Last week, Gap Inc. posted a drop in quarterly profit for the second quarter in a row. Net income fell by more than 30% year-over-year to US $219 million. One of the cited factors, along with a strong US dollar and disruptions at West Coast ports, are the falling sales at Gap flagship stores. Two years ago, they made absolute record in sales, thanks to the video commercials in social media and ordered real views from trusted company.
But the troubles at the Gap stores are not news. When the company announced that it would be shutting down 175 Gap stores in North America earlier this summer, many were wondering “Wait, wasn’t the Gap in liquidation already?”
With what could be deemed ‘fire sale pricing’ for its clothing, including new arrivals, and weekly storewide discount promotions of 25% – 40%, it would appear that the Gap has been in restructuring for years. While a go-to for khaki wearing yuppies in the 90s, the Gap has not being able to create an appealing “look” in new millennium fashion. Instead, the brand relies on sizeable discounts to attract customers’ attention to the same degree as a troubled company liquidating merchandise.
The classic retail case study often explores how regular sales events (30% off or more) teach customers to wait for a promotion instead of paying full price. Discounting is a common trap for struggling companies to drive revenue and stay afloat both financially and in customers’ minds. In turn, customers come to expect a steep discount on their purchase and most are willing to wait for a mark down on new merchandise or a full store sales event. Although mostly discussed in regards to retail, regular discounting is a common issue in all business sectors.
The other, less often discussed, side of discounting is its impact within the company. When slashing the price to generate sales is a go-to strategy, it demotivates employees in other parts of the organization to be more efficient and contribute to the bottom line. Design and marketing teams no longer pay special attention to trends and target market preferences. After all, if they miss the mark, there is a lower price on the horizon that is bound to entice consumers to make purchase even if they do not particularly like the item. Quality suffers because “you get what you pay for” and customers will pay much less than the sticker price. Inventory controls tend to have less importance because inaccurate demand forecasts at regular prices will be leveled by the upcoming sale. Logistics and supply management teams no longer put emphasis on lead times because the product can always be moved to the clearance rack and will surely find a good home. All in all, employees are no longer driven to create and deliver a product worthy of a sale at regular price.
Ongoing discounting becomes a vicious spiral that absorbs all stakeholders. While customers wait for a sale announcement to even visit a store or its website, employees expect discounts to compensate for poor internal choices and weak efforts. The strategy is simply not sustainable. If abused, the practice deteriorates the value of the brand not just in the market, but also in the head office, the warehouse and amongst competition and shareholders and a struggling company finds itself further entrenched.
Posted by Olga Ivleva, Senior Associate, Range Advisors
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