Economic Trends and Retail Business

A quick survey of the recent headlines in newspapers and business news sites show that two of the most popular topics are the cost of oil and whether on line retail will cause brick and mortar stores to fade into history.  While many retailers may feel immune to these trends, history has shown this not to be a wise business strategy.  Everyone is familiar with the effects energy costs have on their business but recent market activity is scary.  An article on Bloomberg points to trends that any time energy costs increase by greater than forty percent, a recession is close at hand.  We have all types of economic forecasters telling us we are coming out of the 2008 economic turndown but energy costs have risen forty seven percent since October.  If we want to blame that on recent sanctions against Iran, we can but inventory levels have been increasing.  True, gasoline inventories have decreased as pipelines actually struggle to move raw materials to refineries but we all know eventually the higher cost of crude will move into an already bottlenecked refining process.  As these costs eat into the disposable income of our customers we know that our margins and sales will be squeezed.  Convenience retailers may think they are immune since we deal in consumables but again history shows our customers are becoming more disciplined and better informed.  Margins are already squeezed as consumers seek the lowest price and are willing to plan their purchases accordingly.  Traditional low margin destination purchases such as beer and cigarettes may continue even as the consumer trades down to lower priced brands but impulse products will suffer, lowering the average ticket and average margin of the purchase.  How will retailers offset these decreasing revenues while absorbing the higher costs of fuel, energy and wage pressure?  Now more than ever, companies should be looking at strategies to increase revenues and margins.  Most retailers have already cut operating expenses significantly and are reluctant in today’s market to increase capital expenditures unless a “guaranteed” return can be demonstrated.  Making a store seem new and pretty may have a temporary lift but customers soon grow to expect that presentation as a given and without new revenue streams, the retailer suffers.  How many beautiful operations have called it quits lately?  There are some fragmented markets that survive due to lack of competition but globalization of markets will soon eliminate this as chains with better operating scales chip away at these markets. 

On line retailing may seem to be impossible for some retailers, especially convenience stores but government and creative lobbying could soon change that.  Witness the recent ruling for on line lottery sales.  Although it is a low margin service, we all know the draw lottery has provided.  What would happen if a customer is allowed to shop on line for the best gasoline or cigarette price and then make the purchase and only accept the actual physical delivery at a retailer’s location?  Sound far fetched?  Why?  Freshness, interstate trade regulations and method of payment are the only real hindrances to this business model.  Paying for $50 of gasoline on line and simply entering a pin at a dispenser would not be very different than purchasing other commodities on line in the form of a futures contract and just accepting the delivery rather than trading the contract.  As a matter of fact, let’s take it a step further.  What is to prevent a customer from purchasing fuel on line and submitting it to an auction site?  Think of ebay for convenience.  Could be scary but as customers demand alternatives to existing business models, market resources could and will create a system to satisfy those demands.  “Blue Ocean Strategy” by W. Chan Kim and Renee Mauborgne demonstrate quite effectively that as markets become more competitive, the waters become bloody as everyone strives for operational efficiencies.  Earnings calls by Susser and articles on chains such as Huck’s show that retailers continue to cut a few basis points off operating expenses by investing in IT systems and soliciting suggestions from front line workers but these will soon be copied and become the norm rather than an edge.  The premise explored in Blue Ocean Strategy is rather than focus on the bloody red ocean, find something new.  Innovate.  Move away from the sharks and demonstrate the value to the customer.  Retailers are spending money on loyalty programs when it has been consistently demonstrated there is very little loyalty left in the market.  Everyone else has a loyalty program.  I had to hold back laughter when being presented a loyalty program and I asked the salesperson to tell me what would prevent this from becoming a commodity and costs of maintaining incentives to the customer would just escalate?  His answer?  Everyone else has one, you need to have one.  Maybe the worst reason in history to participate in a program.  How long will that curve last?  Rather than invest in loyalty, why not use a website to allow customers to purchase fuel at current prices and hedge against cost increases?  Fear?  Lack of technology?  Just don’t know how to do it?  All of those could be resolved.  Your margin is locked just as if they purchased it in the future and the customer would know what their budgeted expenditures are.  Is that a value?  Perhaps.  As mentioned in previous articles, retailers must adapt and change or die.  A wise man once told me there are three ways to make money in business.  Be first, be smarter or cheat.  I don’t cheat.  Who is going to be first?  Think about it.