December 19 2008

Pre-Christmas discounts hit record levels, says Ernst & Young

Ernst & Young's annual Christmas pricing survey has found that pre-Christmas discounts are averaging 37% of the full selling price

Early findings from the Ernst & Young annual Christmas pricing survey reveal that discount levels and promotions across the retail sector have hit new heights in the run up to Christmas. Overall, pre-Christmas discount levels have so far averaged over 37% of the full selling price. Interestingly, though, that is only 3% up on last year's 34%.

"A near total collapse in consumer confidence, driven by falling house prices, surging unemployment and the dismal economic outlook, has left shoppers with little festive cheer in the run-up to Christmas," says Jason Gordon, retail director at Ernst & Young. "So it's no surprise that many retailers have had to offer record levels of discounts and promotions, in an attempt to attract such cash-strapped consumers."

"Since the beginning of November," he adds, "we've seen every conceivable promotion on the high street — from viral marketing to store-wide promotions and multi-buys. This promotional activity peaked in early December, but since then there has been a marked shift towards straight forward price cuts — at unprecedented levels across wide parts of retailers' ranges."

And the level of discounting is expected to increase even further in the final days before Christmas and into January. "With so many retailers already offering massive discounts right across a depressed and highly competitive retail sector, it's clear that some retailers' promotional strategies will be less effective than planned. Consequently, we expect even deeper cuts in the last minute pre-Christmas frenzy and January sales, as retailers desperately try to offload excess stock," adds Gordon.

Key themes from the early release figures indicate:

• Average price cuts are deeper than ever before — 37.1% versus 34.6% in 2007 and 33.6% in 2006.
• Promotional activity has been more widespread and diverse than in previous years, with a vast array of promotional techniques being used from the beginning of November. 2008 has also seen the first move by some retailers to offer promotions according to time of day.
• From the second week of December, there was a clear shift from promotional activity to markdowns. In most cases, these price cuts have been deep and untargeted, often covering whole departments within a store. This contrasts with last year when discounts were focused much more on specific categories and product lines.
• Applying these broad-brush discounts has resulted in 'ugly' price points at the item level, for example £24.01 instead of a clean £24. Many retailers have seemingly abandoned their recent strategy of moving to rounded price points. The reduction in VAT has further confused price points.
• Amidst the exceptionally high level of discounting, the VAT cut has gone largely unnoticed by consumers on all but the most expensive goods. Not only has the change been an enormous operational challenge for retailers, they will have to review the impact on performance and potentially revisit their pricing architecture ahead of 2009's spring/summer season.
• With such high levels of promotions and markdowns taking place, in-store compliance has suffered in some cases. For example, poor or incorrect signage and misleading promotional information has been observed in numerous stores.

All sectors have been subject to extensive promotional and markdown activity, but have displayed different dynamics, says Ernst & Young. For example:

• Entertainment: Plenty of half-price (or better) offers on wide parts of the range, accompanied by widespread promotions, notably multi-buys.
• Electricals: Continued heavy discounting on big ticket items; most retailers have also made huge efforts to capitalise on the reduction in VAT.
• Footwear: Discounting started earlier than last year but price cuts have generally been shallower. Although the cold weather has undoubtedly helped footwear retailers, many have clearly improved their stock management processes.
• Clothing: Highly variable — some retailers continue to sell at full price whilst others have already offered discounts of up to 70%. Markdowns of 20% to 40% across much of the range have been common.

In spite of the record levels of discounting and gloomy outlook, there are some bright spots across the retail sector, notably food, niche retailers with a strong offer and young fashion. "We're certainly seeing a greater level of polarisation between retail sectors than ever before," says Gordon. "In particular, big ticket items such as electricals and furniture, or other products linked to the housing market continue to come under enormous pressure. In contrast food retail which accounts for some 45% of all retail sales, keeps delivering solid growth in spite of some consumers trading down."

"Against this backdrop," he adds, "we are forecasting an overall decline in like-for-like sales across the retail sector of approximately 2% over the Christmas period, albeit with huge differences between individual sectors. We are also likely to see further increases in retailer profit warnings and high street casualties in the New Year, as the recession really starts to bite."

by Sarah Clark (Web Editor)