Price Leaders: Recession Tactic Implimentation

The most critical aspect of maintaining Price Leader status is actually delivering the appropriate minimum level of value across the depth and breadth of the assortment. We've already noted that not all items must be the actual price leaders in their category. Even those products must appear to deliver on the fundamental brand premise.

This means critical and extraordinary oversight by merchandise management, and an institutionalized culture of delivering value. If the entire organization is mobilized around this mission, it's not necessary to depend on a handful of men and women who are trying to oversee the development of the entire assortment. Every single employee of the company can and should become a guardian of this franchise. Because the downside of executing badly is simply not worth experiencing. Further, there's no excuse for NOT delivering on the promise. All it takes is effort.

I've already noted that growth economies do not tend to develop assortment review processes which meet recession economy requirements. Too much leeway provided by all those dollars. What's the first step? Having a clear and easily verified metric for establishing "value" and "price leadership". What do those terms mean in each category? How much over the price leader will the organization tolerate for non-essential products? What percentage of the assortment can be allocated to non-Price Leader merchandise? What is the minimum value level for each category and how is that measured? How is that policed?

Using Walmart as an example (again) in the home soft goods category will help illustrate. This past summer, during White Sale, Walmart had bath towels for $3.98. Which is an outrageous price. However, the product was terrible. The towel didn't absorb. Using it was like using a squeegee, effective only in moving water from one place to another. These towels were advertised, promoted, and placed on end caps. I believe that Walmart sold a ton of them. The end result was to diminish the brand. Evidently the minimum acceptable quality could not be delivered for $3.98. In this case, the merchants were more enamored of enhancing the Price Leadership than in supporting the brand premise. You can't have that anymore. That type of mistake is critical in an recession environment, and only occured because of a lack of oversight and a focus on Price as opposed to Value.

At the start of this week's posts, I noted that Value is the critical aspect of Price Leadership. Minimum value MUST be delivered, or the Price Leadership position erodes. In recessions, consumers cannot afford to make mistakes with their money. They trust Price Leaders because of the umbrella brand promise. It doesn't take very many non-deliveries for consumers to start shopping elsewhere. Remember....there is plenty of Price competition for almost any traffic driving category.

Delivering a Minimum Value isn't hard. It just requires attention to detail, strong process, and an infrastructure which delivers what it is supposed to. There is no doubt that the Walmart merchants did not intend to sell $3.98 squeegees instead of bath towels. Somewhere, a quality control process didn't work which was designed to insure minimum standards. And THAT is the scariest thing if you're Walmart and you are reading this posting. I KNOW you have established processes you THINK are designed to keep minimum value levels intact. They don't work. They don't work because the real God for Walmart merchants isn't Minimum Value. It's PRICE.

Recessions don't allow for non-delivery of Minimum Value. In fact, they punish that action severely. With money in less tight supply, consumers can write a $3.98 buy off as "well, what do you expect for $3.98". Not in a recession. In a recession, there isn't another $5.00 to spend to replace those squeegees with actual towels. The family has to suck it up and use the crappy product. Which just reinforces over and over and over agian the negative brand message....something no amount of advertising dollars will overcome.

So there's at least three elements to this. First, is having oversight on the initial price points. Are they Price Leaders? If not, do they fall into acceptable limits? Are the products truly appropriate for gross margin improvement? Second, is insuring that every product delivers Minimum Value. Value is defined by quality at a price, with a minimum acceptable use intercept point. The $3.98 bath towel was probably the best bath towel anyone could sell at retail for $3.98. The trouble was that the "intercept point" was below the cut off line. Does each product at least meet minimum use expectation? Even Price Leaders have to meet or exceed consumer expectations. That "intercept point" represents that minimum level of meeting expectations for product utility. Third, has each and every dollar in the assortment been spent carefully and with intent. In other words, has the assortment been built along world class lines?

Price Leaders: Effective Recession Tactics

Even world class Price Leaders will need to sharpen some of their existing skill sets and develop entirely new ones in order to meet that most rigid of task masters: the expectation of constant improvement. Let's take Walmart. Right now, Walmart is the only major retailer with comp store gains. That's enough. Today. That won't be enough by the end of 2nd quarter. Then, in order to meet the God of Rising Expectations, Walmart is going to have to start working on either expense ratios or gross margins, or, increasing the rate of comp store gains. To do that, Walmart is going to have to continue doing what they do well, and start adding some new tactics (with accompanying skills and capabilities). Of course, this applies to everyone, not just Walmart, but it's a big name and makes for a good example.

Given that Price Leaders come under fire across a wider breadth of categories than previously experienced, it becomes that much more important to successfully identify those products which they do not have to be the price leader in while still sustaining the overall brand identity. These are critical. Extensive analysis and evaluation has to be done to correctly identify the products where being a few percentage points over the actual Price Leader won't be noticeable. And a process has to be established which constantly challenges this. The worst thing a Price Leader can do is get greedy and allow the competition to successfully challenge for share of mind. Profit-wise, the worst thing a Price Leader can do is fail to capture higher margins wherever possible. Critical observation: these products may vary from market to market. While regional competition is not usually something a Price Leader has to respond to, in a recession, they do. Regional (as opposed to local) competition impacts a signficant enough portion of the overall volume to require aggressive action. When comp store growth is being forced out of any nook or cranny, giving it away to a regional competitor can't be overcome elsewhere. Regional merchandise price evaluation has to be a constantly evaluated process for the Price Leader.

Promotional price responsiveness also must become a critical skill set, and like setting initial prices, has to be managed Regionally. Really. Like the initial prices, promotional prices are very likely to be different from region to region. One of the probabilities of the recession is that less efficient national competitors will either shrink to become regional players, or smaller (less noticeable) regional players with better balance sheets and stronger market positions will outlast their better known competitors. In short, a regional player can often out perform their national competitor when that national player isn't world class in the critical areas. OK, so but what this means is that the promotional pricing the Price Leader has to respond to will vary in depth and agressiveness from Region to Region.

A last, but possibly most important new skill set lies in assortment building. One of the drawbacks of having been the dominant Price Leader is that just about everything sells....to one degree or another. You've got enough foot traffic that just putting stuff on the shelf actually moves it. Obviously that doesn't mean the assortments are all winners.....they clearly are not. What it does mean is that less pressure is placed on putting together the assortment up front. Rather, Price Leaders rely on identifying the losers, moving them out through aggressive reaction, and bringing in the new. This is fine during growth economies. During recession economies there are fewer open to buy dollars available, stress is placed on average inventory levels, and what used to be acceptable product performance levels no longer apply. Which means that the Price Leader suddenly also has to become world class at assortment building. And this skill is NOT usually one in abundance within the organization. Price Leaders rarely attract truly skilled and talented assortment builders. I'm sorry....you don't! Taking Walmart as an example, the organization excelled by treating merchants as if they were interchangeable business managers...requiring little product knowledge, relying on process, technology and methods. That's not going to get the job done for the next several years. The good news is that as "better" retailers fail and downsize, there are going to be some world class assortment builders on the market.....get them onboard. You'll need them. You'll also need to take a long and hard look at your technology and process.

Price Leader - Recession Tactics Issues

Price Leader retailers tend to rely on having established retail brand equity which clearly articulates the positioning. Walmart is now crushing the competition as a result of the strangely fortuitous "Save More, Live Better" market positioning begun early this year. The consumer has no issues about Walmart's retail brand equity. They do not expect a great shopping experience....just the stuff they need, at killer prices. And given Walmart's logistics and sourcing are the very definition of world class, that is exactly what the consumer can recieve. Like really good Price Leaders, Walmart is NOT the lowest in the market on each and every item. In fact, effort is made to grab any gross margin possible for products with less competition or less likely for the consumer to be aware of the actual price leader level.

The problem in a recession is that lot's of retailers start trying to be the Price Leader. Why? Because it is one of the very few marketing levers they think will produce an effective response. Outside of the defensive reaction (if I don't compete on price my competition will eat me alive), tried and true retail theory tells us that foot traffic is stimulated through price competition and promotion. The drawback is that repositioning to be a true Price Leader takes time, money and effort. Short term deep discount promotions will not do anything other than buy volume over very short periods of time. As an example, if a moderate department store attempts to be a Price Leader, it must advertise constantly deep discounted prices across core merchandise categories. Remember, part of this strategy is actually delivering price leadership on stuff the consumer actually needs to buy....regularly. Infrequent deep discount promotional activity does not successfully reposition a store as a Price Leader. It simply trains bargain hunters to wait.

That aside, as has been noted before, becoming world class in logistics and/or sourcing is simply not done overnight. So the margin drain brought on by deep discounts in existing prices is very difficult to sustain without the infrastructure to still bring acceptable operating margins to the bottom line. Building that infrastructure takes time

The recession, however, does put enormous pressure on some Price Leaders because it brings much more competition. In growth economies, being the Price Leader isn't all that desirable. After all, to generate Wall Street desired returns, it's mandatory to be really good at the infrastructure...as noted. This is hard, takes time and effort, and isn't something everyone can do. So there are large segments of the merchandise mix for each Price Leader where there really hasn't been all that much pressure to actually BE the Price Leader. It's been a workable tactic to be the Price Leader where it's visible, important, and drives traffic. In a recession environment, consumers have more time than money. This means they are willing to shop in more than one place if the overall marketbasket comes out low enough. Time is money, but not if you are unemployed. Then all you have is time. So we now have margin pressure brought on by wider and deeper competition across more merchandise categories.

Of more import is the actual level of the Price Leadership. At least for the immediate future, many retail analysts are forecasting deflation....real price reduction brought on by financial and competitive factors. In many categories, this may end up being true. The real price of goods sold may in fact drop as desperate retailers attempt to "buy" market share with reduced prices. This causes those competing at lower price points to lower theirs to maintain market differentiation, and so on. Eventually, the tactic will destroy the less efficient and least financially sound.....but not until siginficant margin erosion occurs first.

Critical to the Price Leader positioning is convincing the consumer that prices are ALWAYS compelling....not just during promotional periods. This requires constant and pervasive advertising, stressing the umbrella brand message while also participating in seasonal and categorical pricing promotions. One of the drawbacks to being a Price Leader is that it doesn't exempt the retailer from promotional activity; just limits the depth of the discount that they offer. During seasonal traffic periods, the Price Leader has to maintain that price leadership against the deep discounts offered by competitors. Existing tactics have focused on standard circulars.....an advertising medium rapidly diminshing in effectiveness. Fewer and fewer consumers read and use circulars, the prices have gone up to distribute them, and the ROI has plummetted. Aside from the already established Price Leaders, this implies a great deal of marketing spend to convince the consumer of the new positioning....and then reinforce that image.....and then reconvince....and then re-reinforce...you get the idea.

Recessions help Price Leaders by shifting consumers down the value chain. However, they put extraordinary pressure on the less efficient operators already in that niche, and provide little in the way of profits for those trying to become Price Leaders. On the supply chain side, the same dynamics placing pressure on retailers effect suppliers, leading to fewer suppliers providing goods at lower margins (price deflation flows downhill until suppliers recapture leverage, which doesn't happen during recessions). With fewer suppliers already operating at lower margins, less opportunity exists for marginal retailers to improve initial cost of goods through more effective sourcing. While lower cost suppliers can be found, they tend to be found by the existing Price Leader and exploited, leaving marginal suppliers to provide to marginal retailers.

Going Back To The Basics

Confronted with a recession now predicted to be the deepest in modern memory, crafting a unique merchandise strategy supported with effective merchandising tactics appears to be more difficult than anyone imagined. A quick review of the existing basic merchandising strategies.

Price Leader: a clear positioning, supported by real price leadership in destination purchase categories. To be effective, this strategy has to be supported by truly world class operational excellence in either sourcing (driving the cost of merchandise down) and/or logistics (driving the expenses of selling the merchandise down). While the strategy has been tried within a given market segment, it truly only works at the lowest possible level. Superior tactics involve surrounding price-leader items with less well known products at less compelling values, generating larger gross margins while preserving consumer perception. Inevitably, this strategy comes under pressure to "improve margins" by "moving upscale". Most often associated with "mass merchants", Price Leader is a position which exists for department stores, Big Box, and specialty store types.

Category Killer: dominates the competition through the depth and breadth of the assortment. Not consistently a price leader, generates traffic by providing superior choices to potential customers. Attracts a relatively wide range of demographics as a result of the depth of the assortment. Not necessarily world class in sourcing or logistics (although logistics efficiency helps), must have world class store operations. The nature of this strategy is that with sufficient time and resources it can be matched: simply creating large enough "boxes" filled with a wide enough array of merchandise. The market itself tries to help, as Category Killers exercise undesirable market leverage over suppliers. Critical to the strategy is the specific category being "killed". Toys has had great difficulty sustaining even one player with the strategy, while computers and electronics have often had several viable competitors. In the end, operational and marketing excellence proves the competitive litmus test.

Trend Leader: provides an aspirational shopping experience. Usually applied within soft goods categories, this still has validity in consumer electronics as well. The successful retailers adopting this strategy deliver a distinctive added value through the nature of the shopping experience, as well as the rapid revolution of the merchandise assortment. Trend translates differently when applied to various categories. Essentially, a Trend Leader meets the needs of consumers who want to be "first" or ahead of their neighbors. Higher margins are the result, and required skills revolve around sourcing, trend development, in-store marketing and store operations.

What impact does this have within the recessionary environment? Consumer spending patterns shift and alter, impacting each strategy differently, creating new challenges and making existing tactics much less reliable, less impactful and less effective.

Trend-Value without an Iconic Retail Brand

What happened for the past decade when a specialty apparel retailer in the Trend-Value segment failed to develop an Iconic Retail Brand? First, a quick definition of Iconic Retail Brand: a brand name, logo or graphic which is identifiable without prompting, and associated by consumers with specific brand values. This applies to all consumers, not just those being targeted by the Brand positioning. As an example, most consumers have an image of what Abercrombie stands for, or Victoria's Secret. Different groups might attribute different brand aspects to each, yet a remarkably common set of brand distinguishers (the words people use to describe a brand) emerges. I didn't make that up....actual research has been done on this subject. Back to the initial question: what happened in the past decade when a specialty retailer failed to develop and sustain an Iconic Retail Brand? In general, they had good years and bad years. The good years were brought on by participating in the strength and longevity of macro-apparel trends. The bad years were a result of poor trend interpretation or a down-cycle in trends themselves. In general, in the good years these players did not lead the pack in comp sales or gross margin basis point improvement. In bad years, they often DID lead the pack in comp sales declines and gross margin basis point decay. Not to mention inventory management and senior merchant turnover. But the point is, mostly, they survived and made a respectible living, when averaged across the years.

Now we enter the recession. What does this imply for these non-Iconic Retail Brand specialty stores? It means your probably volume is even more negatively elastic than your more entrenched competition. Fewer dollars to go around means consumers are more likely to choose locations with greater awareness levels and stronger brand positioning. If you don't know what a store stands for, likely, you'll walk by it when you have less available income. Makes sense, right? Why go in....shopping isn't as fun, you KNOW where you are more likely to find something you like, and you really don't have the time or the emotional energy to hope that this new store will do it "better". In fact, you don't really care about "better"....just about "adequately and less expensively".

Even when one of these non-Iconic stores does an excellent job of trend interpretation, how is this communicated to the consumer? Remember, foot traffic is DOWN. So advertising through window displays is less effective. Yes, word of mouth will still be an important part. Yet even this is impacted by the recession. Fewer "experiments" mean fewer peers trying different stores means less "sampling" translating into less word of mouth impact. Or something like that. Trend-Value players without Iconic brands have depended on location and trend strength for their success. Location leads to traffic, and trend strength leads to sampling and searching.

So what does this mean if you operate a Trend-Value store without an Iconic Brand? First, it's probable you don't see yourself that way. Get an outside opinion. That aside, it means that you MUST do one of (and preferably both) things immediately. First, if there is any potential to establish an Iconic Brand, do it. Borrow it. Steal it. Merge with it. Just get it. Second, you need to be REALLY good at the operational end of your business. Your merchandise cost has to be as low as humanly possible because markdowns ARE going to be higher. Your operational efficiencies have to be tight because your sales per square foot ARE going to be lower. Your inventory control and supply chain has to be tight to t he poinit of JIT because your turns ARE going to be smaller.

First and foremost, get creative about having an Iconic Brand. The risk is worth it. The odds are, if you aren't extraordinarly good at the operational end of the business, or have really deep pockets (strong balance sheet, existing cash and a good credit line)....you may not make it through the recession. Because some of you won't. The best possible solution to the dilemma is to have that Iconic Brand which will give you the upside potential to garner a disproportionate share of diminished demand and interest.

Tend-As-Value Specialty Apparel Merchandise Strategy

Sorry, no new catchy name. It's better than "knock off artists" though! This segment is composed of specialty apparel retailers with private label. Some of these can legitimately be seen as carrying "exclusive brands" while many just carry private label. A moment to distinguish. An exclusive brand qualifies as a "brand" in that it has specific brand values which can be recognized or spontaneously offered by consumers. In other words, the consumer would be able, in some way, to articulate what the brand "means". It has attributes. Private label does not, and generally, the attributes associated with the private label are derived from those associated with the umbrella retail brand. This does NOT mean that the STORE itself lacks a brand identification. In fact, many of the successful non-discount retailers in this segment DO have STORE brand identification. There are obvious exceptions, but let's not get caught up in outliers in the data.

Value Trend players are do NOT, in most cases, set trends. It is not their expertise. Rather, they are adept at two things. First, they are adept at identifying trends early in their cycle, particularly ones with legs. Second, they are particularly good at some element of the logistics, sourcing or store operations side of the business. Put another way, they don't jump into the game too late and then they are positioned to make sustainable profits while playing around, a positioning which allows them to STAY in the game longer than Trend Setters with less advantageous cost dynamics. There are any number of ways, methods and technologies which have been developed to help this segment maximize it's possibilities. From "test" strategies initially developed by The Limited and then adopted and improved by others to fast-fashion supply chains such as Zara, there are existing ways to help manage the front end of this process: getting into a good "game" early and staying in it long enough. The back end requires time, effort and energy, but not rocket science. Fast-fashion isn't that hard to duplicate with the right resources and commitment. Vertically integrated sourcing and flexible materials handling as made best practices in the 80's by The Gap can be modeled and developed. But not overnight. So if you don't have these capabilities going into this recession, either develop them very, very quickly, or get hammered.

Trend-Value players depend on the success of Trend Setters. Think about it. How can there be a Trend lifecycle to jump if no one is setting trends? Makes sense, right. So if the argument that a recession alters consumer spending and consumer values and reduces the demand for trends in the first place, it follows that fewer high potential trends will be available to "interpret". The stronger the trend developed, the greater the number of Trend-Value players the market will support. Again...it's just a case of demand. The Trend Setters create the demand. The Trend-Value players fulfill it. So if the Trend is limited in appeal, the number of Trend-Value players who can make money off the trend will be equally limited. And more so during a recession.

That's an important word. "Interpret". What it means is that each player in a given niche attempts to put their own, however slight, twist on a trend which makes it that much more accessible to their given customer segment. A lot of the time, these "interpretations" are either overstated (yes, you really do look very much like your competition) or miss the mark and result in missing the trend (no, chartreuse was NOT the right color for the tight body fit trend). Which starts to bring up the recession-influenced risk associated with this merchandise strategy. If trends themselves are less likely to be adopted, and have shorter life cycles with smaller peaks due to recessionary spend patterns, the risks associated with interpreting those trends becomes even greater. Once again, there are fewer dollars to go around. Fact of life. Which places greater pressure on the "interpret" part of the equation. Why? Because the way to success is to grab as much of the smaller demand as possible, and to do that, even the Trend-Value players have to different, have to have a unique positioning....otherwise they become strictly price point competitors. In the growth decades, there was lots of room for a number of successful interpretations of each trend. In fact, the market required it. Even in the Trend-Value segment, there are differences in retail brand positioning which drive consumers to desire to differentiate themselves (again, aspirationally). So to keep YOUR brand positioning, you had to be different.

Now let's apply that same philosophy to the recession economy. Fewer trends to interpret, with smaller peaks and shorter lifecycles. Less "aspirational" buying going on, and even more so the further down the socio-economic food chain you go. Less need to find that nuance which differentiates versions of a trend, and more need to find an acceptable interpretation of the trend at the best price. Which means that in the Trend-Value segment, in a recession, it becomes more important to be able to deliver the trend early and at a great price than ever before. As noted at the top, that means being very good at both aspects of the success matrix for this segment. And unfortunately, the past decade has not demanded that all players in the market be VERY GOOD at both aspects of the matrix. Instead, the growth decade has allowed players to be good at one, or the other, or merely competent at both.

There's an assumption here: that the umbrella retail brand actually HAS a verifiable and desirable brand postioning. The next post is going to explore what happens when that is NOT true.

Specialty Apparel Merchandise Strategy in a Recessionary Economy

OK, it's a long title.

Placesetter: one of the elements of a recessionary environment is a smaller overall market for just about everything. Some product categories shrink even further than others, driven primarily by gender, age and socio-economic considerations. While useful to think about, I'm going to ignore that aspect for now. What is relevant is that we have all "grown up" professionally in a relatively steady growth climate. Yes, it's been characterized by cyclicality, and trend lifecycles, brand lifecycles and other product or company specific variables. The underlying fact of our approach to establishing a merchandise strategy in the specialty apparel space, however, has been a relatively inelastic growth trend.

One of the most important merchandise strategic implications of that reality has been the development of private label specialty chains. The majority of specialty chains in existence today are private label (or exclusive brand, if you will). This is even more visible in certain segments, such as women's apparel. Here, outside of department stores (all levels), there are virtually NO large chains carrying external brands. In the face of this, the brands themselves have chosen, in some cases and with varying degrees of success, to become their own retailers. Men's apparel isn't quite this dominated by exclusive branding, although it remains relatively accurate. Kids specialty apparel too has undergone this transformation, although in truth, kids never has been very brand dominated. What difference does this observation make?

Exclusive brand merchandise strategies generally fall into one of two broad segments. Either the brand attempts to be a trend setter, or the brand represents trend-for-value. Trend setting brands have been, by and large, extremely attractive and at the same time high risk plays. The establishment and ability to sustain a trend-right brand positioning is extremely difficult. Abercrombie, Gap, Limited, American Eagle, Urban Outfitters, and many others have experienced varying degrees of success here.....over time. None has been able to sustain their "must have" status indefinitely. It might even be impossible, and the goal might simply be to have an upward trend line when measured over a five year period. Trend setters capture early adopters, who are less price sensitive, tend to have more disposable income, and spend more pre capita. The margins for Trend Setters, if supported by any reasonable form of supply chain competence, are very strong. If managed carefully, with an eye to sustaining "desirability" through intentionally managing supply at levels below demand, markdowns are relatively lower, promotions relatively unnecessary, and overall financials have the potential to be extremely appealing. Of course, there is a flip side to this. When "wrong", or supplanted by another brand, this segment turns sour in a hurry. Without a history of promotional activity, and worse, without a consumer generally influenced by that technique, it is difficult to liquidate trend-wrong merchandise. Financially, a bad season for a Trend Setter can get ugly very fast. Further, it is very hard to rebound immediately from a trend-wrong or trend-supplanted status. Once a Trend Setter has "lost" it's edge, it takes time and a great deal of money to get it back (inexplicable youth movements to the contrary).

Now let's factor in the recession. As noted, a recession means less available spend for everything. Trend apparel hurts here a great deal. The value delivery of trend apparel is psychological and emotional. Trend setting consumers feel better about themselves by being early adopters and establishing their own style. They move off one trend and onto another, in some cases, when adoption moves down through other psycho-social demand segments, eliminating the sense of unique expression which helps create the value. Wardrobes are updated less on physical "need" and more on "social" or "emotional" need. A side note: "early" takes on relative meaning. I am not talking about designer apparel consumers.

So what's the tie in to a recession? The biggest consuming segment for trend apparel is NOT the very early adopters. That segment is relatively small. The biggest segment is aspirational, even for Trend Setters. In both directions. Aspiring to look like early adopters and aspiring NOT to look like late adopters. Either way, this is a relatively insecure consumer segment obtaining value through lifestyle identification and personal status associated with making the right trend apparel decisions. As noted in this space, and in many others, aspirational purchasing drops dramatically during recessions. Simply put, there just isn't as much available income to drive the updating of the wardrobe as frequently or as comprehensively. Suddenly, in this environment, higher "needs" ( in a Maslow sense) take precedence. Like paying the bills. Which implies that the overall Trend Setter market is more elastic to the recession's impact than Functional apparel (words are relevant, don't get hung up).

For the Trend Setter, not only is there this continuing need to be "right" (very difficult to sustain or even to count on) now there is a very real shrinkage in overall demand. And almost by definition, Trend Setters occupying the same competitive niche cannot sustain duplicate trend positionings. If you look like your competition, what's the competitive difference? Price. At which point you really aren't a Trend Setter anymore. You are a Trend-For-Value player. So the pressure is on to be "different" and "unique"......an enormously high risk proposition when the upside doesn't carry anywhere near the potential as it did a year ago. Playing as a Trend Setter means, in general, being the one or two of your kind doing well, or having an enormously bad year. On a single case basis, the upside potential is still there. However, given the consumer spending pattern changes which occur during recessions, the upside for the whole segment is vastly reduced. While the downside remains, and is amplified by those same changes in consumer dynamics.

The post will outline the implications for Trend-As-Value players (and maybe I'll have a better name for you guys by then!)

The Time is Now

During a conference call this morning, with a highly respected and very influential senior retail executive, the subject of tactical responses to the current economic situation arose. This individual speaks at conferences on leadership, and in my humble opinion, is not only articulate but a progressive thinker. This is only relevant within the context of his comments.

The topic we were discussing was the prevalence of the retail merchant community, right now, to be relatively closed to new techniques, technologies, tactics and even thought patterns.....given the brutal nature of retail sales. All participants in the call agreed that most retail executives have taken a severely risk-adverse approach to managing through the current crisis. The specific comment which spurred this posting was (paraphrasing): "I would be hard pressed NOT to counsel any retailer to stay with the tried and true, and tend to their knitting, not looking outside the box for answers, and putting emphasis on the fundamentals they know will drive their business". Coming from this particular executive, I found the point of view particularly telling. And, I think, completely wrong.

Most retail observers and participants agree that the current economic conditions and consumer spending patterns represent something completely outside our experience. Further, it is clear across numerous retailers and a wide breadth of product categories, that the existing levers which have successfully stimulated volume are either broken or much less effective. Again, this is hardly surprising. The rules governing consumer behavior during a deep recession are completely different than those developed during a period of extended economic expansion. Technology and process were developed in response to those "rules"....in other words, the tactics employed to manage our business evolved and were designed specifically for a set of expectations and consumer profiles which to a great degree are no longer valid.

In that environment, to "tend to your knitting and focus on the tried and true" sounds like a recipe for disaster. Or at the very least, for ineffective management. Now is exactly the time to be developing new tactics to meet new rules about consumer behavior and economic elasticity. Simply focusing on what worked in the past is not going to produce reliable results of comparable impact now or for the immediate future. Take this within reason, though, please. This does NOT mean that promotional pricing and marketing should be abandoned. They are critical aspects of the merchandising mix, and will and should be continued. However, they will have less impact and deliver lower ROI's than in the past. As will clearance events, Black Friday and all the other price-related mechanisms retailers use to stimulate volume. Each must be continued (at least in the short term), while each will without doubt deliver significantly less impact. Which means that doing what you know how to do is NOT going to deliver the results you need.

Organizationally, if risk aversion is the dominant driver in tactical planning, then results will continue to lag requirements. It is only by completely rethinking the paradigms which surround your strategy that higher impact tactics can be developed. They will vary from retailer to retailer and from niche to niche, and that is NOT the point. The point is that doing the same thing is going to produce declining results, with greater profit impact than ever before. In the short term, with limited options, these tools must be used, and used aggressively. However, when 2009 is taken into view, it is imperative that NEW be the operating principle behind merchandise and marketing strategy.

Applying Avatars to Historical Data

To get value out of creating Avatars, you have to apply them to historical data. Like it or not, an form of planning system relies to some extent on historical data. If you are going to plan at the Avatar level (and it's worth doing) then you need history to reflect that variable. Not as hard as you think. Yesterday I noted that you may have fields in the data record you no longer use...and which can be "reassigned" to Avatar use. This can be done to past data too. It IS possible to run a quick program to go back and edit any form of data repository....at least most of the more modern systems allow this potential.

The first thing to do is to have someone start to assign merchandise to these Avatars based on the one it is most likely to have been bought by....again....if possible...try to validate by spending some time with long-time floor salespeople who can probably remember last year or the year before's assortment. Other validation input comes from the vendor themselves. Who was the item designed to appeal to? Someone at the vendor, assuming they are still there, can probably answer that question. I hope. Do a quick review of any advertising that ran for both the brand and for the specific item. Sometimes a brand is so poorly defined it starts to be a hybrid of two or more Avatars. Bad news when this happens. If possible, try to remember which of your competitors (or non-competitors) also carried that product or that brand. Sometimes your assumptions about what merchandise appeals to which Avatar can be invalidated based on which of your competitors did well with it or which didn't. If someone you really don't want to compete with had the same product/brand and did well with it, you might be wrong about your Avatar....or even about the desirability of merchandising TO that Avatar.

I digress. The point here is to try to make an educated classification of which Avatar an item should have appealed to....or to the Avatar NONE OF THE ABOVE. This is a really important Avatar for several reasons. First, in the new world, you don't really want to be spending scarce open to buy providing merchandise which appeal to NONE OF THE ABOVE. Second, it will allow you to actually critically analyze the NONE OF THE ABOVE merchandise. Be prepared for some shockers. You may actually have done better with some of this than you did for something which seemed right down mainstreet for one of your Avatars. If this happens....GOOD! It means you might have another Avatar you can merchandise to, or a better Avatar. Remember, the more Avatars you have, the less likely you are to make meaningful merchandise statements and assortments. And yes, this really does apply to hardlines. Let me say that again. Yes, this really does apply to hardlines!

Hands on, what you've now done is to restate historical data so that you have sales, markdowns, GM and inventory based on Avatar groupings. If you do this at the SKU level, it can be made to flow across the store level by your existing merchandise system. In other words, you now have a way of seeing what percentage of inventory, sales and gross margin was contributed at the store level by each Avatar. Doing so will allow you see where a store was over-inventoried, under-inventoried or simply ignored from an Avatar perspective. When we did this for one major retailer, the results were extraordinary. Some stores were simply denied the opportunity to do much business with a given Avatar because they were allocated way too much for the others. Adjusting the inventory to reflect this opportunity raised overall sell through for those stores significantly. True.

Using Avatars to Focus Assortments

Most information systems contain one or more product attribute fields. These are beyond those reserved for static SKU level bits of information, and often left to be user defined. Let's say your system has such a field you either aren't using, or could use differently. A quick note about using existing fields differently. Many data sets were created based on the existing product hierarchy or the current purchase order, allocation or merchandise planning technology input requirements. Maybe these have changed over time. As an example, you may have originally had fields for Category, Class, Sub Class and Dominant. Do you still really use all of them? Let's say you don't. One of them can now be used for Avatars! Really...and it's simple. No matter what IT says. Just decide that from now on, Dominant means Avatar. So honestly....you can do this even if you have a static legacy system with non-adjustable fields.

OK, back to Avatars. Let me create an Avatar example to bring this into perspective. Suppose that we are addressing Women's Apparel. How many distinct customer stereotypes (another word for an Avatar) do you think you need to adequately describe 80% of the women who buy your merchandise? Let's say it's 3: just for simplicity sake but also because doing this too finely results in illusionary differences and creates product overlap and unfocused assortments.

Avatar 1: We'll call her "Kitty"...based on a character from an ABC series, Brothers and Sisters. I do this because if we can find a fictional character who seems to represent the Avatar already, we're way ahead of the game. Even if you don't watch the show, you CAN, and then you can clearly see how that stereotype is being portrayed (TV is great for finding stereotypes....the medium doesn't really support individualized character development very well). Kitty is in her mid 30's, a professional, has a full college education. Fiscally conservative but privately socially liberal, she's very often "in her head" while prone to emotional reactivity. She reads news magazines and the NY Times best seller list, but often has a romantic novel on the bedside stand. Would rather go out to dinner than go to a movie, but not because she's a foodie....rather because she enjoys conversation-as-entertainment. Her wardrobe is extensive: she needs to reflect her many distinct personalities. She wants to be "fun" so will dress with more casual flair than you'd think, just to show you she can.

OK....it's just an example. The point is, she comes to life. Now do this for two or three more Avatars. Now validate these. Don't do it in a vacuum. The very best source of information comes from the floors of your stores. Spend a few days just watching who is going into your stores. Try the Avatars out. A woman walks in. Which one is she? Does she look at, buy, try on or show interest in the products you think she should given who you think she is? Talk to your best salespeople. Describe the Avatars to them. See if they recognize whom you are talking about. Be willing to make adjustments. Ask your vendors: they spend a LOT of time thinking about your customer. Put less value on their input than on your sales people. Ask Marketing! They may even HAVE Avatars already!

The point is, build the description, get input, and then validate. That's the first step.

Assortment Analysis: Using Customer Avatars

Merchandise appeals to people. While this is an obvious statement, applying it as the fundamental basis for creating focused assortments is not so obvious.

Some years ago, it became apparent to me that one of the most effective ways to create distinct focus within an assortment is to create "avatars" of segments of consumers. These avatars are complete descriptions of a consumer, designed to be representative of a larger group. The degree to which your merchants can describe these "avatars" is the degree to which the assortment can be focused on meeting their needs. Even if your technology doesn't seem to support creating merchandise segments based on lifestyle attributes, there may be ways to "fool" it into doing so. First, let's look at what an Avatar is.

An Avatar is a description of not only what a person looks like, but how they think, what they do, how they react, and where they go. A complete description includes what they do for fun and why. How they prioritize their disposable income. What type of home they buy, and why. What they eat, where they go out to eat, how much time they spend with their kids......and on, and on. Why is this worthwhile? Because people buy merchandise and they do it for reasons. The more we, as merchants, can identify who we are selling to, the more likely we are to be able to select merchandise which will appeal to them.

Within the context of limited open to buy and a recessionary climate, creating a focused assortment is a necessity. Limited open to buy means greater stress in creating breadth and managing the depth of the assortment. One of the most powerful ways to understand appropriate depth and breadth is based on consumer Avatars. If each item in the assortment is classified via product attributes on the basis of an Avatar it is expected to appeal to, it becomes easy to determine if there is overlap, inconsistency, price point gaping or any of the other elements of a less than optimal assortment plan.

Data from current and past merchandise assortments can also be retroactively assigned the same attributes. While time consuming, the result is a revision to historical data which can then be used to allocate open to buy......even at the store level. Any segmentation strategy which groups stores into like clusters will, in my experience, be less valuable than grouping merchandise into like clusters, and analyzing the results at the store level.

If you aren't using Avatars, explore them.

Assortment Analysis: The Peer Review

One of the most important actions that will occur, without regard to the market niche or consumer group served, is for retail merchandising organizations to critically analyze planned Spring assortments. I've written in the past about the pitfalls in trimming breadth versus depth in recession times, and embedded in that posting was the requirement that each product in the assortment be intentional and serve multiple purposes. The question is, how do retail executives determine if this level of complexity exists in each and every assortment in the store.

First, let's accept that not all the merchants tasked with building assortments are created equal. Some are more adept at building complex and rational assortments. Others have either less experience or less training and do not demonstrate as visible a grasp on merchandising principles. No slight intended....we all have stronger merchants in some areas than in others. My suggestion is to leverage these stronger merchants as your initial screen for the assortment building and rationalization process.

Yes, it is the responsibility of DMM's and GMM's to analyze assortments and critical evaluate the merchandise planning process as executed by the buyers they manage. However, these individuals are also responsible for all kinds of other tasks and seldom have the time to critically review assortments to the extent that they should. Further, DMM's at least are often co-conspirators in the creation and execution of the merchandise strategy....which means we are asking a player to critically evaluate him or herself. Hard to do. Instead, one of the most powerful processes I've seen is the Peer Evaluation. A group of buyers or merchants NOT affiliated with the specific category are brought together. A single merchant presents his or her assortment. And then the group seeks to ask the questions necessary to determine if the assortment is powerfully constructed or not. These Peers do not have axes to grind.....they seldom know enough about the category to have an opinion on what should be done....they are simply there to question what is being proposed. The answers, creativity and adjustments remain the responsibility of the merchant who owns the category.

The simplicity of this approach is that using Peers takes some of the job security issues out of the equation, and also allows for merchants to learn from each other. A group, tasked with determining if the assortment has a strategy and then is implemented around that strategy, with intentionality will often push harder, look deeper, and accept less nonsense in response than even the most focused of DMM's. The group could then either report to the DMM responsible for the category, or the DMM could be present, in order to insure that changes occur in what may or may not have been seen as relevant and powerful within the planned assortment.

This is NOT merchandising by committee. The group does NOT make specific recommendations around products, pricing, or promotion. Rather, they simply apply the same rigor they've (hopefully) applied to their own considerations in questioning and examining the proposed assortment choices.

Why is this critical? Because open-to-buy will be at it's most limited in recent memory, putting extraordinary pressure on almost every SKU to perform. That will not happen by luck, through the subtle manipulation of skilled suppliers, or even through the vagaries of talent. It WILL happen as a result of focused intention, planning and execution, with considerable outside support to insure that the focus and intentionality do not become lost or side tracked in the process.

Continued Thoughts on Clearance

Mind dump on alternative strategies to mitigate the impact an aggressive liquidation approach is likely to have on already strained operating margins.

1. Consider not taking markdowns. Carefully, and with intent, driven by appropriate analysis. ....not by reductions in markdown budgets. Obviously this doesn't apply to seasonal-temperature items. However, for most of the rest, really take a look at this. Sometimes there are "new" versions of the product planned for arrival in Spring. How much "newer" are they? Would it be better to just refill the current version? "Newness" for the sake of "newness" is a dubious luxury in a deep recessionary economy (luxury retailers not withstanding). If the "new" version doesn't meet a need better, differentiate you from the competition, or have a demonstrable reason to be carried (like a multi-million dollar ad campaign from the vendor).....consider canceling the new and re-stocking on the existing version. Merchants all too often get trapped into the momentum of new product introduction cycles rather than harshly and critically examining the true need for a new product in the first place. And given the overall drop in demand this Fall, it's very likely that your vendor has at least sufficient stocks to keep you going through Spring. You can update the mix for Fall 2009.
2. Set different out of stock dates. Most rules based pricing technology is driven primarily by either a GMROI metric or an out of stock date, or the conjunction of the two. Note: it doesn't have to "say" GMROI....but if you are inputting GM targets and some form of inventory metric (turn, sell through, etc) then for all intents and purposes the system is driving recommendations based on GMROI. Generally, one or the other of these two primary metrics has to be set as primary, because they tend to work contrary to one another. Usually, it's the out of stock date. Check it out, and see what really drives those pricing recommendations. At any rate, set different out of stock dates. I suggest that the driving parameter in setting those are when the space will be needed....and not potential cannabilism. If the existence of merchandise on clearance is expected to have a significant impact on regular price sales of a new item (space not being the issue) then see point 1 above. Different out of stock dates allow you to "milk" certain items and aggressively manage others. Do it at the item level.....I don't care how long it takes.
3. Stop trying to match LY sales on a daily or "event" driven basis. Many retailers use events and promotions during the liquidation process to drive volume. The timing of these tends to be roughly comparable to avoid the unbelievable pain of having to explain temporary shifts in volume. This year, you are not going to be able to make those events comparatively anyway.....so stop trying. I'm not advocating abandoning pre-planned promotions, rotos and other events. They are a necessary and normal part of the clean up process. What I am saying is don't tweak the discounts, price points and timing of those events based on a drive to match LY volume on anything OTHER than a quarterly basis. Trying to match "comps" on a day to day and event to event basis is going to destroy the effectiveness and legitimacy of your rules based markdown recommendations. The world changed, and the rules are different. Elasticity is in the process of being recalculated and promotional responsiveness simply is not going to match last year.


The point of the above is to allow you to be aggressive where you really need to be and to encourage and entreat you to take conscious and detailed control over the process. Because the markdown budget (and inherent GM flexibility) really isn't there to be aggressive across the board. And if you don't manage the process then adhoc decision rules are going to be implemented that senior merchandise strategists will have no awareness of. They'll happen at the planner or buyer level when the decisions are made on which rules-based recommendations are implemented, which are adjusted, and which are ignored. Rest assured....your system will generate more recommendations than you have the budget to take. So my advise is to manage both the technology and the process so that the recommendations that are reviewed are more limited in scope, and represent strategic and tactical priorities. Allowing these decisions to take place at the planner or buyer level is akin to allowing yourself to bleed to death from ant bites. Put another way, this isn't about "trusting" your mid-low level merchandising executives. Very few of them have had to exercise these particular skills and this particular discipline....a result of the growth decade. Individually, and particularly for Specialty Retailers, you probably do have merchants who have had to manage through downturns. None of them like this one, and most of those were due to merchandising "misses" (or mistakes). Which is an altogether different approach to managing clearance, as was pointed out earlier in the week.

Monday I'm going to write about an emergency Assortment Review process I think should go on in each and every retailer everywhere.

Implications of Easter 2009 on Post-Holiday Clearance

The timing of Easter 2009 becomes a critical component of how this year's post-Holiday clearance will be managed.

The single most important tactical decision for Spring 2009 facing merchants is the management of the post-Holiday clearance period. Essentially, there are only two options. Either clearance is managed aggressively or it is managed conservatively. Generally, the strategy for clearance is dictated by the level of post-Holiday clearance inventory, the timing of Easter, and the existence or lack of significant changes in technology or trend.

We've already noted that despite earlier and deeper promotions, and tighter inventories heading into Holiday, the drop in consumer demand exceeded estimates by an order of magnitude. Some retailers will garner share gains, and have clearance inventories close to expectation or even below. Most will not. As a basis for discussion, the post-Holiday playing field can be characterized by much higher inventories of clearance than planned, and deeper pre-clearance promotional pricing. This argues for an aggressive clearance posture.

Technology and trend are not stimulating a need to make space on the floor, or in the consumer consciousness for something radically new. Without exception, all major categories of retail suffer from a distinct lack of compelling innovation, be it color, style, feature or delivery platform. While there are individual products which defy this generalization, on the whole, the market is relatively stagnant across the board. This argues for a conservative clearance posture. In some categories, it may even argue for the "store it and try again" tactic....which makes sense when very little if any change exists from "model year" to "model year"....usually in basic apparel and hard goods. However, given the working capital issues facing all retailers in Spring 2009, I'm not sure storing merchandise is a viable option.

Easter is at it's latest date since 2006....and three weeks later than in 2008. Historically, "Spring" demand accelerates with Easter. A late Easter typically hurts retail in that it reduces the "full price" portion of Spring, accelerates the promotional portion, and then delays the start of Summer. Under normal circumstances, retailers plan for Spring store sets and anticipate relatively slow rates of sale until just prior to Easter. Late Easter allows stores to delay the plan-o-gram set, slow the flow of merchandise, and in general, be conservative on clearance liquidation. Unfortunately, this means "trading" full or promotional priced sales in March for end-of-season clearance sales, with all the attendant impacts on total volume (lower prices on late stage clearance are not made up with higher unit volume) and gross margin. Still, the timing of Easter argues for a conservative clearance approach.

However, as noted, the macroeconomic conditions trump all other considerations. In the climate probable for Q1 2009, the consumer will continue to experience significant financial hardship. Mortgage, credit card payments and living expenses are not going to miraculously become appreciably lower. Real income is not going to rise. In fact, unemployment overall is expected to rise, while real wages are expected to fall. So in reality, the consumer still employed is likely to actually have less disposable income in Spring 2009 than they have now. Wonderful. The ramifications for managing clearance are not pleasant. Regardless of the analysis above, the only viable option for moving the larger-than-expected and lower-value (remember the deeper Holiday promotional discounts) inventory levels is to go out aggressively and continue to drop price quickly and significantly. Stealing "share" in Q1 is going to be expensive....and it's the only option. Being conservative will mean stagnating clearance stocks backing up into the space, money and timing needed for new merchandise arrivals.....because some of the competitive is going to be aggressive.

We'll explore "how" to go about being aggressive, particularly if you use optimization software or rules based markdown timing and cadence.

Post-Holiday 2008 Clearance Dynamics

As important as the Holiday season itself is (undeniably), it's possible that the upcoming post-Holiday clearance process may prove to be even more important to the retail organizations. Clearance sales results are generally driven by three sets of variables: product, category, and macro-economic. Most of the time, that's the order of importance as well. The depth of discount and the timing of each price adjustment is most often linked to the product itself.
Product related variables also fall into three categories: initial pricing, overall demand, and trend targeting. By the time the clearance season starts, as a result of high levels of promotional activity and transparency to competitive pricing, most retailers probably know when they have priced an item too high. Let's rule that one out. Missing forecast due to lower actual levels of overall demand for a product generally looks like lower than expected but not horrible rates of sale during the pre-clearance season. In short, nothing in the market tells you that there's anything wrong with the item, you just own too much. This becomes a market share game at the product level, and price modeling will tell you to be aggressive early to capture as much of the limited demand as possible. Slow or reactive pricing will simply result in mediocre sell through and a generally lower GMROI. Trend targeting is the most corrosive of product level variables. If you are simply off-trend, there isn't much you can do to alter the value proposition until the price of the item gets to an extremely low point. In short, we're trying to appeal to those without trend knowledge, who don't care, or who are simply buying it for it's utility without regard to it's appearance.
Category variables are similar to Product variables except that they apply across the board, acting as an amplifier of the Product level behavior. As an example, when portable CD players were replaced by MP3 (OK, with iPods) devices, the entire category of portable CD players suffered from a huge overestimating of demand, brought on by being off-trend at the Category level. The cyclical nature of denim is another example. When denim is on a down-swing, almost ALL denim suffers. As noted, the impact of Category variables is to amplify Product level behavior. The important note here is that Category trumps Product. Even the "best" Product within an off-trend Category will NOT meet sell through expectations.

Most of this isn't news to anyone....and we have the experience, technology and rules based processes which serve for the most part to manage each of these scenarios.

What we do not have are models and technology which serve to manage macro-economic influenced consumer behavior. And the importance of this is enormous, because Economy trumps Category. Going into January, there are two competing schools of thought on what is really happening to consumer spending. One school argues that what we really have is primarily a psychological crisis in consumer confidence, and once this has settled, then spending will resume....albeit at a lower rate than originally expected. Still, we'll go back to "normal", just with a lower starting point. The other school argues that yes, we have a crisis in consumer confidence, and that it is driven by a real and significant reduction in overall net available disposable spend (which combines available credit with disposable income). This forecast argues that there is a new normal and that it doesn't look much like the old one. I'm going to call this the Deep Recession argument.

Probably the answer is going to fall in between those two points of view. Based on actual economic data in net available credit, actual real disposable income, savings rates and changes to the cost of existing credit, I am inclined to believe that Crisis of Confidence people are wrong.

So what's the point? If the Crisis of Confidence people are right, then clearance sales are going to exhibit "normal" behavior in terms of price elasticity and demand patterns....perhaps, even, showing faster than expected sales rates due to the pent-up-demand part of the Crisis of Confidence argument. If the Deep Recession argument is right, than none of the existing models, technologies or processes are going to manage the liquidation properly. I'll go into "why" that is tomorrow.

So what? Well, the "so what" behind this is that many retailers use clearance processes fed by business rules of some kind. The critical aspects of those rules are the length of the clearance season and the total sell through targeted. Rules established believing in the Crisis of Confidence should not be the same as those established believing in the Deep Recession. Essentially, the downside of rules based clearance processes is that incorrect modeling results in horribly inefficient pricing.

And as I'll note later in the week, how each retailer gets through the post-Holiday clearance season may have the single most important impact on their overall 2009 results......at the very least, will be the single most important part of managing the first half of 2009.

Forecasting Clearance Sales

Although it is only early November, the current rate of aggressive promotions should be calling into question existing clearance methods and tactics. With the focus on NOW (meaning tomorrow's 6 hour sale) and surviving Holiday, it's likely that a re-examination of the intended clearance cadence and progression haven't happened yet. It's a good time to do that. Each promotional change made now has a distinct impact on the depth and timing of the markdowns which will be taken post-Holiday.

Yes, the intent now is to limit the post-Holiday liability by selling as much as possible at higher prices. Nothing earth shattering in that observation. However, if the original promotional plan initiated at 25% off and progressed to 40% at it's low point, then a first clearance markdown price of approximately 33% of would still be considered appropriate. Given that we've already seen 40% off in October and are experiencing 50% off in November, what implications will that have for January? In order to effectively re-think clearance planning, we've got to start with examining what promotions are actually doing in-season this year.

Traditionally, promotions are intended to stimulate the consumer to buy at a specific time, and don't necessarily increase the overall demand for a product....just shift that demand from a future point in time. Early season promotions in particular are not designed to overcome significant consumer apathy toward a given product. Rather, they are expected to help an already predisposed "looker" become a "shopper". As the season progresses, the price discounting deepens in order to draw from a wider and wider pool of potential customers....now, in effect, expanding demand. Still, the overall market isn't usually altered....just shifted from other retailers with less aggressive promotions. I believe that the economic downturn and evaporation of consumer credit have fundamentally changed the nature of in-season promotions this year. Instead of shifting demand from one point to another, the promotions are actually tapping into the "normal" clearance market.

Clearance sales have not, in the past, generally appealed to consumers predisposed to buy a product. Yes, there are the bargain shoppers of the first week or so who really did intend to buy an item and are willing to accept limited choices in order to save money. Progressive markdowns are taken as stocks break, and selections in size, pattern, or color become less attractive. However, a second paradigm is at work as well, seen primarily in non-fashion products. Here the sizes aren't broken, the colors haven't been cherry picked, and the what's left looks exactly like what sold earlier in the season. So why does the price have to keep dropping to stimulate demand? The purpose is to expand the demand pool by altering the value proposition. Even fashion goods are impacted by this reality.

This year, the predominant factor influencing price elasticity is the consumer's economic value proposition. With much less money available, only the truly "needed" items will hold most of their original economic value. Merchandise which has some appeal to the consumer, but is not actually "needed" will hold some value, but still require significant price adjustments to stimulate demand....or alter the value proposition. The impact on clearance is that for all intents and purposes, we will have already begun the progressive markdown process as early as November.

Implications for clearance planning are these. First, if you maintain a traditional clearance progression, anticipate deeper initial price cuts and faster progressive markdowns, even on merchandise where the only flaw is you own too much. Even with a faster cadence and deeper cuts, it's likely that the best estimate will be to match historic sell off patterns. Second, more innovative approaches to moving merchandise can and should be explored. BOGO's, bundling, and anything else unusual will be needed.

The macroeconomic condition is NOT going to get better by January. And all the efforts of all the retailers to move unanticipated over-inventory positions will NOT keep season ending inventories from exceeding plan. The general condition of fewer disposable income dollars chasing larger amounts of merchandise will remain constant in January.....except it will become even more significant. Clearance shoppers tend to come from generally two market segments. Bargain shoppers are those who don't really have to have a "need" for the product, but can be induced to buy on the basis of the "bargain" and the chance of possible future use. This requires some degree of disposable income which can, in effect, be spent without any immediate real-world benefit (the psychological benefit of finding a "bargain" is not typical of recessionary economies). Clearance-by-necessity shoppers are those who truly do need the merchandise, but haven't been able to afford it prior to this point, and who's living situation makes it necessary to actually wait. In short, they don't buy until the price drops to where they can afford it. Neither of these two groups is going to behave as they have in recent years.

Although best practice forecasting will have modeled sales and inventory through to liquidation, it is likely that the assumptions built into the clearance portion have not been subjected to rigorous analysis. The changes in consumer behavior have impacts on clearance results which can and should be anticipated.

Re-Boot The System

Open Letter to Chief Merchants, GMM's, DMM's and VP's of Planning

Dear Sirs and Madams

Probably, most of the merchants and planners in your company failed to anticipate the extent and degree of the downturn in consumer spending. Almost certainly, at the item level, forecasts and sell plans have become virtually meaningless almost overnight. No matter what anyone tells you, none of the last minute adjustments, promotional activity or other "triage" applied to this disaster are going to get you back to what you thought were conservative plans and forecasts. Your people are not alone, nor are they in the minority. Culturally, very few of us in retail could have sold anyone on such a dire prediction.

The one thing your organization can't afford is spiraling failure and a sense of personal ineffectiveness. In many cases, this is going to look like a series of missed estimates, forecasts and plans. It's almost humanly impossible for mid-level merchants to present a real "we've hit bottom" forecast...unless you make it a requirement. What is needed right now is a forecast or estimate that the company CAN make, and perhaps, even exceed. Missing numbers at every level, for a sustained period of time, is like feeding yourself rat poison and expecting to be energetic. So what if every single ad projection failed to reach the expected lift? Is there anything in your modeling designed to describe the current consumer spending environment? I doubt it! The last 6 weeks, however, have given you enough data points to start developing a better set of numbers....but only if you have the ability to extrapolate the trend! Will promotional responsiveness be the same, better or worse in late November as compared to early November? Bet on worse!

Re-Boot your System. You can't re-set back to a calendar point before the world changed....but you CAN reset today so that your expectations become realistic. Realistic expectations clear the way for your talented merchants to focus on doing something which will alter your circumstances in the future. If I am spending all my time trying to explain why I missed yet another forecast, estimate or projection (which represented my best guess but also probably met your guidelines for volume and profit) I am not spending time adapting, learning, and revising my assortment, promotional planning and margin structure for the future.

Re-Booting the System means taking a step back and saying "how bad can it get"....and then making THAT the baseline for the next 7 weeks. The inherent value in this approach is that your executives aren't going to stop doing everything in their power to do better than this "bottomline" forecast....while freeing up additional time and energy to be focused on altering next Spring's probable results. From a PR point of view, by creating an expectation, no matter how bad, that you can actually BEAT, you establish credibility and generate optimism. Moreover, you allow the people what can make a difference to make that difference. There is nothing more debilitating than being a merchant responsible for a business which starts to slide into the abyss of comp store decreases....no matter what you seem to do about it. I know...I've run businesses when trends radically changed or technology went through a revolution...and nothing I could do would change the value of the inventory I owned. (In that case, since at least one competitor DID see the change coming, I was quite rightly held accountable for my inability to anticipate the market).

If you've already made every attempt to forecast a "worst case scenario".....wonderful! Lock it in, encourage aggressive attempts to improve from that, celebrate any "wins" you have, and then focus your time and energy on changing what you can.

Why Depth is the first place to trim the fat

As noted, "trimming the assortment" is a mandatory response to the current economic outlook. Even if you don't grasp it as a strategy, you're going to be doing it as a necessity. Retail open-to-buy is a function of sales, inventory, and markdowns. Period. Inventory has to be planned at or around it's most limiting levels (turns and sell throughs for entire categories will be planned at rates usually achieved only for high performing SKU's). Sales must be planned conservatively (missing sales estimates in a comp decrease environment just doesn't fly culturally within retail....very different from missing on the upside during growth periods). Markdowns will be curtailed because drops in gross margin volume have to be made up by basis point improvements in the gross margin percentage. All of which means, mathematically, that there are significantly fewer open-to-buy dollars than ever before. Never, in our recent past, have all three dynamics been required for competent merchandise and financial planning. So....you really will be trimming your assortment, if only because you are most certainly going to be buying less.

Depth, inherently, is desirable to give the consumer choices. Sometimes, these choices are required because of brand strength on the supplier side. Inflexible brand loyalties require retailers to carry more depth than they would like. If they don't the loyalists to those brands will go elsewhere to find them, even if the merchandise offered from an alternative brand offers essentially the same value delivery. Sometimes depth is required to demonstrate a competitive advantage and establish the retailer as a destination source, without respect to the consumer's actual behavior. Big box category killers have long taken as gospel that a critical mass of depth exists to provide that competitive advantage needed over mass merchants. Sometimes depth seems to be required because of perceived diversity in the products offered by various suppliers. If sufficient variation exists in feature-bundling, it's easy to believe that depth is required in order to effectively serve the market.

In a recessionary environment, depth is not only unnecessary, it's fatal. However you segment your demand, it is sufficient to offer limited choices within each segment. The key, as noted an earlier blog, is the ability to offer choices which adequately address the real needs of each demand segment. If you've done your job as merchants correctly, you don't need a large number of choices in a given price point/dominant/subcategory....you need the right set of alternatives. Invested in too much, depth will result is a significant truncation in the breadth of the assortment. And the breadth of the assortment is the element which broadens the potential demand base. A crucial fact in recessions is that there are fewer dollars being chased for each and every demand segment. Depth will not change this. It may create a destination purchase position for that one demand segment.....but if that demand segment is shrinking, the share increase needed to justify the depth is almost never delivered.

If this sounds too esoteric, look at it this way. When fewer dollars exist to support consumer spending, each consumer is going to seek, in her own way, to maximize how those dollars are spent. Segmenting demands enables the retailer to offer each segment a specific and compelling value proposition made real by a specific product. Choices offered around that product serve only to validate the consumer's choice. And this is a murderously expensive marketing decision. Slow turning inventory justified by it's ability to make a key item that much more desirable is the stuff of years past. Not now. Each dollar in your assortment HAS TO WORK FOR YOU....and not be justified "strategically".

Editing Assortments

I exchanged emails with a friend in retail yesterday who assured me that assortments were being edited, and would be again! Certainly an appropriate response to the evaporation of consumer spending is to minimize inventory risk by reducing the breadth of the assortment. I'm going to argue that there needs to be a systematic and appropriate process followed in determining how to go about that "trimming"......and that it will vary from category to category, and perhaps even with a category.

First, and in my mind most important, is to segregate the management of replenishment businesses from trend/fashion open to buy. Assuming for the moment that replenishment businesses represent "basics" (however those may be defined for your category), they also represent fundamentally necessary aspects of the overall merchandise strategy. Further, once the investment is made to carry presentation stocks, they are for all intents and purposes self funding. While an assortment evaluation and editing process needs to be in place for replenishment SKU's (and seldom actually is in place), there truly is not a great deal of turnover in the overall assortment for these items. It follows that existing levels of inventory are probably sufficient to sustain appropriate presentation stocks. So don't try to reduce inventory by starting in on replenishment SKU's! Remember....they really do pay for themselves (assuming you are using appropriate minimum turn criteria and minimum GMROI threshholds). And don't leave that decision up to the Buyer...the same person who finds professional rewards in managing the fashion/trend aspect of the open to buy.

Assuming you now have a distinct fashion/trend/seasonal open to buy created, the next step is to develop the business rules appropriate for your category to guide the assortment trimming process. Stop for a second: the knee-jerk reaction may be to simply tighten existing metrics: raise the GMROI requirement, raise the turn rate/sell through hurdle rate....or any of the other numerical measures many retailers use in determining if a product should remain in the assortment or not......is probably NOT the best approach. It is NOT true that using these guidelines will result in higher turns, higher GMROI and better performance. Well, it is not ALWAYS true. And that's the key take away: NOT ALWAYS. Each category, and possibly subcategory really needs it's own set of decision rules to guide the trimming process: and they should be driven by the merchandise strategy established for that particular business. If you don't know or can't articulate a merchandise strategy (competitive advantage)....stop what you are doing and get one!

The truth is that assortment trimming is as fast a way to kill a category as it is to make it healthy. Think about gardens. Some plants need to be cut way back each season to make room for new growth....and they look like someone tried to kill them to the uninitiated. Other plants need to be carefully trimmed branch by branch, slowly, and only at specific growth points and done in a specific way. The same is true of your merchandise categories. The business rules used to guide the assortment rationalization process for consumer electronics are not even remotely the same as those used to guide apparel.

We'll talk more about those specific rules and guidelines in future postings.

Focused Assortments Online

Online retail is a product of it's history. Other observers have accurately described the development of ecommerce around two fundamental beliefs which have become intertwined. First, the use of the Internet itself as an information resource led to a transactional approach to ecommerce site development. Focus and effort were directed at applying the tools necessary to enable quick, efficient, flexible and powerful methods for navigating through the site. This was a reflection of the basic Internet paradigm driven by vast amounts of information made cheaply available. Similar thinking led to improvements in sign-in, check out, and other transactional aspects of ecommerce sites. And they were important......no question.

Inherent in the need to "transact" efficiently was the other fundamental reality of ecommerce: the "endless aisle". Unlike all other forms of merchandising (including direct catalog commerce) there really were no limitations to the number of products which could be offered economically. While some merchants began to feel uncomfortable as SKU counts reached into the thousands and hundreds of thousands, their "merchant conscience" was salved by all that work which supposedly made it easy to find what the consumer was looking for. In addition, it all made sense from an organizational point of view. IT resources could be leveraged, while adding an entire merchant organization for this channel of trade seemed economically infeasible. Existing multi-channel retailers were already in an almost constant state of flip flop for direct mail catalog divisions, moving back and forth between distinct merchandising and asking brick and mortar merchants to also select and buy for catalog.

Putting aside the history and the very real business factors which have led to the current state of affairs, the fact is that very few large scale ecommerce websites are characterized by focused, intentional and powerful assortments. This is particularly true of multi-channel retailers where online seldom contributes more than 5% of the total corporate volume. The impact of "endless aisle" merchandising as opposed to "focused assortment" merchandising has been to create very little brand differentiation, online identity, or even a unique "voice" which speaks to specific consumer emotional needs.

eCommerce is not only here to stay, it's the only current growth vehicle out there, and likely to meet just about every reasonable expectation for continued volume growth. Retailers who want to perform well in the next 10 years really must get ecommerce right. There are a huge number of challenges to accomplish that goal, including visual and experiential differentiation.....yet my argument is that merchandising could be the most important area upon which focus.

Online is NOT the same as brick and mortar....many retailers already have sufficient data to truly know how this truth manifests for them. However, accepting it as a truth is critical....because it means that online assortments really will differ from brick and mortar assortments. The challenge in developing focused assortments for the online world starts and ends with treating this "channel" as a monolithic whole. Look....we've come to accept as a given that merchandise and assortment planning for brick and mortar requires sophisticated ways to model and segment demand....not just by volume, geography or store size....but by consumer profiles, avatars, psychographic segmentation and other ways of customizing assortments based on demonstrable differences in demand.

eCommerce cannot reach it's potential until it is clearly seen as an enormous aggregation of vast numbers of consumers. If your website is generating 10 million uniques a month, how is there any sanity at all in having a single assortment plan?

More about Consumer Trust

Yesterday I offered the opinion that building consumer trust involved delivering a merchandise assortment with integrity and intentionality. I'd like to spend a few more moments on this concept.

As retail executives, we've heard forever about the "art and the science" of merchandising. In the past decade, the "science" has tended to take a dominant position, driven by very real improvements in software and technology. Retail merchants can now create merchandise plans based not just on volume groups, but on dynamic and multiple consumer tendency profiles, on store level price responsiveness, and on an almost dizzying array of other variables. Software exists to model probably price elasticity, market basket benefits, and virtually any "use case" which defines consumer behavior. And because this technology, or science, produces numbers and outcomes and projections, perhaps a disproportionate amount of time is spent with it. Just perhaps.

One of the trends in retail for two decades has been away from the "product specialist" to the "professional buyer".....with the belief that the same process, techniques, tactics and technology can be applied to virtually all products and categories. Along with this has been a gradual and very real increase in the SKU count handled by the average merchant....supported in many cases by the technology we've already mentioned. The result is a circumstance where outside of some isolated examples, it's virtually impossible for a merchant to acquire and apply the product knowledge we would have expected (and demanded) twenty years ago. And in the growth decades, that was an OK result.

The recessionary environment almost demands a swing of the pendulum back to some level of product expertise. If my argument that building and maintaining consumer trust is vital in the coming year(s), and if doing so will demand that the assortment deliver on the brand promise....then it follows that the merchants will have to spend significantly more time evaluating each option in the assortment against that criteria. Ask this: do your merchants have either the knowledge domains or the support structure available to adequately perform that analysis? Because if they do not, how can you, as a retail executive, have any confidence that merchandise assortments deliver on the brand promise you are going to work so hard to create-reinforce-build?

Recapturing Consumer Trust

A long time ago, when I was a kid, retailers were trusted sources of information for the consuming public. Granted that there were often many fewer options for almost any product category than currently exist. However, in general, retail equity, once upon a time, was based on the trust developed with the consumer. One inherent aspect of that trust was that the merchandise offered had been specifically and carefully chosen to meet the needs of a given customer group. In other words, as a consumer, you didn't have to become a mini-expert on something in order to feel confident in buying it. The presumption was that the Retailer assumed that role, and had done your investigation for you. With limited floor space and limited open-to-buy, merchandising executives make conscious decisions about the range of products offered to their customers. This responsibility hasn't changed over the years, although the tools, processes and tactics to achieve the result have. So, the "task" of creating a focused, powerful and intentional assortment hasn't changed. Yet, it is almost undeniable that the consumer no longer affords retailers the position of "expert".

What happened? Maybe that's not a good use of your time....looking backward. I'd do it only if you still think you really are given that position of trust and confidence by the consumer. Some retailers have sustained this element of brand equity. I would argue that no one, even the very best of today's retail world, has anywhere near the trust and confidence that some retailers experienced decades ago. Wouldn't we kill for that level of trust and confidence again?

So how do we get it back? First and foremost, as merchants, we have to actually be doing the task outlined above. We have to be creating focused, powerful and intentional assortments. Let me repeat the most important word in that list: intentional. A well crafter merchandise assortment is like a complex matrix of widgets, each of which makes sense both independently and in connection with each other. No single aspect of the assortment exists without a reason. Is that true for your assortments? Or are they accumulations of products within categories and sub-categories which follow some sort of price point or vendor structure? In short, are your assortments a function of your merchandise planning format or are they the result of a creative intentional plan.

Consumer trust can be recapturing by doing what the consumer originally (and still) wants the retailer to do: tailor their assortment to present products which are designed to appeal for specific reasons and offer a consistent value proposition. This is critical. A consistent value proposition. Not that some things are "steals" or "bargains.....no, that each and every item is intended to embody a consistent and clear value proposition. This can be accomplished at every price point and across every dominant, sub-category or consumer profile your assortment is built around. Essentially, given the specific set of features and benefits inherent in each item of the assortment, when compared to the price, a consistent value is delivered. Any one consumer may not be attracted to a given set of features and benefits.....yet there should be, within the assortment, products which DO attract that consumer...given her stereotyped set of needs.

You cannot achieve consumer trust through marketing. All that will do is create the possibility of "trial". The only way to deliver consumer trust is to perform the role the consumer needs from you. Today, in this recessionary environment, it is more important than ever to have some process within your organization which actively questions and challenges assortments. Believe this: retail brand equity is being built or squandered right now at the assortment planning level.

Responding to Evaporating Consumer Credit

For the past several weeks, reputable news outlets such as Businessweek and The New York Times have published reports on Consumer Credit Card problems. Banks and card companies have not only tightened standards for issuing new credit, they've systematically reduced existing credit lines while simultaneously increasing card interest rates. Last week, writing for RetailWire, I called attention to this issue with reference to it's impact on Holiday sales. The implications are clear: less available credit combined with higher interest rates means effectively reducing overall current and potential disposable spending. Credit/Debit cards nationally are historically used for as many as 40% of Holiday retail transactions. Consumer credit card debt is at an all time high, and the percentage of cardholders making minimum payments is significant.

So this is not an "if' but a fact. Consumers will have less credit to use for Holiday retail sales. What will be the impact? You have the answers in your data base, at least to some extent. I suggest that creatively thinking retail executives will have someone in their organization run the following analysis.
1. What percentage of our Nov/Dec sales are via credit cards? Are we seeing any current trends toward credit being used less (Walmart is)?
2. Cross reference product categories (down to the sub-category level) against credit card use if possible. Try to identify the product types with the highest rate of credit card use. Use aggregate and distinct Holiday data. Holiday probably has a different profile than the rest of the year.
3. The categories (or hopefully products) with the most vulnerability to drops in credit card use should have their sales forecasts re-evaluated......downward. With any luck, this will generate lower replenishment orders or cancel some late season balances, reducing overall merchandise inventory exposure.
4. Analyze planned marketing exposure for those products/categories. Promoting these items is not going to generate the lift previously expected. While changing planned marketing exposure becomes a self-fulfilling prophesy against sales estimates, the space could probably be better used on products/categories with less vulnerability.
5. Investigate the possibility of re-introducing store layaway programs. While this exposes the company to the financial risk of potential bad loans, the write-off expense will probably be significantly less than the gross margin loss of accelerated markdowns on higher end of season inventories. In short, even if you write off 5% of the layaway sales, calculate the gross margin basis point loss which would be worse. Your inventory risk due to lower than anticipated sales is probably going to be greater than the financial risk you'll be taking on.
6. Emphasize alternate payment methods for your ecommerce operation.
7. Refocus promotional and marketing efforts on products and categories with less credit card exposure.

The key fact to become comfortable with is that the evaporation of consumer credit means measurably less potential for sales. The consumer may or may not have used the credit which was reduced....we'll never know. It doesn't matter: from the consumer's perspective, they have less money available. This will impact everything.....but some things more than others.

My next post will outline some thoughts about positioning your brand into this cash-crunched environment.