Retail Pricing Perspective
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A perspective talk on Retail Pricing I have given at Indian Institute of Management - Bangalore in 2011 and 2012
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Retail Pricing Perspective
- 1. March 2012 Bangalore, India Perspective on Retail Pricing IIMB Discussion Session Amit Kapoor
- 2. Context • Retail is Personal – “First Moment of Truth” happens on the middle shelf on aisle 5! • Retail is Local – Store formats located within walking / driving radius are the ones that count (or the ones that delivers!) • Retail is Evolving – At least organized multi-brand retailing (FMCG / Grocery / Apparel / Electrical etc.) in India and abroad Amit Kapoor March 2012 2
- 3. Retail Pricing Perspective • Why is it Important? • What are the Challenges? • What are the Approaches? Amit Kapoor March 2012 3
- 4. Importance – Capabilities Lens Strategic Consumer Insight & Planning, Space Value Creation / Format Strategy & Marketing Strategy Pricing Policy Commercial Category Management (Assortment / Range, Price, Pricing Structure, Promotion, Merchandising, Supplier, Private Label) Price Level, Price Communication Executional Demand Operations Customer Pricing Execution, Planning & & In-store Service Price Metrics Inventory Mgmt. Execution Amit Kapoor March 2012 4
- 5. Importance – Profitability Lens • Location # of visitors • Format / Concept footfall • Advertising / Offering Customers • Assortment • Price/promotions % buyers • Merchandise / Layout Sales conversion rate • Service/Loyalty No items • Assortment • Price / Promotion / Loyalty Basket • Merchandise / Layout Value Retail Average item • Format / Concept Margin price • Price / Promotion • Assortment/PL Merchandise • Suppliers • Supply Chain Employees • Service level, unit cost, productivity Costs Point of Sale Space • Location, use, turnover (POS) Other • Maintenance, cleaning, utilities,… Central Amit Kapoor March 2012 5
- 6. Importance – Impact Lens Retailer Cost Breakup Key Retail Profitability levers Net Margin 2.7% Addressed through cost Fixed 24.7% efficiency initiatives Cost Elasticity Net Margin Increase =-0.25 Variabl e Cost 72.6% Elasticity = -1 (Revenue Neutral) Amit Kapoor March 2012 6
- 7. Challenges – Typical pricing capability gaps • Policy and Level • Insight • Tool Box • Process and Governance Amit Kapoor March 2012 7
- 8. Policy Challenges • Rule based − Based on cost plus margin; driven by supplier pricing − Based on rigid guidelines – strict Hi-Lo • Competition based - Matching / follower strategies • Customer based – Targeting the average customer Amit Kapoor March 2012 8
- 9. Policy Challenges – Setting the Right Price Customer price sensitivity Non-product offering (e.g. service, Willingness-to-pay convenience) (Value pricing) Relationship with customer Upper Bound Meet competitive threats Retail How much Drive foot fall Price value to share Desired customer Increase penetration or market with the Level behaviours share customer? Encourage switching Lower Bound Actual cost-to-serve by customer segment (DPP) Cost-to-serve Customer buying behaviour Channel / customer service costs Amit Kapoor March 2012 9
- 10. Insight Challenges – Understanding Elasticity Category: Chest Freezer Category: DVD Camcorders Elasticity = -0.12 Elasticity = -4.68 In-elastic category Highly elastic Sales Volume (‘000s units) Sales Volume (‘000s units) 1% change in Price will result in 1% change in Price will 0.12% change in Sales Quantity result in 4.7% change in Sales Quantity Log (SQ) = 5.7 - 0.12 * Log (ASP) + 0.97 * Log Log (SQ) = 17.3 - 4.68 * (Seasonality) Log (ASP) + 0.64 * Log (Seasonality) Average Selling Price (£/unit) Average Selling Price (£/unit) Amit Kapoor March 2012 10
- 11. Insight Challenges – Not that easy! • Elasticity • Demand Model • Probing or Trials • Pooling with and without cross-elasticity • Lifecycle Price Decay Curves • Cannibalization Factors • Conjoint Analysis Amit Kapoor March 2012 11
- 12. Tools Challenges Revenue Customer Relationship Demand Based Management (CRM) Management (DBM) Sales, Marketing, Price, Promotion, Range, and and Service Merchandising Siebel, Oracle, Salesforce.com DemendTec, SAP Khimetric, SAS, JDA, KSS Retail, Oracle Profitlogic POS Enabled Enterprise Relationship Supply Chain DDSN Management (ERP) Management (SCM) Finance, HR, IT, and Purchasing, Logistics, Inventory and Manufacturing Distribution SAP, Oracle, Peoplesoft JDA/i2/Manugistics, SAP Cost Efficiency Optimization Amit Kapoor March 2012 12
- 13. Process and Governance Challenges Process • Trader mentality – limited structure and guidelines • X-functional engagement (Marketing, planning, channels) • Lack of alignment to category / brand strategy Governance • Limited governance on pricing management / leakage • Driven through overall margin KPIs –reward and incentives aligned to them Amit Kapoor March 2012 13
- 14. Approaches that work • Using POS driven analytics: Tesco • Developing a consumer-centric / geographic model: Best Buy • Managing price expectation: Trolley Pricing, John Lewis • Enforcing competitive / EDLP pricing with discount model: Aldi • Shaping demand with coherent capabilities: Zara Amit Kapoor March 2012 14
- 15. POS driven Analytics – Tesco / Dunnhumby • Segmented customer base + Loyalty tiers • 7 million coupon price promotion; 10x effectiveness • Linking to POS analytics to availability Amit Kapoor March 2012 15
- 16. Consumer Centric / Geographic– Best Buy CDs, Home Departments DVDs Theater Jill: More service Jill (Suburban throughout the store Mom) Barry: Self sufficient in Barry (Affluent many, very focused on Customer) home theater Buzz (Early Buzz: Don’t bother me, I’m almost through level 12! Adopter) Ray: Show me the latest Ray (Family entertainment device Man) BBFB: Product/solution BBFB specific Other Targets All other Low High “Bought” “Sold” Amit Kapoor March 2012 16
- 17. Managing Price Expectation - Trolley Pricing Destination e.g. Milk Price Match / Routine e.g. Category Lower Cereals Importance (frequency, type, Competitive Convenience e.g. role) Pricing Confectionary Margin plus Occasional Pricing e.g. Flower Background Core Key Value Lines Geographic Importance (competition Product Importance intensity) (role, comparability) Amit Kapoor March 2012 17
- 18. Managing Price Perception – John Lewis • Price Protection and Guarantee – “Never Knowingly Undersold” − Will match any advertised pricing for a similar in–stock product by a “conventional shop” − Will refund the price difference up to 28 days from the date of purchase • Does not apply to online and catalogue prices Amit Kapoor March 2012 18
- 19. EDLP Model – Aldi Discounter Provide EDLP prices to consumers Extend Invest in competitive threat Price Drive Volume Share Maintain Increased returns Net to Shareholder Margin Buy for 800 -1000 SKUs Less with 15x volume Drive Efficiency EDLC operation with 5 -8% cost Amit Kapoor March 2012 19
- 20. Shaping Demand – Zara Specialty Retailer 55% Greater 120 120 Margin Regular Price 100 100 ~15% Price advantage 80 80 $ (Indexed) $ (Indexed) 60 Mark down 60 40 20% cost disadvantage 40 20 20 0 0 0 100 200 300 400 500 600 700 800 0 100 200 300 400 500 600 700 800 Sales / Sq Foot Sales / Sq Foot COGS Margin Amit Kapoor March 2012 20
- 21. Final Thoughts • Develop consumer-back strategy – understand the buying process and consumer segments • Invest in analytics – predict, forecast and also shape demand • Align with business model – integrate capabilities and execution You can access this file online at goo.gl/dPNph If you have any questions, please contact me at me@amitkaps.com Amit Kapoor March 2012 21
Editor's Notes
- Before we dive into retail pricing – lets setup some context for Retail. I have always been very passionate about retail and one of things that is great about retail is that it is very personal. It is very experiential. There are “two moments of truths” when you are a customer of a product – First when you physically come across the product – when you can hold it / touch it / see it and second when you actually use the product. Most industries actually focus on the second one - how good the product or service is when you use it - does the shampoo work as advertised, does the phone work as sold, does the petrol give knocking sound or not. Retail is where you come across the “first moment of truth” – you can actually see the product it may be in middle of a shelf down at aisle 5 at a Reliance Store or may be dirty IOC petrol pump or branch officer at State Bank of Mysore extension branch. It is very experiential – good or bad – but they tell you a lot about retail and all of you sitting here have experienced it. Second thing about retail is that it all local. If you want to buy grocery on bannerghatta road and you want to walk – you may go to a hypermarket like reliance, or a convenience store like More, or a supermarket like Foodworld/ Benison or a local shop. If you want to drive you may go to a SPAR or Big Bazaar But that is the universe for the consumer and good thing that is the competitive set the retailer has to think about when he is looking at things. It changes a little bit if you do e-tailing – but it will boil down to where people can deliver – still fairly local. Thirdly it is a rapidly growing / evolving sector. I read some figures which said the Indian Retail markets Is about $410 billion in 2010and of that only 5% is organized retailing. When you compare that with the developed market like UK where in food /grocery the top 4 players (Tesco, Sainsbury, ASDA and Morrison) have 65% market share and the top 10 have 85% - the scope of growth is immense. In the challenges are different – you can see the first wave of players in India over the last few years – experimenting with formats, changing layouts, offering for the customers – and you can see there is lots to learn on how this organized retail market will grow. Same is true abroad – growth of big box retailing in the 90s, the challenges of e-tailing in early 2000 and the threat of discounters in late 2000s. Now there is lot of talk about SKU rationalization, local merchandising , sustainability, closed loop shopping experience, store as showroom, community / social shopping etc. Very exciting sector
- When we talk about retail pricing – I am going to talk about three topics today. Why is pricing important in retail, what are the challenges in retail and what are some of the approaches that retailers have adopted to improve pricing. Importance of pricing – we will look through three lenses – capabilities, profitability and impact Challenges of pricing – we will look through five different types – policy, insight, toolbox, process and governances Approaches of pricing – we will look at some of the things that I know work – Cost-to-serve, Trolley pricing, Price communication, Tools
- Lets take a capabilities lens to understand why pricing is important. There are three set of capabilities within a retail organization and this is also how a lot of retailers are also organized. You have the strategic ones – understanding what is the customer you want to attract into our store, their buying behaviors, and the format / channels that you would want them to use and also where to you open the stores – location. Then you have the planning – financial targets and metrics, space planning – how much space do you allocate within the store to each category – fresh foods, non-food, convenience, impulse etc. You also decide what the overall marketing and brand strategy for the store will be. At the next level you have the commercial operations. This is where most of the tactical action happens. Everything would be split into categories e.g. Milk, Beer / Wine category and within the category, the category manager would be responsible for what range of products should be there and would negotiate with the suppliers, what should be the base price, what promotions should we run, how should the be displayed in a store, what private label should I have etc. He is ultimately responsible for the P&L of the category and responsible for typically three metrics – sales. margin and market share. At the final level is the execution – You have the demand planning and managing the supply chain for the products. You have the store operations responsible for everything that needs to happen in the store – from stocking the shelve to sweeping the floor etc. And you have customer services – within the store or through other channel like internet, telephone etc. Typically to run a run a retail ship – you will a group strategy / marketing director, a group commercial director, a group retail and logistics director and a group customer service director. Along with the CFO and CEO – this is the main guys. You may additional key players like property director if the property portfolio is big, IT. And convenience / non-food as separate commercial people if that is growing areas etc. Where does pricing come in all this. At the strategic level, you have to decide what your economic offer is and how are you creating value for the customer. Which determines your pricing policy. At the category level – you are responsible for setting the offer up – the price structure, the level of price and how you will communicate the pricing. And the final thing is then executing the price at the store level and tracking it.
- Lets take another lens – profitability to see the importance of pricing. Most retailers would take footfall coming into the store as clients of which a certain percentage would get converted into customers. Then you are looking how big of basket / trolley of products to they and what is the average prices within the trolley. IT is easy to see the number one the most important factor is location – that will drive the catchment area and the footfall. That is why you will hear a lot of people saying – retail is just Location, Location and Location. The rest of the factor you will see that it Assortment, Price, Promotion, Merchandising, Layout all that drive. So that is one of the learning – prices is important but is the overall package that counts more that. That is why we talked earlier about category management – you want all these factors to be driven together when you look at profitability. On the cost side now you are looking merchandise that is the biggest cost – hence you look at gross margin. Then you have employees and then space cost and retail is asset intensive business. You want to generate higher margin / sales per sq ft – that is how retailer measure themselves. How tough is the retail business lets look at Q Ratio – which looks at market cap divided by tangible assets –If you have a unique brand, merchandise, format, service which gives differentiation, innovation, loyalty, customer experience and hence better pricing power and profitability you should be greater than 1. You will find that the bulk of the grocery retailers are at 0.8. Most business you can buy them out and money by selling the fixed assets. For fashion / apparel it it 1.6 (Amazon at 5.3, Apple at 4.7, H&M at 5.7, Inditex at 4.2) in 2011
- Lets look through the final lens which is impact Here we have a sample retailer cost margin and we are looking at a net margin of 2.7%. So how accurate is this – If you look at the Top 250 retailers (none of them are Indian) – you are looking 3.8%. FMCG would be lower at 2.8%, hardlines would be 5.9% . So we are kind of closer to the FMCG here with our numbers. Fashion is much higher at 7.7% but that is another story. If you looking at improving retail profitability - say you sell your retail business to private equity player. What would they do. They would really focus in reducing fixed cost – improve productivity in the HQ, improve staffing and staff cost, optimize the portfolio asset (include sale and lease back etc.) and you can see the impact of 1% reduction in Fixed Cost would be about 9%. The second then they would do is focus on cost price reduction – better terms from the supplier, take agents out of the supply chain, focus on private label etc. – and you can see the impact of 1% reduction is basically 26.2% increase in margin – basically everything you. But then you come to real impact which is really driving like for like sales. The street really like this – coz you are say ing I am using the same asset but my throughput is more. One incentives to drive sales or you play with price and promotions. You can increase prices and if you are elasticity = -1, your are revenue neutral but you have increased profitability. If your elasticity is greater than -1. then you actually get better impact. Playing with revenue side is much harder but done correctly you can create sustainable profitability.
- So that’s all good. But what are the challenges in retail pricing which makes it so difficult to execute. Policy: simplistic or rigid policies that guide pricing Typically guided by intuition or experience; largely people based Limited maturity in tools for pricing – excel still dominant and you do not capture the dataset like competition prices, store by store difference etc. Process is largely limited within categories, then there is limited alignment between what your category to do vs. how prices are changed. As price leakage that is something above the sales figure – no one measures or tracks what the opportunity loss are
- Most Policy challenges tend from a fact that they are never truly Value Based, Proactive or Profit Driven A traditional very shopkeeper approach to pricing is the cost plus pricing. I am getting products from the supplier at 70p and I need a 30% margin on it – so let me price it at one pound. You would be surprised how many retailers just follow this simple approach. Or they are following a rigid guideline set up in the system – I need to be doing Hi-Lo pricing every week on the same. I had client – one electric retailers which was doing Hi-Lo pricing on a Table Fan in the middle of a four week hot season when the whole market is out of stock because that was the policy! Then you have a matching strategy to match competition pricing or be within 2– 5% of the competitor . Especially true on the internet now – if any of you have shopped on the Amazon – you will find that you have lot of third party players that will sell you a product / camera at 20 -30% discount. You do not know how much stock they have and they have 5 cameras and you are sitting on 20000 cameras – so if you match their pricing there products you have pretty much lost your margin for the category. So not easy to implement simple matching strategies. Third is pricing to you average customer. That is not going to keep more than 10% of your customer base happy. Consumer companies are good at not doing this – they will not sell the shampoo to the same price to a retailer and local convenience store. – they will differentiate pricing atleast by their cost to serve. Retailer will say we have a customer back pricing but it is really looking at an average customer and trying to fit the prices – without really understanding the customer buying behavior.
- Lets look at the challenges of setting the right price. At the lower end you have the cost-to-serve – how much does it cost you to serve the particular segment / customer depending on how the are buying and which channel are the using. At the upper bound is the willingness to pay – which depends on their price sensitivity, what is the competition like, what loyalty etc. Those are your bounds – and then you have to decide how much you want to share with the customer and what you want to keep it in you pocket. It depends on the category – for a daily product like wheat or egg you may be want to be closer to the lower bound – coz you want them to come again and again – drive footfall but on a Lets take two example which may be easier to understand – Apple on the top end – where brand loyalty is amazing, limited competitive threat in some of your product segments, price sensitivity not that high and service / products quality very good. – so you are happy to price more at the upper end. On the lower end – lets take discounters – example Aldi/Lidl in Europe, Costco in US or closer home you have METRO whole sale discount club. You keep your cost-to- serve very low. You carry 800 -1000 SKUs compared to 20-30000 that a typical supermarket would carry. You have typically small store, low cost of operation (small workforce, multiskilled) and merchandising (sell on pallets, limited shelving) .and not carry too many national brands.. Your value proposition is rock bottom price and small margins and operate on the lower bound. Both are very successful model – Apple $4500 -5000 / sq ft. (compared to best buy $800 – 900 / sq ft.) vs. Aldi at $800 /sq ft. Aldi is about 850K per FTE nearly 3 times higher than the average in Europe For everybody else – it is tough decision to decide where and how to operate? That’s why it is important and complicated
- Describe the two category – Chest Freezer is in-elastic and a DVD Camcorder which is pretty elastic Now you go and buy chest freezer either coz you need it new one in your kitchen when you are installing it or if it is broken down. And it is pretty inelastic demand as you will see. DVD Camcorder is impulse purchase and far more elastic.
- Insight is guided by intuition or gut feeling and highly people oriented Elasticity – - Simple demand mode look at historical prices and aim to draw simple demand curves. They are simple co the ignore substitution impact, competition, prices image, seasonality etc. Also if look at meaningful data at store product level – you find it is very sparse. 25% products are new and 20% products do not have a prices change. How do you draw demand curve from a single point Trials / probing of setting test and control are incredible time and very small sample. We ran a four week test on digital cameras looking at price changes and found the the stock was not there in the control – so extended it for another four weeks .The found for at least for that prices increase the sales impact was minimal but statistically significant. No you have two data points after 8 weeks Pooling - Lump all the store together or all items in a category and calculate average elasticity. And you can also calculate cross elasticity and substitution impact . But did not we say retail was local – so are all items equal / substitution. It become more complicated when you have prices that decline like LCD TVs. Or when you run promotions – and need to find out what is incremental sales vs. cannibalization from other products or future sales. You may conjoint analysis – good for new products when you have the time but very long and costly for day pricing examples.
- How about tools to understand this better - till now a lot of people work on excel and it is hard. Initially the focus was on cost side – so have the ERPS and the SCM tools came in 80s and 90s. Walmart P&G talks a lot about Retallink and taking cost out of the supply side. The you have the CRMS tools that came in 90s and early 2000s. IT is only now that you have the DBM tools coming in – a lot of it is linked to POS (Point of Sale ) data which is in terabytes. A only now do you have the capability and the in storage and cheap processing ad as wells a st the science like Bayesian Inference to do something with it. A they have a long way to go before they become mature and adopted in the industry. I still thing we are in the post hype cycle. A colleague of fine implemented demandtec at one of our clients and they less than happy with the black box approach offered. Learning phase for the industry. Right now when you talk about prices –price optimization, promotion optimization and markdown optimization which works here. And mark the word optimization here – they are not good at setting base prices but optimizing. You need to add a lot of manual intelligence before they work – KVIS, clean data etc. Cleanse your Data Sophisticated Rules – basic, competition matching Pricing elasticity understanding The future obviously is linking the DBM to SCM – what you call POS enabled Supply Network. A stock move from the shelf and a signal goes to manfuacture the next product – that is a topic for another day.
- Also when it come to process – a lot of retailers have trader mentality – pretty much like a stock broker and very reactive - following the market. Very few retailers have structured process around managing price changes and guidelines on operating. Also it hard to get alignment between marketing, planning, channels and the category manager. Governance in difficult – as pricing leakage is hard to measure. How do Is ay what value have I lost because it is above the sales line. You have done Price Pocket Waterfall on the consumer products side – how from the trade price to actual sales lall the discount you have built in. - it is much harder to do that on the retail – coz there is no MRP in the developed markets. A lot of business will look at the margins KPIs and run the business – hard to look at day to day price optimization. Understanding and aligning category roles (traffic builder, profit generator, convenience etc.) Pricing analyst skill set Manage price change domino impact Decomposition / Measure Success
- So lets look at what some of the successful retailers do and what are some of the good approaches I have seen. All of them invest in understanding consumer behavior – Audience question - A leading hardware store had a $1 paint brush which one of there leading product in the category. Now Walmart entered the category and launched the same paint brush at $1 – kind of like a targeting them squarely. Now what should the retailer do? How should it respond to the price. If they studied the buying behavior – they understand that no body comes to buy a paint brush to the store – they come to buy paint. So they eliminated the products and voila there sales increased
- Tesco has had with its Clubcard loyalty program. With more than 13 million active cardholders and 85% of the chain’s sales captured on a loyalty card Founded in the UK in 1989 by Clive Humby and Edwina Dunn, dunnhumby - which is now fully owned by Tesco. While the most visible component of a loyalty program is the key fob or the card itself, dunnhumby has shown its clients that the real value comes in segmenting a customer base and developing tailored offers based on actual behavior. It focuses on generating the granular level of insight required to segment their consumers and shoppers into loyalty tiers, and then works with clients to devise strategies and tactics to move consumers and shoppers to higher levels of loyalty. Loyalty card are typically seen a cost as you give them points and then you need to pay them back What Tesco has done is made it into a effective with price promotions on that – It will sent more that 7 million different variation of coupon / price promotions- and really based on the basket of products that the customer is buying. It is effective - while the direct marketing industries average response is only 2 percent, Tescos coupon redemption rate is 20 percent, and ranges as high as 50 percent. It has now acquired KSS Retail to offer further price optimization based on the customer segments stuff. POS analytics can be effective – OSA is important - Dunnhumby does stuff look at sales in a store for a Kellogs box over and if you find that you have not sold a box in the last 6 hours – you a shelf availability problem – signal to the store to fix it
- Lets look at an example of somebody who took it to an exterme. By 2005 Best Buy was operating 900 stores across the U.S., all with a “one size fits all” logic. It was a skilled marketing amd merchandising operation. They had SOP for everything and store staff was very good – called blue shirts However, consumer were changing putting more emphasis on service and support and less on the technical aspects of products. Best Buy´s broad focus hence did not manage very well to meet individual needs any more - (33% of dissatisfied customers due to that) 20% of its customers (“angels”) accounted for up to 80% of sales by purchasing high-definition TVs and newly released DVDs without waiting for markdowns or rebates. “Devils,” in contrast, were high-maintenance bargain shoppers who asked for price matching, returned purchases, and bought items with returned-merchandise discounts. Anderson believed that Best Buy would be better off if it could focus on the most profitable segments Over the last five years, the company has collected data on 60 million U.S. households. To maximize financial performance in each retail store, Best Buy used data-driven insights to develop profiles of eight customer segments. To translate their insights into increased sales and market share, Best Buy needed to understand the best way to serve each segment. It began by establishing a few stores as laboratories. The company used analytics to determine, for example, the impact of pricing changes on customer perception and sales. Incorporating the insights from data analysis and testing at the lab stores, Best Buy developed new store formats for each segment. A Barry store, for example, is targeted to young, male audiophiles and videophiles and contains a home theater store within a store. Launched Magnolia and Geek Squad
- Major food retailers like Safeway, Carrefour typically adopt this approach Price edge needs to be clearly demonstrated 3% price difference is an average consumer perception level 5-10% price competitiveness is needed on “key items” to clearly show price leadership The price level for each product is defined based on the following three characteristics Category profile (dependent on frequency of purchase, type of purchase etc.) Importance of the product to the customer – KVIs, Core and Background Intensity of competition Talk about Grocer Top 30 basket and Tesco Price Match / Comparison SKU – 1400 SKUs on which they do KVIs. We worked on a client and it was E40
- You do not need to the cheapest to manage this. You can manage price perception in a number of different ways – Price protection and guarantees are one way to do so – JL- departments store in UK sells electricals, home prodcuts , clothes, etc. – It is not the cheapest on price but more know for their range and service. But it has amazing price image due to its “Never Knowingly Undersold” promise. Will match advertised prices from a shop and will refund the price difference up to 28 days IT is very effective coz you may end of refunding some – but a not lot. A lot of people are satisfied with the guaranteed and even if the see lower price – they may not come back to get the refund!
- Talk through the circle!
- Zara is a large fashion retailer – 4000 stores in 70 countries. It entered in India last year as a JV with Trent (Tata Group). Fashion retailing is really hard – coz you fashion change very quickly and what may be selling at full price a week ago – needs to be reduced by 50% to make it fly of the shelf. Zara makes If you look at the figure in front of you – Zara sells 2x times of products at 15% lower price and 20% cost disadvantage – and still manages to makes 55% more margin – completely incredible. Reason is that it prices changes are completely in sync with its business model and it actually shapes the demand to ensure it does not need to sell at huge mark downs to clear products Rapid sensing and fulfillment model – typical retailer takes 15 -20 days vs. 15- 30 weeks that other retailers. Fashion products are fresher, made closer to Europe e.g. Morroco and spain and made in small batches with artificial scarcity. Customer visits the store 4x times. Excess Capacity in the supply chain.
- Wrap up