Thursday, May 19, 2011

The Case Against Category Management – New Products

The next time you get a new item in your store, first ask yourself this question: “What is the presence of this item in my store going to do for me… or to me?” but we’ll explore that question a little later.

In most retail operations, I frown on items coming in unannounced, but if it’s already clogging up your aisles or sitting in your storerooms, you most likely will decide to put it on the sales floors and make it available for purchase. As a consequence, you may have no alternative but to start with the suggested retail price or even an arbitrary mark-up figure based on a category.

In the case of the latter, remember our formula from a previous exercise: Retail = Cost / (1 = %Cost), or if you’d rather use a markup figure, remember the mark-up multipliers are 30% profit = Cost *1.4286; 18% profit  = Cost * 1.2195, 45% profit =  Cost * 1.8182, etc.

Hint: You can create a simple table of common markup multipliers using the following exercise: 1 / (1 - %Cost as a decimal): e.g. 30% profit = (1 / 1 - 0.30) = 1.4286, 18% profit = (1 / 1 - 0.18) = 1.2195 and 45% profit = (1 / 1 – 0.45) =  1.8182. Better yet, you can put these formulas into a simple spreadsheet… see explanation at, and let your PC do the calculations for you.

Before you decide to accept a new brand in your store, remember these famous words: ‘NEW COKE’. It was one of the greatest business blunders since IBM relinquished the PC market to Microsoft. A new brand either has to wean its consumers away from its competition or it has the harder task of creating a new market for itself.

The process of making a new brand successful is so complicated I won’t even attempt to go into it now. Suffice it to say, 28 to 55 percent of all new products introduced into the market fail, and if they fail in your store, most likely you’ll be the one to end up absorbing the losses. The sinister side of this is: even if the product fails completely, the manufacturer benefits, because he gets more of your cooler space.

Your store should not be a test lab for new product introductions. It’s bad enough when a manufacturer test a new product in one store, but when they test one in all of your stores, the failure rate multiplies against your favor.

Let’s say you receive forty-eight items of a new SKU in each of your stores. If you have ten stores, it adds up to 480 items that have an average failure rate of 42 percent. The problem is, your supplier should be doing extensive research before ordering new products from their manufacturers, but honestly, so many new products hit the market every day, we can’t blame them for not being able to keep up.

Even when new brands are successful, adding them to your store doesn’t necessary spell ‘profits’. Consider a statement made six years ago by Morgan Stanley analysts William Pecoriello: "While Bud Select has grabbed a 1.3% share ... it appears to be almost entirely cannibalistic of other [Anheuser Bush] brands.'' Jim Arndorfer of High Beam Research added, “…overall the brewer lost nearly a share point in supermarkets, prompting experts to suggest that Bud Select is eating its own.” Unfortunately these pearls of wisdom often come too late to retailers who have suffered losses from manufacturers’ failed experiments.

Pricing new brands in your stores is a toss-up, and with an average 42 percent failure rate among all new brands, it emphasizes the need to be more accurate in your pricing. If manufacturers aren’t capable of accurately forecasting sales and setting MSRP’s properly, then suppliers surely aren’t, and you will have to do the job for them… or stop accepting unproven products in your stores. The result of sudden unexpected arrivals of new and unproven products is just one of several reasons your profits are as low as they are.

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