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.