2015 BDO Retail Compass Survey of CMOs

December 2015


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10 Year Spotlight:

It’s been 10 years since we first polled 100 retail chief marketing officers (CMOs) about their expectations for the holiday season. In that time, we’ve seen unprecedented changes in the retail industry.

Brands weathered a significant economic downtown, marked by lower sales, store closures, bankruptcies and consolidation. Then, as markets and spending improved, retailers emerged with a renewed focus on growth…and technology. E-commerce, while a growing trend pre-recession, really took off, and many retailers played catch-up with their systems and site functionality. Then mobile changed the game again, forcing retailers to adapt to consumers who want to buy anytime, anywhere—including potentially from a brand’s competitor while browsing in their store.

CMO sentiment during these 10 years has matched the spending outlook, and reflected much of the decade’s change as they worked to improve and communicate their brand and experience across all channels. Ten years ago, CMOs were quite optimistic headed into the holidays, forecasting a 7.8 percent increase in holiday sales. Just two years later, in the heat of the recession, CMOs would, for the first and only time in our study’s history, forecast a decrease in holiday sales. The realities of the recession appeared to temper forecasts, perhaps permanently. Since 2008, projected sales increases have not topped five percent, and cautious optimism—in projections, inventory purchases and promotional spending—has consistently appeared in the survey’s results.

Out of the recession also came the heavy discounting and sales that have become table stakes. Smart marketers pushed seasonal promotions earlier and earlier to give consumers more opportunities to spend. And as a result, there are more and more “Black Friday-like” shopping days starting in early November, and extending to the final days before Christmas.

What will the next 10 years look like? We have a few predictions:

Retailers will use data more effectively, allowing them to better forecast consumer demand, hot products and the right pricing to get customers to buy.

Technology will continue to change the shopping experience, making it easier and faster for consumers to buy across ever-increasing channels. But it will also continue to enhance retailers’ operations, allowing for streamlined product manufacturing, transportation and fulfillment, as long as retailers are smart about adopting new systems. Amazon’s drones may seem wild now, but could be common in 5-10 years.

Deals and partnerships will expand as retailers realize new synergies and opportunities to scale. This may be driven in part by consumer demand for favorite brands, but it will also be driven by economics. Margins continue to be pressured, and partnerships or mergers may allow for greater efficiencies and scale in everything from product costs, to fulfillment to marketing.

We’ll be keeping our eyes on the evolution of these trends, and look forward to learning about retailers’ insights and sentiments in the years ahead.

2015: Retailers Ready to Capture Deal-Hunting Holiday Shoppers

While retailers headed into the holiday season amid more positive economic trends, consumers remained cautious and cost-conscious. They were not dashing to the registers during the back‑to‑school season, and with that in mind, retail CMOs forecasted a modest, but optimistic 4.2 percent increase in total holiday sales this year.

Indeed, retailers expect it will take a lot of (jingle) bells and whistles to persuade shoppers to buy vs. browse this year. As the holiday season neared, CMOs planned careful promotional strategies to blanket consumers across every channel and throughout multiple weeks of the extended holiday season.

Our 10th annual Retail Compass Survey of CMOs found that while CMOs’ sales projections are consistent with the increases they forecasted last year, they were a bit more bullish than the National Retail Federation’s (NRF) expected 3.7 percent increase. The CMOs were right on the money with their estimates last year, with actual sales increasing 4 percent over the November-December period, according to the NRF.
Total Holiday Sales Projections Across a Decade

“The modest year-over-year increase could be attributed to increasingly parsimonious consumers, who are a product of the recession and not spending as much as they once did. And because of this, consumers are favoring a more strategic and cost-conscious approach to purchases, no matter the season.”Ted Vaughan, partner and national leader of the Consumer Business practice at BDO USA, LLP

Unemployment Diminishes as Concern

For the first time since 2009, unemployment did not top retailers’ lists of concerns that could hinder sales. Overall, a smaller percentage of retailers (26 percent) believe unemployment will have the biggest impact on their holiday sales, down from 45 percent last year. Healthy job growth—reaching an average pace of 200,000 jobs added per month since 2013—could be contributing to this notable decrease in concern.

Still, volatility in the energy and global markets led to rising concerns. Twenty-eight percent of retailers noted energy and fuel costs as having the most impact on sales. And, with the global economy experiencing sharp and lasting pains, like the devaluation of the yuan in the world’s second largest economy, the number of retailers worried about the impact of global market volatility on their sales tripled—from 7 percent in 2014 to 21 percent this year.

Retailers Betting Bigger on Inventory Levels

This year, retailers expect overall inventory to grow by 3.4 percent, up from 1.1 percent in 2014, with half planning to increase their holiday season inventory purchases. This is nearly double the number of retailers who planned to increase inventory last year. Signs of broader economic improvement and growing consumer confidence may have encouraged retailers to ramp up their inventory levels: The Conference Board reports that its consumer confidence index increased to 103 in September—its highest level since January.

However, since CMOs made their inventory bets, consumer confidence has wavered, dipping in November, though still reflecting more optimism than seen during the same time last year. In the weeks leading up to the critical Thanksgiving weekend shopping period, some retailers—such as Macy’s—expressed concern that they may have overestimated their inventory needs for the year ahead. Those fears may have been overstated, though: According to a recent study from Adobe, approximately 13 out of every 100 products viewed online during Cyber Monday were out of stock.

Tech Gifts Continue to Dominate

Sixty-seven percent of retail CMOs anticipate that consumer electronics will once again be the top-performing product category this holiday season, and 51 percent expect they will also be the most discounted. According to the U.S. Consumer Electronics Sales and Forecasts, revenues for the consumer electronics industry are projected to grow 3 percent this year, reaching an all-time high of $223.2 billion. Meanwhile, 14 percent of CMOs expect apparel to be the best performing category, and 25 percent think it will be the most discounted.

CMOs Expect to See More Discounts, but Not Offer More Themselves

Seventy percent of CMOs anticipate retailers across the industry will offer more discounts and promotions this holiday season versus 2014. However, when thinking about their own marketing strategies for the 2015 holiday season, they have a different perspective. In fact, nearly four-in-five CMOs surveyed will offer levels of discounting and promotional activity consistent with last year, and evidence suggests consumers will be waiting and watching prices carefully. The new consumer is less motivated by sales events and has become conditioned to hunt and wait for the best prices, knowing retailers will turn to an intense discounting strategy to beat competition, move product and spur sales.

Discounts and Promotions

“Many retailers are feeling less compelled to initiate heavy discounting, because doing so can diminish their brand value. That’s not to say, however, that they won’t ultimately implement a discounting strategy in reaction to pricing pressures from competitors or clearing inventory throughout the holiday season.” Doug Hart, partner in the Consumer Business practice at BDO USA, LLP

Retailers Refocus in Stores, Not Fazed by Rightsizing

When asked where retail CMOs will focus the majority of their discounting and promotions this holiday season, 38 percent pointed to their physical stores. This number is only slightly less than the percentage of those who will focus equally in-store and online (41 percent), highlighting the value of brick-and-mortar stores in retailers’ marketing strategies. And, for the second year in a row, retailers will focus on offering exclusive in-store deals and discounts (45 percent) as their primary tactic in driving consumers from behind their screens.

Retailers like Forever 21 and Old Navy have recently announced plans to shrink their store sizes to appeal to tech savvy, experience-craving shoppers, moving away from the once-attractive mega-stores of the past. Among the 13 percent of surveyed retailers who have reduced their square footage in the past year, most (84 percent) do not expect their rightsizing efforts to impact their holiday marketing efforts. By focusing on bolstering omnichannel strategies to harmonize with more intimate physical stores, retailers are proving that they’re listening and responding to evolving consumer preferences.

Unlocking E-Commerce’s Holiday Sales Potential

Retailers also know the importance of having a strong online presence to complement their physical stores. To boost the effectiveness of their e-commerce sites, many retailers are providing consumers with more perks and options in relation to their purchases. While 27 percent of retailers say they expect promotional free shipping will yield the biggest sales boost this year, the percentage of retailers identifying search engine marketing as their leading tactic to drive sales quadrupled.

Nearly one quarter (24 percent) believe search engine marketing will produce the most overall online sales, up from just 6 percent last year. Effective search engine optimization may be what retailers use to stand out from the pack in the crowded digital marketplace, and is also perceived as lending itself to more precise measurement of a retailers’ return on investment than other online spending.

Christmas Creep Continues

The majority (64 percent) of retailers surveyed plann to spread their holiday promotions throughout the holiday shopping season, compared to 49 percent in 2014. But, the definition of the “holiday shopping season” continues to evolve, with 14 percent of CMOs having planned to launch most of their holiday promotions prior to Black Friday. And although some retailers like REI and Staples announced store closures and reduced hours during Thanksgiving weekend, others opened earlier. The Wall Street Journal reported that some mall operators were pressuring tenants to open on Thanksgiving, matching the hours of their anchor retailers. Overall, 15 percent of CMOs surveyed still planned their heaviest promotional activity during Black Friday and Thanksgiving weekend.

The definition of “Black Friday” also appears to be evolving. As Natalie Kotlyar, partner in the Consumer Business practice at BDO USA, LLP, recently told the Commercial Observer, “This concept of Black Friday has basically become Black Week.”

Multi-Billion Dollar Shopping Days Over Thanksgiving

With consumers no longer waiting for Thanksgiving turkeys to begin their holiday shopping, retailers were modest in their sales projections for what once was the big kickoff to the holiday shopping season. CMOs forecasted a 2.4 percent increase in Black Friday sales and a 2.9 percent increase in Cyber Monday sales. Overall, 41 percent of retailers expected Black Friday sales to increase this year, compared to 30 percent last year. Meanwhile, nearly one-in-three retailers (32 percent) projected Cyber Monday sales would increase, compared to only 20 percent of retailers who felt the same level of optimism in 2014.

So was Black Friday sales boom or bust? In terms of sales, it was a boom. Research firm comScore found that spending through desktop computers reached $1.66 billion on Black Friday. But in terms of serving as the official kickoff to the holiday shopping season, it could be considered a bust, as consumers didn’t wait. Desktop retail sales also crossed the billion dollar mark on Thanksgiving, according to comScore. The NRF reports that 151 million people shopped on Black Friday, and an equal number of consumers visited stores as shopped online. But the boost in sales may be coming more from online shoppers. According to ShopperTrak, combined sales for Thanksgiving and Black Friday totaled about $12.1 billion, down from $12.3 billion over the same period last year.

As for Cyber Monday, retailers reached nearly $3 billion in sales, according to Adobe systems, and demand outpaced expectations for some retailers. As a result of a site-wide, 15 percent off promotion, Target’s website saw its biggest day ever for online sales on Monday. Some consumers saw delays or were unable to access the site as Target metered traffic to manage the demand. Now, retailers across all categories will face the Herculean task of fulfilling all of those orders efficiently and on time.

CMOs Expand and Edit Marketing Budgets

Between 2012 and 2014, retailers consistently increased their marketing budgets for the season. This year, 26 percent of retailers planned to expand their budget, up from 22 percent in 2014 and 20 percent in 2013. Conversely, 16 percent of retailers plan to lower their budget, up from 6 percent in 2014. Despite these polarized sentiments, retailers’ marketing budgets have netted out relatively flat, with a modest 1 percent decrease forecasted.

Omnichannel Efforts in Motion

More than half of those surveyed (60 percent) are familiar with the concept of an enhanced omnichannel approach, and a little more than a third (37 percent) of those respondents report adjusting their marketing strategy to provide customers with a cohesive experience across channels. Among those retailers who are adapting, nearly all (98 percent) say they are relying on consistent pricing across channels to grow customers’ satisfaction, followed by consistent promotional strategies (77 percent) and expansion of delivery options (63 percent).

“With consumers literally sleeping with their smart devices, researching and making more purchases online, it’s no surprise that retailers are prioritizing the use of mobile in order to capitalize on consumers’ digital dependency. And while retailers are ready to reap the rewards mobile provides, they also remain cognizant of the challenges it can present from a data management and security perspective.”Natalie Kotlyar, partner the Consumer Business practice at BDO USA, LLP

Mobile Reaches Critical Mass

For the first time, the majority of retail CMOs surveyed report that they are leveraging the mobile platform in their holiday advertising and marketing plans. Approximately two-thirds of CMOs (65 percent) will tap into mobile, up from 49 percent in 2014. And of those using mobile, 34 percent will focus most heavily on delivering mobile coupons. As retailers turn to mobile to round out their omnichannel approach, they plan to focus 12 percent of their marketing efforts on mobile technology.

Top Mobile Promotional Tactics

Retailers Rely on Social to Sell

The vast majority of retailers (78 percent) will use social media as another way to connect with customers this holiday season. Social media will primarily serve as a deals and discounts delivery mechanism (90 percent), followed closely by offering exclusive promotions and customer service, which tied at 81 percent. Lastly, as “buy buttons” grow in popularity as a sales conversion tool, click-to-buy will be used by more than one-in-four retailers (27 percent) on their social media platforms.

Top Social Promotional Tactics

Data Management Issues Dominate, Cybersecurity Downplayed

As retailers continue to stretch across channels, they must also contend with ever-growing data, which can present as many challenges as opportunities. A vast majority of CMOs (89 percent) say it is challenging to manage the amount of customer data available, with 40 percent calling it “very challenging.” For the third year in a row, effectively using consumer data for marketing is the most cited data challenge retailers face (37 percent). Surprisingly, that concern is noted about five times more often than managing customer privacy concerns (7 percent) or potential data breaches (7 percent).

Retailers appear to feel slightly more secure with their cyber risks this year. Just 15 percent say their cybersecurity risks are higher than last year, compared to 34 percent who said so in 2014. While some time has passed since major breaches at Target, Michael’s, Neiman Marcus and other retailers, cyber threats should remain top of mind. Right before the Thanksgiving weekend, cybersecurity firm iSight Partners reported hackers were using new malware to target credit card information through payment terminals.

Top Data Management Challenges
While 2015 hasn’t seen incidents of the same scale as the massive credit card breach at Target, the threat of cyber attacks to retailers should not be underestimated. It’s critical to remember that the best time to assess and prepare your systems is before a breach occurs. As digital and mobile payments grow in tandem with the introduction of higher risk products, so too does retailers’ vulnerability to data breaches. Retailers must also be cautious of third-party cyber risk, as their relationships with distributors, processors, operators, acquirers, issuers, etc., offer additional points of entry into the payment value chain. New and increasingly sophisticated threats are emerging every day, and as the New Year approaches, retailers should make a resolution to revisit their controls and assess their cyber vulnerability.” - Shahryar Shaghaghi, leader of the Technology Advisory practice at BDO Consulting

The BDO Retail Compass Survey of CMOs is a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, whose executive interviewers spoke directly with chief marketing officers. The survey was conducted within a scientifically-developed, pure random sample of the nation’s leading retailers. The retailers in the study were among the largest in the country. The tenth annual survey was conducted in September and October of 2015

For more information on BDO USA’s service offerings to this industry, please contact one of the following regional practice leaders:
David Berliner
New York
  Issy Kotton
Los Angeles

Jennifer Di Giovanni
Los Angeles
  Rick Schreiber 

Mike Metz
  Alan Sellitti
New York

Douglas Hart
San Francisco
  Ted Vaughan

Natalie Kotlyar
New York