Technology Creates Tough Environment for Retailers
Price particularly is becoming a bugbear, Jim Dion, president of Chicago retail consultancy Dionco Inc., told delegates at the National Retail Federation's 92nd Annual Convention & Expo in New York. The economy is weak, and "Save 50 percent" claims are becoming ubiquitous to where consumers believe markups are now in the 70 percent range.
Add to that mix a rapidly advancing direct marketing channel.
"Customers are becoming more price sensitive as they've gained the ability to research prices using the Web," Dion said.
Price is the biggest lever to bottom-line profitability, he said, citing research from consultant McKinsey & Co. For example, a 1 percent decrease in fixed cost boosts profit 1.7 percent, and 1 percent increase in volume raises profit 2.8 percent. Even better, a 1 percent dip in variable cost grows profit by 5.9 percent, and a 1 percent rise in price increases profit 8.6 percent.
It boils down to trust, which takes years to build yet seconds to shatter. Price is more than just what customers pay, it is a statement they make. So retailers must think hard about matching a competitor's price and what that says about the rest of their prices.
"The customer is not always right," Dion said.
Furthermore, not all customers are created equal. Customers are quick to complain and slow to forgive. Also, customers have choices and are clearly in the driver's seat as never before.
Dion's best guess is that about 20 percent of the population is now "bottom feeders." These are consumers with relaxed consciences.
"It'd be cheaper to stop them at the door and give them $10 not to come in," he said.
These customers raise the retailer's operating expenses. They discourage the retailer's staff. They increase the cost of doing business and drive up prices for good customers. They question the retailer's strategy. And they are not loyal, which means a business cannot be built with them.
The implications of dealing with these customers are many, Dion said. This customer group is growing. Continuing pressure on harsh return policies may hurt relationships with good customers. More judgment calls have to be made by front-line staff.
In one of the bolder suggestions, Dion said retailers "should consider a preferred-customer database -- prefer that they don't shop here."
Also, tracking customers by gross margin will be key to a retailer's success.
The Sept. 11 attacks also altered consumer behavior. They initially brought people to the notions of safety and security. Now, most consumers are between those and love and belonging. This is good for home and consumer electronics products.
"We'll take some time to get back to self-esteem -- fashion [and] lifestyle products," Dion said.
This cocooning is not just germane to the middle and lower classes. Even the rich are staying home, Simmons Market Research Bureau found. Before 9/11, 57 percent of Americans making more than $250,000 a year entertained at home. Afterward, 74 percent of them chose to entertain at home.
Security concerns dampen shopping in lifestyle or fashion products. Sept. 11 broadened the cocooning phenomenon. Messages sent to customers should involve safety, security or a sense of belonging.
"It's all about feeling safe, secure and part of a group and family," Dion said. "It's going to be awhile before things return to 'normal,' whatever that means."
He predicts that ego products will be a tough sell for a long time. Retailers need to communicate in terms of "enduring," "quality" and "investment" -- all emotional appeals.
On technology, Dion quoted from The Economist newspaper to reiterate his point. "The short-term impact of a new technology is usually overstated; the long-term benefit is often underestimated," The Economist said.
It is here that the Internet and e-commerce will be critical.
"The Web has not gone away and is slowly integrating itself into consumers' everyday life," Dion said.
Retailers who properly deploy technology are seeing tangible productivity benefits. Self-scanning of products at checkout for store-based retail is becoming a reality, making "self-service" an oxymoron.
Wireless, hand-held and cell-phone instruments herald the next revolution in retail. However, next-generation cell-phone technology adoption in the United States trails other markets by three years.
Nokia and Microsoft are squaring off to own the hand-held market, with Nokia's Symbian in the lead.
So, basically, customers will choose retailers that make it easy for them to shop. Technology brings real economies and makes products and services cheaper to deliver and thus opens more markets, Dion said.
"The paradox of mass technology and individualization is happening everyday," he said.