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Bottom line results reveal damage caused by discounting

Results season is upon us and what a defining week it has turned out to be for fashion retail.

Indeed, it has proved to be a week of extremes with the winners showing you can defy the downturn if you get your business model just right, and the losers demonstrating how easy it is to get it wrong in the current climate.

Trawling through the various financial reports, what stood out for us on Drapers was how pivotal the various retailers’ discounting strategy and resulting margins has been to their overall performance. Very clearly on the winning side was Asos, not only growing international sales a staggering 42%, but also increasing UK sales by 15%, outperforming the market by some way. Chief executive Nick Robertson pointed to an increase in margins as one of the key factors that helped boost profits.

Asos is, of course, unencumbered by the albatross of an expensive bricks-and-mortar estate, with only its relatively cheap out-of-town warehousing and office space to contend with. But Inditex, another winner, has proved you don’t have to be a pure-play etailer to turn a decent profit.

The Spanish owner of Zara, reported a more-than-healthy 32% increase in profits, all the while opening 166 new stores in a number of markets across the world. This truly global player is cherry-picking the right sites in the right cities and the strategy is obviously paying off.

Back in the UK, Debenhams posted modest interim growth, although analysts commented that this was, in part, at the expense of margin, which had been affected by the retailer’s well-known penchant for discounting. Recently, there has been criticism of the ‘almost constant Sale’ in the chain’s stores, which has led some brands to pull out – most notably Radley – for fear that the pricing is damaging their premium image.

Discounting and loss of margin was also highlighted by one of the week’s poorest performers, French Connection, which posted a loss of £6.3m for the first half of 2012 and has warned that the road to recovery could be a long one in this tough UK market.

Add to this the fact that a number of high street retailers are already going into mid-season Sale, with the weather only just changing to start pushing outerwear sales, and it seems we are already entering vicious circle territory.

Discounting really does seem to be the heroin of the retail world. As soon as you start using it to boost footfall and clear stock, you enter a cycle from which it is extremely hard to recover. Margins fall, and the only option is to drive volume through yet more discounting. With shoppers now hooked on finding a bargain and internet price comparison a given, it is a brave retailer that holds firm at full price while all around are slashing theirs.

We are now reaching the stage, though, where that sort of bravery might be the only hope for some retailers.

Readers' comments (1)

  • A very well written piece with a concise reminder to all retailers . The current situation we find ourselves in is unsustainable but I can't see the retailers generally changing their attitude in discounting for the foreseeable future, so I believe the brands have to step in to force the retailers hand.

    As along standing independent, we respect a brands identity and work with them to create the best possible image and sales without abusing the situation. Most brands, especially those carried by an agent, will not tolerate excessive and unnecessary discounting. Rightly so.

    However, some brands do not take that view and are purely numbers based, naively negating the millions they spend on advertising to create the right image, by encouraging discounting on the view of extra sell through. Who is benefitting here? In anything other than the short term, no one.

    Thankfully though, brands like that are the minority. The clever ones need to warn retailers that abuse of their brands image by discounting will lead to withdrawal of supply. If many brands did this, many shops would have to tow the line as they wouldn't have many brands left to sell.

    Legally this could be considered a grey area, but this is not price fixing, which I don't agree with either (Sometimes we price over RRP on some items to compensate for items that need to be reduced where the RRP may be slightly optimistic).

    Either way, something needs to give because we may find ourselves in a trade with is unprofitable and unappealing. That would be a very sad day indeed.

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