Discounting - An introduction

 

“Discounting, promotions and sales are now a normal part of retailing practice but their widespread use is detrimental to the health of the sector”

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 and discounts/promotions as a planned, strategic tool are most likely to be more successful.

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