Wednesday, July 18, 2012

The Growth Levers in Retail: Price, Selection, Convenience

Amazon's Feedback Loop
If we were forced to reduce the secret of Amazon's success to one simple concept, this would be it: Amazon churning hard on the Feedback Loop featured above. 

This is absolutely critical to understanding Amazon. And not just retail. I mean every business line it's in. So I'll dedicate several posts to breaking it down, and then building it back up again. 

Stick with me on this. It will be worth it. 

The Growth Levers in Retail: Price, Selection, Convenience

In the world of retailing three variables are responsible for driving the lion’s share of growth. Price, Selection, and Convenience. Price is self-evident. When comparing apples to apples, customers want the lower-priced apple. Selection means the retailer offers the products the customer wants. And convenience means the shopping experience is streamlined, not confusing, not complex, and requires as little exertion from the customer as is humanly possible. 

Growth Levers in Retail

Think of these variables as levers a retailer can push, but that pushing each lever requires an investment of capital and other resources (e.g., management attention, supply chain capabilities, real estate acquisition, etc.) that diminishes your ability to invest in the other levers. You can choose to invest heavily in lowering the price of your products, marking them up less than your competitors. But that leaves you fewer resources to invest in having the widest selection possible or the most convenient shopping locations. Since capital and other resources are limited, each retailer must decide which lever to push the hardest making it a game of priorities and compromise. There are always trade-offs. 

See the red X's in the diagram below showing (in simplistic form) how retailers might choose to push their levers. At the far left, price gets the biggest investment, but selection is narrow and convenience is low. In this scenario (think discount grocer Aldi), the retailer is betting the very low price gets customers in the door even if they have to drive further to the store or have fewer items on the shelves to select from. 

In the middle, the retailer only pushes any of the levers so far, aiming for balance instead of a big bet on any individual lever. This might be the case for a grocery store like Kroger. It wants to find the real estate that makes its store locations more convenient to customers so they won't drive another five miles to Safeway or ten miles to a Walmart Supercenter. It will keep a wide selection to meet your full week of grocery needs without making trips to other stores. And it will charge the highest price it can without forcing customers to seek cheaper (but less convenient) alternatives. 

And on the right we have the retailer that forfeits price investments in favor of a very wide selection and a high degree of convenience for its customers. This might be the Whole Foods approach.

Retailers Must Decide Which Levers Get Their Investment Resources
Why do we call them the growth levers? I'll get to that next.