That looks like a hot spot. Usually an irritated spot due to tick or flea allergies. You need to get treatment right away. First, you can get some veterycin and spray it at least 3 times a day. Keep it up for several days and see if he scratches or anything and if it starts to clear. If that doesn't work you need to get him to the vet. Hot spots are a staph infection and if let go they can kill a dog. Usually the veterycin will work. You also need to use some kind of flea and tick remedy on him. However, once in a while these can be caused by grass allergies as well.
He's a VERY happy dog after his bath!!! Lol the discoloration isn't blood. It's really wierd. My Siberian Husky female had something similar and I never could figure out what caused it. London was definitely more comfortable after his bath and not so itchy. If I need to I'll repeat again next week or however often. Just wondering if there's something I could do to help actually fix the problem.