A Big Deal for Retailers this Black Friday – but what to do with the Cash?

As December creeps ever closer, for many in the workplace this means finalising year-end performance and setting plans, targets and budgets for the next year; ‘top-down’, ‘bottom-up’ and ‘stretch’ become the business buzzwords of choice. However, for many retailers the months of November and December mean an intense pressure and focus on tight revenue and expenditure management, because for many around the world, this is the most expensive time of the year. That’s right – it’s shopping season! The retail sector relies heavily on big shopping events in the year with many depending on the key holiday periods to meet their targets. For those corporations used to more stable revenue flows, it can be a significant contrast. For example, the National Retail Federation (NRF) is expecting this year’s holiday retail sales in November and December in the US to total up to $730bn^[1], a staggering amount. And lest we fear any lull in consumer confidence, that’s a predicted increase of around 4% compared with the same period in 2018. The NRF also estimates that this period is responsible for as much as 30%^[2] of a US retailer’s sales for the entire year. This period includes the phenomenon of discounted sale events prior to year end, and even more specifically the concept of very short or single-day discounted sales. An explosion of sales after Christmas, often starting on Boxing Day (26 December) or on New Year’s Day were the norm in many markets including the US and the UK as recently as a decade ago. While these sales traditions still exist, we now have events such as Black Friday and Cyber Monday enticing consumers with discounted products. Black Friday, which started in the US, but now permeates in various forms to many other markets, is according to McKinsey, the top holiday shopping event in the US, Canada, and the UK^[3]. Contrastingly, Singles’ Day in China, which happens earlier in November than Black Friday and Cyber Monday, was the largest shopping event to ever happen globally in 2018. A total of RMB314bn ($45bn) was spent on goods and services in a 24-hour period. To add some perspective – that’s three times the combined value of Black Friday and Cyber Monday online sales in 2018.^[4] The immense popularity of Singles’ Day shows no sign of abating with another record-breaking year in 2019^[5]. For retailers, a successful sales period means a sharp increase in their cash balances which, at a practical level, can be a mixed blessing. It is critical to place and deploy that cash as efficiently and as safely as possible. This cash may be used to reduce debt, to fund internal or external dividends and to invest in the business. However, there can be a lag for deploying this for its intended use. There may also be excess cash above the levels needed to meet the aforementioned obligations. Problems may present themselves if treasury or investment policies are geared more towards the lower average balances of the year rather than larger seasonal flows. For example, retailers will need to question if there are sufficient counterparty limits, counterparties for the sizeable spikes and whether sufficient diversification can be achieved. Money market funds (MMFs) - pooled investment funds that invest in short-dated money market instruments such as bank and government debt - are well equipped to manage such cash flows and are an example of an investment product that retailers should consider keeping in their arsenal. MMFs typically provide daily liquidity and a high level of diversification. These factors can support the needs of retailers and other investors looking to have their balance professionally managed and spread across counterparties. Those funds with a large scale of assets under management are especially well placed to be able to service investors with seasonal or temporary balance increases as well as more sticky balances, while the fund manager maintains investor concentration limits as an important risk management tool. Global retailers can also look to the truly global asset managers who operate with a consistent risk and investment framework. This ensures, for example, that the proceeds of Singles’ Day RMB cash in China is invested to similarly high standards as their Black Friday or Cyber Monday USD cash in the United States, and in turn for GBP and EUR investment in Europe. So, we wish retailers a successful season and a happy end to the year.     ^{[1] https://nrf.com/insights/holiday-and-seasonal-trends/winter-holidays/winter-holiday-faqs [2] https://nrf.com/insights/holiday-and-seasonal-trends/winter-holidays/winter-holiday-faqs [3] McKinsey, 2019 Holiday Season Shopping Report: Shoppers are ready to spend but retailers need to personalize [4] https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/what-singles-day-can-tell-us-about-how-retail-is-changing-in-china [5] https://www.telegraph.co.uk/business/2019/11/11/chinese-spend-record-30bn-singles-day/}