Beating The BIG Boys

Profit through volume price leadership. The catch cry of the market leader in just about every country that has shopping trolleys. Profit through volume price leadership – words that seem to strike fear into the hearts of specialty retailers. Number one in the UK – Tesco. Number one in the USA – Wal-Mart. And now number one in Australia – Woolworths Group. All offering lowest prices everyday.

All profit through volume price leadership retailers and all beginning to build unassailable leads over their rivals.

But the reality is there is plenty of room for smart retailers to make good profits around them. To beat the big boys though, you must first understand how they play the game.

Profit through volume retailers work to sustain the most rational attribute a retailer can own – price leadership. Price leadership is the most rational attribute because the customer can prove it to themselves everyday, every time they shop. And if you have lied to them their trust is broken very quickly. To retain clear ownership of the price leadership attribute in the customer’s mind however, you must stock enough of the products that can be benchmarked by the customer to prove it. This generally means national brands.

Profit through volume retailers work on the 80/20 rule – they stock the 20% of the products that produce 80% of the volume. They are not category killers but category snipers – aiming at the economic heart of any category they contest. They continually refine their merchandise mix based on productivity from space, capital, assets and fixed costs and they wait for an item to move into the 20% zone before they stock it in depth.

They build their business models to operate in the lowest cost, most efficient manner. They build pricing strategies that include house brands that they sell to in order to increase their gross profit dollars – oh yes and they work to gross profit dollars not per cent ratios. They treat ratios as an outcome.

And increasingly they category creep. Meaning they add more and more categories to the merchandise mix (in bigger and bigger stores) where they can leverage a cost or time advantage with the customer. They become the market leader in 60% of the categories that they stock.

The price leadership attribute is so rational that at the end of the day there can only be one winner in a market on this attribute.

And that is why you look at some specialty retailers and shake your head.

“So you really want to take on BIGW on price on identical merchandise and you think you can win?”

David didn’t beat Goliath by trying to slug it out with him.

Profit through volume retailers can only be beaten by playing with the retail attributes they don’t dominate. And there is a market trend which is making this fact even more important.

The polarization of spend.

Interestingly not always aligned with the polarization of wealth. The reality is that spending patterns are moving rapidly to the high end and the low end, at the expense of the traditional hunting ground of specialty retail. At the same time, specialty retail costs are escalating and margins are being self-deflated through bad choices in merchandise mix and pricing strategies.

There are five attributes that affect customer purchase – Access, Brand Experience, Pricing, Product and Service.

Increasingly Access is no longer about simply rolling out as many stores as you can get capital to fund. It is about carefully selecting the catchment areas that are right for your business and tuning multiple formats to ensure each catchment area produces the greatest productivity – put simply, profit per m2.

Brand Experience doesn’t have to mean high end as Target USA and Tesco have proven. But it does mean differentiated in the customer’s mind and reinforcing why they should desire to shop with you. In a time challenged society where specialty retail options are increasingly seen as going out of my way, your customer value proposition (CVP) needs to be relevant and clearly understood by all.

Pricing, outside price leadership (cheapest), is about “bang for buck”.

Product is increasingly about mix, differentiation and turn.

And service is everything from saving me time to adding value through education, done for me and customized outcomes.

You won’t beat the market leading profit through volume operator on: – convenient access (they always have more stores), – no-fuss ambience, – lowest prices, – like for like merchandise and – self-service efficiency.

To beat the big boys the expectations have to change and the model has to migrate.

The horizons need to be lowered in terms of store network size, gross sales turnover and customer numbers. The game is about sustainable profit.

And the first priority is product.

The merchandise mix cannot be made up of items that can be bought in any Target, K-Mart, BIG W, Myer, David Jones, Woolworths or Coles store. Falling back on the “When Myer go on sale it wrecks my business” defence usually indicates a poor understanding of merchandise differentiation. All specialty retailers must move away from the “knock off” look a like and same national brands everywhere syndrome. The same product stocked everywhere can only lead to one outcome – the one who sells it cheapest wins. And believe me Target can direct source anything you can faster and sell it cheaper and the customer knows it.

Differentiation of merchandise is the most critical element to address. That may mean you don’t sell the same volume, but you make up for it in margin. Specialty retail is not in the volume game. Having worked with many profit through volume leaders, let me tell you it is increasingly harder to make up the lost margin profits by increasing volume. Good profit through volume retailers generally make it up through up-sell and cross-sell strategies not on the item volume lift by itself.

Differentiation of product then logically leads on to pricing strategy where you need to think through – from the customer’s perspective – the “bang for buck” that you offer. Specialty retail operators will increasingly be forced to make clear choices between competing in the realm of the few bigger box specialty retailers who exist in the DDS + 15% price band and the move to the higher price points as customers increasingly realize they “don’t need more stuff” and abandon the middle ground. They’ll either buy what they need on price or be seduced into buying what they want (regardless of price) because you make them want it.

Service and brand experience are investments which embellish your differentiation and make the customer’s investment in time worthwhile – ROT as I call it (Return On Time). The negative dialogue that blames poor performance on everyone else – for example rent, labor costs and other retailers clearance strategies – fades away in favour of something much more robust.

A self reliant, self-determining business model and business strategy which is clearly in tune with market dynamics, competitive strengths and company competence. Not to mention customer relevance which, at the end of the day, is the only thing that matters.