BrainTrust Query: But We’re Building Market Share
“But we’re building market share.” It seems to be the standard answer of many of the largest retailers as discounting has taken the profit out of selling merchandise. But how many more retailers ended up shooting themselves in the foot this holiday season?
As more and more methods for discounting have become possible, are retailers losing control of their margins? And while technology vendors have been great at supplying discount delivery mechanisms, have they been as diligent at supplying the tools necessary to use the “discount weapon” safely?
Today, there is a wide range of retail merchandising models, from the “everyday low price” model of Walmart to the “continuous discount” model of Kohl’s. More recently, third-party promoters have come into play. We’ve seen Groupon clients who experience a rush of sales or Foursquare clients who attract “check-ins” from shoppers in pursuit of badges. Consumers have been more than willing to take advantage of below cost offerings. Retailers have used these newer mediums to build up a lot of traffic.
Suppliers continue to offer supplier sponsored POS discounts and broad based market development funds. These are often tied to in-store or in-ad performance requirements on the part of the retailer. Due to the nature of their products, some suppliers continue to offer purchase order-based discounts so they can offload warehousing costs onto the retailer.
All this promotional activity has taken its toll on gross margins and retailers are saying it is part of the plan. But is this true or simply a good defense? Do retailers really have the tools they need to understand what all the discounting is doing to their margins?
On the one hand, technology has made the accounting for POS discounts very straight forward. Detailed POS transaction logs record each discount applied to a line item so that a full accounting of POS discounts is available. On the other hand, attracting customers with a deep discount delivered by Groupon means the retailer is going to lose money in the short-term. There needs to be a good conversion rate that brings back customers at an even higher than regular retail because the retailer has to recoup the discounts provided on the promotion.
The Holy Grail for merchandising has always been “price elasticity” — comparing the percentage change in price to the percentage change in volume. If a small decrease in price yields a large increase in volume, the retailer is in the perfect position to increase sales but not necessarily profit. If the discounts reduce the revenue below the cost of the merchandise, the retailer will simply begin to lose money faster. They say they meant to do it — that their deep discounts are building share. But what good is share if you’re losing money on every transaction? Do retailers really have a handle on discounting or are they simply putting on a brave face?
Discussion Questions
Discussion Questions: Do retailers have the tools to understand what the wide range of discounting is doing to their margins? Do technology vendors offer retailers adequate tools to deal with today’s promotional environment? How might retail’s promotional pricing model have to be re-assessed in the years ahead?
The annual stories about “excessive discounting” leading to lower margins remind me of the old Mark Twain quotation: “The reports of my death are greatly exaggerated.” After all, if sharper promotions and lower prices were unsustainable, Walmart wouldn’t be the world’s largest company.
It’s important to look at promotional activity and discounted prices in the context of an overall strategy:
1. What other supply chain and sourcing savings have gone into the products being discounted most sharply?
2. Is the merchandise exclusive to that retailer, and therefore less subject to pricing wars?
3. Is the retailer managing its inventory levels appropriately, on a macro level as well as on a store-by-store basis?
Over time, most retailers are showing gradual improvements in margins at the same time as their promotional cadence gets more intense. The biggest stumbles this year will come from the stores who headed into the 4th quarter with excessive inventory, not necessarily the ones with planned but aggressive sales promotions.
While I agree with Bill there is a new player and that is the stock market fueling such underpricing as Amazon. “We make it up on volume” is an old saw. Using Groupon is the very worst as I’ve written often about, not just for what it’s done to the retailer, but also how it and the impossibly low margin resellers like Amazon have fundamentally changed retail customer perception.
There’s a lot of talk in the trade about “price transparency” which conveniently leaves out the overhead, marketing and other tangible costs that make up a brand/retail experience.
Retail is becoming the ultimate company town as a very few publicly traded resellers will funnel your hard work to their app.
Will we get to a service fee to browse refunded if you purchase? Will retail adopt the mantra of movie theaters, “Only available in store?”
I’m concerned some of the greatest creative geniuses in retail are focused on getting someone to click a button, using a discount as the engine to drive purchase rather than creating an exceptional human experience.
Retailers should have the tools — they are out there. As long as they hold a “share” mentality rather than a “profit” mentality, they are doomed. Nobody makes any money off share points, as Bill well notes.
We need tools? I thought all you needed was math.
Retailers need to look at themselves in the mirror, especially those that followed a SKU rationalization program that resulted in nothing but a likeness and sameness, with nothing more to offer other than deeper discounts than their competitors. What retailers need to “re-rationalize” is how they look at specialty brands, high profit items, and niche items, and stop with the discounts! They aren’t necessary. Carry these products and enjoy SRPs every day of the year. Not everything on the shelf needs to be discounted! You and your manufacturer partners deserve to earn some profits in 2012.
Many retailers have more and more tools to help them analyze the impact of discounting, as do the suppliers, especially in CPG categories. So, while the endless promotions, which I’ve also written about as “margin-sucking” seem non-stop, they are just a part of the overall game. But, shoppers are savvier than ever before, and while they play the discount shopping game to win, they also desire something more from the shopping experience. I recently wrote about this as well.
Leading retailers will invest in providing a more relevant experience, and create footstep opportunities by doing so. Ideally, the benefit of differentiated (from the ease of “click”) shopping experiences translates to at least some of the purchases at less-than-rock-bottom prices, and more importantly, some level of affinity to the retailer that lasts beyond the next promotion. That is the art of retail, and it requires creativity and insights.
Sadly, the one retailer who didn’t seem to be able to execute either strategy well is Sears, announcing today that they’ll be closing over 100 Sears and Kmart stores.
Unless you’re Walmart et al, discounting is a dangerous game. The big discounters have the ability to move lots of product while making only a small percentage on each item. They usually are selling commodity merch and serve it up with no customer service.
The big non-discount retailers who are giving their stuff away aren’t building share, they’re circling the drain and they know it.
The rest of retail doesn’t have the luxury of giving their wares away in the hope of building market share. Unfortunately many have been sucked in to the Groupon mentality that if you give it away they will love you and come back to pay full price. As Bob points out, this is not only wrong thinking it will fundamentally change how your customers perceive your business and ultimately put you out of business.
Retail needs to leave discounting to the professionals and get back to the hard work of building profitable businesses.
Okay, I love Ian’s comments. It’s not tools…but simple math. One can easily win the battle but lose the war. Market share means nothing if you don’t eventually turn a profit. This why smart retailing combines competitive pricing with the service and experience customer’s want.
I got an email from a client today that reported they are up 30% this holiday without discounting a single item. You know what they call a retailer who does this? Profitable.
This is an aside to the question posed; but I look at what retailers are doing to make up for the promotional pricing. I went to Best Buy to purchase a laptop hoping I would be able to take advantage of the “open box” coupon discount advertised. Naturally there were none available unless it was one of the outrageously high priced models. So I decided rather than continue shopping (I admit to being a poor shopper), I would purchase one “on sale.” The sale price was good enough that I could live with it. That was until I was advised the “sale price” was increased by $70.00 because the Geek Squad had opened this new box to “insure all the updates were available and add anti-virus software. And they had the gall to add $70.00 for this. My next letter is going to be sent to Brian Dunn, Best Buy’s CEO.
As Ian suggests, a pencil and paper can handle much of this. For the high-volume, high-ticket, low-margin (electronics especially) crowd, there are special challenges since they’re essentially dealing with commodities. Here, the deepest pockets ultimately win, and tech tools can hasten the sophisticated end game.
David’s point about how retailers have gone too heavy on SKU rat is a good one. Perhaps we’ll see some retailers giving small, differentiating vendors a chance on the shelf, and this secondary tier can find some new life. But as of now, retailers are beating up vendors on price, battles over deal structures are constant and dubious billbacks are the name of the game. Happy holidays!
Not all discounts erode margin — just look at the retail jewelry business where “50% Off” still allows for plenty of margin.
Ian’s right — it’s all in the math. As Walmart has demonstrated, if your cost of goods is low enough you can afford to “discount” and still make money.
What does discounting do to margins? As Ian noted, the answer is in the math. What does it do to brand? Still incalculable but I believe more damaging over the long term and difficult to reverse, particularly for owned-branded retailers.
Case in point: Gap. Steady blasts of scorched earth, omni-channel, omni-brand discounts on merchandise that wasn’t so compelling in the first place. The results? Ongoing comp slides. Will customers ever pay full price at Gap again? J.C. Penney is no longer a brand, it’s a (crowded) house of brands and I would argue that its streak of brand acquisitions, combined with years of numbing price and promotion shenanigans have made it a brand killer.
I’ll say it again — when everyone has access to the same raw materials, sourcing, supply chain efficiencies,and democratized design, brand is really the ONLY difference.
A brand is a terrible thing to waste.
Walmart is a tough model to hold as the gold standard only because they have the leverage AND sharp pencil discipline that others either do not, or refuse to apply. What ever happened to brand preference, engaging imagery, emotion, imagination, effective competitive positioning and brilliant customer service as the true effective combination of attributes/methods to achieve profitable sales margins? Tiffany anyone? Discounting does what it is unintended to do — discount the brand.
It truly sickens me to go through malls and strip centers, plus website browsing to see day after day of ridiculous % off advertising campaigns, clearance sales, etc., which appear to be pure desperation. Buy me please!
What isn’t mentioned is internal markdowns — drop the price AND give bigger discounts to EVERYONE that walks in the store. A double edged sword that will in the end result in many C Suite execs being exited in 2012. When the income statement and balance sheet show lower gross sales, thinner margins on goods sold and higher operating expense it means EBITDA has crashed.
My first prediction for 2012, is that retail stocks are going to be a big-time bargain Jan – Apr.
Every major national retailer understands perfectly well what discounting is doing to their margins — and they know there’s not a thing they can do about it.
By definition these retailers are in the volume business — selling highly recognizable commodities (or near-commodities) created by brands that themselves are in the volume business. Even mainstream fashion has become commoditized — any one item can be substituted for by any number of other similar items.
They don’t compete on the basis of the commodities they sell, but on their ability to deliver those products to their customers less expensively, and thus, at a lower price. The race to the bottom is relentless.
Just about every technology investment that’s been made in retailing over the last quarter century has been to rationalize the delivery system — from bar-coding all the way through to e-commerce and now to mobile-apps.
Where does it end? It doesn’t. That’s the nature of the free-market system. When one retailer can no longer rationalize their delivery system any further, they go the way of countless others. Somebody else emerges who’s figured out how to do it less expensively. It’s really no different in any other industry either. Margins are never sustainable in the face of competition.
Where is it possible to maintain some semblance of price integrity? In the niches, where smaller specialists can serve a devoted customer base that doesn’t yet denominate value solely on the basis of price. Out on the cutting edge of product development, where early adopters are willing to pay plus margins to get in on the game first. Beyond that….
This conversation needs to be turned 90 degrees. The article and ensuing discussion have focused on price elasticity, margin, and market share. When you are framing the conversation that way, then Ian’s point is exactly right — all you need is math to answer the questions in terms of profitability.
But “The Market” is an illusion, an abstraction. “Markets” don’t shop in stores, shoppers do. And so the questions around whether discounting makes sense should be framed in terms of shoppers, not markets. Which shoppers bought discounted items in my stores? What else did those people buy? Were they cherry-picking the unprofitable items or were they buying the profitless $600 TV and then throwing in $70 of cables that only cost me $20 at wholesale? Did my best shoppers respond to the price discounts with increased shopping frequency or higher basket ring, or were they going to buy anyway?
Gaining market share is easy: give away everything below cost to every shopper you can. But that’s not how you build a successful retail business. To win in the long run, you need to grow the frequency and spend of your best shoppers, get them to buy at least some product at profitable price points, and convert more secondary shoppers and cherry pickers into long-term profitable shoppers.
There is only one acceptable market share strategy and that is to build a sustainable competitive advantage. Price and promotion are not competitive advantages, let alone sustainable. When every participant is going for growth against the same market, the only thing they gain is losses. Take a small loss in same store sales and a big increase in profit. Any retailer not doing that is irresponsible.
Any brick and mortar retailer that has a plan to increase retail share is oblivious to the dynamics. While Kohl’s and Target may still consider Walmart their primary competition, Walmart sees only one real competitor and that is Amazon. Walmart knows their environment; most retailers don’t.
The concept of the “loss leader” is strangely absent from the discussion. Sell a few high-profile SKUs at cost to attract attention and make your money back on the rest of the basket. Few customers will bother checking every single item against the competition (and those are probably not the customers you want anyway). Get customers excited with a few “deals” and make your money elsewhere. Customers are entitled to great value and service. Retailers are entitled (and required) to make a profit to stay in business.
Which math? Traditional margin accounting “estimates” overhead cost. Companies using activity based accounting are always surprised at what they learn about their costs and mistaken margin information. Doing more accurate math is important when making pricing decisions.
Of course there is often tension between market share and margin rates — and between marketing and finance, for that matter. But before we write off margins for the season, or celebrate comp numbers, let’s wait and see what Q4 financials look like.
Retailers get in trouble when they don’t have a valid strategy (one that works) and start jumping at every silver bullet that promises to cure their problem. I see this most often in retailers who try to do the basics on the cheap. They hire cheap, they train cheap, they buy cheap and they market cheap. Have you ever wondered how some retailers prosper and others fail while existing side by side and selling virtually the same merchandise? Try asking their customers and you will find a similar answer. Customers shop where they feel most comfortable.
Between 1860 and 1960, A&P built the world’s greatest retail engine — at that time. For example, the first business to hit $1 billion in annual sales. Two brothers did this, one the sharp pencil genius that drove relentlessly for efficiency, and the other the marketing genius that smelled trends and would turn on a dime.
Growing margins was anathema to them, insisting on ROI as the key metric, and that was driven by volume and efficiency. They also played a major role in supply chain management, forcing efficiencies in incredibly inefficient partners. If that wasn’t adequate, they would vertically integrate and do it themselves. Their razor margins were supplemented by THEIR promotions and advertising, for which they charged the suppliers.
It’s no accident that the chain virtually “vanished” when the two brothers died in the 50s. Replaced 30 years later by Sam Walton who used the very same principles to build the current world’s largest business.
Unless your low prices are driven by superior efficiency, and A&P/Walmart-like focus on the total business, from “field to table,” so to speak, you’re just a chump, waiting for Walmart (or Amazon) to eat your lunch. It’s just a matter of time, measured in decades, not quarterly reports. (And assuming Walmart or Amazon don’t lose their DNA.)
The assumption that retailers are losing control over profitability and margins is essentially wrong. With today’s sophisticated IT tools, the most successful retailers use discounts to create traffic, move large quantities of merchandise and more effectively manage their pricing strategies. In an environment where creating value is essential, aggressive pricing is used to do far more than help a retailer build market share.
The whole system of growth is completely screwed up, as many regional and smaller retailers try to win a tank war with a bb gun. I gave up years ago trying to outsmart Walmart on the few giveaways they offer in their stores. As frustrating as this is, it will not change a thing, because the major food companies are forcing the business into the big-box stores for my customers, by way of lower wholesales.
With a horrible economy for most towns, customers will gravitate to the big stores for the everyday staples, and will not buy them from smaller stores ever again. What to do? How about being more aggressive creating very profitable niche items, that the customer must have to serve their family for dinner or a party? I have written about this many times, and I can not speak for other retailers (clothes, appliances, electronics, HBA and general merchandise) as I have my area of expertise. However the idea is the same. It is not easy being unique and super creative, but if you are to survive, than it is the only way to make a nice profit in your stores.
Study your trade hard, learn from people smarter than you, attend your convention each year, promote profitably, and give your customers a reason to trust your business unconditionally, and the end result will be a nice bottom line going forward.
Isn’t this just math? Really, we might not like to do the calculations, but I think we are all capable. I think the key is the audience/clientele and the timing. I found myself in a rut after offering a 40% discount to my mailing list customers. Orders dried up unless another discount was offered. Then I realised, they are buying my products because it is unique. When they run out they will either buy again or buy something of lesser quality and regret it. I’m now working on expanding my market focus to various groups that aren’t saturated.