VAT Reduction Triggers Flurry of Promotional Activity

Monday, 15 December 2008

When Chancellor Alistair Darling announced on 24th November a reduction in the standard rate of VAT from 17.5 percent to 15 percent, it was meant to help retailers, by encouraging consumers to spend more. But many retailers saw it as more of a hindrance, in that they were given just one week to comply with the change, which went into effect on 1st December.

The response of Anne Walker, a partner at cataloguer International Dance Supplies, was typical. "Changing the VAT rate at the busiest time of the year can only bring more stress and expense to the already hard-pressed retailers," she said. "And for what effect-2.5 percent when most retailers are not able to encourage shoppers with their 20 percent-plus discounts."

But even as they were complaining that the reduction was too small to boost spending, marketers were busy putting together promotions in an effort to make the most of the situation.

Preemptive strikes

The short time frame between the announcement of the VAT cut and its implementation put etailers at an advantage, said Tony Bowman, chief executive of etyres.co.uk: "The beauty of ecommerce is that we can react almost instantly to opportunities such as this." Etyres reduced the VAT almost as soon as the cut was announced, which Bowman said led to a surge of traffic.

Indeed, Nigel Swabey, chief executive of multititle cataloguer Scotts & Co, said that direct marketers in general were in a better position to react to the cuts than bricks-and-mortar retailers. "Conventional retailers will need to reprice most of their stock on the shelves," he said. "In some cases prices have been incorporated within the packaging, and these cases will be difficult to rectify. Direct retailers, being more agile, should be able to adjust to the change more swiftly."

And swiftly they did react. The day after the announcement, fashion cataloguer Boden sent a promotional email that declared: "Gordon, if you're going to cut VAT, cut it properly: 17.5% OFF all orders plus FREE delivery. (This offer includes childrenswear which doesn't actually have any VAT, but, you know, what the heck?)."

Discount apparel cataloguer M and M Direct was also quick to act, announcing on the 26th November that it was implementing the change four days before the official start date. "What's more," said a statement from the company, "any awkward prices will be rounded down, not up, and all delivery charges will also be trimmed accordingly."

Boden wasn't the only marketer using the tax cut as an excuse to offer steeper discounting. Apparel brands Onfire and Extremepie, for instance, awarded customers 17.5 percent off their orders for a limited time. "It's given us a brain ache trying to sort the prices, so we thought you'd prefer a simple VAT refund at the old higher rate of 17.5 percent," announced the latter's enewsletter. Furniture retailer Dwell also played on the sense of urgency implicit in the rate cut, emailing customers to let them know that its VAT-buster deal of 15 percent off was never to be repeated.

Sex-toy retailer LoveHoney.co.uk arguably had the most creative promotion. "We don't think individual customers would notice the savings if we reduced prices by tuppence ha'penny here and half a groat there," said director Richard Longhurst. "So the biggest stimulus we can give is to put all the VAT savings into a pot and let one lucky LoveHoney customer win the lot"-a sum he predicted would hit five figures.

Now that the dust has settled

So far, the reduction hasn't increased sales as the government had hoped. According to IMRG, 1st December-the day the VAT cut went into effect-did set a record for the number of online transactions in the UK. But the organisation's chief executive, James Roper, said the traffic couldn't be attributed to the VAT reduction. "Monday is almost always the biggest shopping day of the week," he said, "and Mondays in December are usually huge."

What's more, although the number of transactions was up 3 percent from the previous year, the total amount spent was flat, said Jon Prideaux, deputy chief executive of payments service provider SecureTrading.

"As ever with grand government gestures, it's pointless," Mark Dugdale, chief executive of multibrand cataloguer Compton & Woodhouse, said of the VAT cut when it was announced. "Will a £2.50 reduction on a £100 product make any difference to spending patterns? I don't think so, but it does create a monumental amount of work for retailers from all channels and disciplines to change prices, especially for Christmas." It remains to be seen if those retailers that put in an extra creative effort to woo customers in the week leading to the VAT change will reap any benefits, but at the very least they all get an A for effort.-Miri Thomas