Below we will examine inventory + a new retail outlook for 2020.
Generally, the sales in Spring are worth about 45% of the total year time period. For a $500M business, this would equate to $225M. The months are generally broken down as follows:
February: 6% and $30M
March: 8% and $40M becomes $20M
April: 8% and $40M becomes $0M
Q1: 22% and $110M becomes $50M (-$60M of revenue)
May: 6% and $30M becomes $7M
June: 8% and $40M becomes $30M
July: 9% and $45M becomes $40M
Q2: 23% and $115M becomes $77M (-$38M of revenue)
This is what a generalized revenue scenario looks like for a $500M company that is closed for 50% of March, 100% of April, and 75% of May – reopening Memorial Day weekend in 2020 – and then ramping up to sales that are -25% lower in June and -10% lower in July. This retailer stands to lose -$98M or about -20% of their total revenue for the year. This puts significant pressure on Merchants, Planners, Supply Chain and Corporate Finance team members to find the right solution for their inventory strategy. This solution must balance an understanding of the company’s finances, an intimate knowledge of the brand positioning, and a connection to the customer’s desires. Let’s examine a few options that are on the table:
IT’S ALL ABOUT CASH FLOW…the finance team is in the driver’s seat.
In this strategy, retailers are trying to turn all inventory into cash – there is a value to every piece of merchandise. This means that the check has already been written to the supplier and now the retailer must find a way to turn the merchandise into as much money as they can get for the product – assume high discounts and aggressive promotional activity. They are on the phone with suppliers trying to get out of future orders to minimize unnecessary expense exposure as well as seeking as many discounts as they can secure from factories. Clear visibility of your design supply chain from product concept to customer availability (Read this excellent white paper from Retail TouchPoints and Logility to learn more about Concept to Customer: “How a Concept to Customer Strategy Delivers Seamless Visibility.”) gives you the ability to find opportunities in your supply chain at all levels, to support the advanced decision-making needed to optimize cash flow.
The number one priority is inventory for cash…
In stores, we currently have Fall 2019 product that has not made its way through the full clearance cycle and we have initial Spring 2020 merchandise. A simplified example of their strategy could look like this:
Feb. Wk2 to April Wk 1 June Wk 2 (MOVE OUT MARKDOWN)
April Wk 1 to May Wk 2 June Wk 2 to July Wk 2 (MOVE OUT PACKAGE)
May Wk 2 to June Wk 5 July Wk 2 to Aug Wk 2 (MOVE OUT PACKAGE)
June Wk 5 to Aug Wk 2 (HOLD STYLE FOR 2021)
Aug Wk 2 to Sept Wk 4 (business as usual)
The remaining Fall 2019 clearance has to be sold immediately upon opening or sold to 3rd party re-sellers to generate cash flow. We would expect to see margin erosion in the Q1/Q2 quarterly earnings, excessive inventory levels in the short-term as they work to turn inventory to cash, and a commitment by their executive team to have inventory management as the primary focus for the balance of 2020. Companies with supply chain platforms will be able to quickly navigate these scenarios create valuable financial scenarios for the organization to consider.
ADJUSTING THE ASSORTMENT…the merchant team is in the driver’s seat.
While we want to turn inventory into cash, the focus is on turning the right inventory to cash vs. turning all inventory to cash. There will be fiscal decisions that have to be made, but they are made with “is this the best assortment we can deliver?” focus. The merchants are narrowing down the line to keep items that are emotionally stimulating items. The customer is looking for an item that makes her feel better during these dark times. The merchant is prioritizing trend, airing forward newness, and looking for ways to offset future markdowns.
The priority is buying your way out of a problem…good items offset markdowns.
Feb. Wk2 to April Wk 1 (IMMEDIATE CLEARANCE)
April Wk 1 to May Wk 2 (HOLD CERTAIN COLORS, OFF-SEASON COLORS TO CLEARANCE)
May Wk 2 to June Wk 5 May Wk 4 to June Wk 5 (REDUCE LIFECYCLE)
June Wk 5 to Aug Wk 2 (AIR FORWARD NEXT TO SET + CHASE NEW COLORS)
Aug Wk 2 to Sept Wk 4 (CHASE NEW PROGRAM)
We would expect to see margin erosion in their quarterly reports, and potential write-downs due to expired inventory, but outside of this…they are focused on the future, not the present. For these brands, the assortment is the rally point for their internal employees and their customers. There is attention to every item that is presented to the customer to generate an emotional response. Companies with assortment planning technology will be able to quickly adjust the line to deliver the most profitable outcome. Integrated planning systems utilize the same data across assortment planning, merchandise planning, allocation and replenishment to ensure a rapid response to adjusting business needs.
FOCUS ON THE PEOPLE…the marketing team is in the driver’s seat.
These retailers want to use this time of working-from-home, and disruption to the market, to rethink their message and to invest in the future. The choice for a marketing team here is simple: you want to pull at the heart-strings and be the one chosen because of what you did when it mattered most…because your customer already knows the brand delivers the right fabric, pattern, and color.
The priority is people over product…
These are brands that use their inventory to push the envelope and try new things because they have an intimate understanding of who their customer is and what their customer desires. This option is a gamble, but it has the highest payoff if executed correctly because the focus is not on winning today…it is winning tomorrow.
From my point of view, the best option pursues a course of all three. Life is about balance, but the starting point of finding proper balance is determined by where your brand is currently positioned. If you need cash flow to survive, then prioritizing customer sentiment over inventory liquidation is not an option. The hallmark of a hybrid approach is that it requires partnerships between the finance team, the product teams, the marketing teams, and the supply chain to find the opportunities.
Opportunities will emerge to bring in new ideas and to connect with customers in a way that we never thought possible. Companies will embrace automation & machine learning capabilities to help with inventory rebalancing – allowing people to focus on the strategies that will guide the company into the future.
REMEMBER THE CUSTOMER…because they will remember us.
Finally, regardless of what a company chooses to do internally to maximize revenue & minimize expense exposure, the consumer will remember how each company acted in the public forum and how well they are able to relate to the individual experience of the consumer. Why? Because we are all impacted by the Covid-19 pandemic in different ways and social media has never been more active at any time in our lives. Therefore, the approach has to follow two paths: make the decision that allows the business to thrive for the long term (don’t turn a revenue problem into an expense problem) and communicate openly/honestly with your customers (how you act in times of struggle will define brand perception for years to come).
Written by
A Logility Supply Chain Expert
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