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UK retailers' discount detox may be short-lived
January 12, 2017 / 12:54 PM / a year ago

UK retailers' discount detox may be short-lived

LONDON (Reuters Breakingviews) - Full-priced fashion is the new black. Strong pre-Christmas sales at UK retailers Marks & Spencer and Debenhams show efforts to wean customers off promotions are paying off. Fewer discounts should translate into better margins. But the temptation to hoist the “sale” signs may return as inflation and weaker growth squeeze British consumers. 

Travellers push trolleys with luggage past a Marks & Spencer Food shop at the arrivals area at Terminal 2E Roissy Charles de Gaulle International airport in Roissy, near Paris, France, November 30, 2016. REUTERS/Mal Langsdon - RTSUCDS

Steve Rowe, M&S’s new boss, took a risk in paring back promotions. In the company’s last financial year, up to 40 percent of everything sold went out the door at a reduced price. With like-for-like sales of clothing and home products up 2.3 percent in the 13 weeks to the end of December, compared with a 5.9 percent decline in the preceding six months, his instincts look to be correct.

The company is focused on gradually reducing the percentage of stock that goes on promotion, with a longer-term target to reduce the number of clearance sales to four per year – from nine in the last financial year. Department store Debenhams, which is also reining in discounts, saw full-price sales improve by 2 percent during Christmas trading.

The detox calls for sharp retail skills. Debenhams is carrying 7 percent less stock than a year ago and buying very prudently. Getting it wrong risks losing customers to cheaper rivals. Supermarket Tesco’s decision not to repeat a promotion on its loyalty card this year weighed on like-for-like sales growth over the festive period.

If retailers can banish the rash of promotions on the high street, margins ought to improve, even if actual prices are somewhat lower. Zara-owner Inditex, whose management of marked-down garments is particularly good, reported an operating margin of around 18 percent in its last financial year, Eikon data shows. M&S clocked in at just over 7 percent, though its lower-margin food business drags down the average.

But even if retailers can resist growing pressure to cut prices in the face of discount events like Black Friday, other factors may prove harder to shake off. Resurgent UK inflation looks set to eat into consumers’ disposable income this year. The temptation to fall off the discount wagon will be strong.

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