The discounting conundrum

It was interesting to watch as the British public picked over the carcass of Woolworths last week. In its apparent death throes, administrators to the stricken retailer announced an everything-must-go, biggest-ever style sale, with the price of goods slashed by up to 50%. However when Woolies opened its doors, there was widespread consternation as the discounts did not prove to go as deep as had been promised. This gave way to disgust as ‘angry of Tunbridge-types’ told the news channels and papers that ‘only’ 20% or 25% was just not enough. It was fascinating, and spoke of the new and rampant consumer mindset. The digital age – we can compare prices online in a matter of seconds on any product anywhere – coupled with this post crunch era and consumers growing appetite for value, means that we have become a nation of bargain hunters, all with an eye for a deal. We want big money off and we want it now. When we are roused from our bunkers by the promise of a big shiny sale, it had better deliver. “We are moving into an era of the frivolous being unacceptable and the frugal being cool,” was how Andy Booth, the chief executive of Asda, put it. The nations retailers have responded. Argos, Boots, Currys, House of Fraser, Marks & Spencer, Sainsbury’s and Waitrose were just a few of those offering substantial discounts over the weekend. And let us not forget Tesco, which was offering 50% off on 1,000 product lines and has of late rebranded itself as the country’s biggest discounter. The question for the eating and drinking-out market is: how does it respond? The subject was aired once again last week as various operators, including Ego chairman James Horler, questioned the validity and long-term benefit of discounting, an activity that both pubs and restaurants have been heavily engaged in for some time. Douglas Jack, one of the sector’s key analysts, last week published a large industry-wide review, as is his want (that he used to call this work Licensed to Print Money and that now it has been dubbed Survival of the Fittest tells us everything). This excellent and wide-ranging document included much about pricing. Jack illustrated that since the last recession, the on-trade premium on drinks had risen from 1.73 times to 3.8 times, versus the supermarkets. He also listed the number of groups that at had some point ‘resorted’ to two-for-one offers in recent times on food. They included ASK, Burger King, Café Rouge, Chef & Brewer, Dexters, Giraffe, Gourmet Burger Kitchen, Ha Ha, La Tasca, Old Orleans, Pizza Express, Revolution, Strada, Tootsies, YO! Sushi, and Zizzi. Some of these offers were very targeted, some were widespread. The worry is that in this effort to keep volumes going the sector is damaging long-term brand equity. In this new era of austerity, it is a complex issue for the industry’s marketers. The key sells for eating and drinking out are about experience, and adding value, but for many it is also, these days, about price. How the industry sells itself right now requires careful consideration. Pub operators have the added complexity that discounting alcohol is politically sensitive like never before. However, it may be that discounting is just something that everyone must do, in some way or another. Whether it’s around the margins in the form of marketing campaigns and data grabs, deep discounts like those mentioned above, or in the form of everyday value, is probably a question of market positioning. Leased pub companies It was with some relish that last week my colleagues and I sat in on the second session of evidence of the Business & Enterprise Committee investigating the power of the UK’s two dominant pub groups. I was looking forward to some vigorous debate, not to mention a little ‘sport’, as the leased pub group CEOs locked horns with the designated group of MPs. However, that anticipation quickly gave way to irritation, then depression as it became clear that this group of politicians were just not up to the job. Ill-informed, ill-prepared, and just plain ignorant, the committee failed to cut through to the more salient subjects worthy of discussion and debate – those grey areas that give rise to considerable friction between pub groups and their lessees. This was an ugly, abject lesson in sound bites and grandstanding (on the part of the politicians I should add), and certainly did not suggest that this process will determine anything new, or lead to any change, whether justified or not. The most interesting thing to emerge from the inquiry was the ALMR’s position. Chief executive Nick Bish questioned the ongoing sustainability of the tie, both for beer and machines. The leased pub model is attracting an increasing amount of coverage. The session at Portcullis House in Westminster came a few days before a Money Programme special looked at the record number of pub closures and in particular the impact of Britain’s leased pub groups. Alas, it was once again, barely worthy of mention as a BBC reporter went to a few pubs, spoke to a few landlords, sank a few beers and then went home. To my mind, this issue is complex but what is clear is that the pub companies do get it wrong, the standard of business relationship managers could be considerably better, FMT is a subjective mess, and hammering someone’s success by hiking up the rent in a scheduled review is just plain wrong. The two big pub companies are also victims of their size: communication is one of their biggest challenges; when their interests are aligned with their ‘customers’ everything is rosy but when they are not I know from experience that trying to resolve issues can be a living nightmare. These faults could be overlooked in the so-called bull market the model has enjoyed in the past decade or so. Unfortunately they have become real issues in the current market. But at the same time there are many lessees that have done very well through the model that would not have otherwise had the opportunity, and too many licensees blame the pub company when they underperform, and ultimately no-one forces them to sign the agreement. Perhaps the answer is that prospective lessees should not enter into these partnerships at all? A little extreme perhaps, but what is also clear, especially in this market, is that when it comes to lease agreements the pub companies desperately need to innovate.