Retail Holiday Newsletter
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Executive Summary
Retailers shatter holiday growth recordsRetailers encountered a deluge of challenges this holiday season, including rising costs, supply chain constraints, and labor shortages—all compounded by ongoing Covid-19 disruptions. Even so, they achieved another record-breaking year of sales. While seasonally adjusted month-over-month growth rates fell below analyst expectations, sales soared over 2020 levels. According to the US Census Bureau’s advance sales estimates, year-over-year growth in Bain-defined retail categories reached 13.8%, recording the highest nominal growth in nearly 30 years and surpassing our forecast of 7% (see Figure 1).
Figure 1
In-store sales had a banner season, growing at an all-time high of nearly 15% year over year. Nonstore sales—including e-commerce, buy online, pick up in store (BOPIS), and mail order—increased only 10% year over year as they lapped 2020's blockbuster season. In fact, for the first time in 20 years, nonstore’s share of total holiday spending declined. Nonetheless, the channel grew around 38% over 2019 levels. Despite anticipated pull-forward in demand, December’s share of overall holiday spending did not materially differ from previous years. Nonstore sales experienced a slight slowdown from November to December. Yet brick-and-mortar growth held steady through the year’s end, even as the Omicron variant challenged already strained store operations. Red-hot inflation contributed a meaningful portion of this year’s holiday growth. The Consumer Price Index (CPI) was up 7.0% year over year in December—an acceleration from November’s 6.8% and the highest level in 40 years. Price hikes boosted retailers’ top lines in some categories—apparel prices rose by 5.8%, and furniture and bedding prices by 13.8%. But inflation also increased labor and shipping costs, likely eating into profit margins. Higher prices may also be alienating budget-conscious shoppers: In December, the University of Michigan’s consumer sentiment index reported its second-lowest level in the past 10 years, citing inflation as a major factor. Holiday performance varied widely across retail sectors, though all store types delivered year-over-year growth (see Figure 2). Categories like apparel and department stores saw considerable momentum as consumer spending recovered from 2020 lows. Meanwhile, spending grew at a lower-than-average pace in categories like food and beverage and health and personal care, which saw minimal pent-up demand due to Covid-19.
Figure 2
Retailers achieved these record sales despite major shortages of both goods and workers. Port delays reached 27 days in December, seasonally adjusted resignations and job openings in retail remained near 20-year highs, and the recent Omicron surge further disrupted staffing levels in stores and across the supply chain. Unfortunately, we suspect many of these challenges will continue in some form going forward. Our New Year’s wishes for retail executivesWhile 2021 was a year of tremendous growth overall, the benefits were not evenly distributed. In 2022, some retailers will be gearing up for a rebound in growth, while others will struggle to match last year’s high sales. Some will likely face declining demand, especially in categories that exploded during the pandemic. But all will grapple with formidable, enduring changes:
In this environment, it’s more important than ever for the organization to operate as a collaborative team of world-class experts. But given that all members of a modern retail leadership team will have their own set of priorities for the year, we want to share personalized New Year’s wishes for each. Dear CEO, In yet another year of unpredictability, you have every reason to feel frazzled. The old “retail is detail” paradigm—which pushed executives to boost profits by executing tired playbooks with ever-increasing efficiency—is obsolete. These days, stakeholders expect you to turn chaos into inspiring visions. They want you to create loyal customers, engaged employees, transformative technologies, and sustainable environments—without sacrificing a penny of profit. The wisdom and courage needed to fulfill these expectations will require nothing short of an extraordinary team. Our New Year’s wish for you is a purposeful leadership team that you can trust to balance short-term profits with long-term values. Most retail executives want to be more than mercenary Scrooges. The challenge is that few know how to transform a profit-maximizing machine into a purpose-driven system without jeopardizing the future of their businesses and personal careers. Start by asking yourself and your team: How can we turn our company into a microcosm of the world that our organization and our key stakeholders want? Create a cohesive system that aligns purposes (why you exist and what you aspire to do for your customers) with behaviors (how you work with others to accomplish your purposes) and mindsets (what motivations and assumptions propel your daily behaviors). Help each other practice purposeful leadership habits. Research proves that complex changes are most effective when a network of trusted influencers collaborates for the greater good. Recommended reading:
Dear Chief Merchant, At face value, some may see your job as merely buying and producing attractive products. In reality, you are the key to creating profitable customers. These days you need distinctive products, services, and pricing to motivate traffic and sales. Our New Year’s wish for you is that you are able to build a customer-back approach to product and pricing strategies, refresh your understanding of targeted shoppers and their motivations in choosing competitors’ alternatives, and innovate to bring the company’s value proposition to life. Your customers’ priorities and behaviors have evolved over the course of the pandemic. There has been considerable demand disruption over the past two years, with seemingly overnight booms in some categories and the restabilization of purchasing habits in others. Relying on “last year plus 5%” for this year’s ordering won’t cut it. Instead, invest in predictive data tools and algorithmic analyses to stay close to your target market. Let the findings influence product selection and design, including private label choices, while setting prices with inflationary pressures and broader macroeconomic uncertainty in mind. Recommended reading:
Dear CTO, You hold one of the toughest jobs in the C-suite. As you’ve experienced firsthand, most retailers have historically viewed technology as a cost center, rather than an enabler of innovation and growth. Our New Year’s wish is that you’ll be empowered to position technology as a source of competitive advantage, acting as a trusted advisor to your organization’s leaders as they embrace transformative digital tools. Prioritize overcoming any “technical debt” you may have accumulated through years of underspending, in order to modernize your arsenal while building out new tech-enabled capabilities. As you face competing priorities, identify the digital tools that will most improve customers’ shopping journeys; employees’ service journeys; and supply chain operations, then sequence development activities accordingly. Finally, lead the charge toward the cloud, emphasizing software as a service (SaaS) and commercial solutions while holding the line on custom builds, except in areas where differentiation is critical. To transform perceptions around technology spending, focus the organization on outcomes. It’s easy to get lost in cool features and apps that customers don’t want and employees won’t use. Nothing is more wasteful than developing the wrong thing, even if it’s on time and on budget. Recommended reading:
Dear Head of Omnichannel Operations, Your team has felt the whiplash of rapid channel shifts, new consumer demands, and blurred lines between physical and digital shopping. Bain analyses prove that omnichannel shoppers tend to be the most loyal and profitable. Still, retailers continue to cast e-commerce and stores as competitors. We’ve long known the synergies between physical and online shopping: Stores enable easier returns, better service, and a “halo effect” for online sales. In the coming year, we hope that you’ll succeed in tearing down channel siloes by working backward from customer needs at the local level. Given shifts in how customers are living, working, and shopping, it’s time to reevaluate the mix of channels, inventory, tools, technology, and personnel that will best serve their needs. Dissect your customer journeys end-to-end—across all episodes and channels—and consider where your merchandising, supply chain, IT, and other teams may be able to collaboratively eliminate frustrations and enrich the lives of customers and employees. A seamless omnichannel journey may require changes to your physical footprint. Take a “blank-sheet” approach to your ideal store and logistics infrastructure, keeping customer needs top of mind as you prioritize new developments, remodels, store closures, or flexible capacity. Collaboration will be key. Work with your supply chain team to optimize for distribution and fulfillment. And work with your finance team to orient goals and key performance indicators around catchment area economics, instead of channel and door. Recommended reading:
Dear CMO, Your shoppers have been rattled by the pandemic. It’s now more critical than ever to put down the megaphone and enhance listening devices. Updating your understanding of consumers’ needs and behaviors will be essential to developing loyalty-inspiring offerings and improving personalized dialogues across segments. This is your year to amplify the voice of your customers inside the organization. Take advantage of your first-party data and work alongside the chief merchant to generate customized offerings that reflect your customers’ values and decision-making patterns. Don’t exploit customers’ cognitive biases to temporarily boost sales. Instead, foster enduring customer engagement through feedback loops that influence your assortments, materials, and partnerships. As you get to know your customers better, take a test-and-learn approach with new channels, messages, and offerings to determine which mass and personalized outreach spurs the greatest engagement. Even if you haven’t yet taken the plunge on trends like TikTok and livestream shopping, your Gen Z customers—and a growing share of older cohorts—are already there, engaging with other brands. Recommended reading:
Dear Chief Supply Chain Officer, The 1,000% increase in supply-chain-related headlines between November 2020 and November 2021 says it all: Your team is more visible than ever, playing a central role in your business strategy and customer value proposition. As challenges persist, it’s time to redefine the role of supply chain, balancing cost-friendly efficiency with speed of service, resilience, and sustainability. Your most important job—getting products into the hands of customers—is now more complicated and expensive than ever. You’ve been accustomed to optimizing for lowest unit cost, but total system cost is a more worthy metric. Increase data accuracy and transparency to engage all functions in solving the most critical constraints, even if those lie outside your traditional purview. This collaboration should extend to discussions around your physical footprint as you reimagine the role of stores; fulfillment centers; and offerings, such as drop shipping, in your future network design. In this short-supply environment, focus on making trade-offs that maximize overall company benefit. And as you evaluate your supplier base, look for opportunities to accelerate progress on environmental, social, and governance (ESG) initiatives. Recommended reading:
Dear CHRO, The Great Resignation, pervasive labor shortages, and pandemic challenges have left you with quite the backlog. Regardless of the strength of your culture two years ago, your team is now running on fumes. Our New Year’s wish for you is to champion change across the organization, fostering a culture of collaboration, mutual respect, teamwork, and personal growth. To attract and retain talent, you’ll need to go beyond increasing wages and benefits. Engage with your frontline employees to understand what drives retention and gives them purpose—whether that be investments in learning and development; schedule flexibility; or more predictable, full-time roles. Frontline employees often don’t feel heard. To ameliorate that feeling, you can commit to reinforcing an inclusive culture, with feedback loops that give workers a voice in business decisions and empower them to contribute innovations. After all, they know your customers best. Work with other functions to better understand how the organization leverages human capital and where employees have pain points. Are there opportunities to use digital solutions to automate and optimize rote or undesirable tasks? Such solutions not only enable leaner operations but also allow you to reassign labor hours to activities that directly influence the customer experience—creating happier, more engaged employees who feel valued in their roles. Recommended reading:
Dear CFO, Let’s face it, strategies are meaningless until you allocate the resources to back them up. As the pace of strategic decision making accelerates, we have two New Year’s wishes for you. First, for the organization to adopt a more dynamic, Agile resource allocation process. Second, for it to look beyond quarterly profits to develop new, more holistic metrics for success. Ongoing disruptions have deemed traditional planning and budgeting processes archaic. It’s time to stop trying to predict the unpredictable. Instead, prepare to iterate frequently and pivot when necessary. Let older command-and-control budgeting processes give way to a more flexible approach, one that allows the organization to focus on creating value for customers and stakeholders, even as priorities shift. The metrics you’re measuring and managing will likely need a refresh, too. Broaden your strict focus on the P&L to embrace the balance sheet, evaluating the literal and figurative assets that will support the future of your business. Consider long-term total shareholder return (TSR), recognizing the implications of today’s trade-offs between growth and profitability. And ensure you track progress on non-financial metrics such as customer advocacy, loyalty engagement, employee satisfaction, and resources—financial, human, carbon, and more. Recommended reading:
Best wishes for 2022This is the last issue of this season’s newsletter. Thank you for tracking the holiday season with us. We hope you’ve enjoyed our discussions of holiday predictions, Amazon’s influence, shifting in-store shopper trends, and priorities for the New Year. The full series can be found here. We look forward to keeping in touch with you throughout the year, and we will be back later this year to share our 2022 holiday outlook. As always, we welcome your thoughts and questions. The authors would like to acknowledge Emily Harris, Licia Figueiredo, Jackson Shain, Emma Hand, and Isabel Romeu for their contributions to this newsletter. |