Tag Archives: retail

Wall Street Journal on internet pricing

December 24, 2012 By in economics, Industry Analysis, Retail Tags: , , , , , Leave a comment

The Wall Street Journal has an interesting, if somewhat disorganized, front-page article today on how internet retailers vary the prices and the selection of goods they offer to different customers.  The article addresses several different topics, which it doesn’t clearly distinguish:

—different pricing in different countries.  Who doesn’t do this?

—dynamic pricing, where prices of goods or services change depending on time and the availability of inventory.  Airline tickets  or hotel rooms are the model of this type of price change.  There have also been attempts by bricks-and-mortar stores to vary pricing by time of day, so that a gallon of milk costs 50% more at midnight than at noon–though I’m not aware of a single successful experiment of this type.

—customer assessment.  Four aspects:

—-The merchant uses the IP address of the customer as a proxy for zip code and offers different merchandise based on area demographics.

—-The merchant offers different merchandise depending on the device the customer uses to access the site–phone, tablet, PC.

—-The merchant offers different merchandise or pricing based on how the customer arrives on the site–mobile app, social media, search engine.

—-The merchant varies merchandise/pricing depending on the customer’s on-site behavior.

—proximity to bricks-and-mortar alternatives.  Here the online merchant varies pricing, based on how far away the customer is either to its own bricks-and-mortar store or to those of its rivals.

 

The first three of these seem to me to be staples of traditional retailing.  So it’s hardly surprising that once enabling technology became available these tactics would emerge in the online world.

The fourth is the problematic one.

There may be legal or ethical problems with charging higher prices in poor or rural areas where bricks-and-mortar alternatives aren’t readily available.  It seems to me, though, that this pricing behavior trains consumers not to use the sites of these merchants but to automatically go to online-only merchants like Amazon instead.

pricing out a polo shirt: investment implications

February 7, 2012 By in Current Market Thoughts, Industry Analysis, Luxury goods, Retail, Stock ideas Tags: , , , , , , , , , 1 Comment

teardowns in tech…

Teardowns have become a staple of IT investing.  Every time a new consumer device appears, tech websites get hold of one and rip it apart. They then publish lists of the components the device contains, along with cost estimates and a guess at assembly time and expense.

It’s all very interesting information.  Sometimes it can be the key factor in deciding whether to buy or sell the stock of a component manufacturer or designer.  Who wouldn’t like to have his chips in the iPhone4S, for example?  Or, suppose your company had a key chip in an older model but has been bumped out by a rival in the latest one?

…and for garments

The Wall Street Journal had an article last week where it did the same thing for a polo shirt.  Not exactly high tech, but I think it’s still interesting  in showing industry structure and where the money is.

KP MacLane

The article is about KP MacLane polo shirts, created by Katherine and Jared MacLane, two former Hermès sales managers who decided to become fashion entrepreneurs.  They sell their shirts online, at http://www.kpmaclane.com, for $155 a pop.

There certainly is a market for expensive polo shirts.  A Hermès polo, for example, retails for almost 3x as much, at $455.  Unlike KP MacLane’s, the Hermès offering does have a pocket.

selling points

According to the company website, the key selling points for the KP MacLane product appear to be:

–environmentally friendly;

–made in the US;

–upscale, niche;

–fusion of European tradition with American “craftmanship,” “ingenuity” and “pride.”

unit costs

The merits of this polo shirt aside, unit costs are as follows:

materials               $10.35

manufacturing     $11.05

shipping               $8.17, including $3 for an embroidered bag the shirt comes in

total                     $29.57 .

pricing

The MacLanes have set the wholesale price for their shirts at $65, a markup of something over 100%.  The wholesale to retail markup is about another 150%.

why is this interesting?

What do I find interesting about this business?

The MacLanes are a startup, so their unit costs are very high.  If they become a success, they’ll be ordering fabric in much larger lots.  This will mean they get a better price.  The same with the cloth-cutting and sewing.  My guess is that they’ll easily shave $2 each off their materials and manufacturing costs, even if they make no sourcing changes.  That would push their per unit outlays down below $25.

That would only be for starters.  But the MacLanes would certainly never lower their prices.   Any cost declines would only become extra margin for them.

On the other hand–and this is what’s really important–if the MacLanes can achieve a $155 price point, their cost of goods is almost irrelevant.

They currently mark up by $125 over the cost of each shirt.  With the economies of scale in sourcing that I’ve assumed, they would increase the markup to $130.  That’s only 4%.  If the MacLanes had a different objective and decided to source both materials and assembly from China, they could probably get their unit costs to $10 or less.  They’d lose their Made in the USA selling point, of course, which might be fatal; their quality control problems would increase exponentially; and they’d only raise their markup by $15.

In addition, it would also defeat the whole purpose of their business, which is to use marketing to create a non-commodity product, that is, one whose selling price is not based on the cost of production.

In other words,…

…the real money in the garment business is not in the manufacturing.  It’s in the brand creation.  The Hermès polo shirt I mentioned above probably doesn’t have production costs higher than the MacLanes’.  But Hermès has spent years of time, effort and spending on creating a brand image that wealthy people want to embody and are willing to spend extraordinary amounts of money to exemplify.

Notice also that the retail markup is hugely greater than the wholesale markup.  Yes, there’s a greater risk in owning retail outlets and in-store merchandise.  But the control of the brand message and of overall inventory is far superior to what a wholesaler is able to do.

the Internet

The internet is still in relative infancy, so I don’t think all its implications for retail are yet apparent.  Some already are, however:

–The role of physical distribution networks as gatekeepers for new products is diminished.  Entrepreneurs like the MacLanes can reach directly to the consumer through the internet, to create pull-thorough demand for their products at low cost.

–Weak brands, like those of many department stores, will face increasing difficulty, as will the brands they carry that use them as their principal means of distribution.  I think this means strong brands will be forced to establish their own retail outlets.  Weaker brands will fall by the wayside.

–For startups, a sophisticated web presence that clearly defines and exemplifies the brand attributes will be essential.

current investment implications

The number-one lesson is to avoid garment manufacturing in favor of branded retailing.

There’s a secular case in favor of luxury retailing, especially for firms that control the majority of their retail distribution.  The same line of thought argues against generic physical distribution, especially physical distribution of the type department stores have.

On the other hand, the broadening of economic recovery in the US is creating a cyclical investment argument in the opposite direction.

What to do?  Several possibilities:

–let relative valuation decide whether you want to make the secular bet or the cyclical one (personally, although I love luxury retail stocks, I’d prefer he cyclical),

–don’t bet.  Avoid the area entirely if you’re an individual investor; look like the index if you’re a professional,

–look for non-garment retailing, like sporting goods,

–find an indirect way to play the recovery of the average consumer.  This is my choice.  I’m betting on hotels.  I’ve owned IHG for a while and I’ve recently bought MAR.

retailers and inventories

October 14, 2011 By in China, Current Market Thoughts, emerging markets, Hong Kong, Industry Analysis, Retail, Strategy Tags: , , , , , , , , , Leave a comment

I want to write about prospects for retail during the upcoming holiday selling season in the United States.  I’m going to do it in two posts.

In today’s I’ll cover the general issue–how retailers figure out how much inventory to have on the shelves.  In Sunday’s I’ll cover what activity at the major ports in China and on the west coast of the US is saying about what retailers are doing this year.

the inventory problem

In its simplest form, the ground-level decision retailers make about how much stuff to buy to stock their shelves can be framed in terms of the two possible unfavorable outcomes.

They are:

–stock-out costs, meaning the opportunity loss a retailer suffers if a potential customer comes in to buy a specific item and is willing to pay full price, only to find that the store has run out.

This is a tragedy.

There’s some chance a good salesperson can persuade the customer to buy a substitute item that is available.  More likely, the customer goes elsewhere and the chance to grab a 100% markup over cost of goods is lost.

On top of that, the rival that makes the sale has a shot at becoming the customer’s first stop from that point on.  Also, too many empty shelves can create a “don’t go there” atmosphere akin to walking down a dark street in a bad neighborhood at night.  And a thoughtful shopper might construe the absence of certain product lines as a statement by their manufacturer about the retailer’s (low) status or creditworthiness.

 

The other side of the coin is:

—excess inventory, especially of seasonal items.  In this case, the retailer has the problem of how to dispose of the extra merchandise.

Three reasons for this:

the value of the inventory is eroding as time passes,

the merchant wants to recover the cash he sunk into buying the merchandise, and

he wants to create shelf space for more salable items.

Some things may be returnable to the manufacturer, whether the sales agreement, strictly speaking, allows this possibility or not.  Most, though, will go through a process of markdowns in the store, followed by sale (maybe even at a loss) into the extensive closeout network that crisscrosses the US.

Although the reality is that few retail purchases in the US are at full price, customers are put off if a store always looks like a fire sale is happening.  Branded goods manufacturers may also become very upset if retailers sell their wares at a discount or if they find their merchandise floating around in closeoutland.

True, some manufacturers are vertically integrated.  That is, they maintain retail doors themselves, as well as wholesale warehouses to serve both affiliated and non-affiliated customers.  In such cases, retailers can operate just-in-time by ordering periodically from local distribution centers.  This doesn’t eliminate the inventory planning issue, however; it just shifts it from the retailer to the distributor.  The tradeoff for the retailer is that he doesn’t capture the full markup from the factory door (as a rough rule of thumb, maybe half the total markup on any item goes to the wholesaler).

Over the past couple of decades, department stores, which still serve many of the needs of average Americans, have increasingly turned to house brands, with merchandise ordered more or less directly from the (usually Asian) manufacturer.  They may use an intermediary like Hong Kong-based Li and Fung for ordering or for design services, or they may go straight to the factory themselves.  In either case, their decision has been to increase their inventory-related risk in order to generate higher margins.

taking retail’s temperature

Generally speaking, small, lightweight, high-value items like laptops, tablets or cellphones, are delivered from Asia to the US by air. For most merchandise, however, speed isn’t essential and airfreight costs from Asia would take too big a chunk out of profits.  So this stuff travels by ship from, say, Hong Kong to California, and then by truck or rail to a distribution center.

Anyone can get a reasonable idea–with some caveats–of how retailers see the holiday season shaping up by monitoring the publicly available data on activity in the major import-export ports.

The message the ports are delivering is that despite relatively robust retail sales in recent months in the US, retailers are planning on at best a flattish holiday selling season.

More about this on Sunday.

 

Thanksgiving weekend shopping reaffirms a recovering US consumer

November 29, 2010 By in Current Market Thoughts, Industry Analysis, Retail, Shaping a portfolio for 2011, Strategy Tags: , , , , , , , , , , Leave a comment

the National Retail Federation survey…

The National Retail Federation released the results of its annual Thanksgiving weekend shopping survey, consisting of interviews of 4300+ consumers, yesterday.

The headline results are:  bigger crowds, $45 billion spent–up about 9% year on year.

The actual survey results, also available on the National Retail Federation site linked to above, contain more interesting information, namely:

–people traded up.  Shopping at discount stores dropped from 34.2% of the respondents in 2009 to 40.3% this year.  In contrast, department store shopping rose from 49.4% to 52.0%, and specialty retail store patronage grew from 22.9% to 24.4%.

–the types of gifts shifted from necessities to discretionary items.  For example,

—–14.3% of respondents said they bought jewelry last weekend vs. a low of 9.6% in 2007, 10.9% in 2008 and 11.7% in 2009

—–33.6% bought books, CDs, videos or video games vs. 41.7% in 2007, a low of 39.0% in 2008 and 40.3% in 2009

—–24.7% bought gift cards/certificates vs. 21.0% in 2007, a low of 18.7% in 2008 and 21.2% in 2009

—–of economically sensitive spending areas, only housing-related (home decor and furniture) is a significant laggard.  Among survey respondents, 20.2%  are spending on this category this year vs. 19.6% in 2007, 20.3% in 2008 and 19.9% in 2009.

–a third of all purchases, by dollar value, were online, with 33.6% of respondents saying they had shopped on the internet.

Many news sources, the New York Times, for example, are reporting that shoppers were also buying things for themselves rather than just holiday gifts for others.

…adds to the evidence of a healthier consumer

Over the past several days, other positive consumer indicators have been announced.  Last week, the Labor Department reportedThe Thompson Reuters/University of Michigan survey of consumer confidence hit a five-month high, although the release itself makes for pretty dismal reading.  While respondents may be feeling more secure now than for almost half a year, they expect the unemployment rate to stay high and salary increases to stay low.

investment implications

For a long time, I’ve been writing that I think that the recovery of the US economy this time around would follow the pattern of the rest of the world (that is, industry improves first, consumer second) rather than the shape it has invariably had in the past, at least throughout my investment career (that is, consumer first, industry second).

Recent data, and especially the NRF survey, seem to me to be in accord with my view.  I read them as saying that finally, almost eighteen months after the economy low, the US consumer is beginning to perk up again.

Ex discount stores like WMT and TGT and home improvement outlets like HD and LOW,  this suggests retailers with significant US exposure may be becoming more profitable than the consensus expects.  Stocks whose main virtue is that the vast majority of their sales are outside the US, in contrast, may begin to lose their allure in Wall Street’s eyes.

It’s relatively easy to check any stock’s geographical revenue breakout (and maybe operating profit, as well, depending on the company).  It should be in the firm’s annual 10-K filing with the SEC, available on the agency’s Edgar website.