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Financial Execs: High Prices Squeeze Profit Margins

The electronic industry's consumer market is price sensitive. So while 2011 is looking promising on the demand side of the retail sales equation, higher costs on the supply side mean profit margins will stay under pressure.

Senior financial executives participating in a KPMG International survey of global retail companies expect to see improved financial performance in 2011 as a result of increasing consumer demand, but many indicate that their companies will have difficulty raising prices and sustaining profit margins.

More than 75 percent of respondents expect “some” or a “significant” increase in financial performance this year, but 58 percent of those executives believe their companies will have difficulty raising prices. As a result, only 41 percent of executives believe they will be able to sustain profit margins. In identifying the greatest threats to margins, 56 percent pointed to costs of inputs or merchandise and 47 percent to discounting and other sales incentives.

“Retail executives are seeing strong top line growth, but in order to generate growth and success in the years ahead, their companies will need to reconsider and often recast their understanding of customers, markets, and their means of serving them, as well as the level of investment that it will take to succeed going forward,” said Mark Larson, KPMG's Global Head of Retail, in a press release.

Among those investments: improvements to supply chain efficiency. Retailers will pursue major investment in customer relationship management systems, business intelligence systems, and enterprise resource systems for transaction processing. In other words, managing costs at the front end of the transaction is becoming as important as managing prices at the back end of the equation.

This is a lesson the industrial channel learned many years ago. In improving supply chain efficiency and costs over the next two years, the retail execs, in order of priority, see enhancing distribution structure, investing in production or distribution technology, decreasing inventory levels, and consolidating suppliers as the greatest priorities.

“We're witnessing the beginnings of a cost-to-growth agenda in retail characterized by a renewed focus on growth, while preserving margins, and investing in IT,” says KPMG's Larson. “The sector has learned the hard way that it can't take its eye off the ball of cost management.”

KPMG conducted its survey in the first quarter of this year with a follow-up to gauge how crisis in the Middle East and Japan in April may have affected operations. Among its findings:

    Sixty-four percent reported little or no impact on their business operations, while 31 percent reported moderate impact, with five percent seeing a dramatic impact. When presented with an array of issues, 61 percent said they expect “energy, input, and merchandise prices” will be most affected, followed by 35 percent who said “availability of goods and services from my company's suppliers.”

9 comments on “Financial Execs: High Prices Squeeze Profit Margins

  1. eemom
    May 12, 2011

    If costs go up and prices stay flat then the Profit margin decreases.  However, there is more to cost than the cost of merchandise.  Retailers will have to take a hard look at their operations and try to minimize cost where possible.  Another way retailers can help their profit margin is by offering good customer service.  It seems that good or superior customer service is a thing of the past.  I will pay more to a retailer that provides me with excellent customer service rather than save money with another who does not.  Its really not all about cost, retailers have to find the value add to attract new customers and sustain the ones they have.

  2. jbond
    May 13, 2011

    Eventually as the costs go up, the only way to continue to make a profit is to increase the price. The only other way to cut costs to increase profit margin is to make cuts to your expenses, which usually means a cut to the work force. Many companies are trying to avoid that route. I agree that customer service goes a long way, and I am more than willing to spend more money for a better experience but most people right now are looking a bottom line savings. The sales with little profit going to the people willing to pay more will get outweighed by the large amount of sales to the people looking for the cheap goods.

  3. Mydesign
    May 13, 2011

        Barbara, in supply chain always the 2 common factors, Supply and demand have the trend to walk in opposite directions. Supply vs Demand is always a common topic in business world, where they are meeting very rarely. In a competitive market, prices for products will vary until it settles at a point, where the demanded meets the supply and hence the equilibrium is maintaining. Otherwise if demand is more and supply is less, there may always an uncertainty of price which leads to higher pricing. At the same time if demand is less and supply is more, we can have it for lower price bands and hence profit may be very less.

        So in competitive market, companies or distributors can have better return in two ways. First is always maintain the production level lower than the market demand and second is increase the sales volume.

  4. eemom
    May 13, 2011

    I agree with you to a certain extent.  Look at the Apple products.  The Ipod costs a lot more than regular MP3 player yet it set the standard and is the number one player.  Reason for it is that Apple is providing quality coupled with a product that is integrated with software that makes the customer experience worth paying for.  Customer Service can be exhibited at more than just the service you get in a store, it could be in the services the company provides to make paying more for a product, worth it to the consumer.

  5. Taimoor Zubar
    May 13, 2011

    @eemom: I agree that improving customer service is one of the non-financial measures retailers can take to improve their profitability. One of the key aspects here is to win over customer's trust and loyalty so that the customer repeats visits on the retail outlet. Given the constraints with implementing financial measures such as discounts and advertisement, this is an important step.

  6. Ariella
    May 13, 2011

    Absolutely, TaimoorZ, in fact it pays to deliver customer service for that reason even if it does involve some cost because that cost is an investment in keeping the customer, which over time is cheaper than having to win over another one to take his/her place. Here's an example from the retail world: I had ordered 2 shirts in the same size in 2 colors. Some time after they arrived, my daughter pointed out that one was 2 sizes smaller than the other, according to the label on the package. She thought I had ordered the wrong size, but the online record of the order proved that I had not. I called Gap and the customer service made sure that I would get the shirt I had ordered with a 15% discount to make up for the error. Also I got a paid UPS label emailed to me to facilitate the return of the wrong shirt. BTW this was all for an item that cost under $6, but Gap knows that if it wants to retain its good name, it has to spend whatever it takes to make up for its mistake.

  7. Barbara Jorgensen
    May 13, 2011

    Hi all, thanks for your comments and perspectives. I think focusing on service is a great way to improve profit margins, particularly if the service is conducted through a relatively low-cost way, such as online sales. While there are always costs for transactions, it is still less expensive than hiring and paying a salesperson.

    I have an example from an electronics distributor that sticks with me in terms of increasing efficiencies and saving money on the front end. Something as simple as a process change can go a long way. There's a lot of paperwork attached to processing an order–RoHS compliance, etc. At Avnet, a worker in a warehouse realized that that the paperwork attached to an order was always processed after the order was picked, and if the order was wrong or if an item was out of stock, the process had to begin all over again. Now, the paperwork is checked against stock before the order is picked and resolved at the end, eliminating a lot of rework. It didn't cost a cent to implement the change and saved both time and money. It sounds similar to Ariella's GAP experience–good work all around.

  8. Anand
    May 14, 2011

    “Sixty-four percent reported little or no impact on their business operations”

    Barbara,

      Thanks for the update. Nice to know that most of the businesses had little or no impact on their business operations in the first quarter. Do you think this percentage will go up next quarter because its been predicted that impact of Japan crisis will affect the OEM's in the coming quarters ?

  9. elctrnx_lyf
    May 23, 2011

    Customer importance is given an highest priority by all the companies. So the manufacturers trying to get get closer to the OEM's and the product makers trying to understand more about the customer needs. Since the competetion is vey high in the electronic products the companies are pushed more n more to attract the customers.

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