Extreme Weather Has Become the New Normal: Do You Have the Right Retail Strategies in Place to Sustain Profitability?–Part 1

Extreme Weather Has Become the New Normal: Do You Have the Right Retail Strategies in Place to Sustain Profitability?–Part 1
October 11, 2012 Revionics

(This is the first blog in a two part series that will provide retailers with the retail strategies necessary to navigate the global retail industry’s New Normal, which is expecting and preparing for extreme weather worldwide that will substantially impact their costs)

It was a rough summer for many areas of the world. Extreme weather affected several parts of the world including the U.S., which experienced the worst drought in 50 years, the UK had its wettest season in 100 years and both North and South Korea experienced the worst drought conditions in more than a century.

Many meteorologists and climatologists say it’s only going to get worse. For example, according to experts at Planalytics, a global source of Business Weather Intelligence®, weather volatility of this nature will persist on a global scale, with more intense flooding, heat and drought and larger, more violent storms.

For today’s retailers and shoppers, smaller harvests due to extreme weather conditions mean higher prices. For example, the USDA released a report that showed U.S. consumers could pay up to four percent more for food in 2013, because of the higher commodity prices. Besides increasing costs for manufacturing the thousands of products that contain corn — everything from cereal to cosmetics to soft drinks — higher grain costs have a ripple effect. Articles advising consumers on what to stockpile are now appearing online, and the list of impacted foods is staggering.

To respond and prepare for extreme weather volatility, retailers must be strategic with price, promotion, space allocation and assortment strategies and tactics in order to maximize return on investment, respond to the inflationary impact and address the subsequent changes to consumer demand patterns.

This series will cover practical ways to utilize optimization, predictive analytics and advanced data mining technologies and strategies to rapidly respond to changing shopper and competitor behaviors and navigate these unprecedented challenges with confidence.

Sourcing Considerations:

Retailers may also consider sourcing implications such as:

  1. Establishing multiple alternative vendors to keep costs as low as possible while still factoring in implications of higher transportation costs and import duties
  2. Shifting purchasing to local suppliers to give retailers a promotional edge by supporting and sustaining the local community
  3. Staying ahead of the curve. Now is the time for retailers to lock in contracts with wholesalers for purchases of products that are likely to be impacted by the corn and soybean shortages—such as cereals and oils—so they can store these items in anticipation for stocking them at a later date

Strategic Approaches Part 1

Retailers can get started right away by evaluating their short-term pricing strategies. For example, what cost increases can they pass on? For which categories of products? Which increases can they absorb — at least partially — to stay competitive and to satisfy customers?

These and other questions may be answered by weighing the options. For example:

  • Establish every-day low pricing (EDLP). Create an EDLP strategy for certain items — and advertise them as such — so that they are not subject to price changes when costs shift. This could be part of a far-reaching campaign, of which price is only one component, in order to set a price and brand image that enhances customer loyalty. If establishing hold-down prices, work with the vendor community in order to have trade funds and promotional dollars reallocated to those particular products.
  • Re-think category manager evaluation. Retailers should consider changing the way that category managers are evaluated, so that they are incentivized to work together. This could allow retailers to creatively absorb some cost changes across categories and to permit the impacted items’ prices to stay low while maximizing total store profitability. Approaching this as a whole, versus working in silos, will help enhance market share, margins and image.

The next blog in this series will provide you with actionable pricing strategy tools and how to differentiate yourself and enhance your retail image during these challenging times.