The greatest challenge independent retailers are struggling with right now, even more than depressed traffic counts, is getting full margins for their goods. This struggle continues with fresh arrivals of fall goods, and shows no sign of abating. Customers remain extremely value conscious, and to them, that means “On Sale”.
It’s important to recognize that what’s at work here is good-old-fashioned supply and demand economics. Consumers are strained. They are not willing to pay what they formally did for things. They require a lower price, and that softness in demand is forcing prices down, and hitting margins.
Like it or not, retailers of every stripe are subject to these economics. As much as I’ve written about protecting yourself from price-point resistance by building brand equity through unique products, engaged and knowledgeable salespeople and memorable customer experiences, brand equity can’t be built overnight. It takes time.
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Independent retailers need to respond to these price-point and margin pressures now. While the consumer may be demanding discounts, the real issue is not the retail selling price, it’s margins. And the immediate response has to be on the cost side. Retailers can’t continue to short themselves on margin. Whether your preferred strategy is to establish lower everyday price points (which is what I would recommend), or to build in margin to cover your discounting, there are two approaches, both of which should be pursued:
- shift the mix of goods you buy into lower price points, with lower costs, and
- insist on lower unit costs from your vendors.
Let’s take each in turn. Moderating retail price points by shifting the mix toward goods with lower costs can only do so much. You still have high priced inventory. If you take an everyday price-point strategy, it increases the spread between the higher price points and the average price point, which further pressures the higher price points. On the other hand, if you build in margin on the lower priced goods to cover discounting, you narrow the spread between the higher price points and the average price point, making your full retails look overpriced. Nevertheless, shifting the mix of goods toward more moderate price points needs to be part of your response.
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The ultimate solution is to insist on lower unit costs from your vendors, on every item you buy, across every price-point. Just as customers are driving down retail prices, you must insist on lower unit costs from your vendors. Deflationary pressure on retail prices requires that the unit costs that you pay come down, and that costs at every stage of the supply chain come down as well. In many cases, your vendors have already demanded and obtained pricing concessions from their suppliers. You must insist that they pass it on to you. They’ll comply, if they can. It’s not in their interest to weaken their customers (you!) if they can help it. They need you right now just as much as you need them, if not more.
Independent retailers must recognize that they are ultimately part of the supply chain themselves. The end of the chain is your customers. If they are forcing selling prices down, you can’t bear the brunt of that all by yourself.
Ted Hurlbut is a retail consultant, coach and speaker who helps independent retailers increase sales, profitability and cash flow by leveraging his deep expertise and proven retail know-how, Get his FREE report “The 16 Essential Elements of a WINNING Independent Retail Strategy” Visit: HurlbutaAsociates.com