Lower prices are good for everyone

I met two CXO level retailers this week; one the VP of retail for a global brand, the second the CEO of an Australian retailing icon. I read with interest the many misinformed comments around the misnamed ‘milk price war’, and saw the first retail trends report from the newly formed Deloitte Access Economics.

In the first two months of this year, many retailers reacted quickly to the learnings from the last three months of 2010 with reshaped product offerings, new online services, targeted price reductions, attendance at international trade shows, industry meetings and store walks all conspiring to positively reposition retailers in the minds of shoppers.

Retailers will always react more quickly to changing circumstances than manufacturers. This is why some of the best retailers in the world own their own brands even if they don’t own the factories that produce their products, and why many large manufacturers have retail divisions to test and sell their brands within. Efficient communications between the till and the factory produce high quality and consistent shopping experiences; Apple, Zara, Nestlè Nespresso and RM Williams are examples of this.

The message is consistent internationally – shoppers are cautious so retailers and manufacturers are meeting price expectations. Depending on whether it’s an existing product or a new product, this is happening in two ways; in the store with price ticketing and before it even reaches the store by lowering input costs.

For existing products in store, retailers and manufacturers are looking to hold or lower prices. If the item isn’t offering the shopper anything different than last season or year, why should a shopper pay more?

For new and ‘better’ products, retailers are looking to hold price or take just small price increases. ‘Better’ is a relative description that exists in the mind of the shopper, not the retailer or manufacturer. ‘New’ Coke was ‘better’ in the minds of Coca Cola, but not in the minds of shoppers. ‘Better’ may be a true step change, like the launch of the first iPad. Or a welcomed improvement in product; think more environmentally friendly packaging for concentrated washing powder. Either way it must be, in the minds of the shopper, better than before to warrant a price increase.

To do this the retailer and the manufacturer work to constantly wash out ‘bad costs’, such as duplicated or legacy costs that no longer need to be there, eg. lowering packaging costs, sea freight instead of airfreight, using the website to sell short run items, or having fewer middlemen with fewer layers of cost and margins. All input costs need challenging to lower prices while maintaining quality.

So when we see milk coming down in price, and a new 3D TV selling at about the same price as a previous non-3D TV, it’s because these steps to lower cost are being taken before the product even reaches the store.

The Deloitte Access Report said: “Australians are a lot more cautious. Retail sales growth came in at 1.1% over 2010, the worst result since the GFC. Food retailing particularly struggled, putting in the worst performance since the late 1980s.”

I don’t disagree with these words. However, I would say that the link between sales volume and profitability has been broken. Food retailing hasn’t struggled because top line sales have plateaued. Coles, Woolworths, Kraft and Coca Cola are no less profitable than last year.

A basket of groceries has dropped in cost, not in margin, because productivity improvements have allowed the shopper to pay less for the same or a little more for something better. And that’s a good thing.

In his role as CEO of CROSSMARK, Kevin Moore looks at the world of retailing from grocery to pharmacy, bottle shops to car dealers, corner store to department stores. In this insightful blog, Kevin covers retail news, ideas, companies and emerging opportunities in Australia, NZ, the US and Europe. His international career in sales and marketing has seen him responsible for business in over 40 countries, which has earned him grey hair and a wealth of expertise in international retailers and brands. CROSSMARK Asia Pacific is Australasia’s largest provider of retail marketing services, consulting to and servicing some of Australasia’s biggest retailers and manufacturers.