Archive for December, 2011

What’s the right pricing strategy for grocery chains?

Discussion at RetailWire this week about the appropriate response by grocery chains to big-box competitors (Costco, for example) and supercenters like Walmart. Stanford Business School studied the question, and concluded that a high/low pricing strategy is the right response. My answer to the headline above is, “It depends”…and here’s why:

General merchandisers have succeeded through the years with either EDLP or high/low promotional strategies, so there is more than one option for food retailers too. However, it’s too simple to say that promo pricing is “the answer,” because it depends on a variety of factors:

1. Which pricing tactics are more appropriate to your overall brand strategy as a food retailer?

2. Does your specific competitive situation really allow you to be priced higher than EDLP food retailers?

3. Is your customer likely to wait for sales, cherry-pick promoted items and do most of her grocery shopping elsewhere?

I’d suggest a market-basket analysis to provide some empirical evidence one way or the other on this issue, but there is likely to be a valid argument on both sides.

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What is the Sears exit strategy?

Plenty of commentary this week on RetailWire, following the announcement by Sears Holdings that it plans to close 100-120 stores in 2012 and suffered significant comp-sales decreases in the last quarter. (It’s also worth noting that Sears’s cash position is starting to decline.) My point of view:

I hope that the Sears in my neighborhood is on the list of store closings, so that the site (part of an otherwise thriving “lifestyle center”) can be re-purposed for a stronger mall anchor. The lack of any investment in this store, while everything around it was remodeled or rethought about five years ago, is emblematic of how Sears Holdings has mismanaged its best asset: its physical stores. How about replacing burned-out light bulbs, or a fresh coat of paint?

Everyone knows that Lou D’Ambrosio is not the real CEO of Sears Holdings, and that Ed Lampert calls the shots. So the “clarity of where we are taking the company,” as Mr. D’Ambrosio puts it, is as clear as mud. As long as the company’s cash position declines along with its comp sales, this becomes a more difficult problem to solve.

As Mr. Potter said to George Bailey, “You’re worth more dead than alive!” At some point Sears Holdings will throw in the towel and recognize that its most valuable assets are its brands and its real estate. Until then, we will all continue to witness the death throes of a $40 billion company.

Let the margin hand-wringing begin (again)

For as long as I can remember, there have been discussions about “excessive” holiday promotional activity…which suggests that we have been living in a highly promotional environment for many years, not just in 2011. And yet the long-term trend is toward improved gross margins and operating margins, with an “outlier” like 2008 where demand suddenly plunged. Here’s my perspective from a recent RetailWire discussion:

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.

“Gadget fatigue,” or the wrong gadgets?

From a recent RetailWire discussion: Is there such a thing as “gadget fatigue” in the consumer electronics business? In other words, are vendors and stores introducing new technologies and products faster than customers are prepared to adapt them? My point of view: It depends on the product. The right tablet, for example (the iPad) will be rapidly accepted, but there are plenty of misfires, too:

I actually see a disconnect between consumers’ response to a survey and their actual behavior. It’s the same syndrome that leads consumers to tell somebody that they plan to spend less for holiday this year, then go out and shop at a modestly higher rate. Pay attention to facts and results, not stated intentions.

If consumers were truly suffering from “gadget fatigue,” would they line up to buy the latest iteration of the iPhone? Would Apple and Amazon be selling tablets at such a fast pace? Fatigue (a.k.a. poor sales) tends to set in when a tech marketer launches an inferior product, with the BlackBerry Playbook being a prime example in 2011.

Return policies: How liberal is too liberal?

Stores’ return policies (and the impact on margins) are a frequent subject of discussion on RetailWire. My contention: A well-managed (but liberal) return policy can be a key competitive advantage and brand differentiation:

Is the return problem centered on high end electronics and tech gear, or on apparel? It’s important to have the answer before developing a solution. If the former, it’s correct that sales associate should make sure the consumer understands how something works before the register is rung. (We all know from personal experience that this doesn’t always happen.) But clearly there is a correlation between tighter household budgets and higher return rates, so the trend may not improve until the economy is on firmer footing.

At the same time, stores should view liberal return policies as a positive way to drive business, not a negative cost. There is no doubt that retailers with “no hassle” programs have used them as a marketing tool and loyalty driver. Like almost everything else in retail, returns are expressed as a percentage of top line sales…so it’s important to drive those sales with a variety of tactics and policies.

 

Reading the 4th quarter tea leaves with two weeks to go

I published the following comment on the RetailWire blog with about two weeks to go before Christmas. There are two looming questions, becoming even more urgent as the 25th approaches: What sort of sales reports can we expect? And how are retailers with excess inventories dealing with the margin impact of clearing goods from the shelves?

Chains like Best Buy appear headed for softer margins as they try to sell electronics categories subject to increasing competition (Amazon) and commoditization (TVs and laptops). And Costco seems to be headed in the same direction (lower margins) even though its share price is not being punished like Best Buy’s.

Stores that are driving higher demand around exclusive brands (Macy’s, for example) are likely to be rewarded in the current quarter, even though they have had to deal with higher apparel commodity prices all year. And, finally, a lot of the margin outcome depends more than anything on leftover seasonal inventory after Christmas; stores heavily invested in cold weather goods cannot be happy with the current trend.

Some corporate cowardice from Lowes

Lowes recently received plenty of publicity (mostly negative) for backing out as a sponsor of the reality show¬†“All-American Muslims.” Apparently Lowes and other sponsors succumbed to the threat of boycott from various pressure groups. I agree with several RetailWire panelists who feel Lowes mishandled this situation at several points along the way:

Not for the first time, this issue treads on hot-button politics as well as marketing “best practices.” The correct action from Lowes would have been to ignore the xenophobia in the first place, once it made the decision to sponsor the show. At this point the PR damage is done, so it would be pointless for Lowes to reverse its position. But succumbing to this sort of pressure in our multicultural society is a slippery slope, indeed.


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