September 26, 2006
Retailers Try Again to Sell at Full Margin
Some may occasionally sell product at full retail, but it is becoming increasingly rare for merchants, especially those in apparel, to turn inventory without discounting it first.
Madison Riley, a retail strategist at Kurt Salmon Associates, told USA Today, “There’s no question we (consumers) are programmed to search and hunt for bargains” and “the competitive dynamics are so high, you (retailers) have to do all you can to minimize markdowns.”
The number and frequency of markdowns has had a serious negative effect, according to Christine Chen, a retail analyst with Pacific Growth Equities.
“Department stores would do the markdowns to draw people into stores, but now it feels like they’re always having a one-day sale … and it doesn’t even feel special anymore,” she said. The discounting does “create traffic, but it trains the customer to expect the sale and not want to pay full price.”
Retailers are looking to increase the percentage of total sales sold at full margins with a number of different tactics, including reducing product quantities, starting out with more affordable pricing and reducing the number of sales promotions.
A number of retailers are tightening up orders of products to reduce the need for markdowns to move merchandise out. Ms. Chen pointed to Gap as one retailer “planning its inventories a lot leaner” to avoid having to deal with this situation.
Retail analyst Dana Telsey of the Telsey Advisory Group said inventory management systems have helped in this regard so that items aren’t out on the rack for “eight to 10 weeks.”
Perceived product quality, said Ms. Telsey, is the establishing factor for a fair market price for goods.
“The more full-price items a store has, the more profitable it can be,” she said. “And guess what? It means shoppers like what they see because they’ll pay full price.”
Other department stores are moving to an EDLP strategy rather than sticking with the traditional high/low pricing used in the sector. Terry Lundgren, CEO of Federated Department Stores, the parent of Macy’s and Bloomingdale’s, said of that company’s EDLP pricing strategy, “What we’re doing is getting down to the sale price. You don’t have to wait for it to go on sale.”
Mr. Lundgren said his company has not totally moved away from sales because consumers would revolt. Instead, he told USA Today, the company has focused on running fewer but more special markdown events.
Abercrombie & Fitch is another among the chains who are looking to limit markdowns. According to Ms. Chen, A&F now runs sales at the end of each quarter to help retrain customers away from expecting the sale du jour. “The customers know if they want something, they’re not going to be able to get it that season at a discount,” she said.
Discussion Questions: Are consumers as price sensitive as most retailers (aside from those in the luxury good sector) believe them to be? What do you
see as the most effective means of retraining customers to pay full retail for goods? Is there a retailer(s) that you believe has done a solid job in this reprogramming effort?
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Retailers have trained customers to look for the sale price rather than buy at full price, just like they have trained customers to shop after Christmas rather than before the holiday. While “retraining” the customer will be difficult, it can be done. The key, as noted in the introductory story, is to find what your customer wants and then deliver what they want at a good starting price. It doesn’t have to be a EDLP strategy, it simply has to be a fair price. Nowadays, many retailers start high knowing they will mark down. That strategy has many negative consequences. The better strategy is to start at the right price, but refresh inventory frequently to drive customer interest (and, of course, sell what the customer wants to buy). Some retailers start down this path, but then quarterly financial reporting catches up with them and they get back on the promotion train to boost sales. Those retailers not under the glare of quarterly reporting may have the best chance to implement a strategy of fair prices and frequent inventory refreshment.
After picking myself up off the floor from laughing, I tried to address this topic in a serious manner. And tried again. And tried again.
So, down to bidness. “Gee,” said the retailer with a Paris Hilton intellect, “should we try to make more money?” “If you say so,” said his partner with the Jessica Simpson upgrade.
The eternal retail question is how to create more margin, and the answer lies in balancing the nature of specific businesses with their consumers’ value equations (deep thoughts, don’t you think?).
Retailers who believe customers don’t shop around for the best prices should step to the back of the line, and retailers who believe customers are loyal should take an additional step back. Do we have everyone’s attention? Good. Customers are not retrainable or reprogrammable regarding price. There are no endurable examples of customers being retrained or reprogrammed regarding their price/value equations. It’s counter-intuitive. Features (such as fashion) have costs, and shoppers are acutely feature-sensitive.
Some might cite private label or store brand merchandise as examples of retailers reprogramming the price/value equations of consumers. Not so. Varying prices create varying expectations, and purchase satisfaction relies on the expectations of shoppers.
Advice: Use the tried-and-true technique of selling what you can at full price while discounting when margins and traffic requirements demand it. Please understand that the flow of commerce is not from retailers to consumers, but from consumers to retailers.
Warren and Russell, I think you have hit the nail on the head. The problem isn’t pricing strategy or inventory strategy, it is differentiation: We looked at over 9000 sales strategies and outcomes for everything from airplanes to paperclips, and we found that the more differentiated a product or channel (i.e., a store, in this case) is, the less of a commodity it is perceived to be, and the higher the margins can be; the more commodity a product or channel is perceived to be, the more price sensitive buyers become.
Our data confirms what we say over and over on RetailWire: retailers of all species (food, clothing, toys, mass, hardware, etc.) look amazingly similar. The stores look the same, the products are almost all the same, the levels of service are the same, the shopping experience is pretty much the same, the prices are often very similar. What was Safeway’s CEO’s quote in Grocery Headquarters, something like, “Blindfold a consumer, take them to a store, take off the blindfold, and they won’t be able to tell you which store they are in.” Exactly.
Retail executives all come from retail, and usually from the same species of retail. Competitive strategies are based on the other retailers in the industry. Store layouts and fixtures are based on the other retailers. Processes are created by industry insiders. Support and sales personnel come from the industry. Vendors are mostly the same from retailer to retailer, from products on the shelf to fixtures to IT systems. The list goes on and on; inbreeding is rampant, which means that differentiation occurs at a micro, not macro, level — executives truly believe their stores are highly differentiated, because they focus on the most incredible detail. If you go into deep enough detail, even the most similar things can look different. At least according to our data, this describes the retail executive’s mindset.
In this climate, you have nothing to offer that dozens of other retailers don’t offer — products, customer service, etc., are all the same. This is a classic commodity dynamic. Customers shop price.
Sorry for jumping in on this thread that seems to be focusing primarily on pricing in the non-CPG sector. But I want to point out that studies have repeatedly shown that shoppers DO NOT KNOW what they pay for grocery items. And yet, retailers continually focus on pricing as the way to get customers and build business. OK, I am not a retailer myself (I do know a few :>) but I’m quite certain that most of their thinking is NOT driven by shoppers, but by brands willing to sell products on promotional displays, at a reduced price, and pay the retailer for the “privilege” of doing so.
Since I have a hunch that I am certainly wrong about some parts of this, I’m not going into a lot of detail. But I’m also confident that there is an important element of truth in the perspective above. (If you believe data and only respect lore.)
Macy’s, Sears and most grocery chains have come to rely on discounts, markdowns and other price incentives to attract customers. At the same time savvy retailers like Nordstrom and Whole Foods have built highly successful businesses on a pleasant shopping experience and quality merchandise that is sold at a fair price. The idea that ALL consumers are looking for is low prices is nonsense.
If and when retailers finally comes to realize that consumers are smarter than we think they are, the industry will be better off…and far more profitable!
Markdowns can be managed successfully by applying good consumer-centric business intelligence to merchandising decisions. It begins with a good, demand-based forecast that sets a realistic quantity for the buy. When a retailer has fewer excess goods near the end of a selling period, its markdown pressure is reduced and shoppers become used to seeing fewer racks of close-outs.
Shorter, faster supply chain cycles support this type of process. Oft-cited Zara, the Spanish clothing chain, famously buys limited quantities of trendy items and sells through without replenishing. It has few, if any markdowns.
When it comes to the inevitable miscalculation of quantities, unavoidable markdowns may be scientifically managed in terms of timing and depth. Demand-modeling software permits the necessary “what-if” decision making, so that the retailer need not pull the trigger too soon, or sell too cheaply.
These two disciplines (demand-based merchandising and markdown management) help a retailer control its “price image” in the minds of consumers.
The evidence says that retailers are more dependent on markdowns than their customers.
Alix Partners asked 6,535 consumers about what they consider important about shopping. Of 63 attributes, consumers ranked “getting the lowest available price” 19th. Courteous employees, good quality merchandise, honest and well-marked prices, and hassle-free returns are at the top of consumers’ list.
Retailers that use frequent promotional and markdown pricing make it difficult for their customers to know whether they are getting a fair and honest price. If promotions are needed to drive traffic, they need to be focused (small number of items), meaningful (#18 on the consumer list), and evaluated for effectiveness.
Lowering the price on the ticket won’t work — customers are so trained to wait for sales, that they will still wait to buy until merchandise is marked down, thereby eroding margins even further!
The only true solution is for retailers to stop the greed and walk away from potential missed unit sales. If stores reduce inventory levels, they will inevitably increase the immediate demand for the item. If I see a rounder full of a sweater I love, I know I can wait and buy it later when it is marked down. If I see only a T-stand of the same exact sweater, I’d be more likely to buy it immediately, fearing that they’d run out of my size before it can be marked down.
Of course, occasional promotions are something that will never go away, but I agree that they should be much less often and much more “special.”
It is a buyers market. Not only can consumers predict sales, but mass retailers now offer improved apparel assortments and the internet offers the opportunity for quick price comparison. The retailers that will be able to retrain consumers to pay full price will be those that can turn smaller inventories of on trend, well targeted products at a consumer acceptable starting price point.
One of the problems in driving more full price sales is that retailers typically lack the business intelligence and reporting systems differentiate full price from markdown sales. Retailers really should evaluate unit sales in three categories: sales at full price, promotional price, and clearance price. Each selling locations should have its own seasonal profile by merchandise category showing the relative contribution of each. Inventories should conform more or less to that profile. Year to year and season to season trends are important to track.
If retailers overlay these unit sale metrics on a customer data base, they will discover who their best customers truly are. Do retailers want to reward the loyalty of customers who buy 90% of their items off the clearance rack? Or do they want to reward full price shoppers? Most loyalty systems ignore this fundamental distinction.
Merchandise planners are especially challenged to make their unit plans based on full price unit projections. After they settle on the dollars, they back into unit sales based on average price across a category. As a consequence they are planning future season full price sales based on last season’s promotional unit sales. Big mistake because they are driving inventories back to the clearance rack. Just like last year.
Good business intelligence practices will separate unit sales and maintain the essential store and category profiles.
The issue is with retailers, not consumers. Retailers have fallen into a deal addiction. They make up their budget based on last year, realize they cannot make the number and add promotions to make up the shortfall. This is what happened to the American automobile manufacturers. They got to a point of not being able to sell cars unless there were incentives. The end result of retailers is a lack of trust in the retailers. Why buy today when it will be on sale next week. When they do buy and it goes on sale, it makes the consumer mad or feel stupid for not waiting. Who would pay regular price at Kohl’s today? This also explains why EDLP retailers have a higher trust factor with consumers.
Differentiation is a key underlying factor. Shoppers know that tuna fish or Levis are just bound to be on sale somewhere at any given moment, if they look hard enough. But if you have really unique products, ones that aren’t practically generic, you can get away without so many markdowns. That tends to mean “high end,” but it can also mean specialty, niche items that are hard to find. I’ve got a friend who’s a fishing guide, and what he spends on tackle — never on sale from what I can see — is amazing. Likewise for all sorts of enthusiasts — from electronics gear-heads to foodies. The more you try to be “all things to all people,” the more you have to “go on sale.”
In an ideal world, retailers could reduce the need for deep discounting through great execution. Having trend-right merchandise…having depth of inventory in the right colors and sizes…developing exclusive product, whether branded or private-label…timely development of supply chain strategies.
But consumers live in the real world of rising energy, health and housing costs, and they have been trained and encouraged to search for value for many years. Whether this means a sale price, a coupon for cardholders or an “everyday low” price is beside the point.
There’s a good parallel going on now in the world of higher education: Harvard and Princeton have dropped their “early decision” application policies, but they are among the “luxury retailers” of their world. Most other colleges will not likely give up a competitive tool unless the other guy blinks first.
Which retailer (department store, chain or specialty store) wants to blink first? Only the one who is 100% certain of his execution and his position in the marketplace.
Reputations are hard to change. Macy’s is a promotional department store, and it’s been that way for generations. The “Triple A Team” (Abercrombie & Fitch, Aeropostale, American Eagle) are rare exceptions to the constant price promotion of American retailing. Costco is another exception. All 4 companies are consistent: they don’t scream sale every week.
Differentiation is the problem. Not so easy. Not only has the whole business become standardized, so has its marketing. There are now millions of e-competitors, all trying to differentiate themselves. Snail stores have one advantage: location. See it, try it, buy it, have fun, no wait. Novelty, quality and scarcity will sell; but not much and not for long. Inventory management/logistics is the long term key.
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Retailers have trained customers to look for the sale price rather than buy at full price, just like they have trained customers to shop after Christmas rather than before the holiday. While “retraining” the customer will be difficult, it can be done. The key, as noted in the introductory story, is to find what your customer wants and then deliver what they want at a good starting price. It doesn’t have to be a EDLP strategy, it simply has to be a fair price. Nowadays, many retailers start high knowing they will mark down. That strategy has many negative consequences. The better strategy is to start at the right price, but refresh inventory frequently to drive customer interest (and, of course, sell what the customer wants to buy). Some retailers start down this path, but then quarterly financial reporting catches up with them and they get back on the promotion train to boost sales. Those retailers not under the glare of quarterly reporting may have the best chance to implement a strategy of fair prices and frequent inventory refreshment.
After picking myself up off the floor from laughing, I tried to address this topic in a serious manner. And tried again. And tried again.
So, down to bidness. “Gee,” said the retailer with a Paris Hilton intellect, “should we try to make more money?” “If you say so,” said his partner with the Jessica Simpson upgrade.
The eternal retail question is how to create more margin, and the answer lies in balancing the nature of specific businesses with their consumers’ value equations (deep thoughts, don’t you think?).
Retailers who believe customers don’t shop around for the best prices should step to the back of the line, and retailers who believe customers are loyal should take an additional step back. Do we have everyone’s attention? Good. Customers are not retrainable or reprogrammable regarding price. There are no endurable examples of customers being retrained or reprogrammed regarding their price/value equations. It’s counter-intuitive. Features (such as fashion) have costs, and shoppers are acutely feature-sensitive.
Some might cite private label or store brand merchandise as examples of retailers reprogramming the price/value equations of consumers. Not so. Varying prices create varying expectations, and purchase satisfaction relies on the expectations of shoppers.
Advice: Use the tried-and-true technique of selling what you can at full price while discounting when margins and traffic requirements demand it. Please understand that the flow of commerce is not from retailers to consumers, but from consumers to retailers.
Warren and Russell, I think you have hit the nail on the head. The problem isn’t pricing strategy or inventory strategy, it is differentiation: We looked at over 9000 sales strategies and outcomes for everything from airplanes to paperclips, and we found that the more differentiated a product or channel (i.e., a store, in this case) is, the less of a commodity it is perceived to be, and the higher the margins can be; the more commodity a product or channel is perceived to be, the more price sensitive buyers become.
Our data confirms what we say over and over on RetailWire: retailers of all species (food, clothing, toys, mass, hardware, etc.) look amazingly similar. The stores look the same, the products are almost all the same, the levels of service are the same, the shopping experience is pretty much the same, the prices are often very similar. What was Safeway’s CEO’s quote in Grocery Headquarters, something like, “Blindfold a consumer, take them to a store, take off the blindfold, and they won’t be able to tell you which store they are in.” Exactly.
Retail executives all come from retail, and usually from the same species of retail. Competitive strategies are based on the other retailers in the industry. Store layouts and fixtures are based on the other retailers. Processes are created by industry insiders. Support and sales personnel come from the industry. Vendors are mostly the same from retailer to retailer, from products on the shelf to fixtures to IT systems. The list goes on and on; inbreeding is rampant, which means that differentiation occurs at a micro, not macro, level — executives truly believe their stores are highly differentiated, because they focus on the most incredible detail. If you go into deep enough detail, even the most similar things can look different. At least according to our data, this describes the retail executive’s mindset.
In this climate, you have nothing to offer that dozens of other retailers don’t offer — products, customer service, etc., are all the same. This is a classic commodity dynamic. Customers shop price.
Sorry for jumping in on this thread that seems to be focusing primarily on pricing in the non-CPG sector. But I want to point out that studies have repeatedly shown that shoppers DO NOT KNOW what they pay for grocery items. And yet, retailers continually focus on pricing as the way to get customers and build business. OK, I am not a retailer myself (I do know a few :>) but I’m quite certain that most of their thinking is NOT driven by shoppers, but by brands willing to sell products on promotional displays, at a reduced price, and pay the retailer for the “privilege” of doing so.
Since I have a hunch that I am certainly wrong about some parts of this, I’m not going into a lot of detail. But I’m also confident that there is an important element of truth in the perspective above. (If you believe data and only respect lore.)
Macy’s, Sears and most grocery chains have come to rely on discounts, markdowns and other price incentives to attract customers. At the same time savvy retailers like Nordstrom and Whole Foods have built highly successful businesses on a pleasant shopping experience and quality merchandise that is sold at a fair price. The idea that ALL consumers are looking for is low prices is nonsense.
If and when retailers finally comes to realize that consumers are smarter than we think they are, the industry will be better off…and far more profitable!
Markdowns can be managed successfully by applying good consumer-centric business intelligence to merchandising decisions. It begins with a good, demand-based forecast that sets a realistic quantity for the buy. When a retailer has fewer excess goods near the end of a selling period, its markdown pressure is reduced and shoppers become used to seeing fewer racks of close-outs.
Shorter, faster supply chain cycles support this type of process. Oft-cited Zara, the Spanish clothing chain, famously buys limited quantities of trendy items and sells through without replenishing. It has few, if any markdowns.
When it comes to the inevitable miscalculation of quantities, unavoidable markdowns may be scientifically managed in terms of timing and depth. Demand-modeling software permits the necessary “what-if” decision making, so that the retailer need not pull the trigger too soon, or sell too cheaply.
These two disciplines (demand-based merchandising and markdown management) help a retailer control its “price image” in the minds of consumers.
The evidence says that retailers are more dependent on markdowns than their customers.
Alix Partners asked 6,535 consumers about what they consider important about shopping. Of 63 attributes, consumers ranked “getting the lowest available price” 19th. Courteous employees, good quality merchandise, honest and well-marked prices, and hassle-free returns are at the top of consumers’ list.
Retailers that use frequent promotional and markdown pricing make it difficult for their customers to know whether they are getting a fair and honest price. If promotions are needed to drive traffic, they need to be focused (small number of items), meaningful (#18 on the consumer list), and evaluated for effectiveness.
Lowering the price on the ticket won’t work — customers are so trained to wait for sales, that they will still wait to buy until merchandise is marked down, thereby eroding margins even further!
The only true solution is for retailers to stop the greed and walk away from potential missed unit sales. If stores reduce inventory levels, they will inevitably increase the immediate demand for the item. If I see a rounder full of a sweater I love, I know I can wait and buy it later when it is marked down. If I see only a T-stand of the same exact sweater, I’d be more likely to buy it immediately, fearing that they’d run out of my size before it can be marked down.
Of course, occasional promotions are something that will never go away, but I agree that they should be much less often and much more “special.”
It is a buyers market. Not only can consumers predict sales, but mass retailers now offer improved apparel assortments and the internet offers the opportunity for quick price comparison. The retailers that will be able to retrain consumers to pay full price will be those that can turn smaller inventories of on trend, well targeted products at a consumer acceptable starting price point.
One of the problems in driving more full price sales is that retailers typically lack the business intelligence and reporting systems differentiate full price from markdown sales. Retailers really should evaluate unit sales in three categories: sales at full price, promotional price, and clearance price. Each selling locations should have its own seasonal profile by merchandise category showing the relative contribution of each. Inventories should conform more or less to that profile. Year to year and season to season trends are important to track.
If retailers overlay these unit sale metrics on a customer data base, they will discover who their best customers truly are. Do retailers want to reward the loyalty of customers who buy 90% of their items off the clearance rack? Or do they want to reward full price shoppers? Most loyalty systems ignore this fundamental distinction.
Merchandise planners are especially challenged to make their unit plans based on full price unit projections. After they settle on the dollars, they back into unit sales based on average price across a category. As a consequence they are planning future season full price sales based on last season’s promotional unit sales. Big mistake because they are driving inventories back to the clearance rack. Just like last year.
Good business intelligence practices will separate unit sales and maintain the essential store and category profiles.
The issue is with retailers, not consumers. Retailers have fallen into a deal addiction. They make up their budget based on last year, realize they cannot make the number and add promotions to make up the shortfall. This is what happened to the American automobile manufacturers. They got to a point of not being able to sell cars unless there were incentives. The end result of retailers is a lack of trust in the retailers. Why buy today when it will be on sale next week. When they do buy and it goes on sale, it makes the consumer mad or feel stupid for not waiting. Who would pay regular price at Kohl’s today? This also explains why EDLP retailers have a higher trust factor with consumers.
Differentiation is a key underlying factor. Shoppers know that tuna fish or Levis are just bound to be on sale somewhere at any given moment, if they look hard enough. But if you have really unique products, ones that aren’t practically generic, you can get away without so many markdowns. That tends to mean “high end,” but it can also mean specialty, niche items that are hard to find. I’ve got a friend who’s a fishing guide, and what he spends on tackle — never on sale from what I can see — is amazing. Likewise for all sorts of enthusiasts — from electronics gear-heads to foodies. The more you try to be “all things to all people,” the more you have to “go on sale.”
In an ideal world, retailers could reduce the need for deep discounting through great execution. Having trend-right merchandise…having depth of inventory in the right colors and sizes…developing exclusive product, whether branded or private-label…timely development of supply chain strategies.
But consumers live in the real world of rising energy, health and housing costs, and they have been trained and encouraged to search for value for many years. Whether this means a sale price, a coupon for cardholders or an “everyday low” price is beside the point.
There’s a good parallel going on now in the world of higher education: Harvard and Princeton have dropped their “early decision” application policies, but they are among the “luxury retailers” of their world. Most other colleges will not likely give up a competitive tool unless the other guy blinks first.
Which retailer (department store, chain or specialty store) wants to blink first? Only the one who is 100% certain of his execution and his position in the marketplace.
Reputations are hard to change. Macy’s is a promotional department store, and it’s been that way for generations. The “Triple A Team” (Abercrombie & Fitch, Aeropostale, American Eagle) are rare exceptions to the constant price promotion of American retailing. Costco is another exception. All 4 companies are consistent: they don’t scream sale every week.
Differentiation is the problem. Not so easy. Not only has the whole business become standardized, so has its marketing. There are now millions of e-competitors, all trying to differentiate themselves. Snail stores have one advantage: location. See it, try it, buy it, have fun, no wait. Novelty, quality and scarcity will sell; but not much and not for long. Inventory management/logistics is the long term key.