Retailers Learn a Valuable Lesson in Supply and Demand

It's been nearly two weeks since Target (NYSE: TGT  ) and Neiman Marcus released their limited-edition holiday collection. The discount retailer's collaboration with luxury goods store Neiman Marcus was meant to boost holiday sales for the companies. Instead, it's taught them an important lesson about supply and demand.

'Tis the season
The holiday shopping season is a critical time for retailers. From extended store hours to aggressive door buster deals, U.S. retailers will try just about anything these days to get more holiday shoppers through their doors. For Target and Neiman Marcus, the strategy was simple: Offer limited designer items at Target's reasonable prices.

This is a strategy that has worked well for the discount chain in the past. Last year, the Target-Missoni event sold out in Target stores around the country in a matter of minutes . In fact, there was such overwhelming demand for the exclusive Missoni line that it crashed Target's website .

Similarly, the company had an impressive turnout earlier this year when it released a special fashion line by world-renowned designer Jason Wu. The Wu collection sold out in a couple of hours . With such strong demand in the past, why should the Neiman Marcus collaboration be any different? In a word, inventory.

We all want what we can't have
Part of the allure of Target's past fashion partnerships was that they were one-time events with limited inventory.

For comparison, consider athletic apparel retailer lululemon athletica (Nasdaq: LULU  ) . The yoga-inspired apparel company struggled with inventory problems in the past. Not having enough inventory, however, spurred demand for its products. Customers knew that, if they liked a product but didn't buy it while it was available, they might not find it again. This can have a powerful influence over a customer's purchase decision.

The Target and Neiman Marcus offering, on the other hand, was deeply stocked . I visited a Target store in Washington, D.C. on Tuesday and the complete 50 -piece collection was available in abundance. I also spoke with a Target employee in customer service who told me that they've been receiving a lot of online returns from the holiday collection.

According to The Wall Street Journal, "Both Target and Neiman Marcus said they did brisk business online ." Though a Target spokesman insisted, "The largest misconception is that this was intended to be a one-day shopping event ." Overstocking the holiday collection may also be Target's answer to resellers.

Supply and demand 101
Let me explain. As history dictates, designed-for-Target products are resold on the second-market, also known as eBay (Nasdaq: EBAY  ) , where they sell for marked-up prices . Think back to the Jason Wu for Target debut in February. One of the designer's shift dresses, which originally sold in Target stores for $39.99, was selling on eBay just hours later for nearly three times the retail price .

Why would any rational consumer pay triple the amount for the same product, you ask? The answer is simple: because supply was scarce. While this is good business for eBay, it's bad news for Target, which would rather be counting those sales as its own.

However, this time around Target overcompensated by overstocking. While this didn't stop eBay sellers from lining up early on Dec. 1 and later listing those items on eBay, it has put a damper on their profits. I have yet to find any eBay bids above the original retail price . Bigger picture, at least for Target, exclusive product lineups are a way to fight so-called showrooming.

Exclusivity on sale
Both Target and Neiman Marcus say they're happy with the results of this partnership . But hopefully both companies also realize that sparking demand takes more than months of prime-time commercial spots or a trifold spread in Vogue Magazine's Holiday issue. It takes such bold initiatives as Target's previous designer collections, which were neither overhyped nor overstocked.

For investors, it's a good lesson: Strong past performance doesn't guarantee future success. I'll be the first to admit that I expected fireworks from this collaboration. Unfortunately, what I got was a timid set of sparklers. Nevertheless, this joint effort with Neiman Marcus has opened the door for future projects between Target and some of fashion's most respected moguls including Dianne Von Furstenburg, Oscar de la Renta, Marc Jacobs, and Tory Burch.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of the last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in our special report. Uncovering these top picks is free today; just click here to read more.


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