The Big Retail Mistake You Might Be Making
Many people in business get panicky this time of year. They want a certain result, like a particular level of sales, and if it doesn't come in as expected, panic ensues. That is just as true in retailing as any other industry--except when retailers panic, the emergency measures can have direct and indirect impacts on manufacturers and distributors.
According to retail analyst firm RSR Research, for many retailers, the all-things-look-like-a-nail-when-all-you've-got-is-a-hammer catchall answer is price markdowns. Offer a sale and maybe that will get customers to pay attention. But when you do that, there's typically an impact on gross margins, which means a further limitation on profits.
The Difference Between Laggards and Winners
According to RSR's 2013 Merchandising Benchmark Report [PDF download], over the past three years 62 percent of retailers have seen an increase in gross margins. For 18 percent of those retailers, margins stayed the same and 19 percent saw them decrease. However, when the firm correlated gross margin changes with the companies that described themselves as "retail winners," "average performers," and "laggards," there was an interesting correlation.
As RSR puts it, laggards are doubly trapped. Forty-seven percent see themselves as having a promotional reliance that leads to brand erosion, compared to 23 percent of retail winners. And 53 percent said that they were "stuck in our product selection: some retailers out-price us, some out-style us." That compares with 16 percent of winners who feel the same. The result is the following vicious circle:
- Laggards think their product selections are weak so they use promotions to drive sales.
- Promotions further erode brand equity.
- They don't get the expected sales bumps but they erode gross margins.
What do you call people who keep doing the same thing and expect different results? Oh, right: nuts.
They identify product problems, but then they see customer data as the cure, as you can see from the following chart.
Best performers want to choose products with an eye to what their customers want. They look for better demand forecasting. As the report offers, the winners are slower to try integrating across functions because we're in a time of old and new ways of doing business colliding. Moving too fast to consolidate them is too risky.
But moving fast is exactly what the laggards want to do. The second biggest perceived opportunity to improve merchandising is to better incorporate customer segmentation and preferences into planning. That sounds at first like listening to the customer, but in a way it isn't. Essentially, the laggards have said that product is a problem but that the answer is to work better internally and to analyze customer preferences to better move what they already have.
People don't buy what you want to sell them, unless you're the only game in town. You become successful by selling what people want to buy.
For retailers, the lesson is clear: listen to the customer in the first place and order your business around what they want and need. Other companies, though, need to heed this as well. If your business deals with resellers or retailers, look at how they do business. Is it focused on what the customer wants to buy or on what they want to sell? When you discuss a product with them, ask about what customers are looking for. If you get blank stares or fast-talking distractions, it's time to look at other partners to help bring your products to market.
ERIK SHERMAN | Columnist
Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.