How low can you go?

The news that Lidl, the German discount retailer, recently launched a range of denim clothing, with such a diverse range of items as denim-inspired knickers (£3.99) and a pair of jeans for the eye-watering price of £5.99, set me thinking.

The obvious question is how can you sell a pair of jeans for such a low price? We will try to answer that. More philosophically you might argue that there must be something “fishy” or unethical about such a price: particularly in terms of how Lidl sources such products at such low cost. We will cast our eye over that as well in the following paragraphs.

A helpful article that was published in the UK newspaper: the Guardian (13 / 3/ 2016) sheds some light on how Lidl might arrive at such a price. The author: Gethin Chamberlain asserts that it might be more accurate to consider the jeans that are on sale for £7.99 in Lidl’s “I love denim” campaign. The £5.99 jeans are more accurately described as “jeggings”.

Upon examination of the £7.99 jeans it revealed that it had four pockets plus six belt loops, three buttons and an YKK zip. It was made of 100 per cent cotton (the most expensive item of the material so far). These items, he estimates, takes he cost of one pair of such jeans to be between £2.30 to £2.50.

You can then add on the cost of thread (for stitching purposes): roughly 19p. The finished pair will also need to be washed. The estimated cost so far pans out at around £3.90.

The average Bangladeshi worker gets paid around 23p per hour. After some calculations, based on the average number of jeans produced in an eight-hour day (six days) and based on some studies undertaken by the Institute for Global Labour and Human rights, he estimates that they get paid roughly between 2p and 9p for each pair of jeans.

This takes us up to roughly £4.50 per pair. If you also factor in shipping, customs and warehouse costs, this increases to £4.80. Then they need to be taken from the port to the store. This generates a cost of £5.30. In the UK, we need to add on VAT. The author reckons that the overall cost pans out at around £6.36. This (on the pair of £7.99 jeans) would generate a profit of £1.63 per pair.

To be more realistic we also need to consider the role played by middlemen in the supply chain. They also will take a cut. It is difficult to estimate how much this might be. It could be of the order of £1.50-£2 per pair. While this ostensibly would eliminate all of the profit identified in the preceding paragraph, it does not take into account the purchasing power of Lidl. Placing such large orders provides the retailer with the opportunity to squeeze the best possible deal from the various players (manufacturers and middlemen) in the supply chain.

What are we to make of this strategy? Chamberlain argues that ultimately such a business model is based on the ability of one player (in this case Lidl) to exploit their dominant position in such relationships and take advantage of more vulnerable companies such as the Bangladeshi manufacturer to generate such as price. It can also be argued that it creates a “domino effect” in that the latter also exploit loose or non-existent labour legislation to pay people very low wages.

What do customers want? Do they know or (more fundamentally) care about the machinations used by retailers like Lidl to offer items such as the denim collection at such low prices?

Lidl argue that their buying power allows them to pass on the savings generated by bulk buying deals to its customers. This may be true at first glance. However it might be argued that it conveniently skirts around the more thorny issue of the pressure they put on suppliers in the process.

An interesting study carried out for Marketing Week (2014) revealed that only 15 per cent of shoppers stated that they were influenced by ethical concerns when making purchases. While this was based on a survey of 2,000 shoppers in the United Kingdom, and thus has to be treated with caution when trying to make generalisations across different geographic regions, it never the less provides some tentative indicators of the depth of feeling (or lack of) about this issue.

Overall 70 per cent of the respondents were classified as “cost-conscious” shoppers.

The study also shows that the ethical shopper tribe is divided evenly between men and women but with a stronger weighting towards older people. While 31 per cent of ethical shoppers fall into the 55 plus age bracket, only 12 per cent are aged 18-24.

The reality is that many shoppers in the UK either do not care about the ways in which retailers sources their products and generate such prices or selectively screen out such concerns when evaluating their purchase options.

From time to time retailers are called to account by the media in the form of exposes on sharp practices in such areas as exploitation, child labour, dangerous working conditions and so on. To be fair, many have responded by instigating practices that seek to address such problems. Codes of behaviour, the auditing of production facilities and visits to such plants are high on the list for many.

However in a quest to further reduce costs from the supply chain, I suppose it is unavoidable that some retailers will push the boundaries and take advantage of their dominance. In my view this will continue with the same certainty as “night follows day”. What do you think?

References

Bacon, Jonathan. (2014) Ethical issues a minor consideration for shoppers. Marketing Week (March 12)

Chamberlain, Gethin. (2016) How can you sell jeans for £5.99? Easy…pay people 23p per hour to make them. The Observer (March 13)

 

 

BOGOF Forever

Having taught various retail marketing courses for over twenty-five years, a phrase that I often use to shock students (or more realistically to wake them up during a lecture) may become somewhat redundant in the United Kingdom shortly. When I get bored in a lecture, I have a tendency to shout BOGOF. This catches the attention of the students but it does have meaning within the context of the retail sector. BOGOF refers of course to that ubiquitous promotional offer used by supermarkets which stands for Buy One Get One Free.

In February 2016, it was rumoured that the Competition and Markets Authority (CMA) had plans to announce a tightening up of the regulations on misleading advertising and promotions that are currently offered in abundance by the large supermarket groups. More accurately referred to as multi-buy deals, they reflect offers such as BOGOF and reduced price promotional offers for a limited period of time.

It is estimated that over 55% of all goods sold in UK supermarkets are based on such promotions. This contrasts with over 29% for Europe. For instance in France and Spain roughly 20% are sold using these methods and in Italy it pans out at approximately 33%.

Why is this government agency becoming so angst-ridden over BOGOFS?

A study by the consumer group; Which, indicated that shoppers on average overspend by as much as £11.14 per week as a result of being tempted by such deals and offers in the supermarkets. This equates to almost £1,300 annually.

Such deals it appears, can be difficult to assess and compare. Only 2% of respondents to a survey carried out by the Money Advice Service organisation were able to select the optimum deal from four sets of multi-buy offers.

Hey, why don’t I test you on one of these offers?

Of the following options for milk, which represents the best deal?

a). Six pints of milk for £1.80p

b). Four pints of milk for £1.40p

c). Two six-pint cartons of milk on offer for £3.50p

d). Two four-pint cartons of milk on offer for £2.

The answer is given at the end of this blog. Please wait!!!

This survey by the Money Advise Service also indicated that around 76% of the respondents regularly overspent on their weekly shop.

The other negative aspect associated with such multi-buy deals is that they encourage people to buy more than they need. This results in a lot of waste in the form of items not being consumed and fired out in the bins at the end of the week or month.

This discussion and proposed changes to the legislation appears to be having some effect. Sainsburys; one of the big four supermarket groups in the UK announced in February 2016 that it was planning to phase out all of its multi-buy promotions by the autumn. It based its decision on the fact that it is more transparent and effective to offer shoppers in their stores lower prices at quantities that are more relevant and appropriate for them.

The impact of the discount retailers such as Aldi and Lidl should not be under-estimated either. Increasingly shoppers are making use of their stores to save money. People that never went there before but have discovered them since the deep recession in recent years, have been surprised by the low prices but also by the perceived quality and value of their business proposition. In short, lower prices may act as a stronger incentive to shop in such outlets.

It should be acknowledged that the CMA has denied that it will explicitly prohibit the use of multi-buy deals in the future: instead it claims to be seeking greater transparency over the way in which products are priced in retail outlets.

Will shoppers miss such promotions if they disappear from the supermarket shelves and gondolas? It is debatable. We have become conditioned over the years to expect a raft of promotional offers when we make our way around the aisles. As mentioned earlier, shoppers are more likely to seek better value that can be identified through lower prices than complicated special offers. Arguably some shoppers are becoming more conscious of environmental issues that spin off into the area of reducing waste: a clear problem with the tendency to “overbuy” as a consequence of these offers.

In an era where supermarkets have undergone major criticism over many aspects of their behaviour: unethical sourcing, misleading shoppers and so on, any activity that attempts to make them more credible and transparent to their target markets is more likely than not, a positive development. Every-day-low pricing (EDLP) such as that advocated by Asda / Walmart certainly addresses the issue of greater transparency.

However we are unlikely to see the total eclipse of BOGOFS; unless of course they are banned, and this appears unlikely. Multi-buy offers allow retailers to widen their range of options when competing in a market-place that is driven by ever greater focus on lower prices and lower costs. We are likely to see less usage of such tactics however. As we know from our basic understanding of competitive analysis and strategy-making, retailers are challenged with the task of constantly trying to come up with the “latest wheeze” which might turn out to be a game-changer and lead to that all important competitive advantage.

Various tactics such as loyalty cards and multi-buys go in and out of vogue. We may see a period where retailers will focus more fully on lower prices and more targeted offers to its customers. This is likely to be driven by the ever-increasing amounts of “big data” which they hold on their customer base. In theory this should present numerous opportunities to come up with more creative ways in which to develop promotional offers that reflect the shopper’s personal preferences and shopping habits. It can be argued that this ultimately, will lead to shoppers capturing better and more customised value from their visits to their retail outlet.

In summary the use of multi-buy tactics such as BOGOFS is more likely to stall and decline, rather than disappear of the supermarket shelves. Simpler and clearer pricing should lead to a reduction in the level of confusion which appears to exist in the minds of many shoppers.

Maybe I can still shout BOGOF at my students into the future!

By the way the answer to my question posed earlier in the blog is???

D (it works out at 25p per pint).

 

 

 

On the Seventh Day

The thorny issue of retailers trading on a Sunday in the United Kingdom reared its head again recently. The government has taken consultation on the issue of whether or not to increase trading hours on a Sunday and is expected to introduce new legislation shortly to extend opening hours on this day.

Traditionally Sunday has been viewed in the United Kingdom and elsewhere as “a day of rest”: for workers, traders and shoppers. This harks back to ancient times, where religious conventions tended to dictate the behaviour of citizens and society. In the past century and in many countries, right up to today, trade unions also have had a powerful influence on the issue of trading on a Sunday – particularly in Europe.

In 1994, The UK changed the legislation and allowed retailers with floor space of over 3,000 square foot, to open for six consecutive hours between 10am and 6pm. This was a contentious issue with many interest groups such as religions and workers arguing vociferously against this move.

However it probably fell in line with what was happening with regard to people’s lifestyles and behaviour at that time. In the area of sport for instance, Saturday was always regarded as the “sacred” day for matches and events. This began to changes in the 1990s with major sports shifting some of their most attractive games to a Sunday. The English Premier League, Rugby Union cricket being to the forefront in this regard. People’s leisure activities also changed. Many viewed Sunday as a good day to “chill out” and get away from the pressures of work. Shopping became an attractive proposition for many and since the 1990s Sunday has proved in broad terms to be popular with shoppers – particularly at critical times in the year such as the lead-up to Christmas.

What happens elsewhere in Europe? Interestingly in major economies such as Germany and France, we have seen a more restrictive and conservative approach to this issue.

Sunday as “a day of rest” has been built into the French constitution since 1906 – a legacy of the socialist tradition. It is only in 2015 that the French government has begun to loosen the restrictive legislation on trading hours on a Sunday and is allowing limited opening hours in so-called “international tourist zones” in Paris. Areas such as the Champs-Elysees and Monmartre are a good example where many tourists visit and some find it surprising to day the least that stores are not open and available for business. Some out-of-town shopping malls are also being considered for more liberal opening and closing hours of business. The power of the unions has also influenced policy-making in this area over the decades. The present French government, hit by a poorly performing economy, see more liberal trading hours on a Sunday as an opportunity to stimulate employment growth and generate more revenue.

Germany also has been quite restrictive in its approach to Sunday trading. It introduced legislation in 1956 which gave limited retail sectors permission to open. Only four Sunday’s in the year could be used for trading. However both federal and regional policy makers (Landers) can apply different approaches. For instance Bavaria, which has a strong Catholic ethos and a strong union presence has been influential in restricting the opportunities for trading.

Despite the secularisation of countries in Europe and a drift away from people practicing religious behaviour, we still see a conservative approach in many countries in Europe.

What are we to make of the pending legislation in the UK to further liberalise trading hours on a Sunday?

In the 1990s we did not have online shopping. This phenomenon has mushroomed in the past decade and more importantly provides the shopper with “24/7” access to shopping. No bureaucrat, legislator or religion can prevent shoppers from engaging in such an activity at any time or day of the week.

For many people, shopping is about leisure and socialisation and getting away from the mundane aspects of the working week. It is a form of therapy for some. Is it not inevitable that we will see even greater liberalisation in this area of Sunday trading?

The proposed legislation in the UK still provides workers with the right to opt out and if victimised, they can take the offending retailer to court.

We arguably live in a “flexible world of work”. People increasingly work on zero or part-time contracts. Many are transients i.e. between jobs or careers. For instance retailers make plentiful use of students and older people to staff their outlets. These individuals are not necessarily seeking permanent and pensionable positions with such retailers.

We live in a mobile and multi-cultural age. People travel more and as noted earlier can find it infuriating to see shops closed on a Sunday.

What’s not to like about this move to more liberal trading in a Sunday?

Over to you!!

Two sides of the same coin at M&S?

Marks and Spencer continues to return disappointing sales and profits. In January 2016 it announced that its present CEO, Mark Bolland, will stand down in April. He will be replaced by Steve Rowe, who currently holds the post of Director of General Merchandise.

The Christmas period did not bring much joy to the company. Sales across its merchandise division dropped by around 5% when compared to like-for-like figures. Unseasonable weather and major promotional activities were identified as the main contributors to this position.

By contrast online sales and in particular, performance in the food section of its business introduced some form of counter-balance: sales held up well in the latter category while online returns increased by approximately 20%.

Herein lies the conundrum in my view. What business is M&S in? It operates in two distinct and separate areas: clothing and food. Over the past number of years the results have been consistent: consistent that is in terms of their predictability. Clothing and merchandise consistently underperforms while its “Simply Food” division generates very healthy sales.

It begs the question as to whether Marks and Spencer has any real future in fashion retailing.

At first glance the obvious answer is that it has. Throughout the 1970s and 1980s it was consistently portrayed as one of the iconic UK retail fashion brands: generating high quality merchandise at reasonably affordable prices. The advent of “fast-fashion” retailers such as Zara, followed by other “leaner” retailers such as H&M, Next and so on. These retailers in many ways have re-defined the way retailers operate: driving costs down, generating affordable and trendy fashion and constantly generating new designs (admittedly through replication rather than through originality). M&S would appear to be constantly reacting to these changes, without necessarily making any advances.

Despite introducing a range of new brands such as Autograph, Indigo and Per Una, it still struggles. Perhaps the introduction of so many brands has led to confusion in the minds of its target market?

Should it remain in the fashion retail business? Should it “bite the bullet” and concentrate instead on its very successful Simply Food division? In the latter case M&S has consistently proved to be innovative and creative when it comes to introducing new food categories such as salmon shells and Santa sponges.

In my view it may be too drastic an option to pull out of the fashion sector. It is experiencing some growth with its online sales division. There is also an opportunity to draw some synergies between the two divisions. In the case of rewarding loyal shoppers for instance it can make greater use of vouchers which can be redeemed across the two divisions. It is also likely that other retailers such as Tesco, Sainsbury’s and Asda will also step up to the plate with more attractive food options and provide a sterner test of M&S’s ability to retain its success in this sector. By putting “all its eggs in one basket” it may leave itself open to even greater threats over the coming years.

In the case of the fashion sector, M&S in my view needs to adopt a more focused segmentation strategy. Who does it currently appeal to? Some commentators argue that by trying to appeal to all ages, genders, shapes and sizes, it falls into the trap of having no distinctive appeal to any one segment of the market. Will young, professional females shop in the same store as their mothers and grandmothers? Probably not. It has to redefine its product offering in the fashion sector. By doing so, it may capture a point of differentiation that it currently appears not to hold.

On a positive note it appears as though its improved supply chain strategy has led to improvements in cost management in particular. Indeed some commentators have argued that the complexities and previous rigidity with regard to managing the supply chain has created more problems that the lack of impact with its different brands.

In summary M&S has a split personality. It has a “good side” and a “bad side”. The latter needs some major treatment. Maybe the next CEO will succeed where others have failed.

Amazon: The biter bitten?

The various theories built around the concept of the wheel of retailing seem to be bearing fruit in the case of Amazon. In November it opened its first ever physical retail store outlet in Seattle in the USA. On the face of it, this would appear to be a contradiction in terms. Amazon has been the “trailblazer” in the area of online retailing and has set the standard for others to follow. Retailers across the different categories have embraced “e-tailing” as shoppers appear to flock to this channel. Now the circle has turned full circle: rumours indicate that Amazon might open over 400 stores in the USA alone, in the coming years.

Retailers such as Waterstones are expressing concern at the likely impact that such physical stores would have in the UK market.

Why the about turn to this strategy? For years Amazon has never physically met any of its customers. Instead, due to the power of the “big data” that it collects on the purchasing patterns and habits of its customers, it has been able to provide a value proposition that is customised to individual needs. It has involved its customers in the process by encouraging them to post reviews of books, movies and other product categories. This has been of enormous help to others in determining what items they should buy. From a marketing perspective it also provides the opportunity for Amazon to “shape” and direct its customers to particular purchases. Why should they revert back to the traditional way of selling books and other complementary products? Especially when it would appear as though opening physical outlets will add to the overall cost of the value proposition and potentially make it less price competitive?

Initial evidence would suggest that Amazon is attempting to harness the detailed data to provide a store experience that is more attuned to the preferences and requirements of book purchasers in particular. The Seattle store highlights books that have received top ratings and reviews on the online channel. Thus it can be argued that it provides shoppers with a pleasant in-store experience that is built around items that are relevant to them.

It also has long moved away from being a simple bookseller: books make up a small percentage of its overall product offering on the web. It can be argued that opening some bookstores will have a negligible effect on its overall sales on the online channel.

Amazon will be attempting to change the face of physical store book selling. For instance shoppers can choose a book and leave the store without have to pay for it at a checkout desk. Technology will ensure that the amount charged for the item will be automatically transferred from the customer’s account to Amazon.

Maybe Amazon are not going “off the rails after all”. There is evidence to suggest that sales of paperbacks and hardbacks are increasing in the UK (Retail Week). This is the first time that such an increase has been tracked since 2012. One of the largest booksellers in the UK: Waterstones, increased the number of stores over the past two years. It is worried about the likely arrival of Amazon to this market.

How are we to assess this development? Perhaps it reinforces the importance of retailers increasingly moving to an “omni-channel” approach; where shoppers can in theory benefit from an integrated and seamless experience across different retail channels. I would welcome some comments on this move by Amazon. Over to you!

Tescoed

The relationship between the large multiple retailers and suppliers has always attracted publicity in the business and academic literature. Much of the views expressed are usually negative, especially about the behaviour of the retailers.

Because of their power and dominance, they are in a position to leverage pressure on suppliers to fall in line with their demands. This can range from imposing slotting fees, the threatening to delist suppliers, demanding retrospective payments or extra discounts and later payments.

In later January the Groceries code adjudicator concluded that Tesco was guilty of a number of breaches of the code, particularly in the areas of late payment to suppliers and treating the position with regard to its own finances as being more important than the issue of being equitable in terms of its dealings with suppliers.

The report also concluded that such behaviour, particularly with respect to late payments was widespread: partially due to a deliberate policy by Tesco and also caused by unclear communications guidelines that were sent to suppliers.

In one case a supplier had to wait over two years to receive payment on price changes that were incorrectly applied to it.

The adjudicator put forward a number of conditions that Tesco is expected to meet. These include giving the supplier a week to correct any errors in pricing and giving suppliers thirty days to challenge any proposed reduction in invoices.

Tesco escaped a fine because the activities took place before the adjudicator has the power to impose such a punishment.

Tesco has apologized and there are indications that suppliers are experiencing a better relationship with this retailer since the investigation started in February 2015.

What are we to make of this? Does this mean that we are unlikely to see any sharp practices by Tesco (or indeed any other multiple retailer) in future?

Such practices have been widespread and historical and it would be a naïve person who would accept that this ruling is likely to see the end of such behaviour. Tesco’s overall behaviour in the last couple of years arguably has been deplorable. Activities such as over-stating profits led to a sizable “black hole” of over £250 million in its accounts.

The pressure to hit margin target led ultimately to the deferral payments in order to reflect a more favourable financial position.

For now, relationships with suppliers are likely to stabilize as Tesco embarks on a public relations exercise to portray itself as an organisation that has accepted the findings from the adjudicator.

However the unpalatable fact remains that multiple retailers are under constant pressure to deliver better financial performance: from shareholders and the financial press in particular.

We are likely to see more subtle manifestations of the leveraging of pressure on certain categories of suppliers – particularly the smaller and more vulnerable ones, in the quest for more profit and efficiency.

In a situation where there is an imbalance in the nature of the relationship between two parties (retailer and supplier), it is a natural expectation that the more dominant partner will seek ways to build on its “power-position”. If the weaker party suffers then so be it!

Let us monitor this situation over the coming months to see what happens.

Somebody has to pay

Perhaps the benefits of shopping online are about to decrease. Recently in the UK, retailers have begun to address an issue which was always there under the surface but has not been really addressed up front. I am talking about the costs of shopping online.

Shoppers, in their droves, have embraced the concept of online shopping in recent years. To such an extent that many retailers are seriously questioning whether or not they need so many physical stores in order to conduct business. The perceived benefits of shopping online are based around the belief that you will get a better deal in terms of price if you purchase from an online retailer.

Amazon, perhaps the pioneer of online shopping, seriously challenged established retailers in the bookselling and music business. Those that have survived have had to redesign and reconfigure their business models in order to ‘stay afloat’.

However, one of the biggest challenges facing retailers who operate online channels is that of the cost of transportation and delivery of orders to customers. It places great strain on their respective supply chain strategies and structures. Many of them, seduced by the exponential growth in demand for online channels, have steered around the issue of the costs of delivering orders.

This however is changing. In the last few months, large retailers such as Amazon, John Lewis, Marks & Spencer, Sainsbury’s and Ocado have reviewed their approach to managing such costs and have introduced an array of different methods to deal with the subject. The common denominator in all of these initiatives is that the shopper will have to pay more for delivery.

These initiatives include shoppers having to make a minimum purchase order before they receive free delivery, or no free delivery at all and charges decreasing only as the spending on a particular order increases. Other retailers apply a time slot to the delivery: people pay more at peak times during the day and less, when orders are delivered during quieter periods of traffic. The latter point is very relevant in the context of delivering orders in major centres of population.

Another initiative involves shoppers being asked to make an annual subscription payment (e.g. around £50 per year). In return, they receive ‘free’ delivery. In some cases, shoppers are finding that even with the subscription fee paid, they still have to make a minimum order in order to receive the free delivery.

Forgive me if I am being cynical, but are we seeing the beginning of a complex problem being created by retailers?

Nobody is naïve enough to assume that retailers will blithely ignore the costs in their ever-ending quest to offer lower prices. However the bewildering array of initiatives being introduced is in many ways similar to the price tariffs that have been introduced in other sectors such as utilities and mobile phone companies. In the latter cases, the end result is that most consumers become confused by the jargon and the complex way in which the prices are determined and presented to them. Consumer groups such as Which also expose many of these companies for deliberately creating confusing and misleading tariffs such that the consumer ends up paying higher prices than are actually available, if people have the time and ingenuity to discover them! The next time you need to travel from one city to another, contact the rail operator for your region and you will experience this feeling of frustration and cynicism.

I would welcome comments and contributions on these questions.

Should retailers incorporate the costs of delivery into their overall pricing? This would avoid the situation where shoppers perceive the costs of delivery as being “extra” charges, over and above the price.

How do they keep the charges simple and transparent?

Do they have to make any apology for introducing these charges? After all, shoppers surely cannot expect such services to be provided free of charge?

Can we learn from any other sector?

How do they avoid being perceived as greedy?