February 19 2008

Discounting is damaging retail

At least that’s what the brains behind the KPMG/SPSL Retail Think Tank think

We’ve been ignoring the KPMG/SPSL Retail Think Tanks for the last few months as it seemed like there was precious little original or interesting thinking, and lots of stating the obvious, which is neither interesting or newsworthy. However, the latest Think Tank caught our eye and made us sit up and investigate further, instead of the sitting on the fence they’ve actually decided to tackle things head-on.

The debate this time was around the subject, “Discounting, promotions and sales are now a normal part of retailing practice but their widespread use is detrimental to the health of the sector” (available at www.retailthinktank.co.uk) and the conclusion of the debate is “that the current retail culture of constant discounting, sales and promotions is unsustainable and likely to lead to increasing numbers of insolvencies. Retail in the UK is at a turning point and requires a new set of strategies to survive.”

Its warnings are based in part on retailers’ actual Christmas trading experiences as well as looking ahead to its predicted difficult first quarter of 2008. This, it believes, will be more downbeat than at any time since the RTT was formed in early 2006. Pressure on retailers is expected in all of the three major business drivers of margins, costs and most recently demand, particularly outside the food sector.

The key observations of the RTT’s White Paper are:

• The use of sales, promotions and discounting has fundamentally changed away from a pure clearance role to a range of more tactical and reactive purposes.

• Sales, promotions and discounting affect shopping behaviour in a way that can be detrimental to the sector. It also has the potential to erode both retailer brands and the in-store experience.

• There is a lack of transparency of the level or the effect of promotional activity on retailer health or future prospects.

• If discounting programmes continue on their present path, the situation runs the risk of becoming untenable for retailers in the longer term.

• Over recent years, sales growth by value has slowed while sales by volume have increased. This has meant negative price inflation in some sectors, obliging retailers to sell more items just to stand still let alone grow. This cannot be sustained ad infinitum, particularly as increasing sales volume further is becoming much more difficult.

• Customers in 2008 will be looking for more to inspire them to spend more. This means adding more value; better quality, better functionality, greater relevance, fashion, styling etc.

• When used purely as a reactionary tactic, under current market conditions, sales and promotions run the risk of failing to achieve the intended result and should be scrutinised more closely than ever before.

• Reversion back to a more ‘traditional’ model of using sales for stock clearance purposes would provide greater solace, but this might require a significant change of mindset, both on the part of retailer and consumer.

• A more scientific approach to pricing strategy is called for, which optimises demand against price throughout the product life cycle.

• Retailers which focus on their value proposition and use sales and discounts/promotions as a planned, strategic tool are most likely to be more successful.

• Retailers should make efforts to add value to drive sales rather than reduce prices.

That’s a lot of observations and while we think they have a point when it comes to the high-street, it’s not entirely clear that this translates into the Internet World. Discounting is one of the central pillars of Internet retailing and without it Internet retailing fails. We’d be interested to get your thoughts.

by Marcus Austin (Web Editor)