BrainTrust Query: Managed Scarcity

Discussion
Dec 11, 2009
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Commentary
by Ted Hurlbut, Principal of Hurlbut & Associates

For
a year now, independent retailers of all shapes and sizes have been
struggling with weak sales, deep markdowns and the question of how
they’ll ever be able to get customers to pay full price again. At the
same time, they’ve drawn down inventories to align stock levels with
sales, reduce markdown exposure and maintain positive cash flow. Throughout,
as inventories have been reduced, there’s also been the hope that lower
stock levels would begin to put a floor beneath prices.

Last
month, The
New York Times
noted
how luxury retailers such as Saks, Neiman Marcus and Nordstrom are
working on sustaining full retails through a conscious strategy of
limiting quantity.

Burton
M. Tansky, president and chief executive of the Neiman Marcus Group,
told the Times,
“We’ve told our customers that the availability is less than they’re
used to seeing in the stores. We’ve suggested that it would be prudent
to shop early.”

“We’re
out of stock on a number of hot items people want,” Stephen I. Sadove,
chairman and chief executive of Saks, said. “Our associates are telling
people, ‘If you want this item in your size, we only have three of
them, we only have two.'”

Most
likely, these retailers have actually planned for slight sales decreases,
given the economic environment. But their sales plan is composed of
more significant unit sales decreases combined with a recovery in average
selling prices. The impact of such a plan, however, would not be slight.
Higher average selling prices lead to greater margin percentages, which
on a plan calling for a slight top line decrease will generate a nice
increase on the margin line.

This
is important for independent retailers, who tend to specialize in discretionary
merchandise, and who have been struggling to command full retails and
full margins. In
an environment where significant top line increases just don’t appear
to be in the cards, a strategy of managed scarcity — of planning for
lower units sales offset by higher average selling prices — makes a
lot of sense for many independent retailers.

The
article was followed by challenging November sales figures for luxury
department stores. Comparable store sales were down 26.1 percent at
Saks, and 7.5 percent at Neiman Marcus. Nordstrom, able to buck the
trend, was up 2.2 percent.

What
to make of all this? My reading is that the strategy of managed scarcity
was not enough to overcome continued weak demand and consumer resistance
to full retails. Limited supply did not lead to higher prices; rather,
higher prices led to weak unit sales.

These
November sales results are a key leading indicator for independent
retailers. They suggest that as we move into 2010, the macro-economics
will still be weak and consumers will still hold the upper hand. Skillful
inventory management will remain vitally important, and cash flow will
remain of paramount concern.

Discussion
Questions: What do you think of the efforts by many luxury retailers
to stem markdown pressures and regain full-price selling by purposely
limiting quantities? Should independent retailers pursue this strategy? Is it too soon for such a strategy for both luxury chains
and independents?

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16 Comments on "BrainTrust Query: Managed Scarcity"


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Bob Phibbs
Guest
11 years 4 months ago

Yeah, with both of their year over year sales off by 20+%; they know what works. These pampered brands used to have a cachet about shopping there. Now let’s face it, they are little more than Walmart with expensive price tags. The pamper and “special” are gone. Both of these brands need nothing less than a wholesale makeover and a reality check that the days of the Mad Men-era shoppers have gone. It’s not price or scarcity but the much more fundamental problems of how their brand is perceived, how it delivers, and what that looks like in 2010.

Max Goldberg
Guest
11 years 4 months ago

Consumers are not ready to return to their free-spending, credit-happy ways. I don’t think this is going to change in 2010. Wall Street may be handing out large bonuses, but the rest of the country is suffering with high unemployment and even larger under-employment.

In this environment, retailers must balance perceived consumer demand with strict inventory levels and overhead controls.

I wonder how much great customer service accounted for the increase in sales at Nordstrom versus Saks and NM. Independent retailers need to stress customer service. Exceeding consumer expectations can allow a retailer to add a few points of margin.

There is no easy answer. Consumer spending will increase, but probably not to levels seen in 2007 for quite some time, if ever.

Joan Treistman
Guest
11 years 4 months ago

Hmmm, as I recall there was a song where the refrain went something like this: “How you going to get them back on the farm after they’ve seen Paree (Paris)?!”

Retailers have given customers a taste of the good new days regarding prices. Value has taken on a new definition and limited inventory does not seem to be part of it.

Marge Laney
Guest
11 years 4 months ago

I know it’s been said that the consumer has a very short memory. That may be true for some things, but when it comes to retailers discounting strategies, they have a memory like a steel trap. While scarcity will help both the top and bottom line, the customer must see value at full price in the first place.

Second, they remember who blinked first last year, and they seem to be more than willing to play that game again this year.

Third, these brands are busy diluting their own exclusivity with their push into the Outlet malls.

The new paradigm for the luxury retailer is that it is no longer just good enough to have a big name and a bigger price tag to entice customers to buy, they need to be sold that it’s worth the price.

Al McClain
Guest
Al McClain
11 years 4 months ago

I think this is a great strategy for the big 3 luxury retailers mentioned. Their target is clearly not Walmart, Kmart, or Target shoppers, and even in a down economy there are wealthy and aspirational consumers who want top of the line fashion and apparel. Focusing on a smaller base of shoppers that is looking for unique items and willing to pay a less discounted price can help restore profit, and some cachet as well.

For anyone who thinks Walmart offers similar products and service to luxury retailers, I think a return visit to these luxury retailers is in order, if only for a gut check. There really is no comparison.

Steve Montgomery
Guest
11 years 4 months ago
As a shopper who has made purchases in all three of the chains mentioned, I can tell you I believe there is a definite difference in the way the consumer is treated. Nordstrom provides great customer service. I find that Neiman Marcus and Saks do not. To sum up the difference at Nordstrom I feel I am treated as a guest–at Neiman and Saks as an unworthy individual who they disdain but if forced to, will wait on. Perhaps that is supposed to be part of the schtick like at Ed Debevic’s restaurant in Chicago. You couple this with a full price and the strong possibility that the item I want is out of stock or not available in the correct size, and they wonder why their sales are down. They may be able to manage margins but great margins and no sales still equals disaster. Balancing sales vs. margins is never easy and certainly this economy has made it harder, but perhaps they would be better off to follow the mantra of the major… Read more »
Bill Bittner
Guest
Bill Bittner
11 years 4 months ago

I would take a completely different perspective of this issue. Instead of retailers trying to anticipate demand and disappointing their customers with intentional inventory shortages, I would ask manufacturers to be bigger participants in the final results. After all, the manufacturer risks the biggest loss as the customer buys another brand when the manufacturer’s product is out of stock.

Vendor Managed Inventory has been discussed for many years and has been successfully implemented in a few cases. By making the store inventory a shared responsibility, both the retailer and the manufacturer benefit. The retailer is less likely to disappoint their customer and the manufacturer is less likely to lose a sale to a competitor. Vendor Managed Inventory (along with consignment inventory) is the ultimate implementation of VMI, but retailers and manufacturers should look for intermediate methods for the manufacturer to share in retail reductions caused by markdowns or end-of-season leftovers.

John Boccuzzi, Jr.
Guest
John Boccuzzi, Jr.
11 years 4 months ago
I recently met with the president of an independent luxury clothing retailer who said just that. The focus now needs to BE ON MARGINS. “It is easy to slide down the price scale, but extremely difficult to climb back up.” It is always tempting to sell more, but not when it comes at the cost of margins. Independent retailers need to be very conscious of inventory and assortment. Carrying unique, hard-to-find items will be as important as inventory control. I had lunch with Ira Neimark, a retail industry icon a few months ago and he talked about inventory control dictating the success of a department/store. If you had too much at the end of a season, markdowns were high and margins were low. Not a great place to be, season after season. All you end up doing is conditioning your shopper to expect the markdowns at the end of each season. For people in luxury retail, I suggest you read Ira’s book “Crossing Fifth Avenue To Bergdorf Goodman: An Insider’s Account on The Rise Of… Read more »
Carol Spieckerman
Guest
11 years 4 months ago

Scarcity is the only way to go. The days of chasing demand and riding hot items to the beach are coming to a close for ALL retailers for any number of reasons (rapid commoditization and price deceleration in many categories; lack of trend in others). After months of sleepwalking through stores, one thing got my attention a while back: A full-price blouse that I really wanted at Fred Segal was sold down to one piece–and it wasn’t my size–and they weren’t re-ordering. It really startled me (running out at full price? You’re kidding me!) and a wee wave of regret crept over me that felt quite alien. Was I actually wishing I had gotten there sooner? Yep.

Robert Heiblim
Guest
Robert Heiblim
11 years 4 months ago

Many of the other comments here include much of the landscape of issues. However, my question is, “when could one not focus on margins?” Yes, top line is critical though number of transactions is also important, especially in this environment of vendors also aiming toward pricing lower.

Consumers today are focused on value. As others have stated, this will last at least through 2010. While I am not a believer in immutable consumer trends, the current situation will still persist. The issue is getting from here to there. A strict focus only on margin may lead to customer defection and that is something one lives with forever.

Balance in all things, as well as knowing clearly what your real as opposed to desired, unique selling proposition is, then maximize that.

Pete Reilly
Guest
Pete Reilly
11 years 4 months ago

The ‘new normal’ is forcing retailers to have a very definite differentiator in their retail customer experience. If I am not made to feel like a valued guest, if there is no ‘wow’ factor to the experience, then why would I not just stay at home and buy it from Amazon?

Managed scarcity may be an effective way to manage margin (less handling, etc.), but you’re potentially damaging the customer experience in irreparable ways. The in-store experience needs to be a reason for me to come to your store and out-of-stocks will likely push me to your competition. Manage scarcity at your own risk.

Tony Orlando
Guest
11 years 4 months ago

Having owned a business in a town that has been in a permanent recession since the 1970s, I’m used to balancing.

Profit margin with hot sales every week. The consumer always wants it for less, hence Walmart’s huge success, but they also want some human interaction. Any independent business person must always be ready to hear what a customer really wants, and provide it at a fair (slightly discounted) price everyday. I’ll take a 25% margin on my gluten free section, vs. 40% for the big chain stores, and outsell them everyday.

Just because you have a niche that fills a special need does not give you a license to gouge, and the customer knows it. 40% of nothing equals nothing, so stay aggressive, listen really good to the consumer, and your business will make it through these very difficult times.

Ralph Jacobson
Guest
11 years 4 months ago

With customers focusing on value more than ever, the total shopping experience needs to be compelling, not just the price. No one wants to pay full price. No news there. The key is to take other aspects of shopping that customers appreciate and highlight those to drive more margin. Few stores can win on item/price strategies only.

Lee Peterson
Guest
11 years 4 months ago

The best way to bring prices back is to bring quality back. I realize that margin may take a hit, but obviously, that’s better than closing shop! I noticed, for example, that Whole Foods numbers are inching back to positive comps after taking up to 5% hits (only) during the worst of the recession. Point being; you can stray from quality for a while, but it’s a little like drinking single malt scotch; pretty tough to go back once you’ve experienced the up side.

The other factor is service. Again, tough to keep service up on the overall margin side, but the alternative is much worse, especially long term. But look at Apple, who, to me, has the best service model at retail. They’re the busiest store on any street (and they’re relentless on the quality side as well).

So, scarcity may work fairly well at times, but quality and service will trump all (even price) in the long run. Stick to your guns!

Li McClelland
Guest
Li McClelland
11 years 4 months ago

A quite recent and very well documented and charted Gallup report on the state of high income and mid income retail spending suggests that high end retailers (especially) should not be playing “gotcha” games with their customers right now.

The report uses the $90,000 threshold as the break between “upper income consumers” and “middle income consumers.”

Christopher P. Ramey
Guest
11 years 4 months ago

The credit crisis, the internet, and the continuing recalibration of the affluent consumers’ values have created a new retail environment. Managing margins is paramount; limiting inventory will minimize risk while management explores the proper strategies for long term success.

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