May 17, 2004,
It's no secret that after several years of price reductions, the industry by 2003 was experiencing a significant disconnect between increases in unit velocity and the level of resulting sales dollars. However, as the first quarter results come spilling forth, there are signs the trend may have bottomed out.
Even the chief financial officer of the world's largest price-crusher opined recently that a little inflation would be a good thing. And when Wal-Mart announced its quarterly results last week, CEO Lee Scott reinforced the "higher-prices-are-coming" message, noting that deflation on non-food goods had significantly improved in the opening months of the year, due to higher raw material and commodity costs.
If a resolute roller-backer of prices like Wal-Mart asserts that it has been giving back too many dollars in price cuts to consumers, it's tantamount to a lifeguard blowing the whistle and ordering everyone out of the pool.
The question now is to what extent suppliers will benefit from the halt in massive, sequential price reductions on consumer goods. My guess would be only partially.
If inflation is to rear its head later this year, as many believe it will, this will be a rising tide that lifts only some of the boats. Even if retailers eventually ease up on demands for markdown money (a big "if"), they're still going to demand more bells and whistles at existing price points. And they'll continue to look for the lowest wholesale pricing they can get on all price points to hold the line on margins.
Also, there's hardly a retailer today that isn't engaged in some form of direct sourcing and product development — and the majority have said they intend to do more of it.
Yes, there will be some stubbed toes along the way. There will also be some real disasters.
But if the price-reduction cycle has finally hit bottom, the retailer-direct trend is nowhere near running its course. It will be a while before retailers figure out just how much cost related to self-supply they can swallow. That day is probably another two to three years out.
As always, what will win the day for suppliers is creativity, freshness and flexibility. Speed-to-market is becoming more crucial than ever. One-trick ponies will have to work very hard indeed to prove their relevance.
All of which means that an industry that has been dancing as fast as it can will have to learn to pick up the pace.
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