Guest Slot – Analysis Insider – Sue Grist

Money-off coupons, vouchers, discount codes, group buying offers, and double and triple loyalty point deals are feeding a frenzy of margin-eating activity that has reached unprecedented, and seriously damaging, levels in the retail industry.

Discounts and offers taking margins downwards.

Offering enticing deals was regarded as a necessary tool in the armouries of merchants to fight back against recession when it first hit. While it undoubtedly did the trick in the early days there has been a gradual increase in the generosity of offers as the market has become ever-more deal driven and promotions have become less effective.

Taking a look recently at the phenomenon that is Martin’s Money Tips it is all too clear that things have become over-heated. Tesco has been offering 50% off certain wines and if that wasn’t enough, savvy shoppers have also been able to use a certain code to receive 250 extra Clubcard loyalty points on the purchase.

The lurch to offers was only supposed to be a short-term solution but the problem is that the current straightened times are proving to be a much more prolonged episode than anybody initially envisaged. This has led to the present situation of deal/coupon saturation.

Retailers are finding it increasingly tough to make an impact in what is a muddied and confused market. Traditional media advertising is short-lived.  We saw the investment by online clothing business Shop Direct Group as they spent millions of pounds on above-the-line advertising to support new brands.
Trapped in a maze of voucher codes.

While that undoubtedly gained it lots of traffic hits to its websites initially, the half-life of such activity is now very short as customers quickly move onto the next (more generous promotional) thing. Both online and offline brand awareness no longer guarantee growth.

The big problem is that while there was some contraction from the initial effects of the recession there were no really obvious examples of retailers facing catastrophic declines in sales. But now, two years down the line things are starting to turn seriously bad. 

The Experian Retail Footfall Index for September suggests a footfall decline of 2.4% from the previous year.  Some of this is due to the unusual weather, but many retailers are reporting that consumers are having a crisis of confidence and we are starting to see worrying profit warnings from unexpected quarters. Mothercare has a long-standing international presence but its profits are being challenged by a near 10% drop in UK like-for-like sales in the last 12 weeks.  

Economic growth rates are forecast to be less than 1% over the next year and when you throw in the potential for further job losses and fuel strikes then the outlook does not look brilliant. Retailers must therefore learn how to trade in a low growth environment and recognise that this could go on for some years.
1: The % rate of growth the economy will be lucky to achieve.

What retailers won’t be able to realistically turn to are more deals and further margin-sapping coupons as it must surely now be accepted that this is a busted-flush. With businesses currently working on their budgets for 2012 the first thing to address is to ensure these budgetary numbers are based on a low-growth backdrop and even tougher demands for the business to reduce costs, pursue sourcing benefits and review their property portfolio.

While there are no cast-iron solutions, what we believe is needed is more of a focus on localisation, a concerted effort to create stronger relationships with customers, and a letting go of some of the complexity that is now dogging many retailers’ businesses. It is time to kill off some of the tail and to instead put resources into improving service levels.

This drive to simplicity is being replicated in the FMCG world where the likes of L’Oreal has recognised that the market has become too complex for consumers to shop and it is pruning 10% of its products in the UK. Unilever is undertaking a similar exercise in Europe with a 40% reduction in SKUs taking place.

This is tapping into the zeitgeist of consumers feeling that they have simply too much choice, which has led to the book ‘Undecided’ hitting the bestseller lists. Retailers would be well advised to follow suit and position themselves away from discounts and offers and to instead learn to live by the maxim that less (choice) can equal more (sales).

Sue Grist is owner of consultancy Egremont Group