Black Friday-style discounting costs UK Plc £20.3 billion a year without omni-channel IT

Stuart Lauchlan Profile picture for user slauchlan March 8, 2016
UK Plc is losing £20.3 billion a year thanks to discounting, but the IT systems aren't in place for retailers to deal with an omni-channel age.

UK Plc is paying a high price for retail discounting of around £20.3 billion a year in contributions to national economic output, a situation that’s being made worse by the limitations of existing retail commerce systems.

UK retail giants such as Tesco, Asda and John Lewis have all complained about the negative impact on their balance sheets of conforming to the imported US phenomenon of Black Friday. Asda has announced it will “step back” from Black Friday plans, while Andy Street, CEO at the John Lewis Partnership, has observed:

It is not in the interests of retailers to grow the pace of Black Friday at the expense of other weeks.

In fact it seems that many retailers only engage with Black Friday for the perceived brand perception benefits it generates among consumers.

Screen Shot 2016-03-09 at 12.12.28
Key sales periods for UK retailers

But wider than that, the trend towards discounting is described in a new report from retail consultancy Planet Retail as:

a drug that is responsible for bad buying and pricing habits as well as poor profits on the part of retailers, and unreasonable expectations of an unsustainable supply of cut-price goods on the part of their customers.

The report - UK Discount Pricing Strategies - finds that more than £95 billion worth of UK retail revenue will be generated from discounted sales this year. That’s over a quarter of total UK retail sales. But in the process, UK retailers will lose over £38 billion in potential revenue on marked down sales.

In terms of how much inventory UK retailers are marking down every year, 45% of respondents mark down 21-50% of inventory, with a further 11% saying they mark down half of inventory across the year. The Planet Retail report suggests this latter percentage is alarming:

Although than just over half (55%) said that discounting improved profitability, 41% felt it either had no impact on profitability or a negative impact on margin. This suggests retailers are perhaps feeling the pressure to offer sales, even though they know they could be shrewder in their pricing strategies to optimise both profits and margins.

Making this worse is the idea that the majority of retailers polled for the report state that their existing retail management systems aren’t able to help mitigate this loss. In an ideal world, such systems would enable retailers to to offer more personalised or location-based discounts, offers and promotions.

But in reality, says the report:

Retailers risk a race to a progressively less profitable bottom line if they do not adopt more advanced retail IT systems that can holistically manage accounting, enterprise resource planning (ERP), customer relationship management (CRM), merchandising, assortment, pricing and promotions operations processes, and so support sophisticated markdown strategies that enhance their brands, and deliver on customer expectations.

Some 60% of retailers of all sizes say that they need omni-channel systems to provide the necessary single view of sales, customers and inventory. Mid-sized retailers are most keen on location-based functionality and insights (64% of those polled), while 53% of smaller retailers say they need more sophisticated merchandising systems.

Such systems will also support the ambition of a majority of retailers (57%) to be able to offer more personalised deals and discounts as well as offers based on location. The Planet Retail report notes:

Only IT-based retail systems that provide a centralised, accurate, and real-time management of sales, inventory, and customers can empower retailers to optimise buying, merchandising and assortment processes. Such optimisation techniques can be used to determine where the best combination of revenue realisation (i.e. maximised revenue on sales) and terminal inventory (i.e. unsold merchandise) will come from, for example, comparing a tactic of low-level markdowns from early in the season against one of later, deeper reductions.

My take

Given the report was sponsored by ERP and e-commerce firm NetSuite, the omni-channel conclusion is a foregone one, but none-the-less valid for all that. The drift in the UK retail sector towards what Planet Retail calls “cynical discounting” is a relatively recent phenomenon. As with ‘Trick or Treat’, the UK has imported Black Friday and Cyber Thursday as though they are long-standing cultural phenomena. Media reports on Black Friday last year would have had the casual observer concluding that somehow Thanksgiving was something Brits had been celebrating for centuries.

Any retailer feeling ‘bullied’ into harmful Black Friday discounting isn’t operating on its own terms. Investment in retail IT systems for the omni-channel age is a far wiser strategic direction. But just spending the money isn’t enough. No-one suddenly did amazing customer service just because they bought a ton of Siebel software. There was a cultural and operational transformation that had to accompany that spend.

It’s the same with omni-channel retail systems - an enabling technology with transformative potential, but one with a price tag that goes beyond cash. It’s about how an organisation wants to interact with its customers and its suppliers in a way that maximises the benefits for all three parties.

(Planet Retail's report was based on the views of 150 of the UK’s leading retailers and 1,500 consumers.)

A grey colored placeholder image