Two of the nation’s three largest retailers experienced an awful week. The market’s reaction to their earnings was partly about inflation and the downstream impact of supply-chain management that curtailed their profits. Wall Street assessed that these problems were something that could affect everybody else.
The result? Investors pummeled both Walmart and Target stocks, and other retailers were implicated. The retailers were “caught off guard by a rapid retrenchment among consumers at a time when they were carrying a higher than usual level of inventories,” noted Bloomberg.
According to the report, Walmart carried one-third more inventory, while Target had 43% more than one year ago. In response to this oversupply of goods, such as discretionary items like TVs, Target cut prices and trimmed its profit margins in those categories. Could better product and category price optimization have made a meaningful difference?
Yes, and here’s why. For many retailers, severe inflation is uncharted territory. Adjusting to inflation and learning to achieve “rapid retrenchment” requires new tools and a shift in strategy. Here are three price optimization capabilities that can become difference-makers for retailers of any size:
1. Listening to the Customer With Analytics: When consumers began tightening their belts, retailers needed to sense and respond accordingly. Which stores are harbingers of demand? Which categories are most impacted? If customers won’t accept price increases for essentials, will they tolerate an incremental rise in discretionary items? Are customers feeling more pain in Store A or Store B? Are digital customers more tolerant of small price increases? That type of listening requires analytics.
2. Changing the Margin Mix: Walmart reported that some of its customers are shifting to less expensive private-label brands. Private brands generally offer higher margins, so it’s a win-win for retailers and consumers. Retailers need to determine where they can make up for lost margin. The trick is balancing the portfolio by not overindexing on price increases or decreases. Most customers still prize quality even in an inflationary environment. Retailers tell us that finding skilled workers who can strike this balance is tricky in this labor market. There is a severe shortage of qualified data scientists.
3. Scaling and Price Optimization: Timeliness is an underappreciated capability. Many retailers encounter labor and technology constraints that prevent them from making timely price changes. For these retailers, it’s easier to reprice an entire category rather than specific items in certain stores. Under these constraints, pricing is a matter of triage and prioritization. But speed is essential when dealing with supply chain and inflationary issues. Today, more than 2 in 5 retailers use price optimization tools, but most cannot sense and predict demand. Many retailers still use spreadsheets to make pricing decisions, making it difficult to make rapid or iterative adjustments—particularly in multiple locations.
Walmart and Target are well-resourced and nothing if not resilient. They will learn from this experience. Will other retailers gain the capabilities to become more resilient to enormous swings in consumer sentiment, consumer preferences and consumer demand?
Anis Hadj-Taieb is general manager for DemandTec by Acoustic. He has more than 20 years of leadership experience in client management, revenue generation and team management, specializing in deploying analytics and optimization into the retail and fast-moving consumer goods industries.