GUEST EDITORIAL: PRICING PRESSURES NEED A FOCUS ON MARGINS
With inventory costs going up, and general expenses climbing, let’s talk about a pricing strategy for 2023.
So far, unit prices have gone up by an average of 10 to 20 percent, led by large European luxury brands. We’re just now confronting our customers with these new price levels. The current plan is to pass on any increases to our customers since demand has been high. But with consumer confidence waning, and recent market volatility, will we soon see a pushback?
ABOVE: Photo by Noelle Otto
With general expenses going up, we surely can’t lower the initial markup (IMU) we use to apply to new purchases. If anything, we need to squeeze another point or two up, since our promotional costs are bound to increase.
That’s why I think focusing on margin is going to be the name of the game for the foreseeable future. And, to continue to maintain high margins and deal with inflation, we need a renewed focus on increasing turnover.
While we’re monitoring margin and turnover levels, we must also keep a third ball in the air: markdown costs. As you know, all markdowns have a cost, and we need to keep them within planned levels. With today’s average IMU of 61% and Maintained Markup of 56%, the markdown cost is only 5%. Any pricing pressure on demand could force this markdown cost up quickly.
Another question we all have right now is at what point will demand drop off as price points cross into new price lines. There’s no way to know until we make the adjustments and see what happens.
What you can do now is establish very detailed price lines, so you know when you’re going to cross the line. Map the price lines by category. In Suits, for example, it could be $600, $900, $1,200, $1,600, $2,000, $2,500, $3,200 and $4,000. Between each price line there can be multiple price points. It’s generally easy to move from one price point to another within a price line. It’s when you cross price lines that demand can be affected.
We realize this wait-to-see approach can be hard, so let’s look at some broader economic data to give us more clarity.Currently, the weak Euro is helping offset some price increases on goods. If the Euro were to recover, we could see prices going up by 20% to 30%, instead of just 10% to 20%. But, unfortunately, the war in Ukraine and its effect on energy costs in Europe look to be around for some time, keeping pressure on the Euro. The European domestic situation, combined with the U.S. Fed’s interest rates hikes, will likely work to our favor for the next season by giving us a favorable rate on inventory.
Now, let’s look at rents. While I mentioned that general expenses, such as labor and utilities, have gone up, many of our merchants are still benefiting from discounted rents that they negotiated during the pandemic. When and if rents return to higher rates, this could bring another pricing pressure that we would have to calculate into our margins.
When pricing for next year, make sure that you have taken these factors into account:
*What is your current rent situation and do you see it changing in the near to mid future?
*Are you benefiting from goods from Europe or do you source from other places?
*What does demand look like in your business? Does it continue to be steady or are you starting to see a drop off?
If your expenses look to be consistent, make sure you’re maintaining your margin rate. If prices are going up and demand is slowing, raising prices further might hit some resistance. This is where our price line strategy could come into play, giving us a rapid warning when customers start to push back. Remain flexible, and update your plans and strategies often. Particularly watch negative open-to-buy extensions. If your cumulative OTB is negative beyond the end of any season, this is a red flag requiring serious review.
If you need help with your strategy for next year, please let us know. scarlet@blksretail.com, 415.377.3170
