Pricing in Advertising: It’s a matter of wording…

In July of 2004, The Forzani Group Ltd. (FGL), Canada’s largest and only national sporting goods retailer, with banners such as Sport Chek, Coast Mountain Sports and Sport Mart, settled a dispute with Competition Bureau Canada for $1.7 million after it allegedly misled customers by inflating regular prices. At the time, this was the Bureau’s largest penalty ever given to a Canadian retailer. This story made the news on every television channel, radio station and newspaper. Of course, the media chose the Bureau’s press release instead of FGL’s, which gave the company lots of bad publicity.

Upon settling, FGL stated clearly that it does not admit to any wrong doing. From FGL’s perspective, choosing to settle instead of fighting in court was only because it did not want to spend the time and money it would have required. So who is right? Was FGL in fact inflating their prices before putting products on sale to show bigger discounts for customers?

The answer: It depends on who you believe! The dispute’s main focus was on the interpretation of the definition of “regular” price. FGL made heavy use in each of its flyers of the phrase “x % off regular price”, leading customers to come to the store to save money on items they would have normally purchased at a higher price. FGL defined the “regular” price of an item as the price on the item’s ticket or tag. This price was determined by the MSRP, or the Manufacturer’s Suggested Retail Price. The item would be brought into stores at that price, and every time FGL wanted to advertise that particular item, it would state its “regular” price, being the ticket price or MSRP.

From the Bureau’s perspective, the “regular” price is the actual price that the product is sold for more than 50% of the time it is available for sale, regardless of what it states on the ticket or tag. For example, if FGL had a T-Shirt arrive in stores and for the following week sold it at the ticket price of $19.99, followed by 2 weeks on sale at $14.99, the new regular price at the end of those three weeks would be $14.99, not $19.99. This $5 difference is what the bureau stated as an “inflated” price.

So how are retailers, such as Winners, able to state in their company advertising “20-60% off everything in store, every-day”? The answer is simple: They do not use “regular” price as the starting point to the savings figure. They use “compared to our competition” or some variations of that. Nowhere is the retailer publishing what their “regular” price is in their advertising. Therefore, they have the ability to have items on sale all the time! Who’s to say that Winners isn’t inflating their prices? How do they decide which other retailer they will compare their prices to?
In the end, in this highly competitive retail market, retailers are forced to come up with new and innovative ways to draw customers to their stores. FGL now employs “x% off the last ticketed price” instead of “regular” price in their advertising. Does this change of wording make a big difference in the customer’s eyes? I don’t think so. The Competition Bureau is there to monitor, but who is to say that they are always right?

SKU proliferation: good or bad? The impact on retailer

If you are a consumer:
Are you tired of there are continually more and more products for you to choose from the
shelf? Especially when you don't have any significant preference over those tiny differentiated
positioning products?

If you are retailer:
You need to secure good and big location to accomodate growing breadth of goods.You put
more and more SKUs in your store, which make your supply chain and logistics times more
complex than before. And you probably hate the fact you can't stop keeping investing in new
technology and maybe consulting to manage the huge number of "Items" because you really want to know which item is right to carry.

Here are some facts:
In 1970, Frito Lay had 10 SKUs; In 2000, they have 78.1; In 2005, probably 150.
Mercedes E class can be ordered in 3.9 trillion unique configurations, each representing a
unique SKU.
Pepsi Bottling Ventures(the third largest Pepsi bottler in the world: 1985: 8 SKUs; 2001,
250 SKUs, in 2005: 450 SKUs.
The average number of SKUs on display in supermarkets each week rose 26.2% to 1,055 between 2002 and 2003, while average store size stayed essentially unchanged at 44,000 square feet, according to Mosaic InfoForce, Chicago, an in-store conditions provider.

Is SKU proliferation good or bad? What's the impact on retailer? To answer this question, first, we need to understand what drives SKU proliferation?

1. Consumer's changing need is one of the factors of driving the SKU proliferation. For example, due to the popular health concern, we have "low carb", "low fat", "low cholestoral" choices when we face any food item.
2. Differentiation shapes the brand strategy of most established brand. As a result, manufacturers are trying to meet the need for consumer even there is only a small segmented need.
3. Innovation from technology also drives the SKU proliferation. For example, we have so many configurations for eletronics product: cellphone, laptop, walkman, ipod, digital camaera, you name it. Even for traditional food product, we have foods package for Oven usage, microwave usage, griller usage, even for brewing usage.
4. Competitive landscape in retail industry also plays a role in SKU proliferation. Some large retailers are able to demand unique or customized SKU from manufacturers. And they believe this will not only differentiate their offering but also make direct price comparison between stores more difficult.

What's the impact of SKU proliferation on retailers?
1.SKU proliferation offer retailer great flexibility in terms of assortment, because retailer now have more choices to implement their assortment strategy. SKU proliferation not only obviously affect breadth choices, but also it does affect the variety and depth choices. Think about it, the more SKUs you carry in one particular category, assuming you have a fix store space, you need to either reduce your variety or the depth of your assortment. No matter which one is choose, you have to reflect your overall assortment strategy first.
2. However, many retailers are actually thinking: "SKU proliferation is bad". "There has been an explosion of products that has exceeded what I think retailers want to offer", a quote from Kim Feil, Mosaic InfoForce's chief executive. Sophiscated research tools were developed to solve this problem.

3.SKU proliferation may increase the requirement of working capital as well. Autozone, the largest and far and away most profitable auto parts retailer in U.S. the retailer's strategy is to say Yes to their customer every time for any particular auto parts unit. Below is clip of CFO's speech from its public capital raising conference in september 2005: "... there is a space where SKU proliferation and inventory proliferation is here to stay....this business as you can imagine but we need to have an awful lot of parts in order to be able to say yes to our customers as often as we need to. Our typical store has about 22,000 SKUs ...two-thirds of them have an on hand of only one....when model combinations keep hitting the road with more and more parts. ...So what we have done is we have focused on the other side, driving the accounts payable to fully finance the inventory investment and taking out the working capital out of this business...In the database there was about 350,000 SKUs that we had to select them from and each and every store is targeted for that...by putting in place all the SKUs that we needed, we have taken that SKU count from 350,000 to 750,000 SKUs literally overnight. Does it sound crazy? Well, I guess it is the reality.

Not for grading: some tips on merchadising

Though our notes and cases provide tremendous information on retail assortment planning, which is very important in the managerial and strategic level, I think operational or executional merchandising tactics are still very important to implement high-level strategy.

From a manufacturer's perspective, ensuring the strategy and implementation to be aligned with retail's assortment strategy is crucial. For example, to increase the impact of new product launch, manufacturer always wants to get shelf space for the new product as much as possible even at the expense of other SKUs in the same brand family. However, retailer may not agree to do so as there is a risk that the new product is not attractive to customers. Therefore, retailer will be very conservative to determine the degree of supporting for your new product launch.

How to tackle this conflict? For manufacturer, planning ahead and be innovative are the keys. Similar to retailer's inventory transition, where some old or slow run rate items are determined to be cleared out with attractive promotion or discount, manufacturer can plan in advance to maximize the shelf space for the whole brand family. For example, offer extra promotion on new products or existing SKUs to get extra shelf space, reduce the supplying of existing SKUs before the launch of new SKUs so that the retailer may need to put more new products on shelf to maintain the on-shelf inventory; bundle the new and existing SKUs together etc.

However, I would say innovation is the ultimate solution to this problem. One kind of innovation is creative display. As somebody pointed out in the class, visual attraction is very important to both retailer and manufacturers. Retailer wants visual attraction because it enhances the customer experience and create an excitement. This is especially true in China (maybe other emerging markets elsewhere) where the retail channels are not as sophiscated and developed as in Europe and North American. I was shocked by the boring shelf display compared to China when I entered supermarket for the first time in Canada two years ago. That's probably because the retailers here have more bargain power than their counterparts of emerging market, and they typically don't want too much distraction other than standard shelf display. Maybe the consumers here just want to buy stuff quickly and will be annoyed by too much noises (creative display). What I heard from industry people is the retailers want more control over shelf display instead of giving it away to manufacturers, so that they raise the cost of special display to be "intimidating".

I also attached some demo which is part of the standard merchandising training for your interest.
The best height on shelf is 20 degree below the eye level. But the range between 10 degree above and 20 degree below eye level is the most reachable. The best width on the shelf for the same brand family is 90cm because people don't need to turn their heads to look for your particualr SKU. Though every brand manager want as wide as possible while retailer will not allow you to do so.


If you like these pictures and want to know more about the display guideline for big and small supermarket, let me know. Hehe, it's difficult to paste picture here.

Delia

Royal Bank, CIBC, & Wal-Mart?

The corporate behemoth Wal-Mart is once again striking fear into small businesses. As we first discussed in class, Wal-Mart is notorious for coming into small or new communities and slowly driving out the “Mom and Pop” locations. By carefully selecting real estate on the out skirts of town, offering low cost items and providing assortment depth, Wal-Mart is able to virtually create inner-city, retail ghost towns.

Studying Home Depot, we discussed strategies that were being considered in order to combat new entrants into the home building/repair space. Now US community banks are being forced to challenge Wal-Mart, as the retailer has applied to the Federal Deposit Insurance Corp. to become a charter bank. The fears that once echoed across the American retail landscape are reverberating across the retail-banking sector.

How can the banks incorporate a strategy to block Wal-Mart’s entry? Do they need to offer more merchandise in order to survive? Guns, cheap clothes or hand soap? Do they need to develop plan-o-grams in order to determine what products will be most profitable sitting on the teller ledge? I suspect that the inventory-carrying costs are too high for retail banks, forcing them to reject that option. Therefore, banks have cried out to the only entity that can help them; the faithful US Congress.

Small bankers, consumer advocates and union activists have been bombarding FDIC regulators with letters ‘encouraging’ them to reject the application. Congress has already introduced the Financial Safety and Equity Act, which could permanently block Wal-Mart’s move into banking. They argue that Wal-Mart should not be in the position to make credit decisions involving new businesses or retail competitors.

Wal-Mart fights back. They say that they only want a little itty bitty, limited-purpose bank in Utah. How does that threaten the US banking industry? Besides, Target has a banking operation similar to what Wal-Mart is proposing. Wal-Mart argues that “… it needs an in-house bank to help with the daily processing of millions of routine business transactions… we currently pay a small fee for each transaction for other banks to do that for us. We’d like to pay our own bank and return those savings to our customers.”

Since US companies and consumers are already upset and worried about the current fashion that Wal-Mart operates, they need to move quickly to prevent the Utah application from moving forward. Wal-Mart claims, “All we are seeking to do is create a small bank that can sponsor debit, credit and electronic check transactions into payment networks”. I am not against capitalism, but I don’t buy it. The business plan submission is based on a 3-year plan. Once approval is given, the applicant is not obligated to follow through with the intended plan. As good Ivey students, we all know that the business plan we conjure up is never the same plan that moves forward-an NVP gone bad. Wal-Mart executives will laugh at America as their pockets grow and the EPS rise. Three years is plenty of time to set up a banking network. Score: Wal-Mart and Wall Street 1, American Consumers 0.

What about the banks that are already in the Wal-Mart locations? A Wal-Mart spokesperson states that they “…have already leased space to independent banks in more than 1,000 of its stores and is constantly seeking new financial institutions as tenants. Wal-Mart has no intention of competing with its own tenants.” My first year finance grade was average, but I have a feeling that there would be more money to be made via a banking operation than leasing out a few square feet at a few Wal-Mart locations. In addition, since when has Wal-Mart shifted its strategy and all of a sudden become not interested in competition?

By allowing Wal-Mart into the banking industry, they do have the potential to do as they did with small retail companies. Banks would be next. I feel that the typical Wal-Mart customer would gladly switch their banking over if transaction fees and service charges were below industry averages. I know that I am service charged to death and would like to have some reasonable banking alternatives, but we live in Canada and don’t have as many options as in the highly fragmented US market. Loblaws has been successful with the President’s Choice Banking services and so would Wal-Mart. Maybe Canada needs some more competition in the banking sector?

Hopefully, Utah won’t rub all of that salt into the deep wounds of American consumers.

Welcome to the Ivey Retail Weblog

This weblog (or blog) has been created as a discussion forum for the Ivey Business School's MBA course in Retail Marketing Management.

The purpose of the blog is to allow students in the course to discuss retailing topics, concepts, trends, theories, ideas, etc. that are important to retail management, yet don't find time inside the classroom.

BTW, a number of students have already asked me for an extended retail reading list. A good start is the list at http://www.ecr.ryerson.ca/retin.html.

Welcome to our blog!

Kyle

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Professor Kyle B. Murray, PhD
Richard Ivey School of Business
University of Western Ontario
Email: kmurray@ivey.uwo.ca
Web: www.kylemurray.com