With promotions up 18% and average order discount increase of 71%, DynamicAction’s Retail Index identifies the need for retailers to heed lessons learned from the Amazon Prime Day effect, to avoid decimating their holiday profits.

Looking at the year to date, the analysis uncovered positive trends for North American retailers, who have seemingly addressed many margin eroding factors as the vital holiday season approaches. Although holding more inventory in 2019 (20% boost in inventory value YTD), retailers are making the right stocking decisions, with both inventory ‘not sold’ and inventory ‘not viewed’ down an average of 20% each.

However, despite this progress, both average order value and customer profitability across all segments have fallen an average of 4% respectively thus far in 2019. Add to this an average uptick of 8% in orders using free shipping when compared to last year, alongside an increase in returns year on 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 holiday season. According to the latest Retail Index over the two week period in which Amazon Prime Day fell this year, there was an 18% increase in orders using promotions with the average discount off full price items increasing 71% across North American retailers. And while marketing costs per order jumped 16% over the same time period, customer profitability across every segment dropped an average of 12%. Furthermore, returns in the three weeks following Prime Day increased by an average of 19% contributing to a potential snowball effect for retailers that gains momentum leading into the significant holiday trading period.

“Prime Day allows Amazon to test its systems and industry-disruptive strategies ahead of the holiday 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 holiday 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-holiday 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 behavior, intense competition along with the rising cost of retailing. With Amazon conditioning consumer 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 businesses to evolve their analytical approaches to understand and respond to the increasing fluidity of customer activity. Retailers and brands are best served when they analyze customer profitability to determine what will lead to 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.”