The holiday season shopping frenzy may be over, but savvy shoppers who are patient enough to wait and are not too fussed about getting the latest and greatest product know that January sales are likely to bring bigger bargains.
January sales are a completely different proposition to sales at any other time of the year.
Throughout the commercial year, manufacturing brands and retailers will run sales latched onto traditional celebrations (Easter, Christmas, Diwali, Passover, Eid, etc.), work calendar milestones (summer holidays, back to school), or artificially created events (Amazon Prime Day or Black Friday) with the singular objective to drive revenue through increased sales volumes. In contrast, January sales are a corrective mechanism. They try to rectify hyped expectations and overstocking, aiming to help brands and retailers shift older products to make space for newer stuff. Because of that, January sales have a different feel for the consumer and a higher cost for the brands and their distribution chains. One of the sectors feeling the impact most acutely is consumer electronics.
Impact for consumer electronics brands
Consumer electronics manufacturers face two buckets of costs related to January sales. The first bucket includes costs directly related to executing the January sales. The second bucket gathers all the costs to deal with the aftermath of the holiday season.
One of the most immediate directly related costs is the reduced profit margin on each product. For an item originally intended to be sold at a 100% markup and then discounted by 30%, the manufacturer might see a direct revenue reduction of up to 15-30% on that item, depending on promotion agreements with retailers and the distribution model. If products aren't sold during the expected holiday rush, there's also a cost associated with holding onto that inventory. This includes warehousing costs, potential product depreciation, insurance, and other overheads that could push costs up by a further 2-5% (or more) if items stay in stock longer than anticipated. Moving excess inventory may require manufacturers to support retailers with advertising funds or promotional allowances, adding another cost for the manufacturer. These allowances can vary but might cost 1-3% of revenue, especially if manufacturers launch aggressive post-holiday promotions.
January isn't just a month of sales but also of returns. Returns can result in open-box items, refurbishment costs, and potential losses if the product can't be resold. Returned products often need to be more heavily discounted to leave the shelves. While this isn't a direct result of January sales, it is a cost associated with the post-holiday period. Whether discounted returns or excess stock, products sold in January have the same warranty and support obligations. If products are sold at reduced margins, but the post-sale support remains the same, this could represent an increased cost per unit sold. Handling returns, refurbishing, and offering post-sale support for items sold at lower margins might eat up another 1-5% of revenue. But holding onto older inventory is rarely an option. Doing so may prevent manufacturers from producing or promoting newer models, delay product launches, or lead to missed opportunities in the market. It is a fine balance between protecting future opportunities by clearing the shelves and protecting the current brand perception, as heavy product discounts can affect how consumers perceive a brand. Consumers might view a product as less valuable or of lower quality if it is constantly on sale.
In the long term, if there's a consistent pattern of overproduction leading to post-holiday discounts, manufacturers might have to adjust their supply chain strategies, which could involve renegotiation with suppliers, changes in production schedules, or even layoffs in extreme cases.
Aggregating the above, a very rough estimate might suggest that January sales and associated post-holiday factors could cost consumer electronics manufacturers 20-40% of the revenue generated from those specific sale items. (See Figure 1.)
Impact on consumer electronics distribution chain
Consumer electronics manufacturers typically navigate a series of distribution channels before reaching the end consumer. Some manufacturers sell their products directly to consumers, often through their own websites or brand stores. Apple, for example, has its own retail stores and online stores. The most common points of sale for consumer electronics are probably retailers, including both brick-and-mortar stores (like Best Buy or MediaMarkt) and online retailers (like Amazon). Smaller retailers and specialty boutique shops specializing in specific types of electronics (for example, high-end audio equipment) typically get the products from distributors and wholesalers. Some electronics products offered to consumers are equally applicable in a B2B environment. Value-added resellers (VARs) who bundle a manufacturer's product with software or services and provide a complete package are the more common sales routes in the business-to-business domain. The costs of January sales ripple through this entire distribution chain.
Holding onto unsold inventory can tie up capital for distributors and retailers. Plus, unsold holiday inventory takes up retail space that could be used for new products. January sales help free up cash and clear shelf space, but at the cost of reduced margins that increased volumes can't always offset. For specialty stores, constantly discounting products can impact the premium image these stores might be trying to maintain. If retailers can't move inventory, they might return it to distributors, especially if there's a return agreement in place, which can impact the distributor's bottom line. For VARs, if the hardware part of their bundle is on discount, it might force them to discount their entire package, affecting their service or software margins. However, holding onto outdated bundled hardware is rarely a good option, as it can make their service/software package less attractive.
While January sales help move inventory and generate revenue, they come at the expense of reduced profit margins for almost every entity in the distribution channel, not just manufacturers.
Using incentive strategies to reduce the impact
Manufacturers and their distribution chain fully accept that consumers have come to expect sales in January for electronics products, especially older models. However, there are ways to minimize the impact, and they all revolve around maximizing sales before January to reduce the amount of stock ( and older stock) left unsold.
Evidence suggests that consumers expect retailers to offer sales starting earlier and lasting longer than they did traditionally (see Figure 2).
Manufacturers can use various incentives like back-end rebates, SPIFs (sales person incentive fund), and market development funds (MDF) to enable and motivate channel partners to sell more during those extended sales periods, reducing January leftover stock.
By offering rebates for reaching certain sales thresholds, manufacturers shift the focus from front-end price cuts to back-end rewards. They move away from devaluing product stock through discounts to motivating partners to sell higher volumes earlier, reducing the need for January sales.
Manufacturers can ensure salespeople promote their products more aggressively and ahead of competitor brands by rewarding them through SPIFs for pushing specific offers. Again, this strategy can reduce overstock that might end up in January sales. The SPIF needs to be substantial enough to drive the desired salesperson behavior.
Market Development Funds provided by manufacturers to channel partners to support marketing activities such as in-store displays, online marketing campaigns, or other promotional activities are also an effective strategy. Such funded activities can boost the visibility and desirability of the products during the peak selling season, reducing leftover inventory post-holidays.
A successful strategy would likely combine all three elements and follow five key steps:
Step 1—Prioritize products: Manufacturers should identify which products are most at risk of becoming overstocked post-holidays and target incentives accordingly.
Step 2—Collaborate with partners: Engage with channel partners to understand their challenges and tailor incentives to address them.
Step 3—Monitor and adjust: Keep a close eye on sales data and feedback from channel partners. Adjust incentive programs as needed to ensure they're effective.
Step 4—Combine incentives: Use a mix of back-end rebates, SPIFs, and MDFs to motivate different parts of the distribution chain. For example, use a MDF to boost overall brand visibility, back-end rebates to incentivize retailers, and SPIFs to motivate individual salespeople.
Step 5—Clear communication: Ensure all channel partners understand the incentive programs and how they stand to benefit.
January sales are a constant in the retail calendar. However, for consumer electronics brands, the key to cost efficiency lies in proactive holiday season strategies. By smartly balancing the expenses of November and December promotions with partner marketing activities and rewards, brands can effectively manage post-holiday costs. Employing strategic incentives and promotions allows these manufacturers and retailers to significantly reduce unsold inventory after the holiday rush, thereby minimizing the financial impact of January sales. This approach ensures a more streamlined and cost-effective transition into the new year.
Sources:
Holiday spending statistics: 2023 Holiday Outlook: PwC
Holiday 2022: Online sales rose 3.5%, boosted by discounts (cnbc.com)
