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.