Sources: Walmart; JCPenney
Can retailers sell anything without sales?
I recently had a conversation with a grocery chain executive who lamented the number of product categories in which everyday priced items failed to turn on store shelves while promoted products provided lift, but not to the degree they did in years past. It turns out, she surmised, that consumers had figured out the marketing game played by brands and merchants and could rarely be incentivized to purchase anything before they were ready.
An article published on The Wall Street Journal website yesterday covers some of the same territory as my conversation. The piece pointed to promotions by clothing retailers around the Memorial Day and the Fourth of July (exactly what the founders envisioned when declaring independence) and the types of language used by retailers – “Last Chance” – to move customers to purchase.
In the end, the article concludes, as did the grocery executive, that consumers rarely buy anything unless they think they are getting a deal. Unfortunately, the constant stream of sales has led consumers to conclude that there is no rush to go online or head to stores to make a purchase.
“Basically, it’s always a sale now,” Barry Schwartz, a consumer psychologist and professor at Swarthmore College, told the Journal. “The retailers are killing themselves.”
Discussion Questions
DISCUSSION QUESTIONS: How can retailers break the promotional trap they’ve put themselves in? Are there retailers you can point to as examples of good practices? What is it about them that makes them unique in this respect?
Poll
BrainTrust
Chris Petersen, PhD.
President, Integrated Marketing Solutions
Gajendra Ratnavel
CEO, L Squared Digital Signage
In economics, the idea of Bertrand Competition (named after Joseph Louis François Bertrand (1822–1900)) is that when multiple sellers compete for the sale of identical units of a good and have similar costs then all sellers will end up with zero profits.
This has nothing to do with sales or promotions, it has to do with the death of a centuries-old business model. It is high time for a new one.
So how do we create the new business model that Ori Marom is hinting at? It’s actually pretty easy: judge our efforts (including promotional campaigns) on the basis of the future/projected value created for the customers who participate in the campaign. If we’re only appealing to low-value cherrypickers, then the campaign is a failure and we shouldn’t do it again. But if it is attracting valuable customers and/or enhancing the value of existing valuable customers, then it’s a success.
Let’s stop evaluating our retail businesses on the basis of volume and costs. It’s all about granular value. “Lift” is meaningless if it’s not lifting value as well as volume.
The problem here with traditional retailers is in the cost-plus model for profitability and driving sales volume. Retail management is compensated on profit margin and volumes and customer value is not part of it except in the vague sense of the customer satisfaction score. Need more volume? run a sale. Need more revenue? Run a promotion. It is a cycle which retailers have built as part of the brand value proposition. Newer online retailers start with customer value like Zappos and are able to break that cycle by defining their brand differently. I just don’t know if retail brands that have established their customer base’s sales-driven behavior can break the cycle.
Old habits die hard … especially in retail!
Traditional retailing was built upon the 4Ps, and when the first three didn’t work, the focus always shifted to price as a way out from old stock and lagging sales. The retailers themselves created the consumer expectation of “sales.”
The revolutionary difference now in an omnichannel world is that everything is on sale all of the time somewhere. E-commerce has a created a new floor for price and most brick-and-mortar retailers can’t compete at bargain-basement prices online.
There is no simple answer. It sounds rhetorical, but brick-and-mortar retailers have to remove price from the equation by creating relevancy and value. Amazon or its marketplace retailers win on price most every day. But you don’t get personalized service and support.
You can buy soap, paper towels and diapers cheaper from Amazon. But what Kroger and HyVee are doing is creating local value with “personal pickers” in their click-and-collect and home delivery of groceries and packaged goods.
The trouble is CMOs feel discounting scales easily versus training their employees how to sell which they feel doesn’t scale. They’re wrong.
Unless you have a strategy to move the merchandise at full price, the discount lever simply won’t work. They’ve trained the rats to wait for the cheese.
I think it’s not always that shoppers conclude there is “no rush.” I think the mere fact that most shoppers are in effect always on a path to purchase means that at many touch points with products they simply aren’t ready to ring the cash register today. In a survey of 1,209 frequent online shoppers we did with the e-tailing group we asked this question: “For products you intend to buy now or in the near future, how often would you wait for that product to go on sale versus buying it immediately?” The results:
An immutable truth is that you reap what you sow. Indeed, if it weren’t for self-inflicted wounds retail would be flying high these days.
I wish I was a cartoonist, because I see a circle of figures facing each other, each representing a retail entity and each carrying a gun pointed at their own feet. And they’re unable to agree on a cease-fire.
Retailers trained consumers to only buy when desired items are on sale, now they need to have the discipline to untrain them. Stores like Macy’s and Gap always have sales, causing consumers to have no incentive to buy when items are not on sale. Conversely, Trader Joe’s doesn’t have sales and its stores are busy. Why? Because they offer every day low prices, without gimmicks, and Trader Joe’s makes shopping fun. Sales and promotions are great ways to boost consumer interest and purchase, but not when they are the only arrow in a retailer’s marketing quiver.
I agree with you about Trader Joe’s, Max. Costco also has truly every day low prices. While they do offer items on sale, somehow their sales seem secondary and it seems shoppers go there for the fair prices, fun experience, and of course the samples, which they do better than any retailer, IMO. There are several gourmet food retailers in our area that really don’t do sales but offer outstanding quality and tremendous prepared food offerings, so shoppers go there for the quality, and think of the price as secondary.
Retailers, particularly in grocery, MUST use data to know their customers. Promotions attract most customers but knowing the purchase habits and preferences of individuals is the surest way to have the right items at the right time for these consumers. Incentives for new trial purchases and tie-in items with the core items to what consumers buy can add sales and profits for a retailer. Kroger has obviously been a leader in these practices.
This challenge has been entirely self-inflicted by our industry, and this discounting has spilled over into other industries, like cars, travel, hospitality, etc. At its core I don’t feel we need to get rid of promotional programs, as long as they continue to drive product movement as well as improved gross margins. Manage the messaging and you can manage the discounts. There are plenty of examples where this has worked for decades in retail.
J.C. Penney makes a good cautionary tale about what happens when a promotional department store tries to go “cold turkey” on its sale events. Like it or not, the customer has been trained to wait for sales for a long time (Gimbels, anyone?) but the difference now seems to be the frequency of margin-busting sale events and extra discounts. J.C. Penney’s experience may have scared other retailers away from cleaning up their promotional calendars and risking a volume meltdown.
Certainly retailers like Amazon and Costco drive plenty of volume without being especially promotional. But they operate with different margin requirements (and expense structures) than the typical department or specialty store. So I’m not sure there is an easy answer to George’s question — but it’s clear that the overpromotion is not driving sales growth.
There are few emulators when it comes to this topic IMO, but an oddball example is Forever 21. How can they be “EDLP” and everyone else is in email frenzy town with “70 percent off!” blurbs? Simply because they ARE always low price. That’s their brand and they stick to it.
This topic leads to a bigger one though, and that is: short term thinking vs. long term thinking. Forever 21 decided that they were always going to put goods out at low margin and then run with that all day long. And so they do. Everyone else seems to have a bad season, a winter storm, a bad buy, a wrong color, a bad CEO, an activist investor, or something along those lines which causes them to panic and abandon their strategies (and their brand) and mark everything down to cost. At the end of the day, more long-term thinking is required. It’s not too late.
Don’t get me wrong, price speaks but so do a lot of other things as well. Let’s take a look at Starbucks and Chick-fil-A. Both on the higher end, price-wise, in their space. However they both offer quality products and quality service.
Personally, Chick-fil-A is my favorite fast food but the lines are so long that when I’m in a hurry, I usually have to opt for something else. Until they offered their new app a few weeks back. I can now order before I get there, let them know I’m there and either walk in and pick up or, in some cases, they will bring it to the car. Who cares that they don’t have a dollar menu? They have a great sandwich! And now, even better service.
These are two exceptional cases where the brand listened to their customers and thought about serving them first. BTW, the scoop here in Chick-fil-A’s hometown is that the app is gangbusters. And I don’t just mean in downloads but in traffic.
For my 2 cents.
For retail stores like Macy’s, they’ve been offering non-stop sales for so long that it now seems like their sales prices are their standard price. I do think that stores offering a line like Macy’s “Every Day Value,” is useful. Consumers know they’re getting the lowest price. Category management and shopper insights should help stores manage their sales items. While everyone loves a sale, finding out which items sell the best at sales prices should help determine their future promotions.
Retailers have done a great job of training their customers to “wait for it to go on sale.” Some retailers have a different sale every week — even daily. Ultimately, it’s about price. Wait for the price to come down. When you train customers to focus on price, they will eventually start to shop the competition for price. And that is where even bigger problems for the retailer begin.
Selling something to a customer before they are ready seems like a silly thing to do when everyone is connected now. Shouldn’t the job be to make sure their product is available to the customer and have built trust in the brand so that the customer picks their product when the purchasing decision is made? The social ripple caused by small issues with a product a customer didn’t want to buy is orders of magnitude worse than something they wanted. Think of it like the honeymoon effect. You are not on a honeymoon with someone you don’t like!
The shopper just wants to be treated “fairly” first off, and get a deal second. Unfortunately for a retailer whose brand is known for playing a discount/sale/coupon game it’s virtually impossible to get off the treadmill and establish an EDLP or fair price strategy instead. If the customer expects you to go on sale, you’re going to have to. EDLP brands like Costco and Amazon have trained their customers to know that whatever they buy is going to be competitively and fairly priced, so they buy with confidence. Going from one model to the other means untraining the customer and building their confidence that the new pricing model is fair. For some retailers that’s Mission Impossible.
Remember the horror when customers figured out that in order to run sales after Ron Johnson’s tenure, J.C. Penney had to first raise prices?
There are plenty of retailers (Aldi, Forever 21, Apple, Trader Joe’s) that never run sales, and don’t have to, but they have unique products. Retailers are going to have to figure out how to sell commodity items without slashing prices.
Anyone can give product away. It takes brains to sell it. It’s not surprising that food retail customers are so price-focused. Since the inception of supermarkets in 1930 (King Kullen), food retailers have constantly talked, promoted and lived for the most part on low prices. In fact, the King Kullen proposition of a new type of food store with a focus on low prices, cash sales and without delivery service, in larger stores (at low rents) with ample parking, is virtually unchanged by many supermarkets today.
There are many examples of food retailers who moved out of the middle, not by being cavalier about prices, but by changing the value equation from quality divided by price to benefits received divided by burdens endured. In effect, changing the supermarket paradigm to a focus beyond simply low prices.
The short answer to the headline question “Can retailers sell anything without sales?” is no. I believe Mr. Johnson did a pretty decent job of proving that at J.C. Penney.
But I’d add an asterisk. While I don’t think if you’ve established yourself as being a high low retailer you can easily change that, with the possible exception of a limited number promoted, true “Everyday Values.” If you’ve never started playing that game and your store has a certain panache (i.e. Nordstrom or IKEA) and/or be a part of an experiential venue (i.e. the gift shop at a Disney theme park or an art museum store).
Hype can overshadow actual price. Although the consumer has gotten less naive and technology has made show rooming far easier, the retailer who does the better job of freshening up their marketing often fairs better even if they don’t have the absolute lowest price.
Consumers lie. If they need it, they won’t wait for a sale and it is at higher numbers than the surveys reveal. I feel like I am Trump saying don’t believe in the polls ;-). Nordstrom is not a discounter, they thrive in a tough environment. For those customers looking for a sale — and it is everyday — there is Nordstrom Rack. Perfect — position the options for the consumer so they buy from you full price or on sale, but don’t cut into your margins when the goods first land in the store. Take the customer’s eye off price, How? By offering a loyalty program and a “cheaper” discount is bonus points vs. markdowns at 10, 20, 30 and 50% off. We did this successfully at American Eagle Outfitters and it significantly reduced the internal markdown rate.
As the battle for omnichannel retail continues to intensify, retailers that failed to differentiate beyond pricing will be locked in a death spiral of never ending sales. We are already seeing this in the declining margins of brick and mortar retailers such as Macy’s. Ecommerce companies should be paying close attention to avoid a similar fate as the online market matures.
Where are discussions on the importance of brand, service, integrity, reputation, client need, experience and 100 other touch points that create distinction? Mass and discount retailers taught their customers that price is everything. You reap what you sow.
Everyone wants a deal. Define “deal” differently.