

Clear Returns’ CFO Ben Thomas concurs, having spent ten years with outdoor clothing and equipment retailer Tiso, which boasts a turnover of about £30m.

“From a retail point of view, you look at how much stock you need to bring in. What are the pricing positions? What are the pressure points? It’s a real headache,” he tells Financial Director, adding that Black Friday brings about a “very quick peak”, with an “online element that is disproportionately bigger”.

“What you don’t always think about is that there could be huge volume of stock dribbling its way back to your distribution centres and into the shops all the way through December,” he says. “In accounting terms, even if you might not make provisions, you’re mentally making provisions for a lot more damaged stock coming back into the business. You have all this stock that you can’t actually sell at full price in December, which instead is going to have to be sold in January and February at Boxing Day prices.”

The ultimate question facing FDs, Thomas says, is whether you plan ahead and potentially overstock or use Black Friday to bring down stock holdings to a normal level.

On a statutory basis, though, there is very little impact, according to KPMG retail partner Don Williams.

“From a statutory perspective, a retail FD will be holding a provision against the stock,” he says. “There probably will be some stock they’ll have to clear completely and get out on the grey market and/or destroy, so it’s appropriate to have some sort of provision against it when you’re holding it at a low value.”

When it comes to Black Friday, Williams says, FDs simply ask themselves what the likelihood is of selling products that aren’t already provided for. The answer, he says, is generally that you won’t, and so it has little or no statutory impact. Given the presence of so many disincentives to partake in Black Friday, it begins to make sense that retailers including Tesco and Asda – the very supermarket that brought Black Friday to these shores – are now eschewing the event.

“It’s probably peaked in terms of revenue but got worse in terms of profitability,” Brock says. “Black Friday makes total sense in the US. You have a day of family celebration in Thanksgiving, which doesn’t involve gift-giving, followed by a public holiday with a big shopping component. It’s the Boxing Day of US culture. Walmart had depth of pockets and the vision to run an extraordinarily large real-world experiment in the UK, coming in and creating the concept of Black Friday, and this year it withdrew and said that customers don’t really want it.”

That does not, however, herald the end of Black Friday in the UK per se. Instead, it is more likely to change, Williams says, taking place over a longer period of time, with less steep price cuts. Indeed, extending the sale’s duration will increase the likelihood that customers have been paid, falling as it does in late November.

“The idea is it’ll take in the November pay day – next year will be interesting because the end of November sits on a Wednesday,” he says. “I think we’ll find we have a week of activity, rather than the one Black Friday. I think there’s budgeting going on, and that reflects caution around pay day.”

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