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Is the discounting drug worse than the illness?

Peter Sheppard

I am continually amazed when walking retail malls the amount of discounting that is offered by virtually all general merchandise retailers, be they fashion, homewares, jewellers or whatever category you can think of.

This is true for the vast majority of the year, be it in peak trading times or not.

I do not understand why a retailer would offer 30 per cent off kids school shoes in January, when the vast majority of school shoes are sold, or 40 per cent off women’s wear in the week before Mother’s Day or 20 per cent off toys in December, and so the list goes on.

In addition, the proliferation of discounts in Australia seems far more prevalent than in most other similar societies around the world.

Twenty five or so years ago, Target started discounting by 7.5 per cent on a Tuesday once a month, and stayed open until to midnight to handle the volume of shoppers, then it became 10 per cent until 9.00 pm, then 15 per cent with no extended hours and so the deterioration of the appeal diminished.

But the regularity and the percentage off kept growing until no one would buy at the ticketed price. “Why pay full price for towels when I know they will be cheaper next week” was a common thought.

And so the ‘rot’ or ‘cancer’ of retail in Australia was born.

In simple terms, in the early days it was about a short term grab at market share, But this instilled a sense of distrust and confusion by the brand of the ‘real price’ offered when not on promotion.

And so many shoppers now have the belief ‘never to pay full price again’.

For a retailer, this is a nightmare. Have a look at the effect of discounting on a retailers bottom line, if sales do not increase due to discounting.

Discounting_example_graph_sales

Is this similar to what has happened at Myer during Q3?

Conversely, if the bottom line of $5.00 profit per $100 sales is to be maintained, but at 25 per cent GP instead 50 per cent GP, then logically sales will need to double to $200 to achieve the $5.00 profit. (All outgoings being equal).

This is a difficult threshold that is not often achieved.

In addition to the diminished financial result, what is the damage done to the brand, and its ability to sell at the full-ticketed price again?

What does it do to the trust in the brand? What do the people who did pay full price prior to the promotion think? Not happy as they would feel they have paid more than they had to!

So in reviewing Myers third quarter results announced recently, that sales had ‘only dropped by 2.9 per cent’ despite a strong season of discounting, one can only await the next announcement of reduced profits, or should it be losses?

To me, the true measure of a retailer’s ability is the management of its gross profit. Anyone can give the product away at discounted levels, but a truly fit retailer concentrates on giving the customer what they want, at a constant fair price, builds trust and protects a reasonable, sustainable gross profit.

One of Kmart’s secrets to its resurgence is ‘everyday low prices’ you can trust. You will not see them offering a per centage off across the store!

Being a good retailer means finding solutions for the business without reverting to the discounting drug as a default solution. It would seem to me the ‘drug’ is more likely to kill than the illness and that it is better to treat the core illness.

First published InsideRetail on May 30 2018

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