The Discount Trap

When Jaeger went bankrupt earlier this year it became clear how much of a role discounting how played in their downfall. 70% of all product sales throughout the year had been discounted..

The Discount Trap

“30% off all Brands” House of Fraser

“20% Everything This Weekend Only” Office

“30% off everything for today only” Gap

It sounds like Black Friday but it’s not, it’s a snapshot from the end of October and a clear example of some of of the biggest names in retail falling into the discounting trap that is a business killer.

When Jaeger went bankrupt earlier this year it became clear how much of a role discounting how played in their downfall. 70% of all product sales throughout the year had been discounted..

It’s easy to see why companies end up in this place though, take the latest monthly CBI Distributive Trades Survey, released last month, as a prime example. This showed 15 per cent of retailers reported sales volumes were up in October compared to a year ago versus 50 per cent who reported they were down. That gave a rounded net reading of minus 35 per cent, the worst reading for this survey since March 2009, when the UK was deep in recession and caught up in the credit crunch.

The report set off something amounting to an earthquake in a range of newspapers decrying that we were heading for a recession and that the economy was doomed.

In reality the CBI numbers are often a poor measure and are highly volatile. Last month they were plus 42 per cent, but that doesn’t make for as exciting headlines.

Even if CBI report isn’t the most reliable measuring tool for brands and retailers there are clearly huge challenges facing the whole industry, no matter the companies size.

At the start of the year we started talking about the ‘perfect retail storm’ and how this was going to have a negative impact on many companies. At a time of lowered consumer spending, companies were faced with an increase in their staff costs, their product costs and their property costs due to government policy and uncertainty.

It’s clear by the discount driven actions of the companies above that these changes are sadly biting for many retailers but it’s also clear to see that there is yet more to come. Consumer spending is expected to reduce further next year and now that the Bank of England has started to increase interest rates, we’ll witness many consumers with less spending money left over every month following their mortgage payments. My bank was certainly quick to pass on the 0.25% increase, I can tell you.

The standard solution businesses adopt to handle issues like this is to batten down the hatches and slash prices to retain market share but it’s clear that this causes significantly more damage, long term. Consumers become accustomed to buying with a discount and won’t unless it is provided, creating a prison for brands where they have no choice but to give in and do as the consumer demands. If they don’t then there are plenty of other companies that will give them the discounts they want.

There are other routes which avoid the discounting trap,

When announcing their recent results Debenhams set out a clear vision for the future of their company with the inclusion of their plans to introduce in-store gyms with a partner and their push to roll out Blow Ltd nationwide following investment earlier this year.

Invest in the Product
So often overlooked by a desire to focus on improving the website, increasing traffic or working with a new influencer. The most important thing to any retail company is the product and it is vital that this is right, not just to attract customers but to ensure they keep coming back for more. The brands that are focused on getting this right and creating a clear proposition are currently the most successful around. Vans are a great example of this and have been the stand out performer of the quarter on Mallzee.

Direct to Consumer
Retail is all about the margin and the best margin is when you make your own product and go direct. With new digital channels if managed correctly DTC can become a huge part of any brands mix. For retailers? Well, it’s time they launched their own brands and further differentiated their offering.

Retail is shaping up to be a hugely interesting space in 2018 with lots of difficult questions needing answered by companies of all sizes. For us the ones that use data at the heart of their companies will be the ones that answer these problems best.

Cally Russell

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