If sales are slow, how do you respond?
The favoured ‘marketing’ tactic of all retailers is discounting; and that includes top-end brands. I can say this without fear of contradiction.
Consultants often suggest that this is a short-term ‘strategy’ that does not address the underlying issue, yet retail operators persist.
I found some good research that addresses this question quite definitively. Unlike many studies, this was not a ‘survey of opinion’, but rather based on a modified Du Pont analysis, including all the fancy statistical safeguards on a large sample of retail businesses. (The only question mark may be whether the American market place is comparable to the Australian one, but I will leave that for you to decide.)
Conventional wisdom is that companies can devise successful competitive strategies around either profit margin or asset turnover. That is; you are either a high margin/low volume business or high volume/low margin business.
Cost leadership strategy attempts to achieve organisational goals by delivering a product or service comparable to competitors' at a lower cost to the customer.
A differentiation strategy, attempts to deliver to consumers some characteristic of product or service that will command a premium price.
In this research, a modified Du Pont model of financial ratio analysis was used to evaluate a large sample of retailers using a metric termed RONOA – return on Net Operating Assets.
The results were interesting to say the least.
The RONOA ranged from 13.5% to about 58 % with a mean of about 29 %.
Cost leadership strategy
The RONOA ranged from -46 % to about 24 % with a mean of about 7 %.
What to make of this?
The results of this study suggest that retail firms that pursue a differentiation strategy outperform those retail firms that use a cost leadership strategy. By a long shot.
In fact, the best performing cost leader is still worse off than the ‘average’ differentiator.
But that does not mean that you can’t pursue a low-cost. You COULD be the one with a 24% return. Just recently JB Hi Fi announced their stellar results.
But the key point is that, when it comes to trying to be a cost leader, is that there can only be one leader (winner). And unless you are going to be that leader, it seems like a race to the bottom.
The better alternative (less risky and more rewarding) is to develop your point of difference. I have written previously about developing your proposition. (With extensive supporting templates – search for ‘mojo’ on this website.)
Sure it is harder than knee-jerk discounting. And it may take longer to get right. But eventually you will be the king of the hill, even if you have to build your own hill.