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Retail Top 100 2012, No. 3: Discounting

February 13, 2013

Discounting dates back to the days of open-air bazaars, but the proliferation of e-commerce and smartphones now puts the neighborhood boutique in direct competition with the biggest discounts offered by any vendor anywhere in the world. And vice versa.

The practice is bleeding profits from traditional retailers, with daily deals and online rivals inflicting most of the damage. Best Buy, to cite but one high-profile example, saw its shares plunge more than 15 percent after reporting a steeper-than-expected drop in 2011 third-quarter profits and margins — the result, Wall Street analysts said, of fierce price competition from Amazon.

Only 20 percent of new customers lured in by daily deals ever return to make a full-price purchase, according to a study conducted by Rice University. Despite this, the vicious cycle is perpetuated by retailers who feel the need to promote, “but know that increasing discounts are eroding category value,” according to Bob Welch, senior vice president of manufacturer practice client solutions at dunnhumbyUSA. Meanwhile, he says, “manufacturers feel that retailers are driving promotional strategies that do not make sense for the category and are eroding their brand’s equity.”

While strategic discounting can be an effective quick-fix for moving volume in a struggling economy, the fix leaves consumers craving ever bigger, deeper discounts — and nothing but discounts. Cynthia Jasper, a consumer science professor at the University of Wisconsin, warns that pursuing discounts can become an addiction. Or as James Dion of the retail consultant Dionco puts it, many discount hunters “don’t bother to eat what they kill,” citing research findings that 30 percent of Groupon deals are never redeemed. “That really leads me to believe that it’s the thrill of the hunt. For some consumers, it is just scoring the deal.”

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