Retailers must kick the discount habit

It will be a brutal year on the British high street. Brands including La Senza, D2 Jeans and

Past Times have already filed for administration and others, including Thorntons, Game and French Connection, have announced profit warnings.

According to insolvency expert Company Watch, several major high street casualties are likely in 2012. By applying its ‘H Score’, it has produced a league table of retailers’ financial health and stability. At the top sits Zara with an impressive H Score of 91/100. And at the bottom lie Dixons, HMV and Clintons Cards with respective H scores of 5, 5 and, gulp, 1.

Review the brands mentioned above and you might spot a commonality. All except Zara are firms in severe financial difficulty. But there is a second theme that unites them: discounting. To wander into a Thorntons, French Connection or HMV is to enter a jungle of sales promotions – not just in January, but throughout the year.

While the popular press might trumpet the current plethora of sales promotions as being good for the consumer, it’s also worth remembering that price discounting is very bad for brands that over-use it.

Let’s start with the most obvious drawback: it’s literally money off the bottom line. Too many marketers focus on traffic and revenues at the expense of margin. And that could be a crucial error when there is a vital trade-off between attracting more consumers into the store with discounts versus cutting deep into gross margin with 30% or 50% off list prices.

Promotional activity makes sense but marketers should treat sales promotions like heroin

The second downside of discounting is commodification. The reason consumers are hopefully prepared to pay more for Thorntons is because it is more than chocolate. The brand associations of expertise, quality and tradition add value to the offer and that lowers price sensitivity, increases demand and further enforces brand loyalty and repeat purchase – the classic outputs of brand equity.

But just as you build brands by focusing on their associations, you break them when you reinforce the commodity at the expense of those associations. And that’s what discounting does. It draws attention to the price and the product and says to the consumer ‘forget all that guff about what we stand for, buy us because we are cheap. Buy us because we are a commodity’.

When I see Thorntons’ Mint Collection – a luxury selection of after-dinner mints – on sale for £4 rather than the recommended retail price of £12, it makes me question the brand. Suddenly it is not expertly made, high-quality fare – it is just cheap chocolate at a bargain price. Once the spell of the brand is broken, very few branded manufacturers can support their high cost operating model in the cut-throat environment of commodity competition.

Heavy discounting also makes a mockery of consumers who paid the RRP only a few days earlier. Full-price December customers are often overlooked in the pursuit of the fickle, bargain-minded January crowd. But brands should sometimes take a longer-term view. A price is a promise of value between a brand and a consumer. When we suddenly and inexplicably drop prices, we embarrass and disappoint those who had the faith to buy us at full price. The discount-driven frenzy will subside, and soon we will need our original consumer back. Let’s hope they will exhibit more consistency and reliability than we did with our recent pricing.

Even consumers eventually lose interest in discounts. Run a single sale and the market flocks to you. Run it again too soon and the impact dissipates. Keep running sales and the consumer starts to wait for them. When that happens, the crucial balance between pull and push is lost. There is a growing fear that the reason the 2012 January sales are not generating the expected figures is not just because times are tough but because the sales in November and December had already jumped the shark.

I am not suggesting brands should never discount. There are valid strategic reasons why promotional activity makes a lot of sense. But marketers should treat sales promotions like heroin. Heroin is a wonderful drug. A single, swift injection of morphine eased the pain and saved the lives of thousands of troops across the battlefields of the 20th century. But repeated use obviously leads to disaster.

Similarly, occasional and selective discounting can make strategic sense. But when marketers believe it is a tool that can be applied without any cost, they begin a vicious cycle in which discounting grows sales, but at the expense of brand equity and customer relationships. As a result, the brand needs to run another phase of discounting to offload unsold stock and attract lost traffic – and the brand is hurt again.

Maybe the likes of French Connection and Thorntons are running such deep and repetitive discounts because their businesses are in trouble. But it’s also worth reversing that causality and questioning whether it was such deep and repetitive discounting that got their businesses into trouble in the first place.