With promotions up 31% and average order discount increase of 43%, DynamicAction’s Retail Index identifies the need for retailers to heed lessons learned from the Amazon Prime Day effect, to avoid decimating their Christmas profits.

Despite the impact of a potential Brexit, the analysis uncovered some positive trends for European retailers, who are attempting to address margin-eroding factors as the peak trading season approaches. Looking at the year to date, European retailers are holding their ground on free shipping (flat to last year), utilising it as a promotion or special benefit rather than a year-round offering. This is in contrast to their counterparts in North America, who have seen an 8% increase in free shipping over the same time period.  Moreover, European retailers are doing better with stocking the specific products their customers want than they were the first half of the year, with View and SKU availability only down 6% each, in the year to date.

However, despite this slight progress, both average order value and customer profitability across every segment have fallen an average of 3% and 6% respectively so far in 2019. Add to this an average uptick of 5% in returns compared to last year and it is clear margins are at risk.

What is evident from the data is that these negative factors peak surrounding the Amazon Prime Day event. When retailers try to compete head-on with the giant, it sets a worrying precedent for this upcoming peak trading season. According to the latest Retail Index over the two-week period in which Amazon Prime Day fell this year, there was a 31% increase in orders using promotions with the average value of discount off full price items soaring 43% across European retailers. Add to this an 18% jump in marketing costs per order and it becomes apparent that these factors contribute to a potential snowball effect for retailers that gains momentum leading into the significant Christmas trading period.

“Prime Day allows Amazon to test its systems and industry-disruptive strategies ahead of the peak trading frenzy and, more importantly, acquire new Prime customers. However, for other retailers it seemingly sets into motion the key elements feeding into the perfect storm of profit depression that is the Retail Vortex,” said DynamicAction’s CEO & Co-founder, John Squire.

“The knock-on effect of Prime Day, combined with the confluence of increased marketing spend per order over the festive period, prolific discounting and post Christmas returns will significantly impact a retailer’s bottom line during the most anticipated profit generating period of the year.”

The ‘Retail Vortex’, is a strengthening yearly pattern identified by the DynamicAction Data Science team, which occurs between Christmas Day and mid-January. The post-Christmas consumer phenomenon is facilitated by increased costs, soaring returns and inventory concerns in Q1. The trend impacts important seasonal profits and creates logistical issues, such as stock misallocation after the busy holiday period, yet it is often overlooked when planning Q4 strategies.

Squire continued: “Retailers are trying to navigate the perfect storm of shifting consumer behaviour, intense competition along with the rising cost of retailing. With Amazon conditioning consumers to purchase 'single items at will' based on immediate need and encouraged by a lower threshold for discounted and expedited shipping, it leaves digital margins eerily thinner each year.”

“Today’s digitally-enabled consumers have transformed the mechanics and economics of retail, and it is critical for retailers to evolve their analytical approaches to understand and respond to the increasing fluidity of customer activity.Retailers and brands are best served when they analyse customer profitability to determine what will lead to a market-beating improvement to their bottom line, rather than simply looking at short-lived revenue peaks. By focusing their seasonal tactics on profitable customer patterns that can meet their commercial objectives, the best retailers and brands will be well placed to nimbly avoid being consumed by the ‘Retail Vortex’ in January.”