By Paula Rosenblum, Managing Partner 6/9/2009 Last Friday, the Wall Street Journal acknowledged what some retail insiders have been talking about for several months: holiday inventory plans are down - way down. The article quotes the National Retail Federation (NRF) report of a 16.5% reduction in cargo traffic plans for the peak holiday receiving months of August, September and October. It also cites continued inconsistency in consumer demand as reflected in erratic monthly comparable store sales results as justification for ordering fewer goods. On the surface, reducing inventories appears to be logical and sensible behavior. Working capital is in short supply, consumer demand seems really unpredictable, and Wall Street has been rewarding retailers whose reductions in comparable store inventories exceed reductions in their comparable store sales. Whether or not specific retailers ended last season with excess inventory, RSR believes there is probably not enough merchandise in the pipeline to satisfy pent-up consumer demand this year. Without careful, timely and clinical business intelligence and reaction, this could put retailers in the worst of all possible worlds: lack of merchandise to satisfy demand driving down the top line, continued consumer expectations for a highly promotional environment driving down net gross margin dollars, and dissatisfied shoppers unable to find the products they want for the 2009 holiday season. 1. Out-of-stocks is one of the most stubborn problems retailers face. Thirty-six percent of all respondents cited this as one of their top three business challenges. 2. Retailers struggle to price merchandise correctly. In particular, 54% of retailers selling predominantly seasonal merchandise cited this as a top-three business challenge. 3. Fifty-one percent of all retailers cited fractured planning processes as a top-three business challenge. In fact, year after year this issue has plagued retailers of all shapes, sizes and levels of performance. This combination of factors, along with the artificial sales “bump” generated by last year’s one-time stimulus money, leaves a lot of uncertainty ahead. Most manufacturers are not making extra product to help retailers hedge their merchandising bets. We believe the best decisions retailers will make will be SURGICAL. To understand what that means, we will again look to last year’s benchmark: · Localize assortments: When every unit of inventory is “sacred” it should be placed in the location where the customer is most likely to want it. While this seems simple and self-evident, most retail chains are far too large to do this “by hand” and analyzing aggregate store demand is far too ham-handed. Sixty percent of our respondents saw a lot of opportunity in localizing assortments with science-based processes. · Promote judiciously and surgically: Retailing is an emotional business, and a weak Black Friday weekend can drive even the most seasoned veteran to pull the trigger on blanket “take an additional 30% off” promotions. There are documented and anecdotal examples of consumers being surprised at the register by additional markdowns given on merchandise they’ve already chosen to buy. Fifty-four percent of respondents selling seasonal merchandise reported their biggest challenge was struggling to price right. They know they’re giving away excessive promotional discounts. Ninety percent of our respondents saw at least some opportunity in localizing their assortments. · Create inter-departmental teams to facilitate planning and execution of stock balancing: No one and no computer program is going to get the merchandise mix exactly right. For most retailers, replenishment will likely have to come from within (lead times are just too long and most vendors are not holding excess merchandise for “immediate buys”). A consortium of merchandising, logistics and store operations personnel may be needed to move product where it is most needed. Contingency planning should start now. Last year, 55% of respondents found a lot value in integrated planning with cross-functional teams. We believe the number will be far higher this year. Using technology to facilitate these steps will give retailers their best hope of avoiding the triple-whammy of out-of-stocks, a weaker top line and an even more anemic bottom line. We’re getting ready to ask you, the retailers, what your merchandising plans actually are. We’ll be launching our 2009 Merchandising benchmark survey, “Localization: Economically Sustainable Customer-centric Merchandising” in about a week. We hope you’ll take the time to let us know what you’re doing.
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