Wharton Profs Offer Strategies for Tough Times

Discussion
Aug 11, 2008

By George Anderson

Knowledge@Wharton asked professors at the University of Pennsylvania’s Wharton School of Business to offer strategies for retailers to compete more effectively in light of the current economic challenges.

Gerard Cachon, a professor of operations and information management at the school, said retailers have emphasized carrying no more inventory than absolutely necessary to keep costs down and improve supply chain efficiency in recent years. Current market conditions, including rising prices and larger numbers of unemployed and under-employed individuals, may mean that distributors will need to rethink taking on excess inventory as a hedge against future price increases.

“The whole mindset has been, ‘Let’s get rid of it,'” Prof. Cachon said. That attitude, he said, was understandable when prices were either stable or declining but makes less sense when costs continue to rise.

“Of course … it’s a little risky to hold inventory that might [lose value], especially perishable goods and fashion-oriented goods… but to the extent [retailers] know that prices will be rising over time, they will start to try to hold more inventory,” said Prof. Cachon.

Leonard Lodish, a Wharton marketing professor, told Knowledge@Wharton that the current market poses different challenges to merchants than past periods of economic softness.

“The problem is not only that there are inflationary pressures, but that aggregate demand is going down,” Prof. Lodish said. “That’s why you see retailers like Boscov’s and Mervyns in trouble, because they may still be marking up their goods but there’s not enough demand to keep the stores full.”

Merchants that may have previously looked to pass along increases to consumers are finding that more difficult when demand is down.

“The smart way for the retailer to do it is to … raise prices a little bit here, a little bit there over time so that the consumer doesn’t have one big sticker-shock,” said Stephen Hoch, a marketing professor at Wharton. “In order to do that, the retailer has to absorb some of the pain in the short run and eventually pass it on down. And frankly, the manufacturers are trying to absorb pain too because … they don’t want to be the one that’s raising prices when their competitors aren’t.”

To find out just how much prices can go up, Wharton marketing professor Omar Beesbes recommended testing various prices in different stores at the same time.

Prof. Hoch recommended that retailers emphasize categories where prices have not increased as well as private label. He said that private label represents an “ace in the hole” for grocers. Another strategy is for retailers to concentrate on cutting prices on a key category, as Costco has done, for example, with gasoline.

David Reibstein, also a marketing professor at Wharton, said retailers needed to stay aggressive with their advertising and promotions.

“Those that do not cut back tend to have much bigger returns for their marketing spend [in economic downturns] than during times of prosperity,” he told Knowledge@Wharton. “And that’s a real surprise, because you would think during prosperity, people have money to spend and you’re more likely to get a return for any of your marketing investment… Most marketing spending has an impact basis — that is, how much you’re spending relative to your competition. Companies with enough cash to boost spending on marketing can use a bad time as a period in which to focus on gaining more market share.”

Discussion Questions: What are your recommendations for steps retailers and wholesalers can take to be more successful in the current inflationary market? Do you see retailers changing buying and supply chain practices to hedge against future price increases? Where should merchants be concentrating their efforts on the sell-side of the business?

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22 Comments on "Wharton Profs Offer Strategies for Tough Times"


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Steve Bramhall
Guest
Steve Bramhall
13 years 9 months ago

Segmentation of product and customer. Knowing which product and which customer will accept a higher price for it is what is needed and conversely which will not. This is the same whether the market is in boom or bust. It just becomes more critical for those that cannot or will not.

Forward buying of commodities is always on the radar in volatile markets and always carries risk. Stock costs money. In our markets, non food consumer goods, the suppliers are feeling the pain as demand drops away. They are starting to respond more positively faced with this pain.

Camille P. Schuster, Ph.D.
Guest
13 years 9 months ago

Superior retailers will win in difficult times. Going back to the strategies of the past, i.e., holding inventory, which cost more and create inefficiencies is not a winning strategy. Creating efficient processes that create value for consumers will continue to be the winning strategy. It is not the easy strategy, it is not the old strategy, it is not the successful strategy of last year. The winning strategy will include more collaboration with partners and consumers, more communication with partners and consumers, more consumer insight, and more innovation. Pricing will be more challenging but will be adapted by choosing the right products and services that can be sold at a price which consumers will pay.

Marge Laney
Guest
13 years 9 months ago

Mall traffic is down across the board. When a customer does choose to walk into a store, they should be able to access service where and when the customer needs it, or they will go elsewhere. There are a lot of choices out there, retailers need to differentiate themselves on something other than price. Walmart and company have that one nailed.

James Tenser
Guest
13 years 9 months ago
While it’s a tad intimidating to try to add anything to advice offered by the Wharton faculty, there are a few observations worth making here. Hope they are not too self-evident: First, measures that will work well for luxury retailers will not be very relevant for mainstream grocers, and vice versa. Ditto between stores #56 and #79 on opposite sides of town. Ditto comparing large chains with independent operators. You get the point–If there is one lesson we have learned from the recent history of retail it is that each store and each shopping trip is slightly different and that cookie-cutter approaches are sub-optimal for all. That said, I do see much merit in grocers, mass merchants and home centers emphasizing store brands in challenging economic times. Many luxury retailers are already heavily private label oriented–they may tell their value stories using promotions instead. To a limited degree, forward buying may make some sense where there is economic inflation. But packing inventory onto shelves and into warehouses has an offsetting cost in terms of stagnant… Read more »
Jonathan Marek
Guest
13 years 9 months ago

Done correctly, price tests not only allow retailers to gauge the impact on consumers before a price increase, but also to understand how that impact varies from store-to-store. Often the margin gains from taking price in some (less sensitive) stores are masked by losses to sales in other locations. The best testers have rigorously modeled the impact that various price points will to top line and bottom-line at each individual store (which can then be rolled up to market or regional pricing if the concept demands).

Michael Tesler
Guest
Michael Tesler
13 years 9 months ago

Winners in retailing focus on top line; it is about getting the right stuff at the right time. Sales and turnover rule. In tough times as well as all times the good ones gain market share, and excite customers with new and fresh product that other stores do not have. Let the “number crunchers” hem and haw over incidental and unimportant margin points (in the long run) while they fall further and further behind and let them listen to professors who operate in the vacuum of classrooms, research and focus groups while the merchants are using the “living laboratory” of the store and the “floor” to prove points the academics will never understand.

Note; I teach Retailing at Bentley College but have also owned and operated successful retail organizations.

Cathy Hotka
Guest
13 years 9 months ago

All of these ideas are fine…but the correct answer (as John McLaughlin would say) is to focus on the customer.

Customers love being greeted when they arrive. They appreciate finding the right size (standard size packs just don’t cut it any longer.) They expect to be able to order online and return products in the store. They want friendly service. These things sound basic, but are elusive, and too many retailers don’t adequately deliver a positive store experience. Make the store a nice place to shop, and customers will respond.

Ryan Mathews
Guest
13 years 9 months ago

Ben is right. Bad times are just the crucible in which superior retailers are strengthened and inferior retailers are turned to ash.

Anna Murray
Guest
Anna Murray
13 years 9 months ago

The business school profs recommend that healthy retailers should view this as a time to get the edge on competition through marketing.

Another way to do this is through technology. I agree with one of the commentators that retailers, for the most part, are woefully behind in adopting an integrated online & offline strategy. If a retailer is healthy enough, now is the time to invest in technology. It’s the job of technology to wring inefficiency out of the processes it touches. When you’re facing tough times, this is exactly the kind of prescription you want.

John Gaffney
Guest
John Gaffney
13 years 9 months ago

I’d sure like to believe it’s all about the customer when it comes to pricing. But it’s not. Two things come into play on the pricing issue, in my opinion. First, retailers should understand that there are brands and products that customers aspire to. Those prices, therefore, can go up without much explanation or positioning. Second, there are brands and services that customers expect to be accessible. They expect empathy and cooperation. So before you crank up milk, blue jeans, baby products and basic foodstuffs, think about how you’re going to tell the customer.

Ben Ball
Guest
13 years 9 months ago

Well, as David pointed out, retailers often look for short term fixes. But as Doron said, the only true lever is VALUE. There is a reason that retailers who are focused on value weather the hard times. Whether it is Burberry or L.L.Bean, Danner or Swarovski, Mercedes or Nordstrom’s–quality, dependability and outstanding commitment to customer satisfaction carry the day through tough economic times.

Raymond D. Jones
Guest
Raymond D. Jones
13 years 9 months ago

Investors know that tough economic times call for better portfolio management.

Retailers are no exception. They need to sharpen their focus on destination categories to draw shoppers into the store. They should try to take build margin on impulse driven products and incidentals where shoppers are less price sensitive.

Consumers are also likely to cut back on trips and concentrate their purchases in fewer stores. This is where retailers with effective loyalty programs really start to benefit.

Dick Seesel
Guest
13 years 9 months ago

I agree particularly with Professor Reibstein’s take. It’s a good time for healthy retailers to gain market share. As long as the financial models make sense, there are opportunities to be more aggressive than your competitors on pricing and on inventory levels, as well as to maintain a strong marketing presence. More aggressive merchants have an opportunity to steer consumers’ buying habits in their direction, in order to build on those changes when the overall economy improves.

David Livingston
Guest
13 years 9 months ago

Oh, dude, I feel like I’m back in one of the college business classes 30 years ago. I need some Mountain Dew to stay awake. These college professors must of have gone undercover and worked at Aldi or Woodman’s over the summer.

The ideas presented by these professors are excellent, however, there is one big flaw. These are long term solutions and most retailers want a short term fix.

Doron Levy
Guest
Doron Levy
13 years 9 months ago

Now is the time for retailers to dish out sterling customer service! The only ideology that works in ‘tough times’ is VALUE. If you can convince your customer you are giving them value, you will have a customer for life. The act of raising prices when people are losing their jobs and houses seems counterproductive to me. Simple advice: offer better service than your competition, focus on higher margin products when merchandising and make sure your loss leaders are shielded.

Joel Warady
Guest
Joel Warady
13 years 9 months ago

Not to sound too simplistic, but for years the experts have advised retailers to focus on having a well-integrated online/offline strategy. Many of the traditional brick and mortar retailers ignored this advice, and they are the same retailers who are complaining that Amazon is killing their business. These same retailers also continue to print Sunday ads that are sent via newspapers, while the newspaper readership continues to decline.

Advice to the retailers? It’s simple. Stop approaching the market in the same way that you have been for the last 20 years and recognize that the world, and the consumers you are trying to reach with your message, are listening and responding in different ways. Once they understand how and why their consumers shop, and adapt to meet their needs, the retailers will have significantly more success.

Gene Hoffman
Guest
Gene Hoffman
13 years 9 months ago

When the economy is tight and you are in the horse race of retailing what do you do? You first slap the horse with your promotional whip. If the horse (retailing) doesn’t respond adequately and win increasing accolades of the fans, you analyze how to feed the horse to keep it healthy until there are faster track conditions and more enthusiastic fans.

So you temporarily invest in forward buying oats since the horse needs to stay well nourished and kept as healthy as possible at the lowest cost during the lazy, hazy interim period so it can run faster when track conditions improve.

Liz Crawford
Guest
13 years 9 months ago

While all of the strategies listed may certainly help, I believe that we may see more retailers buying more pieces of their supply chains to gain greater control of both costs and products. Next step: allow consumers to buy into this kind of saving with memberships.

M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
13 years 9 months ago

The “Let’s get rid of it” philosophy of inventory referenced by Prof. Cachon still remains the only viable solution in any retail environment, atmosphere, or time. Retailers never buy stuff to keep it or to return it. They buy it to sell it. Thus, a more accurate description of the Professor’s observation is probably “Let’s sell it.”

Other than that, we really must thank the Wharton Professors for the notes from their Marketing 101 syllabi.

Mark Lilien
Guest
13 years 9 months ago

What might be appropriate for one retailer might be wrong for another. Supermarkets can’t easily absorb any price increases because their turns are so high and their margins so low. That’s why many supermarkets change produce prices more than once a week. Slow-turning retailers sometimes make nice money marking up their inventory, such as jewelry stores when gold prices soar. And most retailers just don’t have much price independence, because many folks clearly shop around.

Even if all your customers don’t shop around, are you willing to jeopardize 5% of them? 10% of them? Most stores struggle to achieve 3% comp increases. Lose 1% of your customers and that’s 1/3 of your comp increase.

Furthermore, very few American retailers have unique assortments. Most private label items have readily available substitutes at competitive stores. And almost no famous brand items have monopoly distribution.

Ted Hurlbut
Guest
Ted Hurlbut
13 years 9 months ago

I would echo the importance of providing value, and that value means very different things to different customers in different channels and for different products. Value may mean pricing, but just as often it may mean quality, customer service or aspirational appeal. Each retailer, large and small, must emphasize their own unique positioning and advantage. In any economic environment, clarity, focus and execution will lead to success.

Having said that, financial basics need to be followed during periods of rising costs. The top line is critical (if stubborn during downturns) but the margin line pays the bills, and margin percentage is critical to assuring vendor payables can be met. It may be tempting to buy in more inventory with cheaper dollars, for sale later, but excess inventory invariably bids prices down in markdowns and clearance.

John McNamara
Guest
13 years 9 months ago

The “lesson” I get from their study is a priori to their specific recommendations: save cash during the good times to maintain business as usual during the bad.

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