Retail Price Pressure Percolating

Posted by Carol Spieckerman on May 17, 2011

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The recently-released April retail sales figures for the 25 retailers tracked by Thomson Reuters showed an 8.9% gain in same-store sales for stores open more than a year, which is the best performance since March 2010. Profits at America’s biggest corporations are running 26% higher than they were a year ago, and are on track to post a quarterly record of $22.05 a share.

So why did Macy’s CFO Karen Hoguet caution that “flattish for the year is still the right answer,” even as it posted its best first-quarter earnings since merging with May Department Stores in 2005? Why did Saks Chief Executive Steven Sandove call the retailer’s performance a “show-me story,” despite swinging a profit after two consecutive years of losses?

The answer is in several dynamics that are converging and conspiring to drive retailers to caution. These include high fuel costs, rising commodity prices, and ongoing consumer skittishness. In 2011, the Consumer Price Index (CPI) for all food is projected to increase by 3.5 to 4.5 percent, while gasoline prices are already up 30% from a year ago. And in a dynamic that William Fung, managing director of global sourcing powerhouse Li & Fung calls the “China Effect,” China’s cheap goods pricing lid is popping off as consumer spending, rather than producing goods for other markets, becomes the country’s new growth engine. Considering that Li & Fung sources and coordinates supply chains for about 30% of the brands found in the average American shopping mall, Fung is speaking from authority.

Despite these dynamics, I’m quite optimistic about the long-term retail outlook, especially as U.S. retailers put the pedal to the metal on opening smaller, more efficient formats in new markets. Also, as I noted in a previous article for LIMA, acquisitions are on the rise as retailers and brands shift away from cost-cutting margin expansion and toward growth-driven profit improvement. Goods may not be cheap, but now that major efficiencies have been wrung out of the system, the retail and brand landscape is poised to erupt with innovation and expansion.

In the meantime, I believe that a tough holiday season may be around the corner, with the temperature rising for spring of 2012. Proctor & Gamble’s CFO Jon Moeller recently stated that, if they hadn’t faced a $1.8 billion commodity cost increase this year, they would have had a “fantastic bottom line,” and went on to comment that “it’s our job to deal with that.”

Licensors and licensees can prepare for the inevitable by doing their jobs and shifting into scenario planning sooner than later.

Bottom line:

    Consider kicking off one or more of the following processes with your brand partners:

  • Value-based portfolio analysis
    o Licensors – Collaborate with licensees to determine which categories will be hardest hit and which will have relative immunity to price increases.
    o Licensees – Collaborate with licensors to determine which brands are better suited to absorb price increases and which must continue to drive value.
    o Licensors and licensees – Take the long view by remaining open to contract revisions and expectation adjustments on both sides of the table.

  • Retailer collaboration
    o Licensors and licensees – Proactively convene retailer brand decision-makers and discuss problematic findings from the portfolio analysis process.
    o Set discount and promotion thresholds in order to gird against brand devaluation.
    o Proactively recommend balancing brands, categories, and products to manage widespread or arbitrary price reductions.