Analysts have labelled the level of discounting on the high street as unsustainable and said it must change strategy - applauding Fat Face’s decision to reduce its level of markdowns.
The lifestyle retailer has revealed how it slashed the number of weeks it is on promotion annually by two thirds, leading it to deliver sales growth of 7% for the latest financial year.
Although EBITDA dipped from £24.8m to £24.1m - a decline attributed to the tightening of stock controls and quality improvements, as well as one-off debt payments - sales rose from £152.7m to £163.6m for the 53 weeks to June 2.
Chief executive Anthony Thompson attributed this growth to a new strategy, implemented when he joined in April 2010, to move away from discounting.
“Two-and-a-half years ago we were on Sale for 48 weeks out of 52, but that’s just not sustainable,” he said. Thompson estimated that half the retailer’s stock was being sold at discount when he first arrived.
Over the past year Fat Face reduced promotional activity to Thompson’s target level of 12 to 15 weeks, with 20% to 25% of total product sold at discount. “When you start to come off the discount drug there is a bit of a hangover - you need to have determination,” he said. “People need to come into shops and have real trust and confidence that when they buy a present for their loved ones it is not going to be reduced weeks later.”
Honor Westnedge, senior analyst at Verdict Research, called Fat Face’s strategy a “brave move”. Although she warned some customers may shop elsewhere, Westnedge said it was a strategy more businesses should adopt.
“Retailers are stuck in the cycle of having to discount to drive footfall and now consumers are in the Sales mindset they are not willing to pay for anything at full price,” she said.
“They have to get out of this unsustainable practice of discounting because they are not achieving enough margin. At some point they will have to return to having two main Sales.”
John Stevenson, analyst at Peel Hunt, agreed: “You are not going to rebuild margins through cost savings - most of that has been done - but reducing markdown is one way to rebuild margins.”
However, Stevenson added: “Looking at smaller retailers it is great to say ‘We want to drop the level of markdown’, but ultimately you don’t have the choice if everyone else is discounting and you aren’t getting the footfall through.”
Both analysts agreed it would be a slow process taking up to five years, with Westnedge predicting lack of consumer confidence would delay a wider move by at least six months.