"But we're building market share." It seems to be the standard answer of many of the largest retailers as discounting has taken the profit out of selling merchandise. But how many more retailers ended up shooting themselves in the foot this holiday season?
As more and more methods for discounting have become possible, are retailers losing control of their margins? And while technology vendors have been great at supplying discount delivery mechanisms, have they been as diligent at supplying the tools necessary to use the "discount weapon" safely?
Today, there is a wide range of retail merchandising models, from the "everyday low price" model of Walmart to the "continuous discount" model of Kohl's. More recently, third-party promoters have come into play. We've seen Groupon clients who experience a rush of sales or Foursquare clients who attract "check-ins" from shoppers in pursuit of badges. Consumers have been more than willing to take advantage of below cost offerings. Retailers have used these newer mediums to build up a lot of traffic.
Suppliers continue to offer supplier sponsored POS discounts and broad based market development funds. These are often tied to in-store or in-ad performance requirements on the part of the retailer. Due to the nature of their products, some suppliers continue to offer purchase order-based discounts so they can offload warehousing costs onto the retailer.
All this promotional activity has taken its toll on gross margins and retailers are saying it is part of the plan. But is this true or simply a good defense? Do retailers really have the tools they need to understand what all the discounting is doing to their margins?
On the one hand, technology has made the accounting for POS discounts very straight forward. Detailed POS transaction logs record each discount applied to a line item so that a full accounting of POS discounts is available. On the other hand, attracting customers with a deep discount delivered by Groupon means the retailer is going to lose money in the short-term. There needs to be a good conversion rate that brings back customers at an even higher than regular retail because the retailer has to recoup the discounts provided on the promotion.
The Holy Grail for merchandising has always been "price elasticity" — comparing the percentage change in price to the percentage change in volume. If a small decrease in price yields a large increase in volume, the retailer is in the perfect position to increase sales but not necessarily profit. If the discounts reduce the revenue below the cost of the merchandise, the retailer will simply begin to lose money faster. They say they meant to do it — that their deep discounts are building share. But what good is share if you're losing money on every transaction? Do retailers really have a handle on discounting or are they simply putting on a brave face?