The topic for this white paper was debated by the KPMG /SPSL Retail Think Tank in early 2008 during what is traditionally the main ‘sale season’ of the retailing year. This was also timely as the
Christmas shopping season of 2007 was widely reported as having been heavily reliant on discounting to drive footfall.
During its regular quarterly review, the RTT predicted that the first quarter of 2008 will be tougher in terms of its three key indicators of health – costs, demand and margins – with predictions for the latter indicator being the most negative.
So, against this challenging backdrop, can retailers afford to keep discounting and promoting products? And is it good practice to do so anyway? In debating this topic, the RTT concluded the following:
- The use of sales, promotions and discounting has fundamentally changed. Historically, their primary purpose was to dispose of surplus stock at pre-determined times of the year. Over time this has evolved into widespread use of a variety of techniques either on a more tactical or a reactive basis;
- Irrespective of whether the customer has come to expect the current landscape or in fact played a hand in creating it and welcomes it, it continues to affect their behaviour in a way that can be detrimental to the sector. At the same time it has the potential to erode both the brands of, and shopping experience within, individual retailers;There is little transparency/visibility outside of a retailer’s own business of the level or the effect of promotional activity on its 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 to grow, and on the back of a burgeoning value sector, retailers have persuaded consumers to buy more. This cannot be sustained ad infinitum and increasing sales volume further has become 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.;
- Reversion back to a more ‘traditional’ model of using sales for clearance purposes would provide greater solace, but this might require a significant change of mindset, both on the part of retailer and consumer;
- Retailers which focus on their value proposition and use sales anddiscounts/promotions as a planned, strategic tool are most likely to be more successful.
The Changing Landscape
For the purposes of the white paper, the RTT considered a broad definition of the topic area including;
- Sales, including clearance, end of year and mid season;
- Special or seasonal discounts or markdowns;
- Promotions, such as buy one, get one free; two-for-ones; on-line/e-mail vouchers etc.
Traditionally, ‘end of season’ sales were the way in which retailers disposed of surplus stock at regular, pre-determined times during the trading year; primarily in January and at the end of the summer. These sale times were well known by consumers as part of the shopping calendar and people understood that outside these regular sale times they would pay full price. It seemed to be a system that worked well for many years and suited both retailers and consumers.
However, the definition of sale is now thoroughly ‘blurred’. As Nick Bubb of Pali International observed: “The concept of more regular and varied types of sale offer was originally brought from the US , where promotions such as ‘25 percent off for three days’ drove business.” This then became prevalent in the department store and furniture sectors in the UK.
A huge variety of incentives are now commonplace across the nation and have fundamentally changed the retail canvas. The reasons for sales/discounting may now include one or any combination of:
- generating footfall to stimulate interest and product exposure;
- increasing top-line sales;
- cash generation (e.g. to cover financing shortfalls or peak cash requirements such as quarterly rental or VAT payments);
- driving market share;
- targeting or engaging with new/different customer segments;
- clearing stock;
- reacting to/anticipating competitor activity;
- being an integral and planned part of business strategy;
- supporting a brand proposition built around price-based positioning (e.g. a regular ‘always on sale’ public face, which is particularly prevalent in certain furniture, carpet and fashion retailers).
The RTT agreed that sales activities have now moved from a rigid, well-understood, pre-determined approach to one that is multi-faceted and complex. The balance has tipped towards something that is often tactical and also more reactive, as one retailer responds to the activity of another. Helen Dickinson of KPMG said: “The problem with sales in the current situation is that it is a ‘zero sum’ game. In other words, this increasing level of activity has not grown the market, as a whole, in sales terms.”
With regards to the true impact on margins of the current promotional approach, the RTT felt this was harder to call. For one thing, there is little visibility externally and for another it is impossible to ascertain what would happen if a discount were not offered. However, at risk of stating the obvious, unless the increased sales compensate for the loss of margin given away by the discount, profitability will inevitably fall.
As the heightened level of promotional activity is not growing the overall market per se and notwithstanding that the impact on margins is difficult to determine, the RTT believes that there will be many retailers in danger of under-achieving the objectives which were set out to justify the activity in the first place.
The effect on consumer behaviour and their brand perception of the retailer
Whilst on the face of it, high levels of discounting and promotional activity may appear attractive to consumers in the form of lower prices, the RTT believes that widespread use of it can create risks for retailers. First and foremost, it believes that erosion of a retailer’s brand is one of the biggest risks faced.
Paul Clarke of Barclays Retail & Wholesale Sector posed the question: “If consumers are eventually persuaded to go into stores they don’t usually shop in at sale time, do they see a different proposition? Do sales destroy brands?”
The RTT consider that a poorly executed sale or promotionprovides a lesser experience for shoppers and potentially undermines relationships which the retailer has worked hard to create. The value proposition can be diluted and the customer confused. Furthermore consumers are often irritated by seeing goods they bought previously appear at reduced prices at a later date.
The trend towards ongoing promotional tactics has also now ‘trained’ consumers, if they have the freedom or opportunity, to wait for discounted offers. The RTT suggests that this works to incentivise ‘bad’ behaviour from the retailer’s perspective and turn previously ‘good’ customers into ones with a constant bargain-hunting mentality. The RTT believes that the consumer has come to expect this continually changing landscape as the norm and that the likelihood of ‘every day’ discounting by a particular retailer can encourage customers to delay purchases.
There is also the issue of ‘breaking faith’ with consumers. If a store’s point of sale (POS) material always says ‘up to 70% off’, yet the customer never seems to believe they receive this level of discount, they can easily lose faith and take their custom elsewhere. Constant price reductions devalue goods, and fuel price deflation.
Mark Teale of CB Richard Ellis commented: “During sales, shoppers are often attracted to stores that they do not usually patronize. The number and type of stores visited by shoppers increases during sales periods. Sales, in this context, are a way of broadening the customer base: building the awareness of offers. Events programmes in shopping centres have the same purpose: encouraging visits by shoppers who usually shop elsewhere with the intention of converting them to regular customers. Sales, and events generally, are an important element in the overall retail marketing process. Not having sales – when others do – reduces the opportunity to convert new customers to regular shoppers.”
Retailers may now feel that they are trapped between a rock and a hard place and that there is a risk that they cannot very easily or quickly exit the cycle of discounting. “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,” said Sian Davies, Henley Centre Headlight Vision.
The City view
The RTT agrees that the City focuses very heavily on like-for-like sales growth figures as a barometer of the success of retailers.
Tim Denison of SPSL summed this up when he said: “The City should be encouraging retailers to increase margins, not sales at any cost. Retailing is a business like every other. Unfortunately it’s far too easy to be fixated on sales figures.”
The group feel that the City is, on the whole, unimpressed by ‘blanket’ discounting, but views discounting for strategic purposes somewhat more favourably. “It can be an art,” said Nick Bubb. “The City admires the sales and discounting process if it has the right effect on the bottom line.” The RTT observes that many retailers are admired for ‘holding firm’ and having a very structured sales ‘season’ and still using sales to move surplus stock.
It is however, quite understandable why the City concentrates on sales-derived performance. It simply does not have the benefit of transparency in the relationships between retailers’ revenues and their gross margins and therefore cannot make fair comparisons between different companies and their tactics. Helen Dickinson observed: “There are no requirements for retailers to disclose gross sales before discounts or the impact of discounts on their gross margins and there is little consistency between what costs over-and-above the cost of sales retailers include in their margins.”
The RTT believes that the current levels of discounting and promotions in today’s financial climate are untenable long-term; unsustainable; and unhealthy for the retail sector.
The situation, the RTT warns, is now one of a self-perpetuating, vicious cycle, where margins for the retail industry as a whole – as well as those of their suppliers – are being negatively impacted.
Richard Hyman of Verdict Consulting highlighted this when he 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.” This is clearly contrary to the situation currently being seen in the sector, outside of food, in the UK. Mark Teale agreed, saying that it seems there is a current mindset that: “If prices don’t change (downwards), stock won’t move.”
Regulation, however, is not the answer, says the RTT, despite it being commonplace in some other European countries, where local or, indeed, national government determines when a sale can be held or has pre-set rules which require all items to be sold above cost.
However, the RTT firmly considers that a ‘rebalancing’ is required.
Vicky Redwood, Capital Economics added: “There is some merit in a return to the traditional model, with sales being used primarily for clearance purposes.” Not that this means that those whose proposition is based squarely on price will not have a place in the retail sector, particularly at times of difficult trading, such as now. It all is rooted in the basic proposition: ‘you get what you pay for’.
It was also noted though that there are instances where discounts and promotions can be useful in facilitating behaviour change. “Discounts and promotions can be used in a positive way,” stated Prof. John Dawson of the Universities of Edinburgh and Stirling. “For example, discounting or promoting fruit and vegetables as part of the five-a-day initiative can help to encourage healthier eating habits. No-one can argue against that.”
The RTT absolutely concedes that the use of discounting and promotional tactics have a place in modern retail and can be beneficial to consumers by increasing competition between retailers and ensuring prices are competitive. Equally they can create confusion for customers, a less satisfying in-store experience and diminish brand value. From the point of view of retailers, sales and promotions can be very valuable if used in the right way as a strategic tool with a clear objective. However, when used purely as a reactionary tactic, particularly under current market conditions, sales and promotions may not achieve the intended result and should be scrutinised more closely.
Given the RTT’s belief that the current landscape of discounts and sales is untenable in the longer term, it discussed how it sees the situation developing. The RTT believes that retailers which use promotion and discounts more strategically, as opposed to tactically, will be more successful.
The group agreed that value will be the key pillar of retailers’ strategies going forward. To maintain and improve its prospects, a retailer’s focus must be on plans and actions which enhance stakeholder value. Price is only a part of the value equation; product, brand and the environment are equally important.
Across the market as a whole, there is a need for retailers to become more scientific in their approach to pricing.
Tim Denison observed that: “This is traditionally the least ‘sexy’ part of the marketing mix and yet it is business critical.” Retailers are increasingly placing more emphasis on price strategy, development and planning; such as impact assessment, price sensitivity, optimisation research and price-increase management.
The RTT concluded that the retailers which are successful in the future are those giving more attention and dedicated resource to creating their value proposition for consumers, and developing and managing a price strategy with the emphasis on margin maintenance rather than sacrifice, where promotion management and compliance can add more distraction than inherent value.
The appropriate relationship between full price and sales and discounts is a fine balance to optimise price and demand over the long term. If that balance is achieved it will drive value enhancing customer behaviour, such as building loyalty.
As such, the RTT believes the successful retailers in the future will be those who:
- Are committed to adding value to the consumer buying experience. (See the RTT’s white paper ‘What are the secrets of successful retailing and how can retailers survive and prosper in a downturn?’ Available at www.retailthinktank.co.uk).
- Have refocused much of their in-house effort which has previously been put into discounting and promotions into more value-adding activity.
- Hold sales, promotions and discounting activity only at specific, tightly controlled ‘sale’ times or with very clearly defined objectives which are not ‘derailed’ by the actions of competitors. Look broadly across all channels open to them in considering their price strategy. For example, separating promotional or marked-down goods into outlet stores or using other channels e.g. jobbers, which the RTT observed some retailers do with success and with only very limited damage to their brands.
Date Published: 2/1/2008 5:35 PM
Note to Editors:
The RTT panellists rely on their depth of personal experience, sector knowledge and review an exhaustive bank of industry and government datasets including the following:
Members of the RTT are:
- Nick Bubb – Independent Retail Analyst
- Dr. Tim Denison – Ipsos Retail Performance
- Jonathan De Mello – Harper Dennis Hobbs
- Martin Hayward – Hayward Strategy and Futures
- Maureen Hinton – Conlumino
- James Knightley – ING
- Richard Lowe – Barclays Retail & Wholesale Sectors
- David McCorquodale – KPMG
- Martin Newman – Practicology
- Mike Watkins – Nielsen
First mentions of the Retail Think Tank should be as follows: the KPMG/Ipsos Retail Think Tank. The abbreviations Retail Think Tank and RTT are acceptable thereafter.
The RTT was founded in February 2006. It now meets quarterly to provide authoritative ‘thought leadership’ on matters affecting the retail industry. All outputs are consensual and arrived at by simple majority vote and moderated discussion. Quotes are individually credited. The Retail Think Tank has been created because it is widely accepted that there are so many mixed messages from different data sources that it is difficult to establish with any certainty the true health and status of the sector. The aim of the RTT is to provide the authoritative, credible and most trusted window on what is really happening in retail and to develop thought leadership on the key areas influencing the future of retailing in the UK. Its executive members have been rigorously selected from non-aligned disciplines to highlight issues, propose solutions, learn from the past, signpost the road ahead and put retail into its rightful context within the British social/economic matrix.
Definitions: The RTT assesses the state of health of the UK retail sector by considering the factors which influence its three key drivers.
1. Demand – Demand for retail goods and services. From a retro-perspective, retail sales, volumes and prices are the primary indicators. When considering future prospects, economic factors such as interest rates, employment levels and house prices as well as others such as consumer confidence, footfall and preferences are used
2. Margin (Gross) – Sales less cost of sales; the buying margin less markdowns and shrinkage. Cost of sales include product purchase costs, associated costs of indirect taxes and duty and discounts
3. Costs – All other costs associated with the retail operations, including freight and logistics, marketing, property and people
The Retail Health Index – how is it assessed?
Every quarter each member of the RTT makes quantitative assessments of the impact on retail health of demand, margins and costs for the quarter just completed and a forecast of the quarter ahead. These scores are submitted individually, collated and aggregated in time for the RTT’s quarterly meeting. The individual judgements on what to score are ultimately a combination of objective and subjective ones, drawing upon a wide range of hard datasets and softer qualitative material available to each member. The framework follows the example of The Bank of England Agents’ scoring system on economic intelligence provided to the Monetary Policy Committee.
The aggregate scores are combined to form the Retail Health Index (‘RHI’) which is reviewed at that meeting and occasionally revised after debate if members feel it appropriate. The RHI tracks quarter on quarter changes in the health of the UK retail sector and as such provides a useful and unique measured indicator of retail health. The index ‘base’ of 100 was set on 1 April 2006. Each quarter, it assesses whether the state of health has improved or deteriorated since the previous quarter. An improvement will lead to a higher RHI score than that recorded in the previous quarter, and with a deterioration leading to a lower score. The larger the index movement, the more marked the shift in the state of health.
The RHI has two main benefits. Firstly, it aims to quantify the knowledge of the RTT members in a systematic way. Secondly, it assesses the overall state of health of the UK retail sector for which there is no official data.
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