Addressing the value proposition

Retail and Consumer Products Commentary - April 2012

As the economy continues to perk up, Director of Retail and Consumer Products Advisory Services, former industry analyst Jeff Edelman, considers the factors that retailers and vendors should weigh in setting pricing and growth strategies for their business.

How consumers define value: Apparel sales increased 3.8 percent last year according to a recent NPD report. Price inflation was probably in a similar range, suggesting unit growth was relatively flat. However, closer analysis of sales by retail sector reveals a different picture. Off-price store sales rose 5.6 percent, while manufacturer-owned stores, including outlets, increased an impressive 14.7 percent. A large portion of this merchandise was probably manufactured for those outlets, and not necessarily identical to "department store" product. Nevertheless, it appeared to reflect the consumer's interest in "brands for less." Value is not necessarily the lowest price, as evidenced by the relatively weaker sales performance by mass merchants. Consumers apparently perceive better value as being able to get good brands for less.

Adjusting to price-smart shoppers: A March 28 New York Times article highlighted that "pricing has always been a tug of war between retailer and shopper, with the retailer having more muscle, but that is changing.¹ Whether due to the Internet or the recession, the consumer is beginning to shift that balance of power. Strategies of JC Penney and Kohl's in reaction to this shift were discussed in previous commentaries. More recently, H&M reported disappointing gross margins citing reluctance to pass along all of its higher costs in favor of maintaining a price point. Christopher & Banks, reacting to disappointing sales, announced that it would undo last year's price increases. New merchandise was priced about 23 percent higher than the previous year; the consumer voted negatively as comparable store sales declined 14 percent in the fourth quarter. The real question, in our view, is whether the merchandise offerings were aligned with its target customer.

But is it the price or discount that drives the consumer?: Weather, as much as one hates to mention, had a significant negative influence on the sale of cold wear merchandise over the last several months. There was substantial discounting and returns to manufacturers wherever possible. On the other hand, newness drove more profitable volume. As an example, women's dress sales increased 17 percent last year, several times the overall rate of apparel growth, helping lift demand for accessories. It is also interesting to note that even with the discounting, men's outerwear sales increased 1.5 percent, whereas women's fell 3.2 percent. The consumer remains focused on value more than ever and increasingly has determined the appropriate mix among fashion, quality and price equation for their desired purchases—and those percentages will vary by product. Contrary to the lower-end stores, Saks and Nordstrom reported favorable margin comparisons in their recent earnings reports.

Divergent pricing trends could continue: Consumers were most focused on value during the recession, at which time there was a retailer strategy, Saks for example, to broaden price points with an increased focus on the midpoint rather than the upper end. This was in sharp contrast to the previous decade of upward movement as many women's moderate price brands were eliminated in favor of better. There was considerable dislocation within the vendor community in the aftermath. Today, we see a similar pattern evolving. The mid-tier, mass-market retailers appear to be primarily focused on price, as discussed above, realizing that discounting from a higher ticket was not having the positive influence on sales and profits as originally planned. Critical to a store's success is its customers' multichannel shopping experience, with appropriately targeted and differentiated merchandise. Understanding and catering to that consumer will ultimately determine the appropriate margin a retailer or brand can realize.

Jeff Edelman is Director of Retail and Consumer Products Advisory Services for McGladrey, and is located in the firm's New York office. He routinely advises senior management of companies operating in the consumer and retail sectors on strategic, sourcing, financial, marketing and distribution issues. He also works closely with internal teams on matters such as new business development, transactional advisory including due diligence and tax. Jeff can be reached at 212.372.1225, or via email at jeff.edelman@mcgladrey.com.

¹"Knowing Cost, The Customer Sets the Price," New York Times, 28 March 2012, A1