Article

Opinion: Do not give in to 'dumb discounting'

Cutting prices can be a useful tool with core customers, but will just as often backfire on a retailer.

June 22, 2010

By Bob Gordman

There are times when I don’t like being right, and this is one of them. March’s numbers were positively affected by a shift in the timing of Easter as well as significantly better weather in a large part of the country. After the comp store numbers were released, a party atmosphere returned to the industry and Wall Street. Commenting on the results, I pointed out that the party was premature. Two months later, I still don’t see any industry-wide indication that consumers are spending aggressively.
 
There are some retailers who are executing strategies that are relevant to their core customers and are doing very well. The results of well-focused retailers like Kohl’s, Family Dollar, BJ’s, Ross, TJX, Aeropostale, Coach, Jos. A. Bank, J. Crew, lululemon, Big Lots, and many others, shows that consumers are capable of spending if they are given a reason.
 
That brings me to one of my favorite topics and one that is particularly relevant during a period of constrained spending. I call it “dumb discounting,” which is a series of actions retailers take to theoretically drive business. In reality, the discounts frequently create limited sales increases driven by customers who won't shop again at the store and most of the time leads to reduced gross margin dollars.
 
Let me give you an example of dumb discounting. I live in Breckenridge, Colo., an area which appeals to active people of all ages. The cost of living is significantly above the median as you’d expect in a resort community. People who retire here were generally successful in their careers and can afford the premium cost of living. When seniors (60+) go to the movies they receive a $4 discount off their ticket price. At the recreation center, with a senior membership, they pay $3 a visit to work out, $2 less per time than those with a regular membership. These savings mean very little to these affluent seniors, and I seriously doubt they increase the frequency of visits to the movies or rec center. The real irony is that the young people in the area have to work two or three jobs to afford to live here and would probably appreciate the discounts.
 
So how does this relate to retail? The Gordman Group has completed numerous advertising effectiveness studies over the past 20 years. In every case, consumers said that they do not like coupons or percentages off. The message is clear: Show me an item and a price. Retailers like Macy’s continue to ignore what consumers want and run exceptionally complex coupon ads that offer broad discounts off a wide variety of merchandise. Customers buy the most desirable styles and colors at a discount, which leaves the less desirable styles in the company’s inventory. Coupon ads tend to attract opportunistic consumers who will never be Macy’s core customers.
 
Another example of dumb discounting is Walmart’s Rollback campaign. The company has aggressively lowered the price on many items with the intent to increase sales, or at least, market share. So far their comp store sales have continued to decline, and there is no indication the strategy has worked. Based on the results at other retailers who have attempted this same approach, my guess is that unit sales are increasing but at a rate less than the prices have been reduced. This means that while unit sales are increasing, gross sales are declining and so are gross margin dollars. Even more importantly, the customers who are providing these increased unit sales are opportunistic shoppers, not Walmart’s core customers, and are probably buying only the Rollback items.
 
Discounting is a great tool when carefully designed to increase frequency with your core and must-have customers. When applied with a shotgun, it is usually dumb discounting.

Bob Gordman is president of the retail consultancy The Gordman Group. He has spent the last 19 years as a consultant; prior to that, he was President of Strategic Business Planning for Meridian, and spent five years as a Senior Consulting Partner for the Gallup Organization, specializing in strategic planning. (Photo by cdsessums.)