Dive Brief:

• Promotions, including 30% off sales and buy-one-get-one deals, are up 34% over last year, and up 52% during the holiday season (Nov. 1 through Dec. 5) compared to 2015, according to merchandising analytics firm DynamicAction’s Retail Holiday 2016 Index.

• A reliance on promotions has reduced product profit margins for North American retailers by 19% compared to last year, and retailers have seen marketing costs rise 7%, with a 25% jump over the holiday season so far, according to the report. Yet, sales are failing to drive new customer acquisition, which is down 12% for the year and 6% over the holiday season.

• Returns will be a sore spot for North American retailers this year, according to the report: The value of returns are up 6% from last year in 2016 and up 26% over the holiday season. 

Dive Insight:

Amazon has helped usher in entrenched consumer expectations for getting deals and that has led to fierce price competition, DynamicAction SVP of Global Marketing Sarah Engel said in a statement about the report. “From BOGO offers to 40% off everything, Amazon began this process of training consumers to expect a sale, but nearly every major retailer has now joined in this costly race to the bottom,” Engel said in a statement. “In order to cut through the clutter and answer shoppers’ emotional desire to get a good deal, promotions have become table stakes for the holiday season.”

The antidote is to act on good cross-organizational data “and act on it quickly to provide excellent shopping experiences and promote wisely without destroying profit margin,” she said.

There are a variety of ways to protect margins, especially as the season grows late, she said. Retailers should consider shipping thresholds rather than upgrading expedited shipping, keeping in mind that shoppers may be willing to pay more as their need to buy gifts in time grows more acute.

Rather than slashing prices, discounts can be better targeted by offering a low-cost free gift (with a high perceived value) with purchases, Engel said. Retailers that make an effort to better understand and promote affinity products and brands can persuade discount-minded shoppers to buy additional full-price items, she added.

There was some good news in the report: Retailers appear to be getting a handle on excess inventories, which helped drive discounts last year. Due to overstocks in the first half of the year, retailers held an average 12% more inventory year-to-date than they did in the same period last year. But they are doing a better job of keeping the merchandise on hand that shoppers are actually viewing online, with a 3% higher rate of availability for those items.

DynamicAction’s Retail Index: Holiday 2016 is an analysis of more than $8 billion in consumer transactions globally. The transactions account for more than $6 billion in spend in North America and nearly $2 billion in Europe. The Index benchmarked retail trends in key categories from Jan. 1, 2016-Dec. 5, 2016 in comparison to the previous year. 

This story is part of our ongoing coverage of the 2016 holiday shopping season. You can browse our holiday page for more stories.