The Merchant Life - Volume 17

Pricing, Profitability and The Bottom Line

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Setting your pricing strategy is more important than ever.

As brands start to streamline their wholesale footprint and increase their DTC initiatives, pricing inconsistency could devalue your brand.

Further, with the rise of e-commerce, BOPIS, and supply chain disruptions, surviving in today’s retail world is like understanding the next Croc’s collaboration.

Almost impossible.

In this week’s newsletter we focus on the importance of strategic pricing, optimizing assortments, and the fundamentals needed to stay in the game.

Let’s dive in.


Price Wars

As customers become more savvy and the options become endless, price could be your differentiator.

However, if products are always on sale and your pricing is inconsistent across retailers, you risk devaluation.

Take Victoria Secret.

It’s no secret that when you walk into Victoria Secret, you will be inundated with promotions, bras and panties seeping out of every drawer, and sale signage everywhere you look.

It’s also no secret that the perception of a store that is always on sale is that there is never a reason to buy full-price.

VS stores are over inventoried and they are constantly adding newness to their product line while not taking much away. This is a sign of a retailer that test everything from product to pricing strategies on the shop floor.

Of course they are always on sale. They have to get rid of the excess.

As a result, customers are conditioned to expect VS on sale and will only shop when products are on markdown.

The pricing model devalues the brand.

Now take Calvin Klein.

If we look at their classic 3 pack cotton boxer, sold everywhere from Nordstrom, Hudson’s Bay, SSENSE, Urban Outfitters, ASOS, Amazon, and of course directly from Calvin Klein.

The challenge?

Every store has priced the 3 pack at a different price point. Some are on sale. Some are inflated.

Few sell at the suggested retail price of $48.

The customer has its pick of where to purchase because of the ubiquity of the brand; it won’t take long to score a deal.

The CK customer doesn’t care where they purchase from.

Having a single source of truth on pricing demands consistency across your brand messaging.

The value of your brand depends on it.


Supply and Demand

Between bricks and clicks, the Suez Canal disaster, and not enough containers to ship products, retailers are living a nightmare.

The Globe and Mail talked about how retailers are adjusting to supply chain chaos and what it’s costing them this week. Les Mandelbaum of Umbra had this to say:

“I’ve never seen, in my entire career, such a disruption in logistics,” Mr. Mandelbaum says, adding closures at southern China’s Yan Tian port have exacerbated the problem. “It’s very hard to plan.”

Prices of the steel, wood and polypropylene Umbra uses to make its wares have increased substantially even as the supply continues, he says. “We can get [material].

The problem is we can’t make any money because we can’t raise prices quickly enough… We have record sales but the lowest profits I’ve ever seen. And it’s depressing because we’re working harder than ever.”

With challenges directly impacting product supply and time to market, amidst surviving the impacts of the global pandemic, how can retail afford to stay open?

Someone will have to bear the cost of this and there is only so much the retailer can take.

The Sourcing Journal and CNN both reported on NRF’s Matthew Shay and AAFA’s Steve Lamar’s plea to President Biden to help save the US economy by urgently addressing the strain on supply chains.

“The congestion issues have not only added days and weeks to our supply chains, but have led to inventory shortages impacting our ability to serve our customers,” the letter from NRF president and CEO Matthew Shay said.

“In addition, these delays have added significant transportation and warehousing costs for retailers.”

In other words - it’s a mess.

Once product makes it across the ocean, it’s a whole other ballgame.

And that’s not all.

As e-commerce and direct to consumer increased over the last 14 months, retailers and brands expanded the way customers could shop.

These also happened:

  • Implementation (and expense) of last mile transportation.

  • Offering options like curbside pick-up and BOPIS.

  • Upgrading POS systems.

  • Shortages of literally everything including labour, cardboard and in store space.

  • Increase costs at FedEx and UPS.

  • COVID-19 outbreaks at distribution centers, ports, and suppliers.

We ask the question, is it all worth it?

And more importantly, who is going to pay for it?

“Our industry is experiencing whopping increases in freight costs and historic shipping delays, which are already affecting the critically important back-to-school and holiday shopping seasons,” Steve Lamar, president and CEO of the AAFA, said.

Left unchecked, this crisis will continue to fuel inflation for consumers, limit our ability to supply and stock the goods that Americans want, and hobble our members’ ability, particularly small businesses, to keep Americans employed.”

Inflation for customers.

That’s right.

The customer will pay for this.

But, the retailer can’t change the price ticket fast enough.


Pricing and Tech

Supply chain disruptors are something that retailers can rarely do much about and not everyone can afford their own vessel (Home Depot coming through).

Price optimization tools can utilize data to inform pricing while taking disruptors into consideration.

Enabling technology to identify optimal pricing scenarios to achieve the best price and promotions will enable retailers to stay competitive.

One could use an e-procurement sourcing tool to identify pricing scenarios or award scenarios, answering questions like “what pricing or award strategy would maximize value to my business...and how would that impact my end consumer.

Enabling tech could be a game changer.

Selling history alone is not enough.

Predicting customer behaviour, what they will spend to what and where they will buy can assist in assorting the right product in the right channel.

Retail pricing expert, Matthew Pavich, managing director at Revionics, talked to Forbes about pricing fluency:

“The main benefits of investing in AI price optimization capabilities is the ability to offer the right price on the right products in the right channels at all times, profitably.

“Because AI-based price optimization fundamentally starts with the consumer and their shopping patterns, it is applicable to all retail verticals and environments with a lot of nuances to consider, depending on specific retailer needs.” 

Amazon, Walmart, many digitally native DTC brands have this down.

We spoke to Gary Saarenvirta of Daisy Intelligence on price setting. He gave us some insight on the relationship between product and customer. Daisy uses AI for promotional item selection whereby discounting the items that are price elastic (the items whose sales are affected by price). All while determining optimal pricing for the entire product assortment.

Allowing machine learning to sift through data will help target price sensitive customers with the right promotions at the right time. It prevents retailers from cutting into their own margins by avoiding the guesswork on promotions.

No doubt, promos are part of a pricing strategy but it doesn’t have to be the only way to drive sales.


Staying Afloat

Avoiding the overseas supplier and e-commerce altogether is not sufficient to manage the unexpected expenses that can erode the bottom line.

Chewy estimated a loss of $40B in sales due to pet supplies last holiday season and was directly attributed to its supply chain. Furniture and bikes parts cannot be made fast enough and many retailers are looking at lead times of 12 months or more.

With that in mind, here are a few fundamentals to keep you swimming amongst those disruptors.

THE SUPPLY

Constantly questioning your suppliers on raw materials costs due to market shifts will allow you to better understand the Total Cost of Ownership (TCO) and be one step ahead of price increases.

I spoke to Taslim Vastani, a retail procurement transformation leader and this is what she had to say.

Raw material cost is directly proportional to total cost of goods.

If raw material prices go up, so does the cost to you and the end customer.

“Negotiate fixed costs on markets that are volatile where shifts in cost are predictable. Having insight into raw material production to mills and factories will give you leverage as you can spot where your vendor may be inflating your cost.”

“Additionally, your pricing strategy should always go hand in hand with market intelligence and technology. More time strategizing means less surprises.“

Fueling your strategy with market tools, technology enablement, and solid analysis, will unlock productivity and optimize your end result (and relationship with your vendor partners).

You must always evaluate your vendors, anticipate and plan for shifts in the market.

Staying informed will give you a heads up before prices skyrocket and avoid you from scrambling like trying to get a patio reservation when your city re-opens.

THE DEMAND

If you don’t have what the customer wants or you can’t get it to them on time, you risk losing them.

Keep these tips top of mind as your sourcing and planning teams work on your price strategy and supplier negotiations:

  • Initiate auto replenishment on your key drivers and top sellers so you are never out-of-stock.

  • Rely on in-season planning to move goods around and enable the technology to allow you to transfer inventory to where it’s needed.

  • Leave room in your line plan for innovative products that you can buy into in-season, to accommodate for shifts in customer behaviour.

As goods are being held up at ports or collections are delivered in piecemeal, your pricing strategy will mean nothing if brand ambassadors can’t navigate what’s happening in store.

I spoke to the Head of Visual Merchandising for a global retailer this week and his biggest challenge is that he has no visibility on what inventory he has in the store. Accurate on-hand inventory is non-existent because they are fulfilling BOPIS orders while trying to merchandise and sell to customers in store…all at the same time and to top it off, the e-com product assortment doesn’t match what’s in store.

Basically, it’s a nightmare.

This makes me question, who is really losing?

We need to start having more control over the controllables.

Here’s a start:

  1. Reduce the number of skus in your assortment and increase focus on seasonless products.

    Avoid the congestion when other brands are producing and shipping goods.

  2. Stop overproducing and buy less of the products you plan to test in store. Pay the surcharge to produce those goods overseas or locally and avoid minimum order quantities.

    The excess and markdowns are not worth it.

  3. Remove redundancies and manual tasks in your line plan. You do not need approvals from every team member.

    Trust your partners to make the right decision.

  4. Upgrade your inventory management tools so it doesn’t debilitate your staff.

    Real time visibility to inventory is imperative.

  5. Support your store staff and give them a break - they are doing everything they can to keep it together.

    Visit the shop floor, help sell and fulfill BOPIS orders, and get a taste of today’s reality.

The fact is we are retailing in exceptional times.

We are still in a global pandemic and it is not business as usual.

Yet.


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Liza Amlani and Raj Dhiman of Retail Strategy Group


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