Female Inventory Manager Shows Digital Tablet Information to a Worker Holding Cardboard Box, They … [+]
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With three weeks until the end of the year, retailers and brands are focused on their balance sheet, and it’s all about finding working capital to survive. Cutting inventory now – possibly in half – can bring retailers closer. However, determining which items to cut is a fool’s errand when done blindly, or worse, using historical data that doesn’t reflect the fluidity of changing consumer preferences right now.
To top things off, returns are also going to come in hot and heavy in January, particularly because online sales (which have ballooned during the pandemic) tend to have higher return rates than in-store purchases. Forecasts for holiday purchases made online will soar to $234.9 billion in the US this year according to one estimate, which also predicts as much as $70.5 billion could be returned.
Reducing inventory to reclaim capital is a strategy retailers and brands have been chasing all year, but it’s clear that they are still riding on past purchases for guidance.
I recently read about Dillard’s (NYSE:DDS). Despite the pandemic crushing its department store peers, the company improved profitability year over year in its fiscal second quarter, which ended August 1st, and posted a surprise quarterly profit in Q3. Dillard’s is no stranger to inventory glut. They saw what was happening early and took aggressive inventory clearance measures that allowed them to exit the period with inventory down more than 14% year over year. As a result, while the chain’s retail sales plunged 35 percent year over year in its fiscal Q2, retail gross margin increased to 31.1 percent from 28.7 percent in the prior-year period. Combined with sharp cost reductions, this paved the way for a $24 million year-over-year improvement in the company’s adjusted pre-tax loss. Dillard’s continued to clean up its inventory, exiting the period with inventory down 20 percent year-over-year. This enabled it to boost its retail gross margin to 36.6 percent in the fiscal third quarter from 34.5 percent a year earlier.
Kohl’s has seemed to make smart inventory cuts that align with what consumers want right now – activewear and beauty. Recently CNBC reported the company’s shares rose more than 5 percent, after Chief Executive Michelle Gass laid out the retailer’s plans to expand in activewear and personal care in 2021. Kohl’s significantly cut its inventories during the latest quarter, putting it in a position where it will be less reliant on discounts during the holiday season. Kohl’s strategy heading into 2021 is to trim the amount of dressier merchandise it has in stores and focus more on adding active and comfortable clothing. While this strategy seems sound in the moment, I am curious to see at what point they may begin to adapt to the mid-to-late 2021 consumer who may be going back to work and becoming more social as, fingers crossed, the benefits of mass vaccinations take hold.
According to this Wall Street Journal piece, Todd Kahn, Brand President and CEO at Coach said they used to produce 1,000 handbag models each season, but now are only making 500, with an emphasis on the best-selling colors—black, brown and off-white.
Using past purchase behavior can buy you some wiggle room, but it will not go far enough when we are looking ahead to a year like 2021 when consumer preferences are going to be in greater flux than ever. A Managing Director with consulting firm AlixPartners LLP, commented in the Wall Street Journal story, “Simply cutting choices is a bad approach.” Instead, the piece states, retailers need to figure out what consumers want from them and then stand for that.
It reminds me of the famous quote often attributed to John Wanamaker about marketing investments which goes, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”…How foolish in this day and age of data that according to NRF 50% of products fail as well. So, which ones do you drop?
A new report by Mazars discussed how the luxury model is being reborn as the industry adapts to the changing expectations of new customer cohorts. According to the report, the luxury sector has long seen the in-person sale as central. Today, however, the piece notes that this is changing, and the global luxury sector is reconfiguring itself to the expectations and demands of customers who may never set foot in their stores, as well as affluent Millennials and Gen Z-ers and wealthy customers in China. These customers expect experiences that enable them to browse and buy online as well as in-store, to get instant and accurate information about a product’s sustainability and authenticity, and to be looked after following a purchase. This has powered an entire digital shift in the luxury sector, and these retailers and brands are more aligned with customers than ever in the quest to build loyalty, create experiences and gain repeat sales, according to the report.
The reality is that retailers and brands shouldn’t just slash and burn, but rather find a way to cherry pick through their inventory to bring consumers what they want in order to squeeze out every dollar to survive.
I recently participated in WWD’s Virtual Apparel and Retail Summit, where I co-presented with Jonathan Duskin, CEO of Macellum Capital Management. We discussed how companies need to mitigate risk. Move quickly. Test. Anticipate. Then act. And this approach needs to have the right data to back decisions. The fact that only a fraction of retailers and brands have invested in technology that enables them to anticipate consumer purchase behavior in my humble opinion is hard to fathom at this point — particularly as industry innovation has been fast-tracked.
Our recent survey further proved this pervasive disconnect.
Going into next year, it’s likely that we will be seeing more of the same for the first six months (i.e. bankruptcies, closures, liquidations), and probably longer, as we wait for vaccinations to reach critical mass. CEOs and business decision makers must stop being tactical about how they run their business, and use something other than history or gut feelings to effectively improve margins. Tapping into the Voice of the Consumer using technology is the missing link that enables retailers and brands to ensure their inventory is aligned with what consumers want to buy, and to create experiences that generate much needed recurring revenue.
