Retailers' Inflation Improvisation, Part II: Theory of Relativity

The following is Part Two of my two-part series on how retailers are waking up to inflationary realities ... and what they are leaving out.

Rising fuel and raw materials prices are inescapable, escalating realities that have predictably become unavoidable topics in recent retailer financial calls, conference presentations, and interviews. Despite retailers’ attempts at articulating short-term fixes, I see several market dynamics converging that promise to compromise their well-crafted stories (read Part I)

Convenience: Just Another Word for Nothing Left to Lose?

When asked about their inflationary coping strategies, Dollar General, Kroger, and Walgreens have all cited convenience as an arrow in their quivers, even as their convenience claims promise to be compromised by the competitive dynamics I mentioned in Part I. Kroger CEO David Dillon has deduced that, since shoppers are making fewer trips overall but Kroger’s shopper counts are on the uptick, “Kroger is convenient (in) every one of those trips they make.” Walgreens CFO, Wade Miquelon, has stated that “while we do see higher fuel (costs)...we also get some benefit offset because we are very convenient.” Dollar General’s CEO, Rick Dreiling went so far as to cite convenience and price integrity as the “two things that you really need to be tracking” in an inflationary environment. I’ve already addressed the precariousness of price integrity. Isn’t “convenience” a similarly shaky pillar? Retailers should be asking themselves what’s next, when everyone is convenient and close proximity makes price discrepancies even more vivid.

Theory of Relativity

Some retailers are counting on context. Kathy Tesija, Target’s EVP of Merchandising, acknowledged that Target has already executed selective “low- to mid-single-digit” price increases for spring apparel and that fall will mostly likely bring increases “into the double digits” in both apparel and home, and for a larger portion of the overall assortment than in spring. She noted that they also saw their competitors taking retail prices up, stating that “the market is moving along with the cost increases.” Carol Meyrowitz, TJX’s CEO, has said that the company is focusing on delivering “relative value.” I guess the reasoning is that if you’re going at the rate of the traffic around you, you can’t really be speeding.

Target and TJX’s previously-advantageous positioning may actually sink them in this rising tide. Both are positioned as better alternatives to discounters on the low end and value alternatives to specialty retailers and department stores on the high end, which makes for a whole lot of competitors. And as Target ramps up their grocery and pharmacy operations, they have to throw grocery stores and drug retailers into their “comparatively competitive” strategy, and hope that most of them will cave and ratchet up retails at roughly the same time. Sounds like a bit of a gambit to me.

Glomming Onto Globetrotting

Sourcing strategy adjustments have figured prominently among apparel and home retailers, for whom ongoing unanticipated increases in cotton prices have been a major headache. This has also been the case for vertical retailers and other self-sourcers, who have been hit with another whammy through rising labor costs in their go-to country, China. Glenn Murphy, CEO of beleaguered frock-maker Gap, recently revealed that his company has moved to alternative countries over the past 18 to 24 months, cultivating relationships in Vietnam, Cambodia, India, Bangladesh and Sri Lanka. Family Dollar’s CEO, Howard Levine, has mentioned increasing private brand penetration and global sourcing as ways that Family Dollar intends to “mitigate some of this pressure” and has stated that they are on track to increase direct sourcing by 20%.

Dollar General’s Dreiling has stated that while the company was very China-centric three years ago, they now have an office in India and are exploring South Africa and Vietnam. As noted in my coverage of a recent presentation at the International Licensing Expo by Rick Darling, president of sourcing giant Li & Fung’s subsidiary, LF USA , sourcing shifts will probably only provide short-lived advantages. Not only is everyone seeking the same alternatives, but just as retailers are adjusting prices based on competitive dynamics, alternative countries of origin will eventually adjust upward to meet the benchmark “China price.” 

Private Brand No Panacea

Private brands can definitely enhance profitability for retailers such as Family Dollar, who until now haven’t taken full advantage, but once the desired penetration threshold has been hit, they will be up against comps in subsequent years. Also, although private and proprietary brands may blur the lines for J.C. Penney, Macy’s, Kohl’s and others who trade heavily in embellished soft lines, retailers who rely on single-tier private brands with still-generic packaging make it easy for any savvy shopper to compare among competitors (Target's multi-tier, upscale private brand programs provide a bit of insulation by comparison). In fact, if Dollar General’s Clover Valley, Family Dollar’s Family Gourmet, and Walmart’s Great Value aren’t comparable to one another as the small format, consumables-focused crowds begin to form, someone will have some ‘splainin to do.

Will retailers stick to their short-term, inflationary stories as the sands continue to shift? If so, I see current contradictions giving way to future retractions.