Financial Professionals: Maintaining Profitability Amid Lower Selling Prices

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Coach experienced strong comparable store sales through 2007, partly benefiting from an increase in store traffic, better conversion and a higher average selling price. Perhaps the latter contributed 4 to 5 percent of incremental sales for several years, but now Coach's results are trending in the opposite direction with the average handbag price expected to decline 10 to 15 percent this summer, compared with 2008. It is important to note this represents a shift in mix, rather than a reduction in gross margin. As an example, Coach Management noted 50 percent of its handbag offerings were priced between $200 and $300 this year, compared to 30 percent of its offerings last year.

Rationalizations of store space, inventory reduction, and a slower consumer recovery have been the key issues behind tempered growth expectations by retailers and vendors. The lower average selling price will be a major contributing factor, although perhaps offset by market share gains. Vendors will likely experience additional pressure as store consolidation and space rationalization continue. Finally, consumer spending will probably trail income ...
... growth as consumers rebuild savings and liquidity.

Adding to the uncertainty is the merchandise planning process; open-to-buy is usually based in dollars. Unit growth exceeded dollar growth last year because of sharp price reductions, making it difficult to develop a base to plan growth over the next 12 to 18 months. Conservatism will prevail and most stores still appear to be budgeting lower inventory dollars.
One potential offset for vendors may be broadening a brand's product line and expanding channels of distribution wherever applicable.

According to Financial Professionals the recession created excess production capacity such that value pricing can be maintained over the near term; margins could probably improve because of lower inventories and reduced markdowns. However, over the longer term, a more efficient business model needs to be developed - one that has a lean and scalable cost structure.

Financial Resources and expense reduction and cost savings programs have already been implemented by most CFO's and Financial Executives, but many of those programs need to be escalated. Initiatives should include sourcing, productivity and inventory management. In some instances, streamlining and an altering of the buying decision-making process should also be considered. This focus has to be ongoing and similar to the painting of the Golden Gate Bridge - when you get to the end of the process, it is time to begin the process anew.
Retailers should engage in an on-going, extensive sourcing analysis, examining the costs of direct sourcing versus agent sourcing, as well as consolidating suppliers.

Most suppliers have excess capacity today and have reduced prices to maintain sales volume, however, further economies could be achieved through collaboration and more efficient planning to maintain or improve quality. Logistics and distribution also have to be factored into the equation. The lowest manufactured cost in a remote region might not be the lowest landed cost due to a longer lead time and/or greater shipping distance. Further savings could probably be achieved through exploring direct shipping to a store or regional distribution center to minimize handling and time in transit.