By Jeffrey B. Edelman
Today”™s consumer is driving retailers and vendors to be more forward-thinking. The ideal retailer and vendor partnership should help develop a more loyal consumer, which in turn will be a more profitable one.
Moving back to national brands: Over the past 10-15 years, many retailers pared national-brand offerings back in favor of private and exclusive brands. The reasons were several fold, including unique merchandise, differentiation, expanding the value offering, becoming the destination for those brands and most important, an expanded gross margin. It appears as if the pendulum is beginning to move in the other direction, based on comments by a number of retailers.
An adversarial relationship, potentially a losing proposition: Retailers are slowly beginning to realize that squeezing suppliers for extra margin is reaching the point of diminishing returns. Brands and vendors, in turn, pushed back to their suppliers for cost reductions to the detriment of the product. In some cases, quality deteriorated, although perhaps not initially to the naked eye, but sizing, thread count, longevity, consistency and variation issues began to surface, eroding consumer and brand loyalty.
Many long-time suppliers to big retailers found profitability declining to such an extent they began to diversify their business away from those retailers. Coincidentally, those retailers find it more difficult to source quality and quantity with an acceptable timeline and turnaround time.
A more meaningful partnership: Retailers focus on financial performance, with key attention paid to price competition, new product introduction and attempts to maintain a level playing field. Suppliers have a slightly different priority in an attempt to maintain brand image, margin protection for services, new product introduction and partner perception. In the long run, a successful relationship will yield higher benefits for both.
Gross profit per square foot a better indicator than margin: The idea of “stack ”™em high and let ”™em fly” is losing out to focusing on and serving the loyal customer, who is generally responsible for the most profitable volume. Strive to create the want to purchase, rather than price-sensitive commodity merchandise. The standard joke ”” a national store selling lawn mowers in downtown Chicago and snow shovels in Miami ”” is indicative of what used to be prevailing practices.
Technology made the difference: New programs and systems made it easy for everyone to collect data and sometimes more than they could use; however, very few understood how to use it to enrich their profit formula. Buyers would base their plan on what they bought the prior year, which meant that if dresses or lawn mowers didn”™t sell last year, they likely wouldn”™t this year. Vendors gradually became more involved in the process, examining sales by door that indicated what sold and didn”™t, as well as pricing and profitability.
Vendors should be in a position to advise retailers on their perspectives of next-generation stores. The one pitfall is giving too much latitude to the vendor, realizing its merchandise offering should be compatible with buys for the rest of the department and to eliminate redundancies.
Plan for profitable growth: Merchandising planning and using updated information technology is critical to profitable growth. This partnership is becoming more important as so many retailers are now involved with multichannel distribution. The complexities of the consumer buying in store and online through various means as well as merchandise delivery from a distribution center or the store direct to the consumer, have raised the level of sophistication needed for a seamless process. Consumer surveys have noted that while price is important, merchandise availability and timely delivery are keys to buying.
It”™s all about the consumer: It is increasingly relevant to know whether it is a new or returning customer entering a store or website. There is increased need to connect better with the customer by providing inventory intelligence: in store, distribution center or at the vendor. Keep that customer from going to another venue or brand. Consistent with this strategy is optimizing promotions in the store to reflect real-time inventory and competitive pricing.
Jeffrey B. Edelman is director of retail and consumer products advisory services for McGladrey in the firm”™s New York City office. He advises in the consumer and retail sectors on strategic, sourcing, financial, marketing and distribution issues. He can be reached at (212) 372-1225 or via email at jeff.edelman@mcgladrey.com.
