In the spirit of full disclosure I am not, nor have I ever been, the CEO of a major retailer. That said, if I was, and my Chief Merchandising Officer told me that his/her strategy to improve profits was “to buy into inventory, and sell it for whatever we can get” I would at the very least wonder aloud if I had the wrong person in the job, and in a worst case scenario begin severance proceedings.
Quite frankly, in the retail world, buying into inventory always carries some risk. Be that as it may, the approach described above is not informed risk taking, rather it is unbridled gambling.
While I seriously doubt any CMO has actually verbally articulated a “sell it for what we can get” strategy to their CEO, there seems to be a growing mountain of evidence that, in fact, some retailers are beginning to follow this approach.
This shift in retailer behavior is being driven by the intersection of two powerful market forces: consumer price sensitivity, and dynamic pricing technology. The price sensitivity of consumers has been a market force for eons, but with advances in data analysis we can now see for the first time at a granular level how price sensitive consumers truly are. A recent report by Cognizant (as reported by retailtouchpoints.com) suggests that 90% of shoppers will switch retailers over price. The second market force, dynamic pricing, is the relatively new ability of retailers to instantly re-price goods based on real time information about competitor pricing.
When the market forces of price sensitivity and dynamic pricing collide, retailers can draw the erroneous conclusion that in order to generate sales, and thus profit, they must price match their competitors. (This may be one of the underlying factors driving the recent earnings warnings offered by Walmart).
One of the underlying assumptions about price matching competitors is that they actually have inventory on hand that is immediately shippable. But what if they don’t?*
Unfortunately, even with the current advances in price monitoring technology, it is impossible to know if a competitor has inventory on hand, or whether the competitor is simply waiting to receive and order before they procure the product.
If the competitor doesn’t have inventory on hand, should the retailer really be price matching? And if they do, how much profit has the retailer forgone on the sale?
There are no simple answers to this dilemma, but there might be alternatives.
- Only work with vendors that aggressively enforce their MAP policies
- For those vendors with weak pricing enforcement, only take product on consignment
- Only use price matching on chosen loss leaders
- Demand exclusive packaging or SKU numbers from vendors
- Some combination of the above
The upshot is that for retailers, buying into inventory always carries some risk, but buying into inventory and applying a dynamic pricing matching tool without a reasonable understanding of probable margins goes well beyond normal risk taking and borders upon institutionalized gambling.
* Analysts at Brandoogle estimate that anywhere from 3-5% of the time, the web site posting the lowest price cannot immediately ship the selected item.
David Coleman is the CEO and Founder of Brandoogle (brandoogle.com) and can be reached via e-mail at dcoleman@brandoogle.com. Brandoogle works with both Retailers and Brands to improve margins and combat grey markets using a proprietary suite of software and services.