Retail Price Deflation

Yesterday, the government reported that the Consumer Price Index rose 0.4% in August

. The increase, however, was led by gasoline, which jumped 9.1%. Excluding gas, the Index was essentially flat. Over the prior 12 months, the government said that the overall Index was down 1.5%.

Many independent retailers must wonder what Kool-Aid the government has been drinking. For them, retail prices have fallen significantly in the last year. Between clearance and promotional pricing, it's been next to impossible to get customers to pay full price. All any retailer needs to do is compare the monthly average selling prices for each of the last twelve months against the year before, by department or category.

Changes in mix may account for some of the drop, particularly in the past few months when retailers have been trying to layer in more moderately priced goods, but mix doesn't begin to account for the drops we've seen. The change is even more striking if you compare retail selling prices against two years ago.

No matter how you cut it, this is price deflation. Weak consumer demand has driven down the retail value of just about everything, to some degree or another. Discretionary goods, the province of most independent retailers, clearly have taken it the hardest.

Here's the sobering news. Retail prices are likely to drop even further before they turn up, and increase only very slowly from that new baseline. Consumers aren't just looking for value, they've been trained to expect bargains. Even as the economy begins to improve, independent retailers can expect that the retail prices they get will lag the recovery.

This has several implications. If you've been working on short margins because of all the promotions you've had to run, do not expect the consumer to bail you out by settling for smaller discounts. You have to turn to the other end of the equation, to your vendors. If you're not able to get full price, they are not entitled to full price, either. The market value of their goods has gone down. You can't take the hit all by yourself.

It also means that you'll need to continue to look for opportunities to moderate the price points in your merchandise assortments. Intrinsic value is the new cultural norm. Most likely, your customers are looking to shift their purchases from you into more moderately priced goods. Your assortments need to reflect this.

Price deflation also is an incentive to wait. Be patient, your customers are thinking, the price will go down again before long. To combat this maintain lean, fast turning inventories. It's essential that you create a greater sense of urgency in your customers, that if they see something they want they can't risk waiting. Your inventory levels must communicate the message that if you want it, you'd better buy it now, at this price, because it might not still be here when you come back.

Copyright (c) 2012 Ted Hurlbut

by: Ted Hurlbut

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