Point of all the discounting is to earn shoppers’ loyalty for future

The title is a quote from one of the retail managers we will meet later in the article. Write down whether or not you agree with this quote before reading further.

If you look at it carefully, it is not difficult to see that retailers should have no pricing power. After all they are just the channels.

They do not know why the end customers are buying the products (What job is the customer hiring the product for?.

They do not make the products and do not take the risk of investing in R&D, design, supply chain etc.

They do not build the product brands and take the marketing investment.

But they do add one important value – connecting the producers with their target customers and enabling customers get the products they want, providing convenience, service, experience and information to make informed decision. So they get their a share of the value from the producers in the form of low prices they pay to producers or taking a cut of list price (think 30% fee by Apple or Amazon for Apps).

They can choose to share some of this value with end customers in the form of price discounts. They can choose all of the value and more for certain products in the hope of making up for it from selling other products at fuller prices (Loss Leaders).

some we won’t make money on, some we do

What we see with Black Friday deals is even deeper discounting and far too many loss leaders.

Black in Black Friday is supposed to mean ‘turning profitable for the year’ for the retailers. How can the retailers expect to make profit with deep discounts? Best Buy’s chief of retail operations had this to say about his store’s policy of deep discounting:

the point of all the discounting is to earn shoppers’ loyalty for future purposes

Let us stop and take a careful look at this. The only reason we see mob scenes on Black Friday is the deep discounts. Given that customers are willing to shop anywhere and if needed stay in long lines just for lower prices, how can you expect any loyalty?

If they were attracted by deep discount, and ONLY deep discount, to come to Best Buy, what makes you think they will remain loyal when some other store offers same or deeper discount in the future?

This brings us back to second part of the question we did not address on value add – what unique value does the retailer, the channel, add to end customers? When they have no products, no brand power or a compelling unique value to offer and compete only on price, they should not be rationalizing their discounting with hopes of future loyalty.

The deal seeking Black Friday shoppers, having scores their 60-inch flat screen TVs have moved on. Nothing other than even more discounting will bring them back.

The Point of all the discounting is not to earn shopper’s loyalty but a reality forced by the channel’s lack of value add to its end customers.

Best Buy Price Waterfall

Best Buy announced its fiscal Q1 earnings yesterday. The story is the opposite of what we saw for CPG earnings. The CPGs reported increase in profit despite losing market share but Best Buy reported decrease in profit despite an increase in market share. The main contributor to the drop in profits – price leakage. In its press release the company said

The company noted that comparable store sales in flat-panel televisions were essentially flat versus the prior year as unit increases offset declines in the average selling price.”

Despite selling more units the company brought is less revenue – the reason is the many discounts it made available to induce sales during the down economy. The price waterfall for flat panel TV tells the general story behind Best Buy’s statement regarding decline in selling price. From a list price of $1299 the pocket price, after all discounts and cost of capital to extend free credit to customers, drops by almost 40% to $781. bestbuy_price_waterfall

It is a good sign that the company realized the price leakage. We should expect to see drop in inventories, further drop in revenues but increase in profit  from better price realization in the coming months.