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March 19, 2010
The Price of Hamburger

 
 
I recently visited a very unique local shopping mall in San Diego.  The shopping mall is not unlike any other mall across America except that at this mall there is a Wal-Mart on one end and a Nordstrom’s on the other end.  It just so happens that these two stores represent the extreme polar opposites of the retail shopping experience.
 
Wal-Mart’s retail philosophy is to be the absolute everyday low cost provider of various commodity items such as toasters, sleeping bags, soda, underwear, pencils, frying pans and blankets.  These are items that everyone wants at one time or another. Wal-Mart’s prices are typically the lowest found in a given market due to three main factors
  • They sell products that are cheaply made and relatively disposable (but still safe)
  • They pay their employees very little to restock shelves and scan merchandise
  • Their relative size allows them to purchase their inventory at a significant discount
On the other end of the retail spectrum of Wal-Mart is Nordstrom’s.  Their retail philosophy is to provide high quality merchandise and incredible service and charge a premium to the customer to get it.  Their service levels are legendary and the quality of their merchandise is as good as it gets.
 
On the Sunday afternoon that I was visiting the mall, I found swarms of customers in both stores demonstrating to me that there is definitely a customer demand at both retailers.  What surprised me though was the lack of customers in many of the stores located between the two retail giants.
 
That same afternoon, I wandered into Macy’s only to find that the store had relatively few customers.  I used to be a Macy’s customer at one time but gave up shopping there a few years ago.  At one time, Macy’s competed head-to-head with Nordstrom’s offering high quality merchandise and providing superior customer service but then something happened.  I started noticing that the stores were not being staffed like they used to be and finding an available sales clerk was next to impossible, even when the store appeared empty.  The sales events were now defined by the "fine print" on the sales ads excluding many of the most popular items in their "store-wide" sales. 
 
More importantly, the quality of their merchandise began to suffer as they moved to fashionable designer brands (or knock-offs) from high quality staple brands.  I suppose the idea with fashion brands is that the fashion will grow obsolete before the clothes wear-out.  Why carry products made with quality materials and workmanship when customers will discard the clothes in a relatively short time frame.
 
Now I have no axe to grind with Macy’s.  I’ve just used them as an example of the danger of playing in the "middle ground" or cheapening a once mighty brand.  There are a lot of retailers who operate in this same space so Macy’s shouldn’t be unjustly singled out (they just happen to be in the same mall...along with Target, Sears and JC Penny’s). 
 
There was time when only high-end department stores existed and they all provided quality products and outstanding customer service (think Sears 40 years ago).  Then discounters appeared in the market who began taking away a share of the retail business.  The typical department store soon began to cut costs by lowering merchandise quality and reducing sales staffs to a point where they now rival Wal-Mart in service and quality.  However unlike discounters who make no promises about the quality of their service or products, these old-school brands are still asking for a price premium.  So customers (like me) are no longer shopping at these establishments.
  
A certain customer base doesn’t mind paying a small premium for better products and outstanding customer service (see Nordstrom’s) but no one will pay for steak only to be served hamburger (at least not for long).
 
The above story illustrates a growing observation I’ve seen in the component manufacturing and distributing industries over the past few years. 
 
There was a time component manufacturer created products of the highest quality.  Profits were plowed back into R&D to develop new products, provide technical assistance and design help for engineers, and keep an inventory of common parts in order to ship quickly.  Customers were willing to pay a small premium for the added value these companies brought to the table.
 
Then the world became a bit "flatter" and soon knock-off components found their way into factories.  These discount parts were less expensive than their quality counterparts but customers knowingly used these parts in order to save money.  There was no technical support (at least in English) or local inventory available.  Customers were buying hamburger and getting hamburger.
 
Soon the manufacturers of higher quality components began to cheapen their brands in order to save their market share against this foreign competition.  They started cutting corners by using lesser grade materials and using cheap overseas labor with little or no technical knowledge or skills.  They gutted their customer service departments and pushed the sales support to their distribution channel partners.  Sales engineers were viewed as a wasted expense as they now employ sales rep organizations to service their existing customer base. 

They justified all of these measures by explaining that customers just wanted meat and didn’t care if they were getting hamburger or steak.
 
Profits at these companies may be up today but these same companies are really stealing those profits from their "good name" that took years to establish.  Once customers realize that they are being served hamburger they will no longer pay the price of steak.

People today want value whether it’s steak or hamburger and those companies that can provide value are the ones that will prosper into the future. 

There is a place in this world for both Wal-Mart and Nordstrom’s because they offer their customers value...I just wonder how much longer the other ones will survive...

Thank you very much for your continued support of OptiFuse where we strive to offer our customers what they want.


Jim Kalb
President
OptiFuse
jimk@optifuse.com
 
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