We are a specialist retailer that is in a growing market. Will we make more money by cutting our margins to grab market share?
“This goes to the very heart of what retailing is all about,” says AlixPartners director Dan Murphy. He advises specialists to make the most of weapons other than price.
As the supermarkets and major chains have grown in the last 20 years, their massive economies of scale have allowed them to reduce prices to levels beyond the reach of most small specialists; this is one of the reasons why many specialists have failed in recent years.
Murphy explains: “At AlixPartners, we work with retailers across the world, specialist and mass market, large and small. We always try to understand their customer segments and what drives buying behaviour. Whenever we carry out customer behaviour analysis, we usually find that of the 12 or so
factors which drive customer purchasing decisions, price is rarely in the top three.”
He adds: “So we try to find ways of building and presenting the full retail offer – range, service, environment, channel, and price – to emphasise a specialist retailer’s strengths, which the big players often cannot provide.
“Customers do care about service, product knowledge, environment, and choice, and will often choose the specialist over the bigger chains when they can get the balance across these factors just right.”
Murphy concludes: “Price cutting usually ends up as a race to the bottom, and the winner is the one who can hold his breath the longest. Unfortunately, the supermarkets and major chains have bigger lungs than the smaller specialists, and so it’s usually a risky strategy.”