The Race To The Bottom
Posted by Ted Hurlbut on Fri, Jul 08, 2011 @ 02:20 PM
Today, there was an interesting discussion on RetailWire regarding discounting. The question was whether discounting was a disease that has infected brands, retailers and consumers. The evidence is everywhere. Try going into any major national retailer and not finding a whole slew of things on sale. For all the talk about everyday low pricing, the only major national retailer that walks the walk is Walmart, and every fixture in their store screams out price points.
I have written on this blog numerous times how damaging discounting is for retailers, especially independent retailers. So I thought I'd post my response to today's question:
Discounting is not going away.
Discounting is not a sustainable retail business model.
These two statements may seem like a fundamental contradiction, but they are not. I don't think of discounting as a disease, although I have no trouble with framing it that way. Discounting is a terminal disease.
I like to think of discounting as a slippery slope. Once you step out onto that slope there's just about no way to step back. It's all downhill from there.
And yet, in an economic sense, discounting is nothing more than the vehicle for good old fashioned price competition. The competition drives down the market price of goods, forcing the uncompetitive out of business or into the hands of the more competitive. Just when we think that all this competition will lead to a single uber retailer, other concepts spring up with lower cost structures (ecommerce, for example), and prices are pushed lower still. This is why some have suggested that the effective life span of all but the most hardy of retail banners is only several decades at best.
This pattern is particularly true of high demand, highly identifiable commodities or near commodities, which is the business of just about every major national retailer. From toothpaste to TV's to tank tops, race you to the bottom!
Those that can escape this seeming black hole are those who offer highly differentiated products, products that are discretionary, and whose value to the customer goes far beyond the price paid. Even then, prices need to be sharp, but retailers are better able to sustain pricing integrity without having to resort to rampant discounting, and thus are better able to sustain margins.
There's not a lot of volume in these categories, so this is the business of smaller, independent retailers. That doesn't make it easier, because they are trading in more discretionary goods, but at least it's possible to construct a sustainable business model. Unless they succumb to discounting.