Braintrust Query: Managing Retail Price-Point and Margin Pressures
By Ted
Hurlbut, Principal,
Hurlbut & Associates
The greatest
challenge independent retailers are struggling with right now, even more
so than with depressed traffic counts, is getting full margins for their
goods. While the consumer may be demanding discounts, the real issue is not
the retail selling price, it’s margins.
And the immediate
response has to be on the cost side. Retailers can’t continue to short
themselves on margin. Whether your preferred strategy is to establish lower
everyday price points (which is what I would recommend), or to build in
margin to cover your discounting, there are two approaches, both of which
should be pursued: (1) shift the mix of goods you buy into lower price
points, with lower costs, and; (2) insist on lower unit costs from your
vendors.
Let’s take each
in turn. Moderating retail price points by shifting the mix toward goods
with lower costs can only do so much. You still have high priced inventory.
If you take an everyday price-point strategy, it increases the spread between
the higher price points and the average price point, which further pressures
the higher price points. On the other hand, if you build in margin on the
lower priced goods to cover discounting, you narrow the spread between
the higher price points and the average price point, making your full retails
look overpriced. Nevertheless, shifting the mix of goods toward more moderate
price points needs to be part of your response.
The ultimate
solution is to insist on lower unit costs from your vendors, on every item
you buy, across every price-point. Just as customers are driving down retail
prices, you must insist on lower unit costs from your vendors. Deflationary
pressure on retail prices requires that the unit costs that you pay come
down, and that costs at every stage of the supply chain come down as well.
In many cases, your vendors have already demanded and obtained pricing
concessions from their suppliers. You must insist that they pass it on
to you. They’ll comply, if they can. It’s not in their interest to weaken
their customers (you!) if they can help it. They need you right now just
as much as you need them, if not more.
Independent retailers
must recognize that they are ultimately part of the supply chain themselves.
The end of the chain is your customers. If they are forcing selling prices
down, you can’t bear the brunt of that all by yourself.
Discussion Questions:
How can independent retailers better preserve margins amid the downturn?
What leverage do they have with vendors in pushing for lower prices?
What other advice would you have for independents looking to survive
the downturn?
Well, price breaks from large vendors are very very unlikely, unless the retailer is buying close-outs (that’s how my father used to get good prices–he was the TJX of independent retailers in his day!).
It’s a far better business strategy to actually add value and seek out unusual and rare merchandise that a consumer can’t get at larger retailers. If the items you sell are interesting enough, you can command a higher price. and, of course, if you buy from small vendors, you are far more important to them than if you buy from someone selling to a big player…hence you’ll get more favorable prices to boot.
No company can compete on another company’s turf. You have to carve out your own spot, claim it, and defend it.
The biggest reason independents don’t make money is they confuse “margin” with profit. If you are getting a 45% margin and losing money than 45% margin is not enough. I did a post last week about VA farms and how 63% are not profitable. I believe the same can be said of independent retailers.
The only way to fix it is to honestly look at their financials and come up with a margin necessary to take money out, instead of put money in. That won’t come from pressuring vendors or buying even cheaper merch–it’s about being profitable with all of your merch.
By far the best way for independent retailers to improve their margins is to carry a select group of specialty brands either not carried at all by the large chains or those items not typically low-balled by the same. Independent retailers have two advantages over chains in that they can specialize more to the local market and also that they can do a better job with “push” brands for personal selling.
Independent Retailers(particularly those surviving today) have generally done a good job of differentiation from competition whether on perishables, service, community involvement, etc. This has allowed them to minimize the pricing issues that they face with large chains.
The next step needs to be partnerships with their wholesale suppliers to develop pricing and margin strategies on key categories and items. Larger wholesalers today have clout with vendors due to their size and the transparency that exists with major suppliers and there are opportunities to utilize this talent and data at the wholesaler to develop strategies that will relieve some of the margin pressure that Independent retailers face. These wholesalers should be helping to support this side of their business.
They probably can’t! They pay more for what they are selling and don’t have the value reputation shoppers expect. But if they focus on interesting new merchandise, they can develop a successful niche.
There are independents and there Independents. The difference is their value to a manufacturer.
There can be a number of reasons why a retailer is an ‘i’ or an ‘I’. It can be simply the volume or mix of goods that they buy. It can be the ratable volume at which they historically purchase, i.e. a manufacturer knows that company A is going to buy X each month, quarter, etc. Or it could be they concentrate their purchases regardless of the total volume. It may be that they pay on time or their credit worthiness.
It could be an intangible such as their reputation in the industry and selling to them provides me with a marquee account that I can point to or use in my advertising to other independents. There can be many reasons why one retailer is an ‘i’ and the other is an ‘I’.
The bottom line is as a retailer, what value do I bring to my suppliers? The more ways I bring value, the more leverage I have.
I reviewed an independent analyst pricing report on grocery this week that showed one of the top 5 chains pricing down over 8% vs. August year ago–and they are still chasing Walmart! The independent is not going to get there on everyday pricing across the full basket.
To pick up on some earlier themes, they have two choices. Differentiate or hit hot prices on selected items. The hometown supermarket of my youth did both. People would literally place out-of-state orders to get Candler Supermarket pork breakfast sausage. The meat department in the store was outstanding all around and its major draw–but the sausage was a local legend. But the owners also knew this was a rural farming community and that they had to compete with both Winn-Dixie and “home-grown.” Their answer was to buy whatever the local growers had over-produced and to price it so low the local families saw a bargain and the folks from “town” would drive out to the store just to stock up on summer squash and green beans.
If you are wondering if the formula worked–the store is still there.
There are only two things that drive my business to independent retailers: Convenience and service. I pay more for hardware and household items virtually every week at an Ace Hardware store that I can walk to on my lunch hour because it doesn’t rob me of time the way the big box competitors do, and there is always (ALWAYS!) a helpful associate to get exactly what I want, or order it with no shipping fee. At their True Value competitor just a bit further along, I can get a 10% discount on everything I put on my “house account” instead of using a major credit card. So, my two cents is to keep the service level as high as possible and use your smaller size to your advantage, locating in Main Street or strip center locations that the big box boys just can’t wiggle into.
As far as protecting margins, my advice is to keep your inventories razor-thin. I have learned that if I really want something from my preferred (national chain) clothing store, I have to buy it when I see it. The days of waiting for a sale and assuming my size will be there are gone.
In this environment, all the deflation works backwards; the manufacturer bears the brunt right along with the retailer. Which means lower wages, less spending, basically a self-fulfilling prophecy. So, as is always true, with lower margins, only quantity saves you, and “independents” don’t have a chance against quantity.
HOWEVER…what independents can focus on is better service, more convenience, smart buying and merchandising and speed, speed, speed…things that the big guys can’t do as well without changing their M.O., which is nearly impossible.
But, why do I feel like we’ve been having this conversation for about 15 years now? Oh yeah, American’s love cheap. But obviously, the consequences of our inherent cheapness are frightening as we look them in the face. (Good book: “Cheap; The High Cost of Low Prices”)
Independents don’t have a chance of matching chain retailers on price. That’s the bad news–but the good news is that they have the potential to provide outstanding customer service. Even in this environment, that can be a strong advantage.
The first thing that independents can do to get better costs from their suppliers is to ASK. Many independents start with a belief that they are not important enough to the supplier to ask for better costs. They underestimate their value to the supplier. The last thing that a supplier wants is to become heavily dependent on very large retailers, who will drop them in an instant if they find a more profitable alternative and/or will drain their profitability with warehouse chargebacks, markdown money, ad allowances, etc, etc, etc. The vendors get cash flow and economies of scale from the big retailers, but not much profit. The independents should keep that in mind.
The independents, in general, don’t take advantage of the importance they have. They should demand better costs.
Having said that, it’s more important to remember an old rule in retailing–if you compete strictly on price, it’s a footrace to the bottom. The simple truth is that independents will never win (or survive) on price alone. To succeed, they need to give the customer a good reason to choose their store over the competition–an assortment that speaks directly to the local customer, new and different products from smaller vendors, exceptional service, and engagement in the local community. These are areas where the big boys cannot compete.
Small retailers are no different than any small business. To be successful they must know who they are and who their customers are and approach their niche with a laser focus. Small businesses can have an advantage over their large chain competitors in their attention to the customer both from a product point of view and service delivery. Talk about personal service and delivering localized selection; the successful small retailer should be on a first name basis with their customers! They should go to market with them in mind and return with one of a kind merchandise that their customers cannot find elsewhere. Differentiation through unique selection and personal service builds a strong and loyal customer base and adds to the value of the often pricey offerings.
You can only go back to the well so many times and as a smaller independent retailer it is not realistic to think you will get the same price breaks as larger box stores.
Independents do have some key advantages.
1) Independents are closer to the community and understand their customer far better than box stores and national chains. A national chain run out of Bentonville, AR can only do so much with data to understand the specifics of a community. As an independent you can dig in and really understand the needs and assortment your customers are looking for.
2) Independents have the opportunity to deliver far superior customer service than a national chain. Get your employees involved; get them closer to the business and how their effort impacts the overall success of your store.
3) Independents have a chance to go out and find smaller unique vendors that can further differentiate them from the bigger box stores. The uniqueness should also focus on quality. As the recession ends consumers will start shopping again, but I assure you they will be focused on quality and less on volume this time around.
If you believe your only differentiator as an independent is price, close your doors tomorrow and save yourself a lot of heartache. On the other hand, if you focus on providing high quality, unique items with amazing service at a fair price, I am confident that your margins will not only be protected, but your customers will thank you.
There is no magic formula that will suddenly allow independents to compete on price unless they have decided they have enough money and don’t need any more.
Independents have one thing chains don’t and that is their personality. Either individually or as a store. People like to be around other people who make them feel better about themselves. When was the last time you felt good just by going to Wal-Mart? Never, right? Consumers put up with a lot of pain and hassle just to feel a little bit of pleasure at the cash register when they pay. Independents have an opportunity to provide customers a lot of pleasure while shopping and only have to experience just a little bit of pain at the cash register. And having a great front-end staff can go along way to reducing that pain.
I’ve learned lot of tricks from my independent clients over the years on how to beat the price operators. Nothing more fun than to sit in front of their stores and observe the masters of their trade.
I appreciate all of the comments made regarding my piece, and this question, but I do feel as though many missed my point.
My piece wasn’t about whether independents can compete on price; it’s agreed that very few can. My point, rather, was that even for highly differentiated, unique merchandise the customer’s pricing expectations have changed. They now insist on discounted, and lower prices, from every retailer, whether a major chain featuring commodities or a highly differentiated independent featuring unique products, excellent service, state-of-the-art product knowledge and a memorable shopping experience.
The fact is that independents are getting squeezed. Margins appear to be down 4% to 8% depending on the category, based on numbers I’m seeing from clients. They are struggling to cut costs, just as the majors are, to assure profitability and positive cash flow. And they need to push back on their supply chain just as the majors are.
You can’t spend percentages, only dollars. If an independent is able to convince a manufacturer to give them a break and then maintain their margins, their dollars drop. After ten years with Fleming and a few years consulting for SuperValu, here are the top dozen ways I’ve seen independents make more dollars. Some are no brainers and have been touched on here in earlier comments, but some will surprise you.
1.) Better service of course
2.) Offer items the chains don’t. The manufacturers of these products are generally smaller and more willing to work with you on costs.
3.) Better perishables. Ben Ball mentioned a signature sausage. Meat, fish, bakery, deli, and dairy departments offer unlimited opportunities to shine with unique and high-quality products.
4.) Feature ethnic offerings that the chains don’t, won’t, or can’t. Head-on fish in Hispanic neighborhoods. Extensive Kosher products where justified. Look around at the local bodegas, fresh produce shops, bakeries, and meat specialty stores and then match their best products.
5.) Have one-of-a-kind events. Pulled pork sandwich weekend. Ice cream sundae days. Oh Baby! promotions. Cooking demonstrations. Etc.
6.) Emphasize neighborhood participation by sponsoring sports teams and events.
7.) Sponsor fund raising programs for schools, churches, teams, etc. As you know, these programs reward organizations based on their members’ purchases at the store.
8.) Games. There are many out there that can work for single stores.
9.) Pay vendors ON TIME. It’s amazing how this opens them up to discounts and promotions.
10.) Buy from local suppliers. Nearly all perishable departments can add products from popular local vendors. Produce, meats, deli, ice cream and other dairy, bakery, etc. This creates loyalty not only from regular customers but from employees and owners of these local businesses.
11.) Optimize, optimize, optimize. Call Revionics – they cater to smaller operators.
12.) If necessary, make the store fit the customers. In Philadelphia, Fleming purchased several Acme stores as they left the market back in the 80s. One of the stores we bought was in a predominantly Jewish neighborhood, and we installed a great independent owner from the area. After a few months of operation he came to us and said, “My female customers are generally short in stature. I want to remove at least one level of shelving and give them lower shopping carts.” Sales jumped.
It’s tough for independents to compete on price like the big giants. It is essential to find their own niche to boost sales.
I have seen some smart independents adopt strategies like offering niche local products, expanding lines–mainly food–some ready to eat, delicious muffins, yummy oat cakes and others, offered at a competitive price. This helps to bring people back to the stores.
Footfall is the key issue for independent, unlike malls, where conversion is a problem. Hence it’s necessary to do whatever can be done to get customers to come back to the store, be it a local band singing at the store, or a happy food hour or even bingo.