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Price Isn't Everything
Smaller retailers should never try to compete on price alone. By focusing on customer service and quality, they can avoid the fate of big department stores that are losing the ability to offer a compelling retail experience.

Originally published by

By Ted Hurlbut

Hurlbut & Associates

Outside, there were protesters carrying signs, while inside customers were queuing up to collect $10 gift cards as the new retailer in town put its best foot forward. It was the first day of business for Macy's in Chicago, the day after the Marshall Field's banner closed for the last time on State Street.

It's a transition that has occurred throughout the country, from Boston, to Philadelphia, to Washington D.C., to Los Angeles and other cities, as Federated has converted their newly acquired properties to the Macy's banner. And with it, the locally owned and operated department store, gone.

And yet, there isn't anything about this latest round of consolidation that creates any optimism that the long-term declining fortunes of the department store industry are about to change. It's all defensive, about cost cutting, rather than about creating a compelling new business model that will usher in a transformation and rejuvenation of the industry.

What Happened?
You need to go back to the late 1970's and early 1980's to begin to see where it all went south.

I was selling men's clothing part-time for Jordan Marsh while going to college. The guys I worked with were very experienced pros, who understood fabrications and cuts of suits, and were highly skilled at converting every prospect that came their way. The on-site tailors not only fitted every customer personally, they were magicians with a needle and thread. The shoe salespeople in the next department knew footwear construction and fit. The salespeople in furnishings would work tirelessly with customers to match shirts and ties, and build out a whole wardrobe.

It was also a time of stagflation and the Misery Index (inflation plus unemployment rates). Sales increases were tough to come by, while the cost of employing these highly skilled, experienced people was rising dramatically. Merchandising was changing as well, as the pace of fashion innovation accelerated, driven by the rise of designer labels and the beginnings of the tidal wave of imports in every apparel category.

But one other change was particularly ominous. Where department stores had traditionally stood for quality, selection and service, and ran only a very limited number of sales, now they dramatically increased their promotional activity, and started to compete on price. With interest rates approaching 20 percent, the financial pressures forced retailers to squeeze more out of their real estate and inventory investments. Something was now on sale every week, and there was a newspaper insert to advertise it. Before long, it seemed like everything was on sale all the time. They morphed into mass merchants, of a sort.

Soon the salespeople disappeared, to be replaced by checkout stations, manned by cashiers to ring up your purchase -- if they were manned at all. With the departure of salespeople went good customer service and product knowledge. Quality was deemphasized as buyers increasingly shifted programs from nationally recognized brands to anonymous private labels, sourced overseas where costs could be more directly controlled in an attempt to protect margins from the next round of price pressure. Most stores tried to reposition themselves as fashion leaders through partnerships with prominent designers and labels, but when they put it on sale within several weeks of hitting the floor, they sent a second, very different message to their customers, and customers are no dummies.

So what can a small retailer learn from this? Here are a few bumper stickers:

• If you compete on price, there will always be somebody who will be able to beat your price, unless you decide to give it away. And nobody can do that for long.
   
• If you run an ad this year, you’ll likely have to run an ad next year to have any hope of running an increase. And your prices will have to be sharper.
   
• If you think you can cut costs by cutting customer service, plan on cutting customers as well.
   
• Customers may go to the internet for product information, but when they need true product knowledge they will come to you.
   
• Customers will always pay more for customer service than for products. Products they can get anywhere, whereas customer service, true service, is a rare commodity.
   
• Quality never goes out of style.

Competing on the basis of price led the department store industry into a spiral of decline, where sales increases could only be bought by lower prices, where margins were always under pressure, where every cost had to be cut, where local chains could no longer survive alone, but had to combine and consolidate in hopes of surviving in any form.

Twenty-five years is a long time, but it takes a while for an established industry, with a lot of accumulated customer goodwill, to kill itself off.

Marshall Field, R.I.P.

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