Less can mean more for brands who are able to reset their customers’ perceptions of what good value means.
Economic recovery may be some way off, but retailers who want to ready themselves are already weaning themselves off discounting.
Fat Face is the latest example of a retailer that admits it weakened itself through an over-reliance on discounting. Chief executive Anthony Thompson has described discounting as a drug; and a drug where you need an ever greater hit to achieve the same sales high. The fashion retailer has now cut the quantity of discounted product it is selling to a third of what it was two to three years ago.
We knew that discounting would continue to be a hot topic for 2012 after interviewing 25 directors of major retailers for our Retail 2012 report. Many of them commented that they felt slightly trapped in a discounting spiral, afraid of losing share to competitors if they don’t continue to discount but also worried about the longer term damage such pricing practices were doing to their brand and profitability.
From their comments two things are clear. Firstly, too much discounting activity creates a situation where customers never want to pay full-price again. This risk to their brands is something that retailers have been aware of for a while.
But the second issue is only more recently beginning to be understood: customers stop responding to discounts as they become more cautious about what provides real value when everything seems to be on deal. In fact, Fat Face has managed to grow revenue by 7% at a time when it has moved away from discounting, and Shop Direct Group managed to keep revenues flat when it had had previously predicted a 5% fall.
In our Retail 2012 report one operations director explained that deals are no longer resonating with customers: “Some of the deals are just mad, and I think we can expect mad deals to continue. But the odd thing is customers seem to be disappointed by those activities.”
Many commented on how only very genuine offers make an impact on shoppers who have become used to deals. “People are less taken in by stunts. People are more savvy. There is much less of an ‘I must have that’ attitude,” said the chief executive of a high street fashion chain.
And even the director of a big four grocer noted the trend. He said: “We have got to give them price but also quality. They are no longer fooled by low prices if the quality isn’t there.”
Businesses must be careful that a reduction in discounting is accompanied by a clear and consistent message on why their products provide value for money. But retailers who can cope with the short-term pain of achieving this should look forward to a brighter future ahead.