May: The Price Point: Pricing becomes Key as Costs Continue to Construct
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In January, we predicted that the #1 issue facing retailers and manufacturers would be costs. We said that increased costs of raw materials and labor would begin to depress profits more than expected, and that mid-tier and value players would face the greatest challenges. Six months into the year, this has come to pass. Manufacturers have already announced significant price increases to their customers, and now retailers and vertically integrated specialty retailers are beginning to pass these increases on to consumers. The biggest portion of those increases is slated to hit consumers in the second half.
Looking ahead, the real story in retail is not as much COGS as it is pricing. Retailers should be looking at pricing on key programs and items as well as at their promotional efforts in an attempt to drive home a value message for cash-strapped consumers. Stagnant incomes and high gasoline prices are pressuring consumer spending, which grew by only 2.2% in the first quarter, compared to 4% growth in the fourth quarter of 2010.* And declining home values, price inflation, and continued high unemployment pushed consumer confidence down more than five points in April.** In this environment, the last thing mid-tier and discount retailers need is to face bloated inventories coming out of the back-to-school season. These retailers would be wise to launch or continue efforts to tailor merchandise to local markets and invest in sales training programs that may bear fruit in coaxing a reluctant consumer to open her wallet.
On the other end of the spectrum, recent earnings as well as comp store sales announcements seem to indicate that luxury is alive and well, and the well-heeled consumer continues to shop.
As Karen Katz, CEO of Neiman Marcus remarked "The performance of the stock market directly affects how our customers feel about shopping. And our customers are gaining confidence in their finances, which translates into a willingness to spend money on items that are special and exclusive."***
In retail, as we predicted, some mid-tier and value players have seen their stock prices buffeted this month in a tornado of selling as the market has reacted negatively to downward guidance based on expectation of margin compression and weaker than expected performance metrics.
If we look at the retailers we track, the change in value for stock price averaged a 1.8% decline over the last 30 days. Big losers include Apparel wholesalers (-9.1%), Furniture (-7.1%) and Specialty Apparel (-6.9). In the apparel segment, this likely reflects concern about the rise in cost of raw materials and labor and the pass-through effect of the attendant price increases on consumer demand. On the furniture side, weak stock performance is likely related to continued weakness in the housing market.
Source: Publically available data and AlixPartners analysis
Clearly, those retailers/manufacturers that looked ahead last year and moved early to control costs will be better positioned from a pricing and profitability perspective in the back-to-school period and second half. Those who haven't taken those steps should be looking at pricing and promotions for back-to-school and make particular efforts to:
- Price key commodity programs competitively
- Manage margins by compensating for losses on commodity programs with higher prices for differentiated fashion goods
- Look at promotions to drive inventory management
For all retailers going forward, the key will be careful navigation of the twin pressures of volatile commodity prices and a hesitant-at-best consumer.
This Month in Retail
Based on our coverage universe:
Which retailer had worst comps this month?
Destination Maternity
Which had the strongest comps?
Saks
Other than Saks, who beat estimates by the most?
Costco and Macy's
Who missed estimates by the most?
JCP and Stage Stores
Which retail segments performed worst this month?
Men's and Women's Specialty Apparel
Who had the worst comps for the most recent quarter?
Coldwater Creek, Books-A-Million, Collective Brands, American Eagle
Who had the best comps for the most recent quarter?
Tiffany, Zale, Genesco, Foot Locker, Ann Taylor
Which companies have had most consecutive negative quarters of comps during the past six quarters?
Liz Claiborne, Walmart US, A&P, Books a Million, Borders, SuperValu and Winn Dixie
-Need full comp data- As always, our complete data pack of retailer and macroeconomic data is attached. Follow this link to download the AlixPartners Comp Sales Report for May 2011.
For comments and additional information, please reply to retail@alixpartners.com
*"Higher Prices Eat Into Consumer Spending Gains": The New York Times, 28 May 2011, New York edition.
**S. Mitra Kalita and Nick Timiraos, "Housing Imperils Recovery: Home Prices Sink to 2022 Levels; Consumer Confidence Falls as Pessimism Grows," The Wall Street Journal, 1 June 2011, page A1.
***Maria Halkias, "Neiman Marcus' Profit and Sales are Up as Luxury Shoppers Return," The Dallas Morning News, 27 May 2011.
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