Articles

Make It Rational & Watch Your Margins Plummet!

In an environment where retail is growing at historical averages, household disposable income growth and household consumption growth are high but retail margins are plummeting, there has been plenty of comment on the state of retail with very little real comprehension about what is actually going on.

While the internet as an enabler catches the attention – despite being less than 6 per cent of all retail sales – the real culprit is over-distribution. That issue will take some time to sort out. But one thing that has added to the problem of over-distribution has been the over-rationalisation of customer experience making margin decline even sharper than it needs to be.

According to research from Yale University, shoppers combine rational and emotional evaluation systems that affect purchase behavior. By far the strongest system is the emotional system and most social trend research is showing a growing trend not only toward emotional decision making but to the positive influence that it has on both individual lives and retail margins.

When a shopper is confronted by rational criteria in purchase decision-making they click out of their emotional state and get very rational indeed. With so many retailers focusing on the most rational appeal of all – cheap price – the customer is forced into a shallow intellectual comparison. In this frame of mind the purchase is commoditized and the emotional connection to the product eradicated. Commoditization rapidly leads to margin erosion as the shopper simply seeks the cheapest price.

When the shopper is kept at the emotional level, desire is heightened and the purchase evaluation uses a completely different area of the brain allowing for margin elasticity.

In this country we have a relatively flat population growth curve. The same people shop week after week. If they shop using the left side of their brain and employing rational criteria only, your sales growth and your margin dollars will head south. On a continuing and escalating basis. There is simply no volume upside to offset it. There is no new untapped source of shoppers and the existing ones will not buy enough in aggregate volume to offset the margin you give away. You will be very rationally benchmarked and your fate will be sealed accordingly.

Unfortunately in business we tend to think and measure too rationally, too often.

Shopping – for the shoppers themselves – has never been that mono-syllabic. Until now. In a time when there has never been more emotional demand for great customer experience, the vast majority of the bricks and mortar retail industry has not only dumbed down its offer relative to its online competitors, it has forced the customer into making purchase decisions in a manner that has played into the hands of its online competitors and forced its suppliers to go vertical.

Unless the industry rediscovers the power of emotional appeal soon, the consolidation of retail will increase rapidly.