Desperate discounting could lead to long-term brand damage

In yet another “unprecedented” facet of the worldwide economic gloom, three-quarters of UK retailers are already heavily discounting their stock, as they bid to keep consumers spending, even as wallets are shrinking.

Yet experts suggest that such a “panicked” response by retailers will do little to help their situation, and could even damage their brands and bottom lines by setting a dangerous precedent of a year-round discount culture.

Although pre-Christmas discounting is becoming more normal in the UK, the bulk of activity has traditionally not started in earnest until Boxing Day. Yet, though the economy was expected to worsen, the sudden dip in confidence around two months ago has left many retailers with excess stock and a dwindling consumer appetite to spend.

Marks & Spencer has held two, one-day, 20%-off events, while Debenhams has hosted a number of pre-Christmas incentives to lure consumers in store and get them buying. According to figures from consultancy PricewaterhouseCoopers, 75 of the country’s 100 largest retailers are discounting their goods, either by cutting prices or by using three-for-two offers. Just two weeks earlier, 52 out of 100 shops were discounting.

Stock answer

The drive to reduce has also been fuelled by the likes of Woolworths, which, after slipping into administration, has been hosting massive discounts across its stock.

Numis Securities retail analyst Nick Coulton says: “They’re reacting to a sudden deterioration in demand, following the HBOS wobble of six or seven weeks ago. They’re moving to reduce their stock levels now, at 20% off, rather than 50% off in the sale period. It is sensible stock management.”

He expects an even more aggressive sales stance in the New Year, with consumers needing “even greater temptations” to continue spending. “People are reducing their spend this Christmas, but they are still buying, because it is event driven,” he adds.

Paul Bremer, a Merrill Lynch retail analyst, agrees. “Consumers are very frugal and focused at the moment. No one wants to blow money on unnecessary extravagances, so offers are the only way of appealing to them to open their purses,” he says. “There is a desperation in the market, compounded by retailers having to tell investors that they are making big losses to the likes of [online fashion store] ASOS.”

Ernst & Young analyst Jason Goodmas says the high street has been looking to the online players and the benefits of web discounts. He says that retailers “are right to say it increases customer numbers significantly”.

Over the weekend, a number of shopping centres and stores held Christmas bonanzas and VIP shopping events. Oxford Street in London’s West End, and centres including Bluewater and Trafford Centre, say footfall and sales were up on last year.

Yet retailers must beware. A number of experts, including Cass Business School honorary professor of marketing Robert Shaw, say such tactics will not work long term. Shaw believes that “tactical, one-day” events will do little to boost overall results, and may even alienate consumers.

Holding back

“People will hold back and put it off, in the hope of more generous Christmas promotions,” he says. “People who miss out on early discounts will be irritated.”

Another retail analyst adds that as shoppers are “creatures of habit”, the longer the stores rely on discounting, the less power they will have to limit sales once the recession ends. He points to Abercrombie & Fitch, which, in the US during the 2001 recession, discounted prices to keep sales flowing, yet took “several years to build back its brand cachet”. Today, online and in store, the teen brand has little in the way of bargains.

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