Online discounting gives retail a boost but puts margins under pressure

Widespread retail discounting boosted online sales growth in September, but has continued to squeeze their already-tight profit margins, according to fresh data.

Total retail sales grew by 4.7 per cent compared to September last year and online sales were up by 11.6 per cent, accountancy and business advisory firm BDO’s high street sales tracker found.

However, in-store sales grew by only 1.8 per cent. 

“These sales figures may appear positive at first glance, but they show clear issues for the sector as we approach the most critical time of year,” Sophie Michael, head of retail and wholesale at BDO, said. 

“The reliance on discounted online sales to drive growth is not only putting huge pressure on retailers’ margins, but it is also a very costly way of doing business because of the high level of returns. It simply isn’t sustainable,” Michael added.

A survey from the British Retail Consortium (BRC) at the end of September found that a third of consumers expected to spend less on clothes over the next three months, and around a quarter expected to spend less on electronics, beauty, and entertainment.

Similiarly, high street footfall has remained stubbornly below pre-pandemic averages – total UK retail footfall fell by 0.4 per cent in August year-on-year, the best monthly figure for more than a year. 

It’s a concerning trend in a sector already squeezed by high business rates.

Last month, the BRC found that retail pays 7.4 per cent of all business taxes – £33bn – a share 1.5 times greater than its share of the overall economy, which is five per cent of GDP.

The tax bill is 55 per cent of the industry’s pre-tax profit, the highest proportion of all main business sectors. Business rates make up 11 per cent of this, or 5.75 per cent of pre-tax profit.

Labour has pledged to reform the rates regime, although an official policy has yet to be announced. It is expected in either the upcoming Autumn budget or next year’s spring budget.