U.S. Retail 2009
The Future Of
Retailing/Manufacturing: Do You Need To Evolve Or Is A Revolution
Necessary?
I wonder how Circuit City would have answered this question two years ago.Evidently they thought evolution was okay and made some minor changes.
Interestingly, Circuit City did not grasp that the contemporary customer no
longer wanted drab dark stores with very little ready-to-take merchandise on
the floor. They evidently thought their main competitors (Best Buy,
Wal-Mart and Target), all with growing market shares, were in a different
business or had a customer that Circuit City did not desire. That
would be the customer who was spending lots of money on electronics, of
course. The customer had already decided that Circuit City was not a player.
At that point, Circuit City needed a revolution.It is interesting that a quick look at business history is filled with examples
of revolutions that worked, ideas and direction that changed a company’s
fortunes. The Gap comes to mind some 20 plus years ago when Mickey Drexler
changed the format from denim and snap front western shirts to America’s casual
store. Remember when “Made in Japan” meant poor quality and cheap products, IBM
was competing in the PC market and Bloomingdale’s was a bargain store? All
went through some form of revolution to reposition their businesses.
THE issue in retailing today is the economy. We are painfully aware that people
are spending and consuming less, trading down, and shopping price over all other
decision parameters. Kroger is running 28% increases in their private label food
business (opening price), and sales at Wal-Mart, the Dollar Stores and the close
out stores are the strong businesses in the current economy. As further proof,
in an effort to sustain their business, Saks is running sales of up to 60 - 70%
off. So it seems that the only viable business solution is to lower prices on
everything and all will be fine. Or will it?
In some cases, lowering prices may be the only alternative to abandoning the
failing business segment. Whether eliminating more expensive branded products,
or not adding value to an easily identified competitive product, it seems that
the lowest price will be the winner. However be assured the manufacturers and
retailers that already operate in a low cost venue will be most likely to
withstand new competition from those who enter their model. The consumer has
decided that many products are merely commodities, rejecting the need to buy
value-added brands. What brand of salt do you use, or better yet what salt does
your favorite restaurant use? Do you care what brand of copy paper you use?
Waste management picks up you garbage regardless of the brand of bag you use.
And lets face it, one of the single most important nutritional products for kids
between the ages of 4 and 20, macaroni and cheese, is macaroni and cheese,
private label or branded.We have known for years that the latest Nike double jump, dynamite injected,
spring loaded and rocket fired basketball shoe has to be competitive whether at
Foot Locker, Nordstrom, or Ralph’s Shoe and Other Stuff Discount World. Even the
great innovator Apple has felt the sting of falling prices. Note the iPhone now
at Wal-Mart for $99.00. So in our future will everything be the same price, and
will everything be sold in fewer and fewer stores at that same price? Yes, or
maybe no.
To clarify, I am talking about price, not value. Value can be rationalized.
Rationalizing price, why you are okay paying more for the same product is much
harder. Convenience is the primary reason and works for many stores. Higher
prices in a category usually mean brands, and in the brand model there is value
added, so the price has a specific value ratio. The branded product lasts longer
or works better. Nike shoes are better than Bob’s long leapers because you can
jump higher and run faster and hold a conversation with your peers because
that’s what they wear. Value added.
Conversely, it is hard to gain any price spread in so many products today. It
is hard to add value to copy paper or coffee filters or, for that matter, coffee
as Starbucks is finding out. The copper-topped battery now has to be priced the
same as its competitors.Also, manufacturers and stores are in turmoil today deciding where and how to
entice customers who assign their own value equation to products. Many products
are price driven and will most likely stay that way. Remember in the 50’s and
60’s when we drove past one branded gas station because we only used Sunoco?
(Ask your parents and grandparents). Now we buy our gas at Seven Eleven, Rally
or wherever the price is lowest and the added value is not the additives in the
gas, but the convenience store attached to the pumps. Grocery stores are
expanding their own brands at lower prices to serve the price-conscious
customer. Right or wrong we have decided that
many products do not have added value just because they carry a brand name.
The biggest threat to most businesses today is a blurring of value and
price. Price is a component of value and in many cases the most important
component. At the same time there are places where a product is able to sell
for a higher price because of factors apart from the product. For example,
McDonalds and Burger King are in the opening price hamburger business. A
chain called Red Robin also sells hamburgers that are well priced, but not
low priced. The value added (assuming that the hamburgers at McDonalds and
Red Robin are both acceptable) is that Red Robin offers table service and a
broader menu. Both venues have to understand their pricing parameters.
Neither will be able to abandon their traditional price/value equation. Red
Robin could lower prices to better compete with McDonalds, but could not
lower their overhead to sustain the new prices. At the same time, McDonalds
must compete not only with Burger King and Wendy’s, but any chain that
offers fast, convenient takeout. Thus they compete with Subway and Taco
Bell. And the frozen pizza section in your local grocery store
There is not a time in recent history when a strong brand has been as important
as it is today. A strong brand simply means that there is demand for the
product that is driven by the consumer due to that consumer’s understanding of
the brand’s value equation. “I am willing to pay a premium for Tide because
Tide is a better product because it gets my clothes cleaner.” The consumer has
assigned a value equation to Tide.The question is where does your product or store fit in the price/value
equation. Is it evolving to the new consumer demand or is it in need of a
revolution now to survive? And of course, most troubling, is it necessary at
all? Many retailers and suppliers face a daily vacillation between being a
price outlet or a value format. For many, unfortunately, there is no solution.
They are simply an unnecessary entity that was able to hold on during the good
times. Their brands are poorly defined, the categories they trade in are well
represented by stronger companies, and now their capital is strained to the
point that they can no longer finance a needed revolution.
My point is not that price alone will sustain a business, but rather that the
consumer is re-setting the table on what are allowable price tiers, and in some
cases there is only one tier, low. The strategy for both manufacturers and
stores cannot simply be a wholesale revolution of price reductions. The simple
fact is that many cannot play in that league.
Rather, they need to decide whether an evolution or revolution is necessary to
remain viable, which requires a review of the price-value equation.
Unfortunately, if they are competing in a segment of business where the product
is solely a price commodity, they must adjust or abandon the business.The sky
is falling, but it will not hit everyone the same way. There are as many
theories as there are players and none are perfect. A few simple thoughts:
1. Determine
which businesses you can AFFORD to compete in;2. Devote your
resources to those businesses, including innovation and marketing, while
abandoning support of the others;
3. If you are
competing in a business that has become strictly price only, revolutionize your
approach, moving marketing and R&D support to supply chain and manufacturing
efficiencies development;4. Examine your
competitor’s weaknesses at the same time acknowledging yours; and Make the hard brand decisions. Don’t be GM.
IT'$ THE
CU$TOMER, $TUPID
Has there ever been a time when customer service is more important for the
survival of a business? Observed the past month:At noon in an outdoor restaurant, open only for lunch between 11:30 a.m. and
2:00 p.m., during the height of the season, a maintenance man cleaning the fans
over the tables of diners while the staff stood by.
Shopping in a newly opened second store of a small boutique business and
enquiring about the price of a painting. The response? “The owner hasn’t
priced that painting yet.” Period. No offer to take my name and number, or call
the owner.
|
