Wharton Profs Offer Strategies for Tough Times
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?