RSR Research: Pricing Merchants Right
By Nikki Baird, Managing Partner, Retail Systems Research
Through a special arrangement, what follows is an excerpt of a recent article from Retail Paradox, RSR Research’s weekly analysis on emerging issues facing retailers, presented here for discussion.
There’s a business axiom that has been around so long, it’s almost cliché:
You get what you measure. And while Retail Paradox recently explored how same-store sales have become an inadequate measure of retail performance in light of the rise of multi-channel synergies, retailers may also have to redefine how they measure their people as well.
Most merchants that I know of are measured on some combination of gross margin and turns. But new tools and more sophisticated retailing strategies are starting to make it painfully clear that the decisions that merchant teams make have a far greater impact on other organizations (like supply chain and store operations) – and yet often have very little accountability for that impact.
Let’s start with pricing. I recently attended the Retail Pricing Summit and moderated a panel of retailers who spoke about their experiences implementing pricing solutions. Their number one implementation challenge? Cultural barriers, both on the merchant side – who worry that some of the suggested prices will not drive enough volume to offset the margin loss – and on the store side, who resist the increased number of price changes that began to come their way.
Buying teams are measured and bonused on how they move inventory, and this limits the effectiveness of any pricing solution. In the status quo, merchant and pricing teams use price to drive demand, assuming that inventory is what it is. So pricing recommendations come down without taking into account whether a particular store has the inventory available to meet demand. In pure economic terms, price is a mechanism to match supply to demand. But merchants aren’t measured against how efficiently they deliver supply, only how well they squeeze deals out of suppliers and how quickly they turn that inventory. With too much focus on demand, supply chain is left scrambling to try to achieve merchant volume objectives.
Perhaps it’s not surprising that stores’ number one internal challenge are merchants, according to the results of RSR’s upcoming workforce management benchmark study.
Pricing alone provides an example of the problem, which is that merchants don’t have visibility into, or have accountability for, the costs of implementing their various pricing and promotional programs in stores. I’ve been victim of this thinking myself – store labor to a merchant is a “sunk cost”: they have to be there anyway, so what difference does it make if they’re standing around doing nothing, or putting up my latest promotional display? But store labor is not a sunk cost – when store associates spend their time doing a merchandising activity, there’s an opportunity cost to that, primarily in the form of helping customers. And when store labor is viewed as “free,” it gets abused and over-used, again, limiting stores’ ability to execute merchandise strategies.
Pricing, merchandise localization, cross-channel – all of these activities put increased pressure on the organizations that implement a merchandise strategy. If the merchant drives the activity, they should have accountability for the results. Merchants should be held accountable for the supply chain costs of delivering their goods to channels, and they should be charged the labor costs of implementing their price or promotional strategies in stores.
Discussion Question: Do you think how merchants are measured should be redefined in light of activities such as pricing optimization, merchandise localization and cross-channel shopping? What other criteria would you include in measuring merchant performance in today’s retail climate?
Merchants are living in a world where the future is rapidly overtaking them. I’ve gone through two fairly recent reviews of the merchant function and both showed not only significant gaps between what merchants do and what needed to be done, but also between what merchants were trained to do or had the skills to do. Many merchants don’t have the training or background to handle the many new metrics they really need to understand to perform effectively. In many cases, they also don’t have access to timely information to help them make well-reasoned decisions. Those merchants who have been in the business for many years are struggling to learn new skills while keeping up with their traditional workloads. The merchants with less experience are struggling to find mentors who understand the dynamics of this brave new world. I think companies really need to ramp up their training and support for the merchant function or face a growing disconnect between this critical function and other aspects of the business.
I think we need to address another issue and that is of the labor force. Merchants hire an array of employees–some trainable, some not. Those who are trainable, usually end up smart enough that they don’t want to work as hard as their managers and go off to college or more higher paying employment. Let’s face it, the retail industry does not have much luster or benefits toward today’s instant gratification younger society. So why would merchants invest in training only to lose out in the end? Therefore, they have to work with a scaled down workforce which leads back to the problem of ROI. It’s a vicious cycle.
Every strategy that is developed at the retail level must be tested and validated to justify its costs. The article correctly points out costs are not just upfront, the opportunity costs can be significant too. Retailers, like manufacturers, have started implementing analytic practices and statistical models that measure the sales and ROI impact of store-level strategies, be it pricing, display or in-store media. Current analytic practices may need to factor in ‘soft costs’ like impact on consumer satisfaction to measure true ROI. Ultimately retailers are headed down the same road of marketing sophistication that manufacturers have embraced over the past several years. As measurement becomes sophisticated performance evaluation and rewarding will get sophisticated too.
First off, the “old adage” needs tweaking for clarity. It should read “you get activity around that which you measure, and you get results around that which you reward.”
This plays out perfectly in the case of the merchants, who are rewarded (bonused, annual performance evaluations, etc.) on the measures of volume and gross margin. The panelists hit many of the reasons this causes disruption and suboptimization of the chain’s total assets, but perhaps the most troublesome to correct will be the that today’s merchants are doing what they have been trained to do. This is their skill set. And, no different than the failed attempts by manufacturers to go “from sales manager to business manager” in the 1990’s, changing today’s merchant will be extremely hard as well. They simply are not possessed nor trained in the new skill sets required.
But here the analogy ends, for manufacturers (at least so far) have been able to settle for “sales managers who sell” and to support them with field marketing teams, category management teams, local market agencies, VMI, etc. to get the job done. Retailers may not have that luxury going forward. They are making a fundamental transition from distributor to marketer, and they will not succeed with merchants who are not trained to maximize the retail outlet as a complete marketing tool.
Because retail store operation is so repetitive, every task can be costed out fairly easily. Retail chains can calculate their costs to change prices, erect and dismantle displays, and every other daily, weekly, and seasonal activity. There’s no reason buyers can’t be charged their share of those costs, as well as their share of the real estate costs. The costing can be done using statistical sampling from time to time. It doesn’t require everyone in every store to measure what they do 365 days a year, hour by hour.
All in all, retailers have measures of their own that need to mirror some of the PCGs partners’ measurements and benchmarks. IMPORTANTLY, the reverse applies too.
And this is happening, based on the quality of tracking and discussing alternative ways for multi-purchases–on deal and off deal needs, stock outs, comparison of movement when PCGs’ advertising occurs with in-store activity and not, the strength of brand equity, and retailer’s market position.
Hmmmmmmmmmmmm Three way communication–consumer, retailer and PCGs partner–a necessary and wanted plus!
From my perspective, the whole concept of using price to drive demand is and always has been retailing’s great slippery slope. Once you adopt the strategy that price will be used as a tool to stimulate demand, you’ve destroyed the basic price integrity necessary to maintain margins over the long haul. The cost of all those price changes is far greater than the cost at store level to process them. The primary cost is the fundamental erosion of the value of the store brand in the customer’s eyes.
Demand is driven by the perceived value delivered to the customer. The most successful retailers define value far beyond any price ticket. True value resides in quality, customer service, utility, fashion and brand cache. Price is just a measure of that value. Retailers of all stripes need to focus far more on marketing that value, and protecting that value with prudent, lean inventory and supply chain management strategies.
I agree with the premise that merchants (merchandisers) must be more conscious of the impact their plans have on the supply chain in general and store operations specifically. The question is how to accomplish this without creating total disruption in the beginning. Unless the patient’s suffering huge losses, in which heroic action may be justified, I prefer moving in measured steps.
First off, use the results of tracking gross margin and turns to change the performance measurement to “gross profit dollars.” Make sure that your measuring tools include the effect of markdowns to get rid of excess inventory and a “lost sales” calculation that factors in shortages.
To get some of the cost associated with merchandising programs you need some sort of Activity Based Cost (ABC) or as the grocery industry likes to call it, Direct Product Profitability (DPP) calculation into your promotion planning tools. This could be as simple as having a standard incremental cost factor associated with building end displays or front end promotions. It would be nice if this was integrated with your workforce management system so that store schedules reflected the additional effort.
Now you have the actual advertising expense. What does it cost for that front page “super blow” on the weekly ad vs. a line item in the back? Is there radio, TV, or Internet involved?
Probably the most difficult piece of all this is to understand the impact on other sections of the store. What is the substitution effect or the increase in hot dog roll sales when Ballpark Franks are on sale? Has the hot dog merchandiser given away the profits or have they increase the gross profit dollars for the bakery merchant? How do they get credit for helping bakery?
On second thought, let’s just go back to gross margin and turns.
I like to compare store performance indicators to an automobile instrument panel. The sales number is the speedometer and all the little gauges are all the other performance indicators. The speedometer tells you how fast you are going but you still need to make sure all the other gauges are showing good performance to maintain and increase speed. Things like price optimization and merchandise allocation service levels are critical to the success of any retailer. What I would like to see is customer service scores in that gauge cluster. In retail, customer service scores can really reveal many things about a business and more chains should take this area seriously.
Isn’t it interesting as you go through life, you realize those old sayings passed down from generation to generation have merit? The merchandisers’ measures should be redefined in order to enable tracking of the key performance you want to instill for results.
The other criteria I would measure is stock outs and stock availability, merchandising strategy and bounce back customer loyalty.
This discussion is certainly centered on the right core issues, but nobody seems willing to point out the “elephant in the store” standing at the center of it all.
Performance of our pricing, shelf space allocation and assortment activities (not to mention promotions and in-store media) all revolve around the effectiveness and efficiency of in-store implementation.
If we can’t positively answer the questions: “Did it happen?” “When did it happen?” “What did it cost to make it happen?” and “What was the result when it happened?” every day, routinely, and systematically, then our programs are doomed to be sub-optimal.
This industry is so focused on sophisticated segmentation and planning that we routinely overlook the oh-so-basic requirement that we get it done at the shelf and confirm that it got done. Instead, we throw programs down from on high, analyze results post hoc and try to use the inadequate measures we have to validate our strategic plans – even though the implementation variables are so far off as to render the analyses invalid.
We don’t get planograms accurately implemented and we don’t confirm that it happens. We don’t get new products on the shelf on time. We don’t replenish the shelves consistently and well. We don’t bother with in-store implementation plans and we don’t assign people in our stores who are responsible for ensuring that implementation gets done. And when we have conscientious folk working at the shelf, we ensure their poor performance by burying them with needless and poorly planned work without tools to help them prioritize tasks or reward good results.
I am an advocate of integrating demand-based pricing tools into the category management and promotional process. But the giant, tusked truth staring us in the face is that whatever positive results we gain from optimization are difficult to evaluate because the implementation variable overwhelms our analyses. In short, we can’t reliably tell if an item under performs due to price resistance or an inventory void. We can’t reliably evaluate a promotional price if we can’t confirm which stores had the displays up and on time.
Throwing more labor dollars at the problem is not the answer. Our retail consumer products industry must adopt a “plan, do, measure” mentality surrounding in-store implementation–and do it soon–if it wants to garner real benefits from its new, sophisticated planning tools.
Hear that persistent trumpeting sound? It’s a giant herd of long-overlooked elephants in your stores crying out for implementation.