Rapha boss explains how brand is reducing reliance on discounts

In the second part of our interview with Rapha founder and CEO Simon Mottram, he reveals how the company “got it wrong” on relying on discounting to help drive sales, and the steps it is taking to get the balance right to help restore profitability.

Accounts filed last month at Companies House showed that in the year to 27 January 2019, the business made an operating loss of £30.4 million on sales of £75.6 million.

In an interview with the Telegraph shortly before those accounts were filed – the first since its acquisition in August 2017 by an investment vehicle controlled by Steuart and Tom Walton, heirs to the Wal-Mart grocery fortune, Mottram admitted “We’d taken our eye off the ball.”

Besides noting that the company had become increasingly complex since the decade and a half since it was founded, he also said that it become too dependent on discounting to chase sales and clear stock at the expense of profits.

When we met Mottram at the company’s North London headquarters last week, he said that the company hadn’t gone for discounting as a specific strategy, pausing for thought before explaining how it had come about.

“There's a commercial imperative for lots of businesses, because our business is about designing and buying products and taking stock and then selling it. The great thing about wholesale is that you ask your wholesale partners what they want, you can then make that, and you know it's sold.”

In other words, for clothing businesses that don’t sell direct to the public, once orders have been taken from retailers for forthcoming seasons and the stock delivered, the onus is on the retailer to shift it.

Rapha, however, is a direct to consumer business – nowadays “probably 97 per cent” of sales, Mottram reveals. But, as he points out, that means that “you have to take the stock yourself, you take the stock risk, which is where there's more value if you can sell it, but actually where people get caught out is that if you don't sell it, you've then either got to sit on it, burn it, or sell it at a discount.”

So, while the potential rewards, in terms of margin, are greater, so too is the danger of getting left with a surplus of unsold stock, which as Mottram says, is where discounting comes in.

“I think as a direct to consumer business we'll never get the merchandising right,” he says. “We’ll never get it 100 per cent right. So, we’ll always have too much of a colour or too much of a size.

“Particularly when your business is growing, you don't quite know what you're going to need to sell, so we’ll get some things wrong, so we’ll always have to sell some things at a discount.”

There’s nothing wrong with discounting as such. Mid-season sales or outlets – Rapha has Archive Stores at Shepton Mallet and Bicester for example – are widely used to clear stock. But where it can hurt a brand is when discounting becomes so prevalent that many customers wait to see if a product will go on sale, affecting not only stock turnover, but also margin.

It's a difficult balance to strike, and Mottram acknowledges that Rapha is far from the first business to encounter that problem, saying: “Where we got it wrong like lots of brands is we got onto that treadmill.

“You're growing really fast so actually the bets in-season become even bigger because we grew at 25-30 per cent last year so you’re going to grow at 30 per cent next year, so you’re buying 30 percent more stock, so you’re making a 30 per cent bigger bet.

“So, you're ending up with more unsold stock at the end of the season and you have to discount more, and the more you discount the more immune to discounting the market becomes so you have to discount deeper.”

It was identified as an issue that needed to be addressed urgently in the wake of the 2017 takeover – there is a certain irony that the Walton family fortune was built on a stack-it-high, sell-it cheap model that turned Wal-Mart into the world’s biggest retailer – and Mottram outlined steps Rapha has taken to meet the challenge and restore margin and profitability.

“Our promotional days this year are 50 per cent less than last year,” he says, “and our full-price sales are something like 35 per cent higher. So, we're making a change.

“What we can't afford to do is to just go cold turkey or go ‘right, we’re not going to discount’ because we're sitting on stock and we've made commitments to buy product in and also you don't want to go backwards by 30 per cent in sales which is probably what you do.

“So, we've taken the decision to gradually wean ourselves off it, actually pretty aggressively – halving our days on discounts is pretty strong.

“Black Friday this year is a couple of days less than we did last year and the discounts available a little less than last year, and that stock pile is a bit less but actually we've done more sales, which is interesting because it suggests to me that by not discounting over a year, when you do have promotions there’s more demand for it.

“To some people it'll feel like we’re doing too much and we feel like it's still too much but we're on a journey to getting it right,” he says.

“We're actually really pleased with how it's going. The worst thing would have been if we'd not discounted through the summer and then when you do have a discount sale, and nobody wants to buy,” he adds.

“That would mean you’ve got something really badly wrong because there’s no demand unless there is a discount all the time, and that doesn't seem to be the case.”

In the next part of the interview, we'll be hearing how the Rapha Cycling Club concept will be an important part of the company's startegy in the coming years; meanwhile, you can read the first part of the interview at the link below.

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