NRF Stores published an article in December 2012 entitled “Tying it All Together," in which they summed up expectations for retailers in 2013 in one word: Convergence.
Depending on your industry, convergence can mean many things. For retailers, convergence relates to tying together the web, big data, analytics, mobile, social and all things digital. The ultimate goal for this level of convergence is to place and secure the consumer at the center of the retailer’s universe.
However, there is a downside to the proliferation of information that consumers have at their fingertips through convergence: Pricing. Further to the NRF Stores article, “All this power and knowledge has negatively impacted pricing, making it essential for retailers to pull out all the stops when shoppers engage with their brand.”
With the exponential growth of e-commerce, Amazon, eBay and the like, many retailers find themselves in a “race to the bottom” when it comes to pricing. Aided by new cloud-based technologies that troll the web for comparable prices on similar products, retailers now compete in real-time to offer the lowest price. The result is lower prices and lower margins, which is counter-productive for a retailer or brand that wants to be perceived as adding real value to the consumer experience.
Wisdom of Crowds in the Cloud
There is a different type of convergence - crowdsourcing - that, when implemented correctly, can redefine the consumer’s role in the retailer’s mind. Crowdsourcing is the convergence of the collective wisdom of a group of people to achieve a better decision than would be made by a single individual acting alone. The ultimate result in retail is a reversal of the race to the bottom, and a new race to greater profitability.
The consumer is already in the cloud. They are accessible, willing to engage and have a desire to be part of the process, not an afterthought. Crowdsourcing in the retail industry is nothing new. Social shopping sites such as Threadless.com and ShopMyLabel.com let users create and stock their own boutiques and act as both the buyer and the stylist.
But when it comes to the titans in retail, crowdsourcing takes on a whole new meaning.
The Right Way to Crowdsource
Crowdsourcing can apply to a wide range of activities including fundraising, voting, complex problem solving and even finding a missing person. Regardless of the use, crowdsourcing is about getting your particular project in front of the right people at the right time.
In James Surowiecki’s book, “The Wisdom Of Crowds,” the author spells out four conditions that characterize wise crowds:
- Diversity of opinion - Listening to consumers who don’t buy your product is just as important as listening to those that do.
- Independence - A wise crowd contains people that have opinions unfettered by the opinions around them.
- Decentralization – People are able to specialize and draw on local knowledge
- Aggregation – Having a mechanism for turning private judgments into a collective decision
There are three elements that are critical to a successful crowdsourcing project in the retail industry: timing, scalability and listening.
Asking consumers what they think about a product after it is on the floor is too little, too late. If the crowd likes a product, that’s great. But had you known up front that it would resonate with consumers, you could have increased the buy to meet the demand. Conversely, negative sentiment could lead to over-stocks and the need for significant discounts, eroding margins. The time to ask the crowd about a new product is before it actually becomes a new product. And you need the answers fast – in days, not weeks or months.
Scalability in crowdsourcing is two-fold. First, you must be able to tap a wide range of opinions across multiple demographics. (See condition #1 above) According to Surowiecki, “Today’s complex problem solving requires multiple perspectives. The days of Leonardo da Vinci are over.” Secondly, it’s one thing to crowdsource five new t-shirt designs to see which ones consumers like for a small boutique. It’s an entirely different story when you have hundreds of designs and only room for a few dozen on the floor across a national or global set of stores.
When you conduct market research – such as a focus group, survey or conjoint analysis, all responses are weighted equally. If I happen to be sent a survey on wedding gowns, I can assure you that I know little to nothing about the attributes and pricing of said gowns, yet my response would be weighted the same as someone who does understand the category. Listening means paying attention to the right people – the people that are predictive of what will actually happen when the new products are rolled out.
In the end, perhaps the biggest reward for a consumer is to feel as if they are part of the process, not an afterthought. The cloud gives retailers the access they need to reach the consumer. The crowd is willing and able to provide the feedback you need on new products. And, the right technology, in the cloud, gives retailers the ability to listen closely to the right consumer. The result: The right product at the right price at the right time.
Ingredients such as inclement weather, worries over the effects of sequestration, and the continued slow pace of the U.S. economic recovery combined to form a recipe for tepid comparable store sales over the last 3 quarters. But these weren’t the only factors that led to these underwhelming results.
How did department stores, specialty/vertically integrated retailers and mass merchants fare during this timeframe? Let’s take a closer look.
Department stores have always been the multi-taskers of retailing, offering a wide array of products – from housewares and jewelry to apparel and beauty – within a spacious environment. Hit hard by the recession, department stores have rebounded nicely over the last year as they continue to adapt and expand merchandise assortments, while making the stores themselves more of a destination.
For the quarter ending in October 2012, on average, comp store sales for department stores were down 2.2%. However, you may have heard about a company called JC Penney that ran into some “challenges” last year. Those challenges resulted in a negative 26.1% comp store sales figure for the quarter. If you take jcp’s number out of the equation, the average swings to a positive 5.1 %.
For the quarter ending January 2013, excluding jcp, the average comp sales increase for department stores was 6.6%, buoyed by double-digit quarterly comp increases from:
- Kohl’s - 13.3%
- Macy’s - 11.7%
- Nordstrom - 11.4%
- Stage Stores - 10.8%
Obviously all eyes will continue to be focused on jcp and the effect returning CEO Mike Ullman will have on the struggling department store. Will he be able to bring this once great U.S. institution back from the brink, or is it too little, too late?
Specialty/Vertically Integrated Retailers
Encompassing teen retailers, fast fashion companies, athletics and men’s formal wear, this category is highly competitive, particularly in the teen category.
For the quarters ending October 2012 and January 2013, the category average comp increases were 5.1% and 1.9% respectively. Here are some of the winners from the quarter ending January 2013:
- American Eagle – Up 4%
- Anthropologie – Up 7%
- Chico’s – Up 7%
- Urban Outfitters – Up 11%
- White House/Black Market – Up 6.3%
Fast Fashion Fatigue? Not so fast.
Several companies in this category are considered “fast fashion.” In recent months, H&M, a worldwide fast fashion behemoth, spoke about the tremendous upside in the U.S. market. But there is one company that is quietly growing like crazy and is becoming a major threat to the rest of the industry: Forever 21.
Forever 21 does not report comp store sales, but their growth and presence in the market is hard to miss. Discussing their growth, analysts at Bank of America stated, “Forever 21 is becoming too big for the specialty retailers to ignore. At this size, rapid growth could have ripple effects on the other retailers as Forever 21 takes more share.” Forever 21 is faster and cheaper than its competitors and has expanded its customer base to all members of the family – not just teens.
For the quarters ending October 2012 and January 2013, the category average for mass merchants was up a paltry 0.9% and 0.7% respectively. Companies like Sam’s Club, Walmart and Target all posted low single digit comp store sales. The drag in this segment came from Kmart, which was down 4.8% and 3.7% over the same two quarters.
Walmart and Sam’s Club have long competed for shoppers. They both maintain a one-stop, stock-up appeal, with overlapping geographic reach and building which frequently share the same parking lot. Although competition between these formats is not new, it is intensifying as they seek to capture a greater share of a diminishing stock-up trip.
Unfortunately, Walmart and Sam’s Club also share an overlapping target audience. For more than a year, Walmart has placed a renewed emphasis on price-sensitive higher-income shoppers, who are likely to cross-shop between Walmart and clubs. According to ShopperScape®, 59% of past-four week Costco shoppers also shopped at Walmart in the same timeframe. In addition, Target is the #2 cross-shop destination for more affluent Walmart shoppers, with 53% of higher-income Walmart shoppers also shopping at Target in the past four weeks, according to ShopperScape®. It appears Walmart is using both its Supercenter and Club formats to combat Target and Costco’s bulk-pack, stock-up appeals.
A look ahead
Three department stores released earnings for the latest quarter. Although not as strong as the previous quarter, most indicators in this segment are positive:
- Macy’s – Up 3.8%
- Ross Stores – Up 7%
- Kohl’s – Down 1.9%
Although comp store sales were down at Kohl’s, gross margin was up, mirroring Macy’s numbers. "After a slow start, sales improved considerably in April as the weather finally improved in our most weather-sensitive regions," Kohl's Chief Executive Kevin Mansell said in a statement.
Offering the right mix of name brand and private label products, department stores have incorporated e-commerce, mobile shopping and social engagement into a compelling store environment, and consumers are responding.
As with the department stores, comp store sales results for the most recent quarter in the specialty/vertically-integrated segment were not quite as strong as the previous quarter, although generally positive:
- Limited Brands – Up 3%
- The Buckle – Up 1.2%
- American Apparel – Up 5%
International expansion has become a core growth strategy for many companies in this space. Gap has increased its national presence in some 40 countries over the last 6 years. The company will begin franchising with its Old Navy brand in the newly-entered Asian markets. In addition, Gap is going to target China initially to franchise up to 75 stores by the end of this year.
Similarly, in an effort to enhance its profit numbers, American Eagle Outfitters is planning on expanding in Eastern Europe, Northern Africa, and various parts of Asia.
With economic conditions in Europe and Asia mirroring the U.S., international expansion could prove to be far more challenging than companies anticipate.
Recent quarter comp store sales numbers in the mass merchant space may be the most interesting to review:
- Costco – Up 6%
- Walmart – Down 1.4%
- Target – 0%
With Walmart and Costco flat to down, is Costco taking market share from them? Or perhaps Dollar General and Family Dollar, both with positive comps for the last three quarters, are benefiting from the economic pinch the Walmart and Target customer are feeling.
It’s clear that the election, sequestration, fickle weather and the stagnant economy all played a part in making comp store sales “weak.” But in the case of the segments mentioned here, missteps in management and healthy competition played a significant part in the “less than desirable” results.
Today, Amazon announced their entry into the monobrand e-tailing business with an online store dedicated to Derek Lam’s 10 Crosby contemporary line.
You may recall that on May 7th, 2012, Amazon’s Jeff Bezos proclaimed, “It’s Day 1 in the category,” in reference to Amazon’s foray into the fashion world. Since that time, a good bit has been written about the impact this would have on the fashion industry. The big question on everyone’s mind was: Would Amazon be as disruptive to the fashion world as it has been to books, DVD’s, music and other products?
Amazon executives are well versed on the company’s mantra of eliminating costs and waste in order to offer consumers lower prices. But when it comes to fashion, that mantra has been tested. In October, Cathy Beaudoin, President, Amazon Fashion stated on ft.com: “Price is not really a differentiator for us . . . We maintain the pricing integrity that our brands have established and we don’t break from that.”
At Amazon, it’s all about Amazon. In an article on WWD regarding the Derek Lam line, Beaudion stated: “When we think of what’s next, we think of ourselves. We want to raise our own bar for presentation and innovation around the shopping experience, and partnerships like this one that elevate the whole experience give her content that she might not have [received] otherwise, and immerse and shop the brand in a way that she can’t today.”
Amazon and Beaudoin are in discussions with bigger names including Ralph Lauren, Burberry, and Gucci and Prada from Italy. German fashion group Hugo Boss says Amazon’s power cannot be ignored, but adds that many Hugo Boss products on Amazon have not been approved for sale on the site. Amazon, which gets 40 percent of its revenue from 3rd party sales, continues to deal with complaints from Hugo Boss and Guess over the practice of unauthorized sales.
Another challenge Amazon will face, similar to brick and mortar stores, is the acceptance of retailer/designer collaborations (e-tailer in this case). The success or failure of these collaborations is dependent on three critical, interdependent elements: the designer, the retailer and most importantly the customer. In an article on Forbes.com entitled Retailer/Designer Collaborations – The Missing Link, Greg Petro, CEO of First Insight stated, “The solution is for retailers and brands to understand whether their target consumers will buy the proposed collections through the proposed channel. This involves a deep understanding of consumer value at an individual brand and product level, by retailer. The good news is that consumers want to be involved, and modern technology tools make this possible."
Amazon will not be immune to the factors that can make or break a successful collaboration between retailers and designers.
In his four part series on Forbes.com last year, “Can Amazon Take on Fashion?”, Greg Petro discussed in detail the challenges Amazon would face when entering the fashion world. In addition, opportunities and solutions were presented for retailers and brands to create exclusive assortments in order to avoid commoditization and instead present a truly unique product.
Time will tell if Amazon will reap big rewards with its fashion foray. But confidence in their success is not an issue. Closing the article on WWD, Beaudoin concluded, “It’s a 10 Crosby destination on Amazon. It’s a little boutique that’s integrated into our store like a shop within a shop. It’s a model for how we want to partner with brands going forward. It’s our maiden voyage with this brand, and we’re all really [pleased] about it. It’s feeling really good.”
Last Sunday, I realized I needed to buy a few things for an upcoming trip. As I left my home, I began to think about what I would need on the road. Traveling towards the shopping district near my home, the question of what I needed to buy turned to where I was going to buy it. It was decision time: Retailer A was on one side of the street and Retailer B was on the other. I already knew that both stores would have many of the same, basic products I needed for my trip - at similar prices. The manufacturers of these products would get a sale either way. But which retailer would win my business?
I would expect that many of you experience this situation often. To me, the fact that a basic product is priced slightly lower at one retailer isn’t enough to make me choose them over another store. On that morning, I chose Retailer B over Retailer A for two reasons: Retailer B carries a selection of products I can’t get at Retailer A, and Retailer B has great customer service.
Much attention has been paid recently to the practice of price matching. Would the fact that Retailer A was willing to match Retailer B’s prices have made a difference that morning?
The idea of price matching is alluring for buyers. On the surface, the belief is that a price-matching retailer looks out for its shoppers and is dedicated to ensuring customers get the best possible deals. This certainly has the opportunity to boost consumer confidence and brand loyalty.
But when you get beneath the surface, you see the complexities of price matching policies. The fine print on Target’s price matching policy is an excellent example of a tricky balancing act: customers must do their research and show proof, request a price match at Target Guest Services (not at the sales register), and avoid the lengthy list of exclusions. Though policies at price matching retailers tend to vary by store and by season, customers who think they have a right to a price match can often be left out in the cold.
‘Strategic’ Price Matching: Good in Theory, Bad in Practice?
Department stores and retailers have recognized that, with commoditized products, a certain level of price matching is a necessity. Promotions touting 30-day price guarantees, “guaranteed lowest prices” and “meet or beat” promotions are nothing new, and they won’t be going away anytime soon.
But some retailers have moved past using price matching on an exception basis and are elevating the practice to a “strategic” level. This became particularly prevalent this past holiday season.
With retailers taking a proactive approach to communicating and promoting expanded matching policies, along with mobile price comparison apps, the battle over bottom-dollar pricing is raging. One of the more ambitious players in the price matching game is Citi Price Rewind, which claims to have automated the price matching process for registered Citi customers.
Typically, retailers scale back their price matching programs after the holidays, but this year was different. In a bold move, Target announced at the beginning of January that it would extend its holiday pricing matching year round. Not to be outdone, Best Buy announced that it would extend its holiday price matching program until March 2nd. But that was just the start. Best Buy announced on February 18th that it would make price matching a permanent program on March 3rd. The chain will now match advertised prices for brick-and-mortar rivals as well as 19 major online competitors like Amazon. And in a first, Best Buy stated that one of the main reasons for the year round price matching program is to combat “showrooming.”
The reality of price matching, however, is that it is not a guarantee of sales or success. Even if price matching nets more sales of certain products, it still directly impacts margins — and bottom lines. And there will be a need to make up for those lost margins by driving sales of other products.
Get Strategic About Pricing
Perhaps the most important consideration in price matching is this: If price is your organization’s sole focus, you will be running a “race to the bottom.” Some companies do live in the bargain basement space; but that’s obviously not the case with most of the retailers mentioned here. For most companies, there’s nothing strategic about being the low-price leader. In reality, too much price matching could leave them in a very tough situation from which they may not be able to recover.
Nikki Baird, Managing Partner of RSR, recently told me, “Retailers must return to a value-based proposition to consumers. This means there is a lot more importance on the initial price, because any retailer making a value argument about its prices is going to lose a lot of credibility with consumers if it then has to run promotions or mark down items because it didn't hit consumers’ initial expectations.”
The focus needs to shift to the idea of “right pricing” and building a responsive strategy that is more about consumers than competitors. A successful approach is based on the needs and wants of your potential buyers, not merely a reaction to your competitors’ weekly flyers or online ads.
At the end of the day, it’s critical for retailers to understand their customers and develop proactive pricing strategies that map into customer demand. Retailers also need to build brands, assortments, and service models which enable them to differentiate on elements other than price.
Over the past several weeks, I have spoken to a number of CEOs regarding what is arguably the most challenging aspect of the retail business: Pricing.
Regardless of their experience or perspective – specialty /vertically integrated retail, department store retail or brand manufacturing, the common concern is avoiding the “race to the bottom” on pricing. These retail CEOs all agree that a poorly executed pricing strategy can make the difference between success and failure. The time is right for new, innovative and more precise methods to determine optimal pricing.
During our panel discussion at the NRF conference in New York this year, Matthew E. Rubel, former CEO of Collective Brands and Cole Haan, now with private equity firm TPG Capital, stated: “The model that has been in place over many years was that you would look at your competitive set, and your distribution, understand the product category that you want to be in, understand what you can buy the goods for, and strive for a certain mark-up in aggregate. That’s pretty much old school.”
So what does Rubel think retailers need to do moving forward? He stated: “New tools which will help you set the right price up front… to me is the wave of the future that we have to get on with.”
While speaking at the WWD Apparel & Retail CEO Summit earlier in January, Mickey Drexler made a critical point: “The real price of goods is always the selling price. The best price is to sell it for what it’s worth.” Drexler’s statement is right in line with Matt Rubel’s perspective. The results of “old school” pricing methods are already known – hyper-promotions, markdowns and clearance pricing. – a “race to the bottom.”
With pricing such an important factor in retail organizations, one must ask: “who owns it?” Nikki Baird, Managing Director of RSR Research, reported some of the results of RSR’s 2012 Benchmark Report on Pricing during the panel discussion. RSR found that a full 67% of “laggards” (poorer performing retailers) say pricing is managed by the buyer. Conversely, “winning” retailers are creating a separate pricing function and investing in tools to better manage the process.
Offering further insight, Baird stated: “Retailers have an opportunity, with more tools available than ever before, to make better decisions. It’s just a question of everybody starting to use them.”
So how do retailers avoid the “race to the bottom”?
Mindy Meads, Wet Seal Board Director, former co-CEO of Aeropostale and previous CEO of Lands’ End, believes product differentiation is one way to avoid the race to the bottom. She stated: “You have to know your customer, who is that customer, you really have to understand who they are and what they are looking for.”
Mark Cohen, Professor at Columbia University GSB and former CEO of Sears Canada, Lazarus and Bradlees, agrees with Ms. Meads about the importance of the customer. “There are no retailers in the world who have ever succeeded who have disregarded the behavior of customers and the presence of competition.”
How can retailers know what the product is really worth, and what the selling price should be?
Greg Girard, program director for merchandising, marketing, and retail analytics at IDC Retail Insights, addressed this issue: “Avoiding the effect any race to the bottom on price has on revenue, margin, and unit sales erosion requires bringing the right products to market and setting their initial price right. These dynamics now put a premium on predictive analytics that complement merchant judgment."
In the end, I believe brands and retailers can avoid the race to the bottom in three ways:
- Identifying their brand/product differentiation and sticking with it.
- Understanding the customer “value quotient” – the combination of product desirability and price at which the customer will buy.
- Setting and maintaining prices based on this value quotient, with 100% authenticity and transparency to the consumer.
As many of you know, at First Insight, we offer a solution which enables retailers to identify this value quotient. By applying predictive analytics to real-time consumer data, we help retailers and brands understand the price elasticity of a new product, months before it is launched. We also provide an accurate forecast of the full lifecycle AUR of a new product, as early as the design stage. This is helping designers and merchants make decisions on whether or not to move forward with a new product, and how to establish the promotional approach when the product is introduced.
The goal of retail is to sell more goods at full price, and 2013 will be a critical year which I believe will separate the winners from the losers. I look forward to your input and to helping you address the challenges you face moving forward.
Millennials — individuals born between (approximately) 1982 and 2000 — are the coveted new face of commerce. Also known as “Generation Y,” these 13- to 30-year-olds number somewhere around 80 million and represent a huge market. But they remain an enigma to many.
The study results and the lists of “defining characteristics” of Millennials are as wildly varied as they come. For all those who call these individuals spoiled and self-centered, an equal number term them socially conscious and inclusive. And while some analysts look at lagging employment figures and say Millennials are broke, other analysts show them spending robustly (even beyond their means).
Whatever the adjectives of choice, the sheer size of the population makes them a force to be reckoned with. And unlike Baby Boomers, they will be reckoned with for generations to come. So given that Millennials are a bit of a moving target from a marketing perspective, how do more traditional retailers create a strategy that will connect with this segment?
Redrawing the Retail Landscape
With many traditional retailers, reaching Millennials will require a concerted effort to rethink their approaches or, in some cases, completely reinvent their images.
A great example of this is the Gap, a company and brand almost inexorably tied to Baby Boomers since its launch in 1969. The Gap became a victim of what Robin Lewis, CEO and Editorial Director of The Robin Report, calls “positioning drift” — when a brand unwittingly ages along with an original target audience. With its average customer age now sitting at 39, the Gap needs to become relevant to younger buyers in order to secure its staying power.
As CMO Seth Farbman looks to reshape the Gap’s image, he is targeting some common Millennial touch points: optimism, energy, quality, and sustainability. His goal is to not only attract younger buyers but to get the average Gap customer thinking younger.
Farbman’s efforts kicked off in earnest last fall with an ad campaign targeting millennials and a push in stores and online, including videos that showcased the 1969 denim manufacturing process and displays that attempted to evoke an image of artistry and creative design. This spring, the focus turned to quality; Bloomberg News reported the company “invested in upgrades of its merchandise” and brought that message front and center in stores, on product tags, and in employee training.
Creating a Customized Space
Macy’s is another company that’s making a huge and very public push for Millennials. Rather than taking a top-down approach, Macy’s is carving out niches for its target audiences.
The retail giant has developed two sub-brands to reach Millennials: Its mstylelab focuses on customers between 13 and 22, while its Impulse brand is designed to resonate with 19- to 30-year-olds. These “store within a store” concepts will house exclusive lines and feature products and brands that Macy’s feels will capture the interest and imaginations of the customers they seek.
In all, Macy’s will be introducing 13 new brands and expanding another 10 brands across all its departments in the hopes of harnessing Millennial monies. It could certainly prove to be a lucrative pursuit as WWD estimates this age group to have an annual spending power of $65 billion for product at Macy’s price points.
With Millennials, It’s All about Engagement
With all the varying stats and descriptions, there’s one thing everyone can agree about with Millennials: They are connected. Yes, part of that is because Millennials are the children of the digital age. But this connectivity isn’t just about technology. Millennials embrace brands that embrace them, and they respond to personal exchanges and a sense of community.
Brands that are winning the Millennial battle include:
- Target, which conveys a joyful spirit and delivers quality at a reasonable price
- Amazon, a marketplace seemingly tailor-made for this audience, with easy comparisons, user-generated reviews, and competitive pricing
- Facebook, the ultimate platform for sharing opinions, building communities, and socializing
We Can Help You Connect
At First Insight, we recognize how important it is to engage with your customers — from Millennials to Gen Xers to Baby Boomers — and make them feel they are valued and that their feedback matters. Engagement is a critical step in our testing solution
, which is designed to give retailers a real-time view of customer demand and merchandise profitability. With data that is directly derived from your customers, First Insight helps you see exactly what they value and at what price.
As the Northeast continues to recover from Hurricane Sandy, retailers last week began reporting October’s comp store sales results and providing guidance for Q4. Even without tomorrow’s presidential election, we have a lot of factors in play and seemingly a lot of uncertainty.
First, let’s look at the October comp sales results reported last week. In general, retailers exceeded expectations for October, confirming the general consensus that consumer confidence is on the rise. According to Thomson Reuters, excluding drug stores, same-store sales rose 4.7%, beating expectations for a 4.3% increase. Here are some of the winners:
- Nordstrom – Up 9.8% vs. 6% expected
- Costco – Up 7% vs. 6.6% expected
- TJX – Up 7% vs. 4.3% expected
- Kohl’s – Up 3.3% vs. 1.1% expected
- Macy’s – Up 4.1% vs. 3.2% expected
The big story here is Macy’s, not so much for what happened in October, but for what they are expecting for the remainder of Q4.
What is Macy’s forecast and how is Sandy expected to affect the retail industry?
Macy’s actually guided up, raising its second-half 2012 comp sales increase forecast to 4% from 3.7%. This is amazing given that approximately 29% of Macy’s stores are in the area affected by Hurricane Sandy. Although Macy’s raised guidance, the company did acknowledge that the storm created substantial disruptions.
“More than 200 Macy’s and Bloomingdale’s stores were closed for some period of time (ranging from a few hours to multiple days) as a result of Hurricane Sandy,” Macy’s said in a statement. “The company is confident that it can make up some or most of the lost sales through the remainder of the quarter.”
“We are feeling confident about our prospects for the upcoming holiday season and have increased our sales guidance for the fall season, despite the interruption caused by Hurricane Sandy in the first few days of the fourth quarter,” said CEO Terry Lundgren.
Citigroup analyst Deborah Weinswig believes that for department-store chains, Sandy will negatively impact November same-store sales by 1.5 to 2.5 percentage points, recognizing that some purchases will shift online. Perhaps Macy’s is expecting that this move to online purchases will make up for the loss of store purchases during this period.
Speaking of online shopping, Amazon seems poised to be a big winner as a result of Sandy. They reported no outages or degradation of service during or following the storm. It’s my expectation that of those who had power and Internet access but were unable to get to stores, many purchased online, and we will see this show up in November’s results.
What about the vertically integrated apparel retailers?
According John Morris, an analyst for BMO Capital, the timing of Hurricane Sandy (i.e., between the fall and holiday seasons) will lessen its impact. “Retailers have plenty of time to make up for lost sales as the quarter progresses, especially with the key holiday periods still to come,” Morris said in a MarketWatch interview last week.
In the same MarketWatch article, a Morgan Stanley analyst said, “Timing is retailers’ silver lining. We anticipate Hurricane Sandy’s retail sales impact to last about 8 days. Still, we believe November’s final two weeks are more critical than week one for most retailers — especially those participating in Black Friday/Saturday promotions.”
Not surprisingly, some of the biggest beneficiaries from the storm include home improvement retailers such as Sears, Home Depot, Lowe’s, and Ace Hardware.
According to an ABC News article last week, a Sears spokesman stated on Tuesday that “generators, chainsaws, wet and dry vacuums, flashlights, batteries and lanterns, along with dehumidifiers, utility and sump pumps” were headed east from 42 distribution centers as far west as Memphis and Chicago. When stock trading re-opened on Wednesday, Home Depot’s stock was up 2.2%, Lowe’s was up 3.3%, and Owens-Corning, a manufacturer of building materials, was up 6.8%. By Wednesday, Home Depot and Lowe’s had re-opened all but 3 stores across both chains.
What about the mass merchant chains such as Wal-Mart, Costco, and Target? Most analysts believe they saw a benefit before the storm as consumers stocked up on food and consumables. However, J.P. Morgan’s Chris Horvers said, “We estimate the [positive] impact will be to a lesser degree than the home improvement retailers given the lack of post hurricane spending and pull forward of some demand. Stores could be affected after the fact by closures and traffic impacts.”
Overall, is Sandy just a blip on the radar?
On balance, it appears the industry is expecting to recover from the storm with minimal impact. “November is where we will see the impact, but I think it'll be marginal,” said Tom Clarke, director of AlixPartners' retail practice. The consulting firm still expects sales for the holiday season to be up 3.5% to 4%.
If this forecast holds true, it will be a testament to the determination of the U.S. consumer to spend during the holiday season, a period which traditionally accounts for approximately 20% of all retail sales for the year.
The practice of showrooming — where customers visit a bricks-and-mortar store to see a product but then purchase elsewhere, generally from an online competitor — is quickly surpassing “phenomenon” status and becoming the new order of business. Chalk it up to technology: smartphones, tablets, and other handhelds are making it easier than ever for consumers to compare prices, features, and other product qualities in a matter of seconds.
Think your store is above the fray? Think again. Studies of showrooming behaviors abound, with some surveys showing that up to 59% of U.S. smartphone owners engage in this practice. And consider this: Many consumers purchase from an online competitor while still in a bricks-and-mortar showroom. These types of behaviors will only become more prevalent — so it’s best to accept and adapt.
Which Factors Drive Showrooming?
An AlixPartners survey completed in August 20121questioned more than 2,000 adults about their showrooming behaviors during the prior 12 months. Some important takeaways:
- 33% of those surveyed purchased items online after viewing items in-store.
- Showrooming was most common with consumer electronics purchases (43% of respondents); clothing and apparel purchases followed at 38%.
- Top drivers for choosing an online purchase over a brick-and-mortar store included lower pricing, free shipping/home delivery, lack of in-store availability, the ability to check consumer reviews and ratings, and the opportunity to compare products and product options.
Interestingly, in response to a poll by financial consulting firm BDO USA2, 88% of retail CFOs said they are not concerned about showrooming. But that doesn’t mean they are ignoring it. And neither should you.
Tips for Addressing Showrooming Head-on
The fact that potential customers are in your store means you’re winning an all-important retail battle: You have something they want. Don’t let those sales slip through your fingers. Instead, consider opportunities to capitalize on customer visits. Here are two ways some retailers are combating showrooming:
1. Address pricing from the beginning
Naturally, we at First Insight feel that accurate pricing is critical to overall success. Pricing is a primary driver behind showrooming behaviors, and some retailers have embraced price-matching as their primary combative effort. Best Buy and Target, for example, have already said they will match prices with some online sales outlets during the holiday season in an effort to keep sales in stores.
But matching seems reactionary rather than strategic. Retail Systems Research (RSR) released its Benchmark Report about pricing in April 2012, and it helped highlight the factors retailers are battling with regard to strategic pricing initiatives. For example, survey respondents named the following factors as pressures to lower pricing:
- Increased price sensitivity of consumers (67%)
- Increased price aggressiveness from competitors (51%)
- Increased price transparency and the impact of comparative price shopping (47%)
Once you have the customer in your store, if you have set prices correctly from the outset, the need to price-match is greatly diminished. In “race to the bottom” scenarios, the end point is the bottom. And who wants to be there? Our white paper, “Determining Entry Price Points Using Consumer Insights” offers a step-wise approach to establishing optimal starting price points.
2. Think like a “luxury” brand
According to Joel Bines, managing director and co-leader of the retail practice at AlixPartners, luxury brands generally aren’t susceptible to showrooming. Bines told Women’s Wear Daily that two dynamics — scarcity of product and consistent pricing across channels — are key to negating the behavior.
The exclusivity of luxury brands and the overall brand experience also help drive a certain image and customer outlook. To truly embrace a luxury mindset, retailers need to go beyond tactics such as price matching and free shipping and commit to a brand promise. Some retailers are doing this by:
- Cultivating exclusive offerings, both with established and up-and-coming designers.
- Implementing rewards and loyalty programs
- Holding private sales and giving early sales event access to preferred customers
- Offering exclusive benefits (like personal shoppers) to preferred customers
Of these methods, the first strategy — offering exclusive products — provides the best long-term way for brands and retailers to avoid becoming showrooms for online retailers. Smart retailers and manufacturers are coming together to identify the specific products most desired by the customer base of each retail channel. With this approach, shoppers find the products they like, and they don’t easily find the same products online or in other stores.
At First Insight, in our work with both brands and retailers, we are finding that this strategy is creating lasting competitive advantage and a win-win scenario. Read more in our white paper, “Developing Exclusive Fashion Assortments Using Consumer Insight.”
Bottom Line – Strategy Counts
Showrooming is real, and it’s here to stay (smart devices are not going away anytime soon!). Responding with tactics such as price matching may help retailers win a short-term battle, but they will definitely lose the war. Why? Consumers will know you will always lower the price, so they will wait or find the item somewhere else. Once you have engaged in price matching, you have lost ALL of your negotiating power. The consumer is then in complete control.
Retailers need to develop strategies that will create long term sustainable advantage and reinforce their brand promise.
1 AlixPartners Showrooming Survey polled a demographically representative sample of 2,010 U.S. adults between July 26 and August 1, 2012 about their purchasing behaviors online after shopping in-store
2 2012 BDO Retail Compass Survey of CFOs, conducting during August and September 2012
In my last two posts, I wrote about Uniqlo and Zara, two of the world’s largest fashion retailers. Both companies are succeeding, although with very different approaches and strategies. Uniqlo is focused on technological differentiation using long product development cycles and offering basics which appeal to large groups of consumers. Zara has built a supply chain which allows it to follow fashion trends in near real-time.
H&M, the Swedish fashion group with over $17B in annual sales, has an approach that is a hybrid of the two. H&M is the second largest apparel retailer in the world, just behind Inditex SA. With 2,600 stores in 43 countries, H&M was a pioneer in pursuing a strategy of vertical integration with its own distribution network.
What are the keys to its success?
The company’s clothing collections are created in Sweden by 150 designers and 100 buyers. H&M’s production function is outsourced to a network of 800 suppliers; 60% of the production takes place in Asia and the remainder in Europe.
H&M offers two main collections each year, one in spring and one in fall. Within each season, there are several sub-collections so there are always new products in the stores. The main collections are the traditional long-lead items, and the sub-collections are the trendier items with short lead times.
The key to H&M’s ability to react quickly is its network of 20-30 production offices which are placed close to the suppliers. These offices mediate between the buyers in Sweden and the production facilities, reviewing samples, checking quality, and deciding which supplier gets each order. Generally, the items with very short lead times are manufactured in Europe, while the longer lead items are manufactured in Asia.
Also critical to H&M’s strategy is its IT infrastructure. Each store is connected with the logistics and procurement systems and the central warehouse. The design and product development functions are also IT-enabled, so central managers have visibility into the entire process from product design to sales transaction.
Uniqlo, Zara, and H&M. Three very different models which are proving to be successful for 21st century retail. What do these companies have in common?
All three companies understand that you can’t win in apparel retailing simply by guessing on the next hot style. You also can’t win by distributing your guesses across a large number of styles, putting them in stores, and hoping that most of them are winners. Clearance racks are full of items like these. In fact, across the industry, 30-40% of seasonal volume is sold at markdown prices, as compared to only 15-20% for Zara.
All three companies rely on understanding what their customers want and have built systems for identifying consumer preferences, along with supply chains for delivering on them. In Uniqlo’s case, getting customer preferences right is extremely important because of their long development cycles and long-term commitments to materials and products. For Zara, reacting quickly to consumer preferences is a core component of their competitive advantage. H&M is well-known for its focus on researching and predicting emerging trends. In fact, the company staffs this function both in Sweden and in national offices throughout the world.
In today’s retail environment, regardless of approach, it’s critical to know how consumers will react to your products well before you launch them. How do leading retailers know what their customers want? Take 15 minutes to watch our recorded webinar –"20/80 Insight on How To Select Winning Products" – to find out.
In my last post I described the traditional apparel retail business model of making product design decisions six to nine months ahead of time, then committing to big buys and waiting for sales data to determine whether the bets were placed on the right products. I described Uniqlo’s strategy of avoiding trendy fashions and building a supply chain to deliver technology-based differentiated products which appeal to the masses.
At the other end of the spectrum is Zara. The Spanish apparel company has embraced the fast-changing tastes of consumers, and has built a supply chain which allows it to deliver new fashions as soon as a trend emerges. Zara delivers new products twice each week to its 1670 stores around the world. This amounts to over 10,000 new designs each year! It takes the company only 10-15 days to go from designing a dress to selling it. Zara is not leading the fashion world; rather, it is seeing what is popular and is following that trend.
How is Zara able to do this?
Zara was built to be fast and flexible from its inception. Rather than subcontract manufacturing to Asia, Zara owns 14 highly automated Spanish factories, where robots work around the clock cutting and dyeing fabrics into “gray goods”. Like Uniqlo, Zara has leveraged automaker technology within these factories, using a “just in time” inventory approach which was pioneered by Toyota Motor Company.
Zara has a partner network of over 300 small shops in Portugal and Galacia which handle the final stage – assembling the gray goods into dresses and suits. With this approach, if an item looks like a winner, Zara can increase manufacturing very quickly and deliver them to their stores.
Zara has been very successful with this approach. Zara’s parent company, Spanish company Inditex SA, is now the world’s largest clothing retailer. They reported a 10 percent net sales gain to $19.15 billion for the fiscal year ending January 31, 2012.
Zara’s approach has not gone un-noticed. Some U.S.-based apparel companies are now using this approach of manufacturing longer-lead time “gray goods” in Asia and performing the final manufacturing in the U.S., allowing them to quickly get the finished products to store in the U.S.
Uniqlo and Zara. Two very different approaches, both very successful. In my next post we’ll explore H&M and then look at what all three retailers have in common.