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Short-term profits vs. long-term value

By Ronald T. Wilcox,

The big idea: Should Pink Palm, a Lilly Pulitzer signature store, dramatically increase its merchandise purchases for the upcoming season? Sales have been strong, but buying too much could lead to deep discounts to clear merchandise and long-term damage to the brand.

The scenario: Although Lillian Lee McKim was born so rich that her servants even tied her shoes, she would grow up to become an iconoclast, a rebel who would test the conventions of the sedate 1950s and embrace the laid-back philosophy of the 1960s. She would also go on — as Lilly Pulitzer — to found a quirky fashion empire based on bright colors, good cheer and the good life.

Many of Lilly Pulitzer’s sales come through privately owned, upscale signature stores. Lizanne Jeveret and David Holmes own and operate Pink Palm, Lilly signature stores, in the Richmond, Charlottesville and Washington areas. “Our shoppers aren’t wallflowers,” Jeveret says. “They are confident women who don’t mind being in the spotlight. Lilly lovers are emotionally attached to the brand. They wear Lilly Pulitzer clothing for the happiest occasions of their lives.”

The key to making the shops profitable is managing the inventory. Jeveret and Holmes spend several million dollars each year buying merchandise. They rely on their managers to know what might sell and in what quantities the following season. Sarah Fauerbach, manager of the Charlottesville store, put it this way: “I know what my frequent customers want, but there is always that one piece or two that you could never have guessed would get hot, and it does, and you wish you had more. And then there are the dresses you have to sell at 75 percent off because they just won’t move.” Full-price margins are necessary for the long-term health of Pink Palm. The company could make a little money on modestly discounted merchandise, but because its margins are lower than those of Lilly corporate stores, there was not a lot of room to maneuver. Pink Palm also prided itself on attentive customer service, which is expensive.

Pink Palm’s business has been strong and growing. It was clear to its owners that they could buy more merchandise and sell it profitably if they were willing to sacrifice some product margin. The profit impact of that decision would be large and immediate. At the same time, they were concerned that this tactic might train customers to wait for discounts and punish loyal customers who generally pay full price. It could also undermine the high-end image of the store.

The resolution: Pink Palm bought more merchandise to keep up with growth in demand, but it held fast to the view that selling more products on promotion would be a mistake. It still sells the substantial majority of its clothing at list price.

The lesson: Protecting the long-term value of a brand requires disciplined marketing and the willingness to forgo short-term profits. The temptation to undercut the brand is all the more difficult when the short-term financial gains are obvious and quantifiable and the long-term benefits of a strong brand are harder to quantify.

Wilcox is a professor at University of Virginia’s Darden School of Business.

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