January: Top-Line Fool's Gold
At the beginning of January, pundits expressed optimism that 2011 holiday sales came in on the high side of consensus estimates. But we were skeptical that the stronger sales were really indicative of the improving health of retail. We were then treated to multiple
pre-announcements, from prominent and lesser-known retailers alike, bemoaning lower profit margins. And we expect to see more of the same as earnings announcements come out in February.
Let's remember that this year's 3.6% uptick in overall sales barely outran annual inflation, estimated at slightly over 2%. While this increase is surely welcome, retailers have to stop thinking they can "make it up on volume." Strong performers are focused on the bottom line—always.
What dragged retailers—and margins—down? The simple answer, of course, is discounting. But that's too generic of a response. Shoppers proved they were willing to spend when stores priced merchandise right, and many retailers performed admirably on both the top and bottom lines. As we cautioned all last year, those who were unprepared simply chased each other down the discounting drain…on margin. Add to the normal issues facing retailers the key differences in 2011: Consumers are trained not only to look for but also to wait for eventual discounting, and without a compelling reason to buy they are happy to wait out the sea of me-too offerings. Additionally, consumers comparison-shopped with a vengeance, using mobile technology to turn many categories into a generic price game, forcing retailers to entice them with margin killers like free shipping, price matching, and extended operating hours.
In the table below, we summarize some of the key consumer behavior and select countering tactics. While not exhaustive, it helps to frame the problem retailers are facing:
Table: Consumer Behavior and Countering Tactics
| Consumer Behavior |
Countering Tactics |
| 1. Holding out for markdowns (only making discount and deal-driven purchases) |
• Compelling value (not just price)
• Improved inventory management
• Deeper analytics for omni-channel touch points
|
| 2. Comparison shopping (showrooming brick-and-mortar stores against e-commerce) |
• Exclusives and/or private label
• Price intelligence solutions
• Differentiated product presentation strategies |
| 3. Demanding convenience (expecting extended hours, free shipping, price matching, etc.) |
• "Boutique style" customer service
• Integrated selling platforms
• eWallets and payment options
• In-aisle shopping and self-check out |
And, as always, our complete data pack of retailer and macroeconomic data is attached. Follow this link to download the AlixPartners Comp Sales Report for January 2012.