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Retail Think Tank Says Discounting is Damaging Retail

The KPMG/SPSL Retail Think Tank has warned 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.

GENERAL MERCHANDISE

Retail Think Tank Says Discounting is Damaging Retail

The RTT recently debated 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” for its latest White Paper (also released today and available at www.retailthinktank.co.uk) . 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.

Retail Bulletin readers can have exclusive access to the White Paper by clicking this link.

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

  • 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.

 

Selective quotes from the White paper:

Sian Davies, Henley Centre Headlight Vision said; “Retailers have confused value for money with bargain-hunting, but this has been created by the sector itself.  From the consumer’s point of view, it is difficult to justify non-discounted prices when they see retailers are seemingly able to drop them by 70 percent, later in the season,”

Richard Hyman of Verdict Consulting said:  “2008 will be yet another year when rises in retailers' costs will outstrip growth in their sales.  Following years of cost cutting, most of the low hanging fruit from this source has already been picked. Driving top lines will increasingly determine retailers' fortunes going forward.  Since the opportunity to further drive sales volumes as in recent years is clearly receding, and since we have seen negative price inflation in the non-food sector, sales at higher price points are essential.  However, this cannot happen without improved added value.”

Tim Denison of SPSL observed that: “This is traditionally the least ‘sexy’ part of the marketing mix and yet it is business critical.”

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