June 07, 2020

Deflationary Trends

When you read that Nordstrom generated 60% of sales in the prior fiscal year (pre-COVID) from ONLINE and RACK, you realize that something very different is happening among their customer base (click here).

Think about it this way.
  • In 2000, the customer would have spent 85%ish of sales in Full-Line Stores, 10% in Off-Price Rack Stores, and 5% via Online/Catalog.
  • In 2019, the customer spent 40% of sales in Full-Line Stores, maybe 35% in Off-Price Rack Stores, and maybe 25% Online.
So you've got a fundamentally different dynamic that you are managing, right? While this isn't mathematically fair to say, it's like there has been an implosion of the Full-Line Store concept resulting in a third +/- of all traffic to disappear. It's not a third, that's not how the math works, but for illustrative purposes it should cause you to think, and that's what I'm asking of you, right?

A company like Nordstrom builds two separate business units ... growing one while the other sets up for contraction.

Dollar stores are different ... they sprouted up and continue to expand as the middle class is whittled away. They built a customer base because their customers didn't have a choice ... less relative income, a lack of quick access to a Walmart. Dollar stores go up, mall-based stores die.

Now we turn to your brand.

The most common deflationary trend surrounds margin manipulation.
  • 2000 = Buy an item for $19.99 ... cost of goods is $9.00, gross margin = $10.99.
  • 2020 = Buy a comparable item for $24.99 ... at 30% off ... cost of goods is $6.50, gross margin = $10.99.
See what happened with margin manipulation?
  • The customer paid $17.49 ... not the $19.99 the customer paid in 2000. If you adjust for inflation, well, the customer really paid $11.77 in 2000 dollars. Similarly, you made less money after adjusting for inflation ... but on the surface, you made comparable gross margin dollars.
  • Your suppliers got squeezed. In return, your suppliers had to squeeze somebody, which leads to an awful lot of shoddy quality and lowly-paid employees outside of the United States.
Think about whether this dynamic happens at your brand or not.

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