Discounters appear to be winning - a warning on discounts

The news in Retail Week is that the discounters in the food sector, including Lidl and Netto, may be gaining market share from Sainsbury and Tesco as a result of changing spend patterns arising from the pressure being applied to their customers purses.

Welbeck has often mentioned warnings about discounting, which needs clarification here. Discounting where it is the basis of the business plan and the supply chain is properly managed such as is the case with models such as Lidl et al is good business, and is paying off for them currently - they will always gain edge in recessionary periods - but the important thing for small retailers who are tempted to emulate these larger players is that it is the basis for their business plan and they do manage their supply chain. SME retailers can't just offer large discounts without first considering how this is to be financed and what it is trying to achieve.

The advice from Welbeck is clear - if the margins can be retained, then discount away, if not, then ensure that the period of discounting is limited and the reason for discounting is catered for in the discounting structure.

Retail Think Tank gets it right

Well it might seem a bit much a mere mortal pouring blessings on the words of the wise but I remember a conversation that I had with my then Managing Director; I warned that our then current policy of continually discounting heavily on specific ranges would have the effect of reducing our capability of responding robustly to changes in the market.

My warning was in about 1989 and related to the sports department in the department store in which I was then responsible for all operational matters. It was said in the context of the then wars that existed in the sports trade which saw a wholesale culling of many, especially SME, names that had previously existed on our high streets. As a consequence we stopped trying to play the game and identified niches that matched the rest of our business and traded on function and quality and especially on service. It remains a philosophy which is destined to win for SMEs.

It is true that there are many more complex economic problems facing SMEs, and the market dominance of fewer and fewer mega-retailers is a significant one, but it is still not impossible for SMEs to trade effectively and profitably if the retailer is absolutely clear about their market segment and their intended audience.

Lessons to learn

The news is out that 'The Works' book shops chain has been placed in Administration by their bank. This is the latest of a number of High Street names that this has happened to in recent weeks and months. My immediate question is "are there any lessons to learn for small businesses"?

The pundits reporting on the administration order blame a variety of issues that have led to this calamitous outcome for the company; terms like credit crunch, increased costs and others are cited - and these probably are real reasons for the firm finding itself in the position it has - but is that all there was to it? As a remaindering outlet, was there a problem with their range - could it compete effectively with the direct competition? As a heavy discounter - was the firm producing sufficient margin to meet their commitments? It is my belief that the answer to these last two questions was no (although I admit that I have no inside information); and these certainly are lessons that we might all benefit from learning.

A balance needs to be struck in all things and the specific needs of a particular shop's market will be the deciding factors that drive the decision making - or at least should be! Too great a range is costly to maintain and sometimes confusing to customers; too small a range or one which is not refreshed regularly will discourage returning customers - at least these are truths for shops who trade in regularly purchased goods. Using discounts to develop business is generally a good thing, whereas a need for regular or permanent heavy discounting is a symptom that something is wrong with the market or the traders' position within it.