Commoditization: Channel Wars

By Jim Dion

In today’s hypercompetitive marketplace, more products are becoming commoditized by both online and brick-and-mortar retailers. For an increasing number of products, the retail price has been falling faster than productivity gains would ordinarily warrant, and the result has been ever-declining margins for most retailers.

This “race to the bottom” has been fueled by a weak economy, which for the past five years has made it very difficult for both the consumer and retailer to thrive, as well as by Smartphone technology, which gives the consumer the ability to check prices in the store as they shop. Consumers no longer have to drive from one retailer to another to comparison shop, they can do it right from a showroom. This ease of use means that customers are comparison-shopping even for small purchases.

THE LOSS LEADER TACTIC
To satiate the consumer’s price obsession, many retailers, both online and omni-channel brick-and-mortar retailers, have been using the loss leader tactic to an extreme, which means pricing an item at a loss, sometimes below cost, to either drive traffic to the store or website or to take a leadership position in that category. It can be predatory in nature and used to hamper or eliminate competition.

For flooring retailers, this means taking one or two categories and pricing them very aggressively to gain traffic, then hoping that the customer will buy some of the better margin items in their assortments. Ads for $0.49 per square foot laminate and $1.69 per square foot engineered hardwood are examples of this type of marketing. Once the customer is in the store, the retailer hopes to upsell them on to a higher priced product or add in higher-margin extras to make up for the loss.

This strategy isn’t used only in flooring. The most notable example of this sort of category decimation is flat panel TVs. The average retail profit margin on flat panel TVs today is less than 14%. It is simply impossible for most retail stores to cover basic overheads with this margin, much less make a profit, so retailers who are faced with this reality find other categories—such as audio, furniture and bedding—that will provide a better margin and use the higher margin categories to offset the lower margin category. This can work for retailers who can afford to carry other categories at a higher profit margin in their store, but it can also lead to scramble merchandising, confusing the customer with categories that they did not expect to find in the store and obscure the true nature of a business. Yes, some like Nebraska Furniture Mart can get away with selling carpeting and appliances, but they are truly unique.

FIGHTING THE RACE TO THE BOTTOM
Many retailers are awakening to the reality that they cannot afford to join these races to the bottom and are fighting back on two fronts that go beyond just adding more profitable categories to offset the unprofitable.

Many of the larger retailers and buying groups have created their own private label products, which removes them from the comparison price trap. This is a strategy well-tested outside the world of flooring. Retailers like The Gap, Victoria’s Secret and Brooks Brothers never ventured into selling other brands and, instead, made their store brand highly desirable. Others, like Ace Hardware, carry name brands but also have their own private label to compete with the name brands.

When a retailer has their own brand, they control the price at which a product is sold. No one can undersell them, and any online search that the customer conducts comes back with their price.

Some retailers that can’t afford to private label, like many mom-and-pop stores, can utilize a bundling strategy to help them compete, offering the consumer a price that includes product and services—such as measuring, design, removal, delivery, installation—so that they cannot comparison shop the product price.

Retailers who choose to carry brand name products know that customers will “showroom” them, using their Smartphones to compare their prices to other retailers’ or doing a side-by-side search of a retailer’s brick-and-mortar versus online pricing. Many customers are gravitating towards suppliers and brands that enforce a minimum advertised price (MAP) or, even better, have a unilateral price structure in place, setting a minimum selling price for an item, advertised or not. Often, the UP is the same as the manufacturers suggested retail price (MSRP).

More suppliers today are putting UP or MAP policies in place, recognizing that, if they do not, the dealers who do support their brand by offering great displays, knowledgeable staffs and value-add services will not survive the price wars, and then the supplier will be left with only large volume discount channels that do not enhance their brand image and will eventually destroy it.

Ultimately, if you do not build your own brand, you have to rely on quality suppliers that will partner with you and respect what you do for their brand. And suppliers need to realize that opening their own stores or selling on their websites will eventually destroy their retail partners and turn the supplier into a completely vertical operator, an almost impossible mode of operation today. Retailers add value to suppliers, and the relationship between them needs to be symbiotic if everyone—supplier, retailer and consumer—is to win.