It seems that a lot of clever people have been left scratching their heads. It’s a Friday evening and as I sit down to write this piece in a well-known coffee chain, it is clear to see that at 6pm, business is booming in this particular sector of retail.
Ironically, I am sure that there will also be a number of IBDs cashing up this evening and wondering what on earth has happened to retail.
This question is not limited to the cycle trade – it’s an epidemic that’s spreading like wildfire throughout the whole of retail. Just over the past week or so, we’ve lost Toys’R’us, Maplins and a host of high street staples are on the edge of either CVA or full-blown administration. It appears that the ‘use us or lose us’ scenario is expanding.
When you read the news, the blame shifts from poor business management, branding and the obvious Brexit. All of these do indeed contribute to the downward spiral of commerce, but in reality, it is down to simple microeconomics and the law of demand.
In microeconomics, the law of demand states: “conditional on all else being equal, as the price of a good increases, quantity demanded decreases; conversely, as the price of a good decreases, quantity demanded increases”. This is exactly what is happening in retail. We are falling into the trap that the most obvious way to sell more products and in higher quantities is by dropping the price.
However, in the 21st century, there is a flaw in this approach to commerce. As rents, rates and other fixed costs of business increase, we decrease prices to increase sales, ultimately profits are reduced, placing the screws into the business’ coffin. I’d like to aim this piece at something that I see and notice on a daily basis – continuous discounting in order to drive sales.
But what happens if you don’t have to reduce the prices of major brands to compete and draw customers in? What happens if the critics of the high street are wrong, and what happens if you could take a slice of the strategies employed by the larger retailers?
The examples I can give of this are the likes of Aldi and Lidl, ignored in the 1990’s and now dominating the grocery sector of retail. They have silenced their critics and are changing the way we shop, leaving the traditional giants concerned that they did not see the ‘perfect storm’ on the horizon. Admittedly, these two will never become the behemoth giants of the likes of Tesco and Sainsbury. They are, however, meeting the law of demand in their own approach, working on the very basics of retail that changed the way you or your parents/grandparents shopped in the 60s.
Let us look at the brands that they offer. They work on the basis that their brands offer simple quality, simple style, basically utilising the ‘me too’ approach. By taking this approach, they are not offering the full-blown brand, thus not paying the premium to stock the brand and equally not having to discount it to attract sales or being held prisoner to the brands ideology – Morrisons discounted 1,200 well-known lines to try and match similar Aldi and Lidl own brand products on the run up to Christmas! Clever indeed – but what about marketing? People want the real deal right? This is where brand recognition meets law of demand.
On average, a major UK supermarket stocks 10,000 lines. If you were asked to buy a can of baked beans, I am pretty sure you would pick up Heinz, ignoring a host of other brands. Why? Because of brand familiarity and the power of their marketing. However, if and when you shop in Aldi or Lidl and I ask you to buy me a can of baked beans, chances are you wouldn’t be able to purchase Heinz, instead you would have to purchase whatever brand they are offering, ultimately removing the option to autopilot approach. Instead, their product branding looks similar, and tastes roughly the same, but most importantly for Aldi or Lidl, the need for price- matching or discounting is removed, because that’s what they have on offer and as you are there, you might as well buy their brand as it seems cheaper than the Heinz alternative.
But how does this transfer across into the cycle market, I hear you ask? Look around at what you’re stocking. How many of these items that you stock are readily available online? What happens if you decided to stop selling the same products as everyone else and started looking at various options not available online? What happens if you took at stand and only looked at items that were able to offer you a margin of 60 per cent, instead of being discounted by 60 per cent?
Would sales drop off? Would customers not continue to shop with you? Not necessarily. Business is changing. Amazon has changed the way we shop online, iTunes has changed the way we buy music, Monzo is changing the way we bank and retail is changing full stop. When was the last time you actually looked at the price of a product before adding it to the B2B shopping cart and thought, ‘is there a similar product that offers the same quality for a cheaper price, offering me a better margin?’
Here is the bombshell; say you stopped ordering on the B2B, and when you next saw the supplier’s rep asked this simple question – ‘How much would you pay me to stock this product’? After all, this is your floor space, your livelihood, your dream and your countless sleepless nights!
Remember that the rule of retail dictates that a particular square foot of wall should generate X to cover Y, and at the moment, I am pretty sure that X is nowhere near Y...
Remember the golden rule of retail – ‘eye height is buy height’ – so you might as well ask for a contribution for it. All the major UK retail companies now ask for a contribution towards stocking a product, retail space is expensive, times are tough and only in the cycling industry are we displaying and promoting brands while paying a premium for it.
In my previous sales positions, I have been approached to the tune of £20,000 to promote products on some of the major online shopping sites, in what was then banded in loose marketing terms as ‘a sponsored product page’. My reaction to this was awe and amazement at the audacity of the request, but deep down knowing that most suppliers would bend over backwards in order to keep this key account and not quibble. I am sure that there are 20 shops in the UK who in asking the same suppliers for £1,000 each, the answer would be a resounding, “no!”. At the moment, I am sure you get some point of sale, a poster and a nice window sticker perhaps? That’s great, but often, all you are doing is allowing customers to come in and use your shop as a showroom, before leaving to purchase the product online at a lower price.
Then comes the law of demand. The customer is in the shop, and now is your time to sell something different with a smile, with a service and knowledge that cannot be found online, and most importantly, to build a rapport with the customer in the hope of bringin further business opportunities in the future. As, a customer myself, if I have taken the time to buy a product, which I then find much, much cheaper online, disgruntles me. Embrace the change of retail – adapt and overcome
by asking for a contribution towards your floor/retail space, and remember you are the customer to start with, and you should have the power to decide to stock a product. This should not be based on just latest thing but if it actually makes you any money, do the excel spreadsheet work out how much that brand will generate for you and don’t just stock it because it’s a major brand, the law of demand is very much alive. The reality is, Maplin and Toys ‘R’ Us failed because they were selling the same product as I can buy anywhere else, often much cheaper than they were offering it, but instead of discounting major brands just to compete on the law of demand, perhaps offer a similar brand with the same overall ethics at the same price point, with higher margins, and perhaps with a more open approach to work with you.