The Limits of Growth From Cost Reduction

GM, Wal-Mart and Circuit City have many things in common to admire. But consistently offering consumers an exciting product or shopping (buying) experience isn't one of them. Quite the contrary – shopping for a new car at a GM dealership is typically only compared favorably to getting a tooth extracted. Cheesy sales approaches, irritating price negotiating, me-too products, and weak customer service are the typical ways consumers describe a new car purchase in North America today. The anticipation of shopping for electronic gadgets at Circuit City or deer hunting licenses at Wal-Mart likewise suffers, in this case due to cluttered stores, unhelpful clerks, me-too product knockoffs, consistent out-of-stocks, and poor merchandising.

What all three do have in common is low prices. GM announced it is about to launch an aggressive price discounting campaign called “The GM Red Tag Sale” in response to the failure of recent efforts to roll back price discounts. Wal-Mart’s results in November were destroyed after an attempt to pull back its price discounts; November sales at stores open at least a year rose only a fraction (0.7 percent) of the company’s expected a 2 percent to 4 percent gain. As a result, Wal-Mart launched a new advertising push last weekend about its low prices.

But the real message is that growth strategies based on undifferentiated product offerings and low-service retailing - built on the back of relentless supplier price concessions, employee benefit reductions, and cuts in customer service levels - are inherently flawed and doomed to eventual failure. It’s a treadmill with a finite life span; once suppliers run out of profit, where does the strategy turn? China and other developing countries? Perhaps, but an over-reliance on overseas suppliers with commodity mindsets is proving no panacea. Rising oil and logistics prices, global currency risks, reduced product innovation, escalating supply chain management costs, and a lack of category management expertise are making that path less attractive in a hurry.

No, the real answer for Wal-Mart, GM, Circuit City, and others with low cost myopia, is to remember first that they are in consumer businesses. While cost management has a vital role to play in any business, the reality is that the long-term health of retail growth strategies starts with the consumer. Not with supplier prices. Not with labor costs. And not with employee benefits. The old adage has changed: the key to success in retail is consumer, consumer, consumer.