Shoppers fear a discount gap this holiday season. Here’s how retailers are responding

While discounts are one of the few incentives getting consumers to make a purchase this holiday season, many shoppers are anticipating a pullback.

According to research from Gartner, 40% of shoppers expect fewer discounts than in 2024. At the same time, retail buyers expect 76% of consumers to only buy discretionary products during promotional periods, per a Deloitte survey.

And Adobe Analytics forecasts nearly one-fifth of online sales coming during the five-day period covering Black Friday and Cyber Monday, up from just 6.3% last year, suggesting deal days are even more important to shoppers this year.

In other words, the very thing juicing spending in an uncertain economic environment could be in short supply this holiday season, placing retailers in a position where they can’t pull the same levers to drive sales, and leaving consumers in a lurch as they wait around for deals that may never come.

“I expect this holiday season is going to be pretty intense,” John Tomlinson,global director of research at M Science, told Retail Brew. “I don’t think it’s going to be one where you’re going to see significantly better margin trajectory this year versus prior years.”

But is this discount gap inevitable or are consumers’ fears misplaced?

Balancing act

Nikki Baird, VP of retail innovation at Aptos, told Retail Brew that retailers would happily discount more given the level of responsiveness they are still getting from customers, but the question going into the holidays is whether they have the available inventory to justify higher discounting.

In response to tariff-related cost increases, she added, many retailers simply brought in less product. As a result, they’ve now got less slack in their inventories and have proceeded more carefully through the holiday season to make sure they hit their margin goals while also maintaining product availability.

She said retailers are “trying to make sure that they don’t go too hard too early and then not have enough inventory, or end up not capturing the margin benefits they think they could because they may not have as much inventory to satisfy consumer demand.”

• Indeed, discount rates are set to dip after Black Friday weekend, per Adobe Analytics. Discounts will run as high as 28% off listed prices through Cyber Week, then drop down to the 11%–17% range in December.

As McKinsey Senior Partner Emily Reasor noted in a recent podcast, retailers need to make sure their promotional strategies are “right for consumers but also work within the P&L [profit and loss statement].”

More than a deal machine

That’s another way of saying retailers can’t discount as much as they want whenever they want, and picking your moments can be challenging in an environment where there is significant competitive pressure to offer steep and frequent promotions.

“In certain categories—and certainly in discretionary categories—consumers are really looking for deals, and that is a struggle for retailers because it becomes hard to not become just a coupon or a deal or sale machine,” Katherine Black, partner at Kearney, told Retail Brew.

Gap CEO Richard Dickson touched on this challenge during a recent earnings call, when he lamented the fact that the apparel brand had gone from focusing on merchandising and storytelling to becoming a “promotional retailer that ultimately sold apparel.”

“Somewhere along the line, we lost that plot,” he said.

To combat becoming merely a coupon machine for shoppers, retailers are experimenting with different kinds of promotions and incentives.

Black said one common strategy is to offer shallower though more frequent discounts, though she’s not seeing evidence of that yet in the market. What she is seeing—as far as financial incentives that could replace straight discounts—is the increasing prevalence of buy now, pay later offerings.

• On that note: Buy now, pay later is on track to drive $20.2 billion in online spending this year. That’s up 11% year over year, per Adobe Analytics.

AI changes the game

Whether these options are viable alternatives to promotions or not, there is a bigger question facing retailers: What is their value to customers outside of price? Coming up with a compelling answer could be key in a world where AI increasingly mediates customer interactions.

“Using a platform like ChatGPT or Perplexity…to find the lowest deal can be a real game changer for the retail industry, because suddenly price transparency has never been more prominent,” Black said.

This is scary for retailers, Baird said, because there’s “increasing concern they have less agency in putting their story in front of customers.” Customers may come to their website via a chatbot, she said, and they have no idea what drew them there.

And while this may still seem like a future problem, AI shopping is on the rise. According to Adobe Analytics, referrals to retail sites from GenAI are expected to spike 500% year over year. Accordingly, it could become more important for brands to distinguish themselves in ways other than their pricing and discounts.

Balaji Balasubramanian, president and chief product officer at SAP CX, a software company specializing in business solutions, said “there are several retailers who can benefit, not just from a value conversation that is tied to discounting and prices, but tied to experience.”

Fortunately for retailers, there are some positive indicators. SAP’s Customer Loyalty Index, which tracks customers who return to stores without incentives, increased to 73% in the US.

SAP attributes these gains to the adoption of AI, personalization, and connected systems, but there may be something to the argument that the same technologies challenging retailers could be their salvation.

Sheryl E. Kimes, a revenue expert and professor at Cornell University who studied discounting practices, said retailers can use AI technology themselves to sort through their competition and then ask themselves a crucial question: “What can I offer that they’re not able to offer?”