Many retailers feel they're stabbed in the back by their vendors. The company who used to supply stuff to sell, are selling now selling it directly to their customers. In the worst cases, they are doing it at a lower price than purchase prices offered to the retailer. How can retailers survive the competition?
We first analyze the situation and then list tangible real-life survival tips.
Even since e-Commerce rolled in like an unstoppable Juggernaut, retail business ain't what it used to be. Before e-Commerce, price composition was pretty straightforward for retailers and resellers.
A manufacturer produced an item for price
p
, a distributor added its mark-up
m
, and the retailer added the final retail price markup
n
. A customer faced
P=
(
p+p*m)*n
. If this sounds all too mathematical, the simple point is that customer did not have access to goods before every business in supply chain had gotten its markup.
All right, in rural areas, you could go to a farmer and buy veggies at wholesale prices, but there was no chance you got a TV set without retailer markup. Things have changed, as large consumer goods manufacturers like Sony have started selling their stuff online.
Retail Battlegrounds
Many manufacturers still respect the business interests of their resellers, keeping their direct e-Commerce prices high enough, so resellers can accommodate their costs and net income. A retail business has to pay salaries, logistics, warehousing.
With a right kind of enterprise software, retailers can reduce inventory build-up and cut other costs. But even e-Commerce can be in trouble when a manufacturer starts selling directly, but brick-and-mortar retailers get hit the most.
There are three retail conflict zones:
- Brick-and-mortar against online retailers;
- Retailers against distributors;
- Any retailers, including online ones, against direct selling manufacturers.
In RetailDoc's blog, there's a fantastic post by retail guru Bob Phibbs that address the issue. "Not only is it easier than ever for customers to buy products directly from manufacturers online, but they are opening their own stores and using third-parties to get around the very retailers who built their business," Mr. Phibbs writes. "But I get it, stockholders are looking for additional value and the easy way is to cut out the middleman; just like the customers."
So how can retailers survive? We in Erply are confident that the bell does not toll yet. Or even if it does, it's not for you, but for some other retailers who bury their heads in the sand for too long. Bob Phibbs is optimistic, too. "/.../ the customer I believe still needs a middleman," he writes, and poses a question: "As an independent retailer, how do you turn a profit on products like this when your margins are thin, to begin with?"
Key Players of Retail Supply Chain
Distributors and retailers are links in the supply chain. Their existence is cemented by the value propositions they have to offer.
Never mind the value propositions of specific goods, here's what each link from the factory to the consumer has to offer:
- Manufacturers' value is in the products they make.
- Distributors and wholesale businesses offer a selection of stuff in bulk, sourced from diverse manufacturers.
- Brick-and-mortar stores offer a selection of good, displayed in a nice way and – this is highly important – displayed so that consumers can look, touch, smell and try the products before they buy.
- Online retailers offer cheaper prices and a possibility to shop in the comfort of one's home.
Brick-and-Mortar vs Online Retail Giants
We still see a great competitive advantage of brick-and-mortar commerce. No other player on the retail market makes it possible to check out the goods in real life.
Bob Phibbs: "From the point of view of a traditional brick-and-mortar retailer, adding value for the customer can be an easier proposition when you're competing with online giants like eBay and Amazon. The very fact that you are able to provide instant in-store customer service has for years, put you at an advantage."
We have seen an amazing e-Commerce revolution this millennium. As Investopedia puts it: "In the past decade, online retail sales have grown by more than 20% annually compared with only 2.9% for retail sales overall."
While this sounds like an apocalypse for physical retail outlets, we actually believe that the online growth is largely related to Internet usage growth. Amazon and eBay are well established in many product groups, but for clothing, cars, and food a real-life experience is preferred. Not to mention that ordering a sandwich online does not sound really feasible.
Emarketer.com writes about it: "As internet usage continues to mature across the world, e-commerce growth will slow over time, settling around 10% by the end of our forecast period. However, with sales reaching $2.356 trillion in 2018, a 10% growth rate still represents more than $200 billion new dollars that year."
Online retailers can offer goods with lower markups if they buy directly from manufacturers. Or have manufacturers selling in their channels. Otherwise, the online difference with brick-and-mortar is the lack of nice looking display rooms. On the other hand, online retailers have to dispatch their stuff to buyers, so there is a lot of extra logistics involved.
Retailers vs. Manufacturers
"But when you have to compete on price directly against vendor online stores, things get more difficult. One merchant told me a vendor dropped the prices at their online store below what it costs her to buy from the vendor," Bob Phibbs writes in The Retail Doctor.
How can retailers survive competition if manufacturers start selling directly? The simple answer is to rely on the essentials. Retailers are experienced in marketing the goods to the end user. For centuries, retailers have displayed the products and made people buy these. Beware, manufacturers are catching up.
Bob Phibbs: "Your first rule of thumb is simply to look the part of a successful competitor. It is important that your store looks every bit as professional and inviting as your vendor's. In fact, you should put the effort into looking better than your vendor."
He states that today's shoppers want the illusion of vintage. "They want the feeling of a funky crab restaurant that is clean, the food is great and the servers well-trained so they seek out Joe's Crab Shack - part of a multinational chain. Same in retail. We want the feel of old-time clothes but want it without the BO under the arms and the questionable stains on the pants. That means your store shouldn't look, feel, or smell anything other than the first rate and modern."
Here's a list of suggestions that Mr. Phibbs gives to retailers (source: The Retail Doctor).
- Look fresh
Update your flooring, clean it. If possible, replace it. Replace your worn-out furnishings with new. Replace your monolithic 26" tall counters with modern counters 32" high. Replace your display fixtures that have had the chrome ripped off from all the scotch tape with gleaming new ones.
- Look bright
Upgrade your yellowing fluorescent lighting covers and add even more bulbs or replace with new LED spotlights where appropriate so your camera equipment, vehicle, tools or kitchen appliances gleam.
- Look clean
Then ensure your professional and attractive displays are well-maintained with a cleaning crew, not leaving it up to your sales team when they have free time.
- Look confident
Lose your multiple messages of SAVE NOW! And FREE DELIVERY! and "SALE" in your point of purchase materials. Customers aren't stupid and when we notice dozens of Day-Glo signs hanging from the ceiling, papering over your display windows and taped to every product, it looks like you're like desperate. Even if you are, never look it.
- Look cool
Next get the energy right in the store. That means finding ways to get your vendor's products into the customers' hands. Finding ways to demonstrate live - not an LCD screen - using your best and brightest people. That might mean borrowing a page from the Apple stores' original plan of holding classes in the store. That might mean borrowing a page from the new AT&T store and have cubbies where customers and salespeople can sit and talk about the products.
- Let your customers look
Back of the 50's closing techniques and see your employee's main job as
1) Getting customers curious about what they can do with your products and
2) Getting your products in the customers' hands.
It is OK if someone just spends 30 minutes "looking." Be grateful for it!
- Keep in touch
Once that customer has purchased and used it for a while, they can be eager for becoming smarter about their product. You can really deepen your relationship because the customer who is most likely to look for the low price is the one most interested in information. Find ways to connect to them, offer by email, text or old school phone call offering a tip for getting more out of their purchase.
- Get the best stuff from manufacturers/vendors
Let your knowledge guide you in selecting merchandise. Know which products from a particular vendor they are looking for, then keep the right quantities of those products in stock. And remember your best salespeople should be able to poke holes in anybody's products, so train them how to show several answers to your customers' questions, not just their own personal favorite of one vendor.
We find this store-front related suggestion highly important for competing vendors and other retailers. As you've probably noticed, it's not only about new carpets. There's quite a lot of analysis and multifaceted real-time action needed. Besides excellent storefront employees and setup, retailers need superb back-end tools to make a headway in competition.
Here's a list of essential tools you can't go without:
- Customer Relations Management (CRM)
You have to know your customers. A mom-and-pop storekeeper can really know the client by heart. In a large store or retail chain, there are tens of thousands of clients. CRM software has to be accessible in each and every point of sales. Personalize as much as possible. Get sales history, and target offers well.
- Inventory and Product Information Management (PIM)
How to avoid the stock pileup, keep products flowing and run out of stock, optimize stock between stores? Use cloud-based software that connects to CRM and sales history, so you can predict sales and restock as needed. PIM lets you create dynamic price lists and product bundles. NB! Pair goods from multiple manufacturers, as this is something a single vendor operation never does!
- Advanced Point of Sale (POS)
Point of Sale is not only about taking the money and filing the transaction. A modern POS features built-in CRM and works in conjunction with inventory management. You could set up the dynamic discount system, so when customers buy something, the clerk can reward them with discounts in the next department. Again, a manufacturer-turned-retailer is unlikely to beat you in this.
- Real-time reporting
You have to have an overview of what's going on. How much does a product actually cost you? How much does storage per item cost? Which points of sale are doing better and why? Which products are selling better? A modern retail software solution – and we're proud to say Erply
is a leading one in that sense – gives you real-time reports of any complexity level. You can get a quick 360degree view, or drill down to fine-tuned regional, seasonal or product group reports.
Distributors: A New Value Proposition
Lastly, let's not forget about distributors get run over by competition, too. Retailers try to get their products directly from manufacturers. Big box stores are moving their private labels from generic Milk and Cheese to the territory of fancy marketing that mimics high-end brands both by looks and quality. And manufacturers are more and more selling directly or through online channels. Some distributors have successfully approached consumers and changed their business to online marketplaces.
For those distributors who have not gone online, the day ain't over yet. They're in charge of their business is focused on certain product groups, especially the ones that are regulated, or rely on a plethora of sources, or come from overseas seasonally and in huge quantities. Pharmaceuticals, firearms, exotic teas, herbs and coffees, grains and vegetables.
For the rest of distributors and wholesalers, the only hope is to perfect their supply system. The key factor here is to integrate the warehouse software with clients' inventory management software.
Thanks to cloud-based enterprise management software, a distributor can plug their supply data to retailer's software system practically seamlessly. Leading retailers don't go without automatic stock replenishment nowadays, and any API capable inventory software can integrate the supplier and the retailers.
It's almost as if a distributor becomes a supplier and common warehouse for a number of retailers. The distributors, therefore, have a new value proposition to make: they offer more than a selection of goods, they offer warehouse and logistical support. As a distributor serves several retailers, there's an obvious cost cut involved.
Retailers Will Survive... But Not All
We believe that in the raging retail competition wars, brick-and-mortar stores may lose ground, but the ones who survive will come out stronger. Cash-and-carry and big-box stores will probably lend the way to retailers, who rethink their stores as showrooms, not just place to keep stuff until a buyer comes. Analysis and dynamic information systems provide the competitive edge needed, so the better the retail software is, the better a retailer will do.