Black Friday conundrum

For many fashion retailers, Black Friday marks the beginning of the make-or-break margin period. It has essentially replaced Christmas as the most crucial selling time, driving massive sales in a short period.

A poor Black Friday, where stock doesn’t move as required, can severely impact cash flow and working capital, negatively affecting the entire business and raising serious questions about its ongoing financial viability.

How the game has changed

Retailers once enjoyed healthy profit margins leading up to Christmas, as customers purchased gifts throughout the preceding months. However, the landscape has shifted dramatically. Now, customers anticipate sales and discounts, particularly from Black Friday onward.

Black Friday epitomises this sale-driven mindset. Customers actively seek out deals and expect substantial discounts. While this trend presents opportunities for high sales volumes, it also introduces significant risks for retailers if their strategy is misaligned.

The stock gamble

Many brands develop exclusive stock for Black Friday, products designed to drive volumes without impacting the margin on standard stock. But today’s customers are savvy. If they don’t see real value in these products or offers, retailers can be left with unsold inventory that needs to be cleared. It’s becoming a growing challenge for many brands: how to take part in Black Friday without creating stock issues or giving competitors an advantage.

Christmas sales often reflect Black Friday performance, so a strong result during that period can have a significant impact on overall outcomes. In Australia, Black Friday 2024 was mixed for many brands, and Christmas was even tougher.

When a brand relies on Black Friday and Christmas to drive profit and to cover annual costs, poor performance during these periods could mean they lack funds for next season’s inventory. This might force them to use older stock, which presents its own problems (discussed below), or incur more debt to acquire new stock.

The stale stock problem

When working capital is limited, selling last season’s stock or hoping for favourable weather becomes a necessity. But older stock is often less appealing than fresh, fashionable products, so discounts are often needed to generate needed working capital.

This creates a difficult balance between the creative side of fashion – designing fresh, appealing products, and the practical need to generate enough funds to keep the business solvent. This is a constant challenge that very few mid-market retailers have managed without significant financial support.

The vicious cycle

Here’s how the cycle can unfold: a poor Black Friday leads to a poor Christmas. A poor Christmas means minimal cash for new inventory. With little or no new inventory, a brand risks losing relevance. Being less relevant means worse performance next Black Friday. It’s a cycle that can be hard to break out of once you’re in it.

The constant sale problem

Customers have been conditioned to expect perpetual sales. Black Friday, for instance, has lost its unique appeal as consumers anticipate further discounts just around the corner.

This relentless discounting erodes customer perception of value and negatively impacts retailer’s margins. Customers may delay purchases, even for items they would otherwise buy at full price, under the assumption that a price reduction is imminent.

The bottom line

Black Friday is undoubtedly important, but if a business’s success depends on getting it exactly right every year, they are setting themselves up for failure.

Instead, retailers need to cultivate a business capable of weathering a poor Black Friday.

Understand your cash flow requirements in detail so you know precisely what level of performance is needed to fund the business profitably into the next season. Prioritise building customer loyalty throughout the year to minimise dependence on short-term promotional periods like Black Friday.

If a brand is relevant, valuable and understands its customers better than its competitors, it can build a profitable structure that supports long-term sustainability and growth.

Retailers that are only relevant when everything is half price are not building a sustainable brand; unless discounting is an inherent part of their brand DNA, in which case they’re  essentially operating as a discount store. Unfortunately, there will always be competitors willing or forced to discount deeper, leading to a race to the bottom.