Sale-ing close to the wind

In today’s post-recession market, are retailers desperately struggling to keep profit margins buoyant or merely ripping off an unsuspecting public?

SBHD: In today’s post-recession market, are retailers desperately struggling to keep profit margins buoyant or merely ripping off an unsuspecting public?

I intend this week to pen an apologia for the retailers – something that regular readers of this column will know does not come easily.

It’s not that I have anything against the retailers personally. It’s just that they really haven’t done themselves any favours recently. So, before I develop a line that has been put to me as to why life has been particularly bloody for retail margins, let me illustrate with an anecdote how one retailer has done itself no favours in public consciousness.

I bought a CD player at Dixons in Bond Street just before Christmas for a penny less than ú300. The pleasant and helpful shop assistant then told me that I would need a three-year warranty costing ú65.

This would be the warranty that director-general of fair trading Sir Bryan Carsberg had just slammed as anti-competitive and against consumers’ best interests, I mused.

Ah, she rejoined, what the OFT doesn’t understand is that when these things go wrong, it costs ú55 just to look at them, before parts and labour. She had a television that would have cost a small mortgage to repair if she hadn’t had a warranty.

This banter continued at the till, but I resisted. Then, her finger hovering above the buttons, she said something quite extraordinary: “How about ú55 then?” I declined. “ú50?”

I couldn’t believe it. I was being sold insurance in the manner of a street pitcher: “I’m not asking ú60, not even ú55…” I ask you, is this any way for a reputable retailer to behave?

Incidentally, when the transaction was complete, I was handed a one-year guarantee for free, something that wasn’t mentioned during the warranty hard-sell. There was a television commercial for Dixons at the time that had a silly, staccato, rap-style voice chanting “Dick Dixons”. After my experience, I am inclined to agree. If nothing else, it demonstrates the sort of commission that the shop can afford to throw away and still make a handsome profit.

Three years or more of recession have hit the retail trade hard and I suppose we should be sympathetic. But I would only ask whether we are still entitled to consider ourselves a nation of shopkeepers, offering reliable and wholesome service in the manner of a Grantham alderman, or whether the new breed of slick and cynical British retailer is intent only on ripping us off.

It is a pertinent issue to consider this month, as London’s shops throw open their doors for the “sales”, in which prices are slashed. Are they really competing hard for our custom, cutting margins to the bone because “everything must go”, or are we just being manipulated again?

It should surprise no one that I incline towards the latter conclusion. I mentioned before Christmas that a major distiller had been prevented from cutting prices by the retail trade. A big chain took the attitude that drinks manufacturers could cut prices all they liked, but the cuts wouldn’t be passed on to customers. The retailer couldn’t contemplate a downward spiral when it had fat margins to protect.

Protecting these fat margins in the Christmas market provides plenty of room in the price for “slashing” in the January sales. All retailers are really doing in these sales is reducing their prices to their natural levels. We don’t so much get bargains as get ripped off during the rest of the year.

The syndrome is similar to Dixons’ warranty commission. The margin of profit on servicing the arrangement is so wide that staff can afford to erode it substantially and still make money.

With this in mind, one should look at Dixons’ claims that its business in the sales has boomed and wonder precisely what it means. Perhaps consumers will return to market when retailers shave their margins.

But, as I say, this is an apologia for the retailers, not another harangue. So permit me to rehearse the margins argument on behalf of the retailers. Just this once.

Food retailers – who ramped the price of our Christmas cheer by refusing price-cuts – argue that their reluctance to pass price reductions to their customers is more than matched by competitive pressure not to pass on increases either.

In short, superstores are restrained from passing on price rises because of the wide variety of outlets where customers can purchase exactly the same stuff. They simply have to erode their margins or make themselves more efficient. Or both.

Nothing wrong with that, of course, but the retailers still want us to know that it’s bloody tough out there. If they can protect margins in the Christmas market, they argue, then that is but a small cash cushion for the rest of the year.

Investment in bricks and mortar over the past decade, particularly in big out-of-town sites that the Government has now decided it doesn’t like and is going to discourage, has also made it that much harder to make efficiency gains. Nevertheless, return on capital invested can be further facilitated by more investment in new technology. That process is underway and the benefits of its increased efficiency will be felt within 24 months – creating a new margins environment.

This new hi-tech world of electronic point-of-sale terminals will streamline the supply chain to the extent that the retail trade will be able to operate on tighter margins, thereby passing cost savings on to the customer and restricting the degree to which manufacturers’ cost increases have to be passed on.

The City takes a sympathetic view of the retail trade. It is not unusual for analysts to calculate that retailers have been restricted to passing on to their consumers slightly more than half of the total rise in manufacturers’ costs – aggregate margins fell by nearly 20 per cent last year.

Add to all this the pressure on payrolls caused by the advent of Sunday trading and retailers seem less like the villains of the piece. Manufacturers, they argue, simply do not appreciate the vice-like grip in which retailers are caught at both the supply and demand ends of the business equation.

So there you have it. The case for the retailers. I think the jury should retire for 12 months to consider what progress is being made on that 24-month technology schedule, before returning a verdict on whether retailers are helpless victims or cynical manipulators of the market.

Meanwhile, no one should pay more than ú50 for a Dixons warranty.

George Pitcher is joint managing director of media consultancy Luther Pendragon.

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