Tuesday, July 7, 2009

Bland Retailers

William Cowper in his poem Task said that "Variety's the very spice of life, That gives it all its flavour", and if this is true - then US retailers are becoming rather bland. The reason is that recently The Wall Street Journal reported (subscription may be necessary) that many large US retailers are reducing the amount of product variety sold in their stores. The reason are consumers are demanding less variety and retailers are finding that lower inventory costs and greater shelf space for store brand products are increasing retailer's profits. Additionally retailer's reduction in product variety lowers their labor costs and adds greater retailers leverage over product suppliers for better deals.

For product suppliers who survive the cull - their sales growth and profits also are likely to increase and the survivors tend to be the market share leaders. While in general I am not a fan of using market share as a performance metric - here is a good example of where greater market share is an important factor in determining a firm's profitability.

The question not addressed in the article is: what effect will a decrease in product variety have on product prices? My guess is - not much. Retailers are still constrained by consumer demand and product suppliers will have less bargaining power (and less ability) to raise prices. On the other hand, industry concentration should increase in the product lines that are being decreased, but here we have the unusual effect of increased industry concentration and little (if any) increases in wholesale product prices.

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