Why cheap doesn’t always mean cheerful when it comes to retail discounts

Laura Barnes takes a look at how slashing prices has affected the big chains like John Lewis, and whether there’s still money to be made from big discount events like Black Friday.
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In keeping with most of the British retail news you’ve heard over the past year, another big high street retailer announced a disappointing profit report in September. For the first half of 2018, John Lewis’ profits were down by nearly 99%.

The retailer noted a number of reasons for the shocking slump, including the usual suspects: the weak pound, and investments in new stores and infrastructure.

John Lewis also noted the lead up to Brexit was creating a level of uncertainty amongst retailers. But what has been most talked about in the news is the blame on discounts from rival retailers.

John Lewis revealed that £40 million went into matching discounts amongst rivals in the first half of this year.

Sir Charlie Mayfield, chairman of the John Lewis Partnership, told the BBC’s Today programme that the “biggest single reason for the decline in profits is all about margin”.

The store’s profit margins had been squeezed in “what has been the most promotional market we’ve seen in almost a decade”, as Mayfield puts it. “This year there has been twice as many extravaganza days as there were a year ago and actually the discounts have been even deeper.

“We’re never knowingly undersold at John Lewis, so of course we are matching that, and that affects margins,” said Mayfield, adding it was an “extremely valuable” promise.

We’re used to hearing of independent retailers struggling to compete with the big boys, but it appears the business of heavy discounting is affecting those further up the chain as well.

Stuart McClure, co-founder of LovetheSales.com revealed that the company’s own data corroborates the statement from John Lewis regarding retailers squeezing margins.

“We track over two million products and have seen an average fall in prices of 26% for the first half of 2018, compared to the first half of 2017. We’ve also seen a 20% increase in discounts over the same time period.”

Digging a little deeper into how these discounts are affecting large and small retailers, McClure told PCR: “The increase in discounts is an interesting challenge for retailers. There are two opposing forces driving it – slower sales leads to increased overstock and increased competition leads to price wars.

“On top of this you have the bricks and mortar vs online challenge: online companies can offer lower prices to consumers because of lower overheads.

“It is certainly a challenging time for retailers. However, it is the landscape in which they operate, so finding a solution to the problem is a necessity,” said McClure. “Smart discounting in order to clear stock in season is essential, rather than blanket discounting.

“Additionally, a focus on consumer value is imperative. We see a lot of retailers who don’t focus on the value that can be added to customer lifetime through discounts, or their ability to add new consumers to the database. The financial customer metrics of discounting are essential to solving the underlying challenges of this complex environment.”

Friday feeling

Huge discount shopping event Black Friday is on the horizon (it takes place on 23rd November this year), and reports are coming in thick and fast claiming that this year’s event is projected to be the busiest shopping day of 2018.

But even Black Friday has been suffering from what’s called ‘Christmas creep’, where retailers start offering deals earlier and earlier each holiday season.

Black Friday will also mark the start of the top 10 busiest shopping days of the year, which will all occur in November and December.

These 10 days are expected to account for almost 45% of this year’s holiday visits, according to an annual survey by ShopperTrak.

Jake Trask, a FX research director at global money transfer site OFX, recently offered up his tips to retailers looking to make the most of Black Friday, citing inventory planning as a key to a successful event, and an “essential way to avoid disappointing customers on the day”.

Trask also warned retailers to prepare to sell overseas, invest in marketing, and make sure your listings stand out.

“If you also sell your products through marketplaces like Amazon and eBay, you’ll want to make sure your Black Friday offers stand out from the crowd,” he explained in his recent Tamebay article.

“Your listings are an obvious place to start. Make sure you use high-quality images, include all the details your customers might need, and incorporate key search terms into your product descriptions. If it’s a Black Friday deal, say so! Using clear, punchy language should make it easier for shoppers to find your products when searching for a bargain.”

The stats show that Black Friday is certainly still a big deal, but taking all these points on board, it can be easy to see how retailers might get carried away with over-investing money in the lead up to the big day, or stocking an abundance of extra products that may not be sold.

Big chains and indies have to think more carefully about their approach than ever before. No one wants to miss out on sales, but it’s important to not let profits take a hit from slashing prices too far, or doing everything possible to compete with rivals.

John Lewis may have the ability to bounce back after its severe profit slump, but some smaller retailers probably don’t have that luxury.

McClure offers this advice to retailers looking to make a sensible play for Black Friday sales: “Again, this comes back to looking at the underlying metrics. Amazon led the charge of Black Friday, making it a national event in the UK – they did it for two clear reasons.

“Firstly, it helped them beat competitors to wallet share, but secondly, it was because they have a solid understanding of the metrics behind increasing repetitive transactions from their customers.

“Some transactions may not be particularly profitable, but they lead to massively profitable lifetime values. If retailers focus on the metrics that matter to them, and to driving their consumers to increased sales, it is definitely still a time that can be advantageous.” 

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