We live in an era of a perpetual imbalance of supply and demand, and, therefore real-time price deflation across almost all consumer-facing industries. Indeed, price promoting has become the basis of competition. And, as we all know, this is a downward vortex that kills. A business cannot cost or price cut its way to growth over the long term. Today, it cannot even do it short-term.
Happy Holidays to all of our readers! With what seems like more sugar plums in consumers’ heads this year, and the “sugar high” of expecting more money in their pockets next year (or not!), the season also promises to bring prosperity to most retailers. This is what I’m hearing across all sectors. So, go for it – while you can.
Because one of the underlying realities that isn’t going away anytime soon is the never-ending imbalance between supply and demand which continues to force almost all retailers and brands to prioritize price promoting as the sole basis of competition. If any consumer-facing business wants to survive this perpetual pricing dysfunction, it’s going to have to break from the way business has been conducted over the last century. Hang on, I’ll get back to that.
To say we are over-stored is way too simplistic. It’s also what I have been saying for the last half century. When most of us hear or read the words, “over-stored,” our eyes glaze over. Let’s be clear: Flat out, the world just has too much of everything. How about over super-marketed? And when you’re inside, just note the staggering selection of stuff. And, not to state the obvious, over-malled?. Talk about the endless aisle online, we have endless aisles in the physical world. There’s twice as much capacity for manufacturing automobiles than demand warrants. And, yes, the U.S. has an astounding 23 square feet of retail space per capita. And hundreds of new websites are populating the internet every week. And then there’s the “Amazon Effect,” loading more and more stuff onto their platform at prices devoid of profit because they can.
Even though we read about a huge number of store closings this year, according to the IHL Group (as reported by WWD), there will be an increase of 14,248 stores opening this year vs. 10,168 closures, or a net increase of 4,080 new stores.
This perpetually mounting excess in supply will continue to kill many businesses and will drive others to totally transform themselves. However, the net amount of “supply” (retail space) that is reduced will not be enough to return it to equilibrium with “demand.”
Along with population and demand growth not keeping up with supply, it’s axiomatic that either growth or death are the only two alternatives in a free market economy. Making matters worse, Amazon and its wannabe upstarts are proving that growth doesn’t have to be profitable. Therefore, the pressure is on businesses to make more stuff (and services) faster and cheaper, but not better. And that’s what ultimately happens when businesses continue to scale up for the sake of growing the numbers. Most CEOs will tell their assembled troops at year end, “Congratulations, we grew the business this year (x-numbers), and next year we’ve got to beat those numbers.” So, imagine the insanity when you multiply this illogical call to action across all consumer-facing businesses. And the other thing that happens with more, more, more – and even more — is that the creators and distributors of the never-ending piles of stuff have to find more ways, more pipelines and more platforms to shove it all through, all the while searching for enough consumers to buy all of it.
Metaphorically, it’s like trying to shove ten pounds of s%#+ into a five-pound bag.
Furthermore, we are in the earliest stages of the Technology Revolution. We are now witnessing the impact that technology and the internet are having on the worldwide ability to make and distribute even more stuff, more efficiently and quickly. This has an enormous multiplier effect on the already strained supply-demand imbalance.
The time, manpower expertise and sheer capital investment challenges that all consumer-facing industries have to identify and implement the new technology tools required to transform their businesses is mind-boggling.
If these challenges in the land of excess, along with the billions of capex required are not enough, price promoting has shifted from a weapon of choice to a weapon of necessity. And the pricing game is exacerbated by technology-enabling price transparency. This is a retail nightmare.
The Basis of Competition Must and Will Change
We live in an era of real-time price deflation across almost all consumer-facing industries. Indeed, price promoting has become the basis of competition. And, as we all know, this is a downward vortex that kills. A business cannot cost or price cut its way to growth over the long term. Today, it cannot even do it short-term.
So, what must happen if we accept the fact that supply will forever exceed demand, and we know that a business cannot survive competing only on price? The basis of competition must change. And it will, but businesses that don’t make the change will die.
New world consumers are the equivalent of the cavalry leading the charge, and mark my words, it will force change both voluntarily and involuntarily. We are at the intersection where the new world of young, tech-empowered consumers are meeting and choosing the new-world tech empowered retailers, who get it and/or the old-world retailers who are empowering themselves with technology and making the transformation. They are not choosing the dinosaur old-world players who are still doing what they always did, but incrementally better, hoping for a different outcome.
Well, we know what the outcome of being incrementally better is. Going, going, gone!
So, what are the in-transformation old-world retailers, as well as the pure e-commerce players, going to have to do to win this new consumer drowning in a world of material excess? First of all, they must understand that the young new-world consumers are defining a whole new culture, and a major part of it is that they are totally reassessing the meaning of value and values. And it is becoming obvious that their personal values have an enormous impact on how they define value. In fact, they are redefining value beyond price, thereby reframing the entire commercial value proposition.
New-world value is not just defined by constant newness, with ever-changing innovative new products, services or experiences. Value is also assessed by the full cradle to grave journey of a product or service. It starts with where and how the entity is created and with what ingredients. Then it moves to how, where and in what environment it is presented. It continues to how it is distributed and delivered (free, fast and now). Value is equated to the entire holistic path from creation to consumption, and must also include a highly personalized, empathetic and frictionless experience. And then there is the overlay of the values of the manufacturer of the product – what the company stands for and how it lives its ethics. And finally, when the life of the product has ended, value is defined by trading, recycling, repurposing, sharing and otherwise sustaining the life of the product in a responsible way.
All of these components combined represent 360-degree value beyond price to new-world consumers. Because of their critical mass and the fact that they are tech-armed in the world of over-abundance, they can demand this level of total value. Therefore, they will force a new basis of competition beyond price. Only those retailers and brands that arm themselves with the necessary technology and all of the other components defining value for this new consumer will be able to compete in this new world.
Most importantly, this is the only path out of the downward vortex of price promoting. Who are our current role models? Do Starbucks, Apple or Lululemon put a high priority on price promoting? Is it the basis upon which they compete? I submit these brands have tremendous value, and they cross all generations.
In closing, enjoy the holiday cheer and the growth you are going to enjoy this year. But make a New Year’s resolution that you will rethink your intrinsic value so it aligns with the definition that this new world culture has given it.