More Margin More Retail Problems?

By Benjamin Smith

Hand It Over!

A retailer asking for more margin?  Not shocking – or ridiculous.  It’s a free country – you can decide if you want to offer more, or stare them down.  Unless they have no respect for you or  your brand, in most cases, when they ask for more margin they have a good reason.  At the end of the day, it all goes back to the cost of opening / maintaining all those retail stores.

Credit: Wall Street Journal

You have to have faith in free markets that there are limits to what they can justify asking for – otherwise their competition down the street – or increasingly online – will find a way to do more with less.  This is of course reaching critical mass today as retailers like Best Buy see customers come to their store to get educated, then use smart phone apps and web research to compare prices and buy elsewhere.

How does a retailer asking for more margin tie into Retail Leverage?  I’ll illustrate our ideas and provide some suggestions at the end of this article, but the key perspective is that changes at retail present opportunities for a repositioning.  Whether it is a new buyer at your key retailer, a new entrant in your category, or a seismic shift in terms of where consumers purchase, change means you have a chance to gain leverage.

SOS – “Save Our Stores”

A favorite author of mine, Rafi Mohammed, founder of the Pricing for Profit blog, touched on the disadvantages facing brick and mortar stores and proposed a way to save them.  His proposal is called the “Physical Store Equalizer” aka the “PSE”, where manufacturers help compensate physical retailers for the value they bring to the sales proposition.

I’m linking to Rafi’s article “The Pricing Strategy that Can Save Brick and Mortar Stores”, as well as including the key sections here:

The conventional wisdom is that consumers will pay a premium for the convenience and service provided by brick and mortar stores. But as online retailers’ growing market share attests, that CW isn’t holding up. I went online to buy the TV the Sears associate helped me select, and I saved $150. As the sliding value of Best Buy shares confirm, too many shoppers aren’t willing to pay a premium for sales associates, in-person demonstrations, or the ability to get a product right now. The current retailing model, which expects consumers to pay this premium, is starting to look broken.

It’s time for a new system in which manufacturers help compensate physical retailers for the value they bring to the sales proposition. They can do that by offering brick and mortar retailers lower wholesale prices than their web counterparts. I call this discount the Physical Store Equalizer, or PSE.

Retailers’ pitch to manufacturers to try to gain this discount should be straightforward: “As a brick and mortar retailer, we add value and generate higher sales of your product. Our stores increase your brand awareness, provide a venue for people who want to touch and feel the product before they buy it (whether they buy it from us or online), and our sales staff help educate your buyers. We bear costs for these services, so it’s impossible for us to match online prices of your product. To be fair to us, we require a wholesale price that is 10% less than what you are offering web retailers.”

Retail Leverage Takeaways:

Let’s be realistic – the PSE already exists in many different forms.  Different classes of trade have different margin requirements already, and that is just the cost of entry.  Start layering on paying for circular ads, end caps, slotting fees, in-store tv, staff training / access to staff – it adds up.  What Rafi’s “Physical Store Equalizer” is attempting to capture is payment for the advertising effect some retailers provide, even if the customer purchases elsewhere.

And you know what – participating in these extra “advertising” opportunities is one way to gain retail leverage.  Not to mention that many may be truly advertising and come out of a different budget.  I’m not sure what scorecard they keep internally at retailers but it surely doesn’t hurt your buyer if you belly up to the bar on some of the extra opportunities they ask you to participate in.

However that doesn’t get around the central proposal Rafi made, which is to survive, brick and mortar retailers should be asking for/receiving extra margin, above and beyond whatever has been built into the system today.  An overlay if you will.  While I firmly believe all brick and mortar retailers will be increasing their margin demands (maybe with a copy of Rafi’s article attached), I don’t think all will see equal results.  Increasingly manufacturers are going to have to make tougher choices about where & what they sell.  If you don’t know where your retail bread is buttered you’d better figure out quick.

If you’ve got a big brick & mortar business but have little leverage, you may have tough choices to make in terms of what & where you sell online – from amazon.com to your own direct site.  I know – it’s tough – the whole Internet thing isn’t going away anytime soon.  Or you have to be prepared to sweeten your offering to brick & mortar retailers – from exclusive or protected lines/items, to better terms, to more money for in-store marketing/advertising.

And without getting into all the legal pricing issues, there is always a number you can get to that will justify a business case – offer x retailer increased margin with expectation of a y increase in business (from retailer steering more business your direction).

What Do You Think?

Put up or shut up?  We’d love your perspective on this situation, whether you are from the brand, retailer or agency side of the aisle.  Please share your comments in the section below, or share with us on twitter @retailleverage .

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