The cost of Myer's refusal to play the discounting game

In January and February growth in sales stalled in large part because management wouldn't play the deep discounting game that most of its competitors were engaging in.

This turnaround can't be seen to wobble so early or investors will fear that the New Myer is just the Old Myer with a lick of paint.

The trouble for Myer is that if competitors get involved in another discounting binge between now and the end of Myer's financial year in July the department store group will suffer again and risk not meeting its targets for profit and sales growth.

Given the revenue result, sticking to these targets is now looking increasingly brave.

Myer is only 18 months into its revival plan to create New Myer and investors won't be happy if the momentum peters out. The disappointing (read: nasty) sales result that it reported on Thursday was enough to give the market the jitters, pushing the company's share price down more than 5 per cent by lunchtime.

This is despite the fact that the profit it reported for the first six months of the year, to January 2017, was better than the experts had predicted.

For the most part the chief executive in charge of the renaissance of the previously long-time underperforming department store chain, Richard Umbers, is doing the right thing in fixing the balance sheet, overhauling the product lines, churning unpopular brands with new ones, cutting costs, and improving processes and technology.

Much of this ongoing work was responsible for boosting the bottom line profit and this should continue as there is plenty more to be done.

But it's very hard for retailers to grow profit in the medium term if sales are not growing. And it's really difficult to grow sales for a retailer that isn't heavily discounting product when its competitors are.

Umbers talks of consumers experiencing sales discounting fatigue in January because so many stores started this process before Christmas - by January they had either run out of money or shopping momentum.

The rush by others to start sales before Christmas was in response to their difficulty in moving stock. Such behaviour makes customers even more addicted to discounts.

However Myer's disinclination to discount too heavily didn't save it from a fall in its retail margin (the difference between what Myer paid for goods and the price at which it sold them). This is still falling - albeit less than it had been previously.

Myer blamed the particularly competitive environment as being responsible for crimping revenue. A lot of other retailers have said the same thing. And most department stores have been hit with weaker sales or slower sales growth over the past year.

But in a general sense the market is only getting more competitive thanks to large offshore apparel giants like H&M and Zara gaining territory.

Just what will happen when Amazon starts up here and starts selling many of the brands housed by department stores? Umbers is hoping this will result in a growth of the retail pie. This remains to be seen.

Umbers is right about the notion of weaning customers off shopping only for discounted items - he is also right that this is not particularly profitable sales.

But you really need a store filled with must-have items - which are demonstrably better than those stocked by competitors - in order to have pricing power.

He was hoping that the investors would appreciate his strategy of avoiding profitless revenue growth.

"I took a gamble that people would understand the strategy [to avoid deep discounting]."