Promoted to death?

Bargain madness is rampant in retail right now. Open any paper and the store ads’ typically scream deals - half-price, bogof and prices slashed.

During the tempestuous trading conditions of the recession retailers increasingly focused on price in their attempts to convince shoppers to spend.

Now the recession is past but, as companies and consumers alike anxiously await details of likely spending cuts and job losses to address the national deficit, promotions still seem to dominate the retail landscape.

Promotions are a permanent fixture in the retail armoury and will surely always remain so, but it is no surprise that some fear the scales may have been tipped too far in the direction of discounts. The concern is that shoppers, always price savvy, increasingly baulk at paying full price at all.

The evidence of the extent of promotions is visible across the industry, from food to fashion and general merchandise. “There are signs of panic, and it’s only the middle of September,” observes PricewaterhouseCoopers chief retail adviser Christine Cross. Pricing expert and Booz & Co principal Jason Gordon says: “There are large areas of retail that are over-promoted. How do you step back from that?”

Earlier this month, Argos-owner Home Retail attributed a 125 basis point gross margin decline at the catalogue store business in part to higher year-on-year promotional activity in the second quarter.

The same day, grocer Morrisons reported that there had been “a record level of promotional activity” during its first half. During that time Morrisons sold milk and bread at 50p and fresh fruit and vegetables at 30p - “the lowest priced staple products in the country”, according to the supermarket group.

But perhaps the starkest evidence of the extent to which the environment has changed came from Debenhams, which stunned the sector with an in-season Sale offering 25% off thousands of products.

Kick-starting shopping

However, in many - if not all - cases, the swathe of Sale signs and money-off deals does not reflect crisis. There was more to the Debenhams spectacular than appeared at first sight, for instance.

Debenhams’ price-cutting was not an attempt to clear stock as would traditionally be the case but, according to chief executive Michael Sharp, an attempt to kick-start seasonal trading and give wary shoppers a reason to spend.

Sharp said the initiative was a “call to action” designed to create a sense of “urgency”. In fact the retailer has held such events before, but this time it pitched the promotion in a new way.

And Debenhams was not the only retailer to try new approaches. Halfords, for instance, ran a summer Sale - its first ever - in July. Halfords chief executive David Wild says: “We’d noticed that in other retailers there were a lot of aggressive promotions going on so we took the decision that we’d have one too.”

The retailer has since, like others, deployed the use of vouchers or special promotions on particular products and categories, in order to create excitement and appeal to bargain-hungry shoppers.

Gordon says: “We’re starting to see Sale events at unusual times of year and there are lots of smaller Sale events rather than a few big ones. That’s not a bad idea, unless a retailer would struggle without them.”

While promotions look likely to remain widespread, it is in the interest of many retailers to wean shoppers off the expectation of discounts. Kingfisher chief executive Ian Cheshire believes consumers themselves are tiring of promotions.

He says: “The customer is getting used to this. Promotions are having less of an effect.” Instead Kingfisher is giving shoppers “clarity” on prices by limiting promotions. There are other signs of a move away from promotions, led, as so often in retail, by the big grocers.

Shift away from price

During the recession few were as aggressive in bringing down prices than the supermarket groups. Tesco exerted its influence especially strongly with the introduction of discount brands and the award of double Clubcard points to loyal shoppers.

But, while price competitiveness will always be part of the Tesco DNA, there has been a switch. Ads running at the moment focus on quality and added value, whether it is the absence of additives in cakes or the number of British apples stocked by the retailer.

Asda too, while remaining true to its Everyday Low Prices (EDLP) promise, has put quality at the top of its agenda.

The grocer this week relaunched its mid-tier Asda brand. It invested £100m in the range, now called Chosen By You, and relaunched more than 3,500 products. Chief executive Andy Clarke said: “Asda has always been known for price but now we will also be known for quality. Chosen By You will drive as hard on quality as it does on price.”

Asda took the decision earlier in the year to focus on EDLP as it felt it had become too promotional. Clarke said Asda has taken out about a third of promotions so far and invested back into price, and launched its Asda Price Guarantee. He added: “There will always be some promotions as sometimes they provide the extra fizz that customers want, but our core promise will always be EDLP.”

Relentless focus on price alone is simply not sustainable for many retailers, says Gordon. The issue then becomes how to change the consumer mindset so that price is not the be all and end all.

Deep customer understanding is key to achieving that, says Gordon. “Understand and maintain the customer relationship,” he advises. “John Lewis is a great example of the fact that people will pay more if they are getting great service.”

In that context Gordon believes that loyalty schemes, such as Tesco’s Clubcard, can give retailers that use them an advantage over those that do not. “They’re not free but can be cheap in comparison with conventional promotional mechanisms,” he maintains.

Cross also thinks what the grocers are doing contains lessons for non-food retailers and points to their renewed emphasis on quality. “Don’t mortgage your future with discounts now,” she urges general retailers.

Widespread press coverage and debate about likely clothing price rises have also fed the promotional frenzy. Retailers are keen to make sales while they can and fearful that new year price increases will bring purses snapping shut, which also creates the temptation to win custom with promotions.

But Cross wonders whether the impact of rising costs, such as that of cotton, on retail has been “over-egged” and questions whether price increases would meet with much resistance from shoppers. “If consumers have to pay an extra 50p on a £5 dress I don’t know if that would be a deal-breaker,” she says. “I’m not sure it’s as sensitive as that.”

She says that retailers’ skilful use of price architecture can enable them to maintain keen price-positioning, rather than discounting. Emphasis on opening price points, using tags such as ‘prices start from’ and a marketing focus on, for instance, whole outfits within which the margin mix is managed to offer value to the shopper and profit to the retailer are among the options.

Marks & Spencer is widely thought to have been trading well in clothing, despite competitive conditions and a refusal so far to follow rivals with promotional spectaculars. Its price architecture is thought to be a driver of performance as shoppers have traded up into better and best categories. Even Primark, Cross notes, has a range of prices in-store despite its reputation for rock-bottom prices.

Despite their fears, retailers may find managing the environment less difficult than they expect and without recourse to potentially damaging promotions.

Adapt to survive

Cross points out that Christmas 2008 was one of the sector’s most panicky and many stores suffered hits to margin by driving sales. But even by last Christmas many had adapted and the festive season was less promotional than had been expected.

As Wild points out, one of the reasons for promotions is to create excitement. That has led some observers to question whether the EDLP model is therefore under threat because it can appear dull in comparison with eye-catching deals. Asda’s poorer trading of late is cited as evidence of that by some.

But Gordon believes the real differentiator is the ability of retailers to distinguish themselves from rivals and ensure shoppers feel they are getting value, whether through promotions or in other ways.

“Make customers happier, their lives easier and interaction with the retailer more fulfilling,” he says. “That’s the difference between a high value, lifetime customer and one that deals with you on a one-off transactional basis.”

The issue is likely only to become more urgent as the growth of multichannel retail brings ever greater price transparency and consequent complexity to promotions.