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.

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