World Retail Congress 2015: Are retailers hooked on the discount habit?

World Retail Congress 2015: Are retailers hooked on the discount habit?
October 17, 2015 Revionics

Source: Planet Retail, Miya Knights

Implications

  • The main message around discounting from retailers was a warning to abandon cynical discounting. The success of luxury brands versus negative sentiment around additional discount events, such as Black Friday or Amazon Prime Day, for example, calls for retailers to develop more sophisticated pricing and promotional strategies that can capitalise on customer and Big Data analysis.
  • Increased focus on making the most of customer data should be directed towards employing discounting in a more personalised way. The Waitrose top ten discounts of choice is a recent interesting example of this approach. On a practical level, real-time intelligence on customers, sales and inventory can promote more intelligent buying to maximise margins and minimise markdowns.
  • Apply customer data analysis alongside pricing optimisation tools to improve the markdown process itself and reduce margin erosion. Aligning category and range reviews with KVI analysis can speed up and support more effective merchandising and marketing processes, for better execution on optimal pricing and discounting strategies for both the business and brand.

With customer data emerging as a high priority on the agenda of retailers at this year’s World Retail Congress, the focus quickly turned to ways to put such data to work tackling the corrosive effects of discounting across every industry sector. 

It was evident that markdowns, promotions and price wars are weighing heavy on the minds of many at the event, as emerged during a retailer panel discussion on how business, process and technology change can help break the discounting habit.

Do retailers rely too heavily on discounting to drive sales to the detriment of profit and margin? The entry of dedicated discounters in the grocery space, including Aldi and Schwarz Group-owned Lidl, has certainly led to erosion of market share of traditional players. But when Ian McGarrigle, World Retail Congress Chairman, addressed delegates in his opening keynote last week, with a theme of retail transformation, it was little surprise that he revealed customer data was top of the list of priorities among retailers surveyed for the event.

The numbers need to be crunched

Taking this focus on data, coupled with the findings of a global survey of over 450 Chief Executives commissioned by labour and supply chain provider JDA Software and also revealed at the event, it is clear that knowing the customer, and using that data to drive more intelligent marketing and merchandising decisions is going to be increasingly important in dealing with competitive and external threats, as well controlling margin erosion and price positions.

Lee Gill, JDA Group Vice President, Global Retail Strategy, told delegates that an optimised supply chain would be key in mastering the execution of any effective sales and marketing strategies. “The factors of customer, product, time and location impact merchandise planning,” he said, where every retailer knows that efficient planning is one of the important levers at their disposal, alongside promotions, to minimise markdowns.

Ian McGarrigle, Chairman of the World Retail Congress, makes his keynote opening address. © World Retail Congress

In fact, when asked about their risk concerns, retail chiefs in the JDA survey named increasing competitive threats (41%); margin erosion and cost reduction (39%); data security threats (25%), and attracting and retaining customers (24%) in their top four. With competition, margins, and customers all figuring highly here, it was interesting that these were also the focus of discussions at World Retail Congress around the discounting habit.

The darker side of Black Friday

It’s also why the comments made early this year by Andy Street, Chief Executive of UK multi-channel department store retailer John Lewis, also perfectly summed up the frustrations of this retail panel. “It is not in the interests of retailers to grow the pace of Black Friday at the expense of other weeks,” stated Street, commenting at the time on how the weekend of heavy discounts known as Black Friday could be damaging Christmas sales. “We’ve got to ask if it’s right to concentrate trade so much in that one period,” he said of the event.

The panel, hosted by Congress sponsor and price optimisation software vendor Revionics, asked: ‘How do we kick the discounting habit?’ The panellists, ranging across wholesale, fashion and apparel and general merchandise sectors, established a consensus view that discounting for its own sake, without a clear strategic goal and tactical execution, could be more damaging than beneficial to the bottom line – as was also arguably seen more recently with some of the more negative sentiment generated around Amazon Prime Day, as well as Black Friday.

Marco Messini, Chief Distribution Officer, United Colours of Benetton, commented: “Brands have created a habit around discounting when they realised markdown sales and promotions could drive customers instore and [drive] sales on full price product. Plus the arrival of outlets creates an expectation among consumers that they can also get a 35% discount. If not well managed, discount events can kill you from a margin perspective.”

Multi-channel considerations

Looking at the impact of discounting across multiple channels, Richard Millar, Business Development Director for general merchandise retailer Argos, said moving its catalogue and store-only business online had led it to triple its number of SKUs without needing extra resource in order to offer more choice in terms of range and assortment.

Argos has also focused on speed of fulfilment to maintain competitive advantage. “Half of our sales now come from online, leading to price transparency becoming increasingly important,” Millar said. “So we work out who to price-match against and who our competitors are in terms of who is important to our customers. This means establishing much more data-driven and systematic processes, systems, and rhythms.”

 Black Friday… no longer the retail panacea it once appeared to be? © mirror.co.uk

From a wholesale perspective, for Mauro Muraro, Head of Customer Relationship Marketing, Market Research and Price Strategy, Metro Cash & Carry, pricing transparency meant focusing on key value items (KVIs).

Muraro said his role in the Italian arm of the business was to identify who its core customers were. These include hoteliers, bars and fast food businesses including pizzerias. This enabled the company, in concert with basket analysis, to define its most profitable SKUs based on KVI price perception, rather than using just sale transactions. “This led us to define 200 SKUs that represent 25% of the range,” he said. He also explained that – whereas before its merchandising system could only handle one price across all of its stores – the company was now able, “to compete far more locally,” allowing each store to set its own price for each SKU.

This strategy, which involved sentiment surveys, recognised that Metro Cash & Carry customers would source their competitive intelligence about why to buy from competitors locally, on its stores’ doorsteps. The Metro example proved that every business has the opportunity to use price optimisation to guide more fact-based, data-driven pricing and promotional decisions, according to Jeff Moore, Chief Science Officer, Revionics.

Getting a handle on Big Data

While knowing the customer was top of mind for all of these retail executives, Moore widened the topic to include multiple and varied intelligence sources by improving the management of Big Data. “Big Data increases your chances of being able to go to a much more deep level of granularity around pricing transparency,” he said.

Giving a practical example, Messini of Benetton added: “From a supply chain perspective, another big factor is the weather. Some sophisticated analysis can remove weather from the impact of sales, so you can get a like-for-like comparison.”

Cédric Ducrocq, Chief Executive of retail consultancy Dia-Mart Group, agreed that Big Data analysis was an important weapon in the retailer arsenal. “Depending on the category and industry sector, retailers have different levers they can pull to execute promotions with a more surgical precision, especially when working with brands that don’t like to use promotions heavily,” he said.

 French CE retailer Darty has managed to shed its EDLP burden without damaging its brand.

Citing French electrical retailer Darty as an example, Ducrocq continued: “Darty’s brand used to be based on an everyday low price. But three years ago it decided to become more aggressive on pricing, but without destroying the brand. Since then, we have seen it deliver precisely targeted and personalised promotions. They understand that good promotions drive sales and improve price perception. Bad promotions lead to lower sales and destroys price perception, as well as margins.” Ultimately this, and the work and other examples of the World Retail Congress panellists, bring a new initiative by UK multi-channel food retailer Waitrose to mind.

This summer Waitrose launched a “pick your own offers” scheme for its myWaitrose loyalty cardholders, offering 20% off their favourite 10 items each time they buy them online or instore. Interestingly, the scheme falls short of being applicable across its entire range. The scheme extends to a curated list of basics to more expensive items and fresh produce.

At launch, about half the list comprised of Waitrose’s own-label lines, allowing the retailer to tune pricing on these products even more acutely. We have yet to see if it delivers on the potential for retailers to master competition, margins and customer data without getting developing a reliance on discounting that quickly becomes a habit that’s just too hard to break.

Source: Planet Retail, Miya Knights