Your ship’s come in! That’s a good thing, right?
Much of the merchandise languishing aboard cargo ships stuck in ports around the world during the pandemic-fueled supply chain crisis has made it to store shelves. No doubt this brings some mirth and merriment in an otherwise bleak stretch for consumers, but it also brings a massive migraine for retailers.
Not that all shelves are overflowing, mind you. About 31% of grocery products consumers looked for were out of stock in the first week of April, according to Datasembly, a research firm that monitors grocery and retail pricing. That’s up from 11% at the end of November 2021. What’s worse, Americans are paying more for many of their staple goods. One example: egg prices are up 56%, according to the Department of Agriculture, driven up by drought, a bird flu epidemic and the war in Ukraine.
Nonetheless, there are deep discounts in stores across the U.S. Burt Flickinger, managing director for Strategic Resource Group, told CBS News he’d seen the biggest discounts across “consumer electronics, sporting goods, apparel, clothes, and accessories.”
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Big Box Blues
Retailers including Walmart, Target, Macy’s, Amazon and Best Buy are dealing with a combined $45 billion in excess inventory from orders placed during the height of the pandemic, according to Bloomberg. With much of the inventory suddenly arriving, retailers are realizing that the macro economy and Americans’ buying habits have changed while the goods were adrift. Target, for instance, said it ordered way too many televisions and home appliances. To move out the misfit merchandise, it will ramp up discounts. It’s a bit like dinner guests who show up two years late, hungry, and wearing the wrong clothes.
Not unlike Target, Walmart said it will have to offer discounts to get rid of general merchandise, reducing its profit margins. “The increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars,” said Walmart CEO Doug McMillon in a recent statement. “We’re now anticipating more pressure on general merchandise in the back half; however, we’re encouraged by the start we’re seeing on school supplies in Walmart U.S.”
So, what happens when you have the wrong product mix priced too high during a period of high inflation? Some of the extra goods often get sold to liquidators like Bargain Hunt, which sells items at up to 70% off retail. But this time, Bargain Hunt executive Norm Rankin is seeing something different. “The condition of the product — it’s never left the case, it didn’t make it to the stores, it’s not dog-eared or wrinkled or ruffled having been on a shelf.”
Inventory shortages have downside implications of their own, but they typically do allow retailers to sell more at full price and avoid aggressive promotions designed to quickly clear out overstock. The pendulum has swung back, and it’s easy to understand the thought process in hindsight. In an attempt to mitigate the recent chaos in the shipping industry, many retailers ordered even more aggressively to meet expected (strong) consumer demand. Then, as port problems eased, a glut of inventory – a phenomenon known as the “bullwhip effect.”
Understanding the Impact of Pricing and Promotion on Inventory
To make the best of a less-than-ideal situation – i.e. to protect margins – it’s important for retailers to bridge the gap between promotional activity and inventory management with a better understanding of the impact of pricing and promotion on inventory.
An optimal pricing and promotion analysis solution uses machine learning algorithms and price elasticity models to create promotion-influenced forecasts. In other words, your planners will have a mechanism to perform granular what-if analyses in the face of frequent price changes, to better understand the extent of discounts needed to generate enough demand to move excess product. Users can leverage the technology to understand the impact of pricing and promotion on demand (the ‘lift’) and take action to ensure inventory positions are sufficient.
A pricing and promotion analysis solution (PPA) will benefit your business if you:
- Have a basic forecasting discipline in place but no systematic way to model price change outcomes and account for differences in important segments (location, region, etc.)
- Have outgrown manual tools and are (often) mired in multiple spreadsheets from multiple sources
- Need a strong promotion lift solution to complement your demand planning capabilities and generate a price-adjusted forecast to align inventory decisions with marketing campaigns
- Have sufficient price and sales data at the product category and SKU level.
In other words, this type of solution shouldn’t be viewed as a “break-glass-in-case-of-fire” option. It offers continual benefits to any company that wants to better model the relationship between price, sales and inventory positions. But it tends to get talked about during a period of massive discounting.
To get the most out of PPA, your company must ensure that data is accurate and complete, and that confounding events have not strongly biased the data and obscured important nuances, such as seasonality, business changes, market changes or a combination of these.
Are you interested in learning about more ways a pricing and promotion analysis solution can help with supply chain planning? Read more here.