Mitigating The Cost Of Tariffs Using Demand Shifting
Retail store expressed mixed earnings result but the overall direction of retail was towards faster fulfilment, curbside pickup, online digital sales, data-driven product sales, autonomous last mile delivery, and investments into the distribution centre, store remodelling, smaller store format, and real estate purchases. Discount stores & off-price stores released better-than-expected-results.
Most retailers sited on the earnings release that the retail operation could be affected by economic changes and also issued warnings about the price increases due to tariffs. It has been a concern for the stores on negating the impact of price increases.
One of the recurring cost in the retail operation is transportation cost, as it varies depending on demand. As the demand varies it becomes difficult to have full load transport always and the frequency of transportation increases to fulfil the demand. Retailers have been adding more convenience for the customer to increase the volume of purchase made. They have also resorted to crowdsourced delivery for reducing the cost of last mile delivery. The main attribute is the frequency of transportation that is required. Crowdsourced fulfilment may be cheaper but when you multiply it with the frequency of trips that are made. It adds up to the cost of operation.
Frequency of trip made depends on present consumer demand. People make purchases at their own convenience and they try to adjust their purchase behavior based on the offer availability. Consumers are always in the marketplace to buy the product until the product alleviates the inconvenience of not buying it today. In a simple sense, it should make sense to buy today than wait for normal purchase.
Demand Shifting
Actions people exhibit are purposeful. The demand can be shifted with price optimization which increases the basket size of the purchase orders. Pricing is an important driver for consumer purchase behavior. The main reason why discount stores & off-price stores posted best-than-expected results in the Q1 earnings release is because of the pricing. With current levels of debt, it becomes difficult to service the debt as companies start laying off.
When the prices increase in the economy, the consumer absorbs the cost in varying fashion depending on individual needs. People start prioritizing the products that are in most immediate need vs other products that can wait. Unless this inconvenience is alleviated using price reduction it doesn’t make sense for the people.
Price optimization can be implemented at various avenues of retail operation. One such space is discount coupons that consumer will get while the customer purchases one product and this can be utilized while buying products from other section of the store to get a discount. This increases the basket size of the purchase orders. Bundling products together at a lower cost also aids for increased purchases. Discount coupon on bundled products that allows customers to buy other bundled products at a discounted price will enhance the probability of increased basket size. Retailers have to test their margins to see the demand generated to the percentage of the drop in pricing of the product. Bundling products can also be done strategically combining products with the different life cycle, newly launched, margin, assortment, group it based category, most bought, machine learning unravelled correlated products etc. Bundling products is about adding convenience to the customer so they don’t have to pay for individual items or nor they have spent time in finding them individually. In a sense, bundled products reduce shopping time. Logic is to shift demand into single purchases than multiple smaller purchases. This way the frequency of transportation is reduced and also aids in demand estimation.
Subscriptions model also help in reducing the frequency of transportation. Same pricing optimization can be applied to the products in the subscription model to increase the purchase volume.
When people anticipate a price hike then they would do two things -> Buy products today that are in immediate requirement and also stock up before the price hikes take effect. Once the price hikes are in place people pullback their purchase behavior or look for alternative options. We are seeing debt level raising and the increased of servicing the debt is curtailing purchase behavior. In such an environment, people buy products that are in immediate need and any price reduction a store can provide would be attractive to the consumer.
Many of the retailers have expressed their concern about the cost of fulfilment exponential increasing with the order volume. Retailers have taken advantage of the retail stores and converted them into distribution centre to deliver faster. This is cost efficient than fulfilling orders from a fulfilment centre. Almost all the retailers have remodelled their store for faster replenishment of inventory. Stochasticity of the purchase behavior makes it harder to predict demand.
Discount coupons & bundled products often reduce margins but the uptick in the sales coupled with reduced transportation cost should be able to overwhelm and add basis points to the margins in the balance sheet. It would offset the increased cost of retail operation due to price hikes in the product.
It’s absolutely important for businesses to be risk-aware. Diversification of risk would help avoid a decline in sales and protect companies that are over-leveraged and depend on short term operating cost to keep the balance sheet look good against liabilities.
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