November 11, 2008
Retailers Not Prepared for Bad to Worse Turn
Retailers
had cut back significantly on inventories heading into the fall season
knowing ahead of time that while the weather might get brisk, business
was going to be anything
but.
But as prepared
as they may have thought they were, many retailers were caught completely
off guard as sales went from expectedly bad to whole lot worse. Reduced
inventory levels still left way too much stock on the floor and in back
rooms as double-digit declines hit home in September and October.
The end result,
a recent New York Times (NYT) report pointed out, is that
many stores are left with trying to move out fall merchandise as Christmas
merchandise is being delivered.
"I’ve
never seen as many ‘percent off the entire store’ promotions as we’re seeing
right now," said Kimberly Greenberger, a retail analyst at Citigroup. "What
we’re hearing anecdotally from different retailers is that when they’re
putting something on sale at 30 or 40 percent discount it is no longer
having an effect on consumers. They’re having to cut prices 50 to 60 percent
to get consumers interested."
Ms.
Greenberger told the NYT that retail chains including American
Eagle, Ann Taylor, Bath & Body Works, Chico’s, Gap, J. Jill, Talbots
and Victoria’s Secret, have cut prices on their entire lines and, in some
cases, offered ‘buy one and get another half off’ deals.
While
it is important for retailers to move merchandise, the type of discounting
being practiced now could have serious negative consequences, according
to some.
Marshall
Cohen, chief industry analyst for the NPD Group, said retailers normally
expect to discount about a quarter of store merchandise. By expanding the
amount of items on sale, he said, stores risk running out-of-stock on
popular items early into the holiday selling season.
"What’s happening
is the retailer is almost saying, ‘Please just come in. We’ll pay you to
shop,’" he said.
Discussion Questions:
How bad was the fall season’s inventory story for retailers? Are
merchants in danger of discounting themselves out of business this holiday
season? Is there a better way to deal with excess inventory going into the holiday
season?
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Discussion Questions
Poll
Its a lesson in math
A = total income
B = percent of disposable income
C = demand
D = supply
If B is declining relative to A
Then C is declining relative to D
All silliness aside, it is obvious that most retailers did not anticipate the kind of economic downturn that has been precipitated by the financial meltdown which has and will continue to have knock on impacts to the economy. As to the question of whether there is a danger of discounting themselves out of business, they literally have no choice, as it isn’t about gaining market share at the moment, it is about survival and maintaining a cash flow.
It is inevitable, in my mind, that the retail industry will go through another wave of consolidation in the near future. I do believe that formats such as Aldi’s will benefit from the current economic climate and will help to make their format more acceptable to a much greater range of consumers.
First, nobody should get any flack for not predicting this–no one could have predicted the market’s reaction to Lehman Bros. fall, no one could have predicted that the government wouldn’t pass a rescue plan the first time around–the whole financial world was in free-fall in early October. I was traveling a lot at the time, at conferences and user groups, and in some ways it felt odd to be there–it was a disjointed feeling that the financial world was ending and yet “real life” goes on. Of course no one shopped then. Even if they had not previously cared one whit about inter-bank lending and credit default swaps, everyone was glued either to the TV or to their PC screens set to their 401(k) portfolio. This was a singular event in economic history–and not in a good way.
In fact, as people dredge up Great Depression history and analogies, I keep thinking that what we need is not a bank holiday, but a news holiday. If the news media weren’t grinding out story after story about the horrors and the recession and foreclosures and people losing their jobs, I think 90% of Americans would look around at their personal situation and say, I’ll probably come through this OK. Instead, surrounded by relentless bad news blown to hysterical proportions, we have a self-fulfilling prophecy, where 90% of Americans are looking around and saying, I have to prepare myself for financial Armageddon. And thus, retail sales fell of a cliff in October.
The bigger question in my mind is, what will falling gas prices do to this mix? I filled up my SUV for under $40 this week. As those lower prices roll out into commodity prices, will that encourage consumers to spend a bit more? Only time will tell. Add in some positive news–the election is over and actually went off without a hitch, Circuit City didn’t have to liquidate because they were able to pull together financing for a Ch. 11, gas may fall below $2 a gallon real quick…. The biggest stimulus this economy needs is an injection of confidence. Hopefully we’ll get one in time for the holidays.
A long time ago in a galaxy far far away when I was a manager trainee, a crusty old store manager gave me 3 possible solutions for excess overstock: sell it, store it or burn it. Obviously we are not going to explore the last solution but I suspect there are many a store manager stocking up on kerosene and flares. Storing it is way too expensive and we are in the selling business, not the storage business. So that leaves selling the stuff.
We need to be more flexible when merchandising and displaying inventory. If its not selling in the back, move it to the front. If the price point is too high, cut it down gradually until you reach the magic number.
The bottom line is that merchandising is an organic process especially in the seasonal end of the business.
So now Doron wants me to spend more money on labor? Sounds ugly at first but when your seasonal is gone and turned into cash, spending a bit more to manage the goods doesn’t sound like such a bad idea.
It’s very difficult to place any blame for being over-inventoried on any retail planner this year. The drops were unprecedented and therefore impossible to forecast. In any case, there’s too much inventory out there.
So given the above, the real question is; what of Holiday? October is usually a key indicator of what December is going to look like. But, my prediction is; NOT in this case. I don’t think December’s going to be as bad as we think right now. Again, there’s really no reason to shop in October in the first place so, if retail was ever going to ‘crash’, October (or perhaps January) would be the month. But December? No matter how bad things are, there’s a reason to shop that month…we all will be out there buying, it’s just what we do. Will it be bad/worse than last year? Yes. Will it be as bad as we think right now? No. Nothing can top last month’s debacle. Plan on it.
Merry Christmas, retail!
“Irrational exuberance” has come home to haunt us. Did we ever envision that the honeymoon of increasing sales would ever come to an end? Or that escalating percentage-off promotions would finally fall flat on the consumer we conditioned to expect greater and greater discounts? The great Pogo warned us when he sagely said, “We’ve seen the enemy and it is us.”
Now to the $64,000 question: Who is going to pull retailing out of the wilderness?
The economy is clearly becoming a discount economy. I see more and more people looking for price breaks in every product segment, and in every retail establishment. I was in a discount shoe store the other day that was offering a buy one pair, get the second pair at 20% off sale. A younger couple asked an associate that if they bought three pairs, could they get thirty percent off the third pair? The answer was no, of course, but the point is, would these people have asked that question even as recently as six months ago? Probably not.
We have a problem in this country whereby credit has become the main media in tendering most sales, both on the wholesale, as well as the retail level of business. The credit is gone, and while this situation was in fact predicted as being inevitable a few years ago, most people ignored the warnings. Including retailers.
So now we are in a situation where many of us have no way of buying new stock, and no one buying the stock we have, unless we are willing to sell at a discount. Tightening cash flows do not bode well for KPIs. Unfortunately, while cutting a price below cost may put cash in the drawer, it also reduces your ability to buy replenishment, which also affects your future sales figures. I see too many stores offering discount prices that really have no sound basis to do so. People are going to buy what they need in a down economy, no matter the price, instead of what they want.
I believe it makes more sense to sit on slow moving product and concentrate on the staple items that drive a store’s business. Discount products that have a shelf life coming to an end, perishables and dated products such as software and fad related items, but limit the discount policy to what one would normally expect discounts on.
Statistics show that consumer borrowing started to rebound in September, but the flow of credit was not going towards spending, but rather towards debt realignment, such as paying off larger balances on cards with high interest rates. Things will turn around and the market will rebound, and those of us who stay the course and refuse to act in panic will come out ahead of the game in the long run.
Through September, I felt that many retailers had done a pretty good job scaling back their inventory levels after the excesses of last year. Then business simply rolled over in October in an unprecedented way. Now, when I’m out shopping, many of those retailers don’t look quite so sharp.
It’s still too early to tell if October was an aberration or a harbinger of things to come. I’m hopeful that October represents the bottom, and that the holiday season will hold some upside surprises. But I’m an optimist by nature.
The challenge for retailers is going to be in how they adjust their spring purchases. I would anticipate that they’ll be cutting back further in order to protect their cash positions. I think that even the category leaders are likely to be far less aggressive in using the recession to expand market share than we’ve seen in the past.
From my blog post yesterday.
…. It’s like 50% off is the new 20% off. When demand is down, you typically are cutting your profits without generating additional sales. That means you probably are still selling the same numbers of units but without additional profits.
I learned this in the hotel business when the owner wanted to cut rates to increase occupancy. What happened? Occupancy moved up 2%, which was insignificant. What did happen is the people who would have paid more got a deal and profits fell. I can’t bring people to the beach in the winter with a discount. What we needed to do was get more money out of those who came.
And you know what? We were able to double our average daily rate, put more money into the rooms to justify higher rates and occupancy and profits soared. But it took discipline and avoidance of the discount philosophy so prevalent in the news today.
We are a nation of shoppers looking to discover something new, something different and presented in such a way we have to have it. If you aren’t willing to commit to that, you’ll be just like Macy’s – loaded with employees, with merch, with customers and with discounts but no profits. That’s nothing less than a complete collapse of a selling culture, not customers.
It’s hard to judge in early November whether stores have over-invested in fall and holiday inventory, but stores reporting earnings this week will have their 3rd quarter-ending inventory levels under a microscope. It’s a balancing act: Are single-digit comp store reductions in stock levels “enough” considering how tough October was, or do stores run the risk of running out of desirable goods in the event of a slight uptick in demand?
As to the deep discounts: At least for stores pursuing a high-low promotional strategy (think Penney, Kohl’s, Macy’s), the depth of discounting doesn’t seem out of the ordinary. And that may be a problem: If your store has routinely driven traffic through 30-40% discounts, how low do you need to go in order to attract attention? And, at the end of the day, did you have the right content and depth of key items that the consumer wants this year?
Has anyone considered insufficient inventory as a bigger problem than superfluous inventory? Out-of-stocks have long been the bugaboo of retail, but never more than now. Certainly in the soft/hard goods bidnesses the chance to manage inventory for the holidays passed months or even a year ago. But in food stores inventory management is week-to-week and even day-to-day. However, just a couple of days ago in the middle of their ad week, I cruised past the Marie Callender “display” in the frozen food section of my Safeway and it was empty. Torn up. Vacant. Three for $5 vacant. Poorly-planned vacant. That’s seriously wiped out, but indicates that shoppers are ready to buy.
Forward-buy purchasing skills have grown soft and ineffective during our recently-abided retail heyday. Buying and prognostication talents must be improved and sharpened in all retail sectors. “Buyer” must cease being a titular retail career steppingstone and become more of an honored destination career. More times than not, the retail question is not IF shoppers will buy, but WHAT they will buy.
An earlier commenter decried the role of the media in stoking fear concerning the economy which thereby affects consumer confidence. While this may indeed be valid, we should not overlook the aura of fear and desperation being ladled out by retailers themselves. Of the slick ads which fell out from my Sunday paper just a couple days ago only one did not have something akin to bold 30%-50% headlines in even larger print than the stores’ name and logo. The impact of the offered discounts on consumers has simply disappeared into the cacophony because the discounts are so unimaginative and ubiquitous.
This past week, I have been picking up my neighbor’s mail while they are away. It is staggering how many coupons, “special event” postcards, and brochures which announce teasers and enormous discounts from many area retailers (not to mention several shopping centers and nearby downtown shopping areas) we received between our two mailboxes in just seven days. This is a relatively affluent market, yet one can almost smell the retailers’ fear.
Why will savvy consumers not wait for even larger discounts to magically appear? And after the immediate crisis has passed how will retailers ever be able to pull back from a discounting strategy now that their consumers “have seen Paree”?
Mr. Banks, I agree with you wholeheartedly which is why I run a professional sourcing company. Getting the right inventory mix based on market and customer intelligence, accurate forecasts and customer requirements is seemingly a challenge. Factor in price being the only differentiator and it’s a small surprise. Without the surprise financial meltdown we see many companies get the inventory mix wrong, buying on promotion and selling on promotion because it helps the PPV targets. Return logistics and warehousing are the ugly cousin, ignored and not seen very often.
How big an impact will an extremely slow Fall have on retailers this holiday season? Combine lingering inventory with new holiday inventory and the recent retail report indicating that gift cards will be the leading gift this holiday (click here for the story), and the answer is “nightmarishly bad,” unless retailers move quickly to get their marketing databases lined up to hit gift card recipients specifically, and indeed their entire customer base, with highly relevant product and experience offers and promotions that drives traffic back in to the stores and online for purchases.
Going in to 2009, personalization of offers, knowing thy customer, and remaining both top of mind and relevant should be the mantra of every retailer.
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Its a lesson in math
A = total income
B = percent of disposable income
C = demand
D = supply
If B is declining relative to A
Then C is declining relative to D
All silliness aside, it is obvious that most retailers did not anticipate the kind of economic downturn that has been precipitated by the financial meltdown which has and will continue to have knock on impacts to the economy. As to the question of whether there is a danger of discounting themselves out of business, they literally have no choice, as it isn’t about gaining market share at the moment, it is about survival and maintaining a cash flow.
It is inevitable, in my mind, that the retail industry will go through another wave of consolidation in the near future. I do believe that formats such as Aldi’s will benefit from the current economic climate and will help to make their format more acceptable to a much greater range of consumers.
First, nobody should get any flack for not predicting this–no one could have predicted the market’s reaction to Lehman Bros. fall, no one could have predicted that the government wouldn’t pass a rescue plan the first time around–the whole financial world was in free-fall in early October. I was traveling a lot at the time, at conferences and user groups, and in some ways it felt odd to be there–it was a disjointed feeling that the financial world was ending and yet “real life” goes on. Of course no one shopped then. Even if they had not previously cared one whit about inter-bank lending and credit default swaps, everyone was glued either to the TV or to their PC screens set to their 401(k) portfolio. This was a singular event in economic history–and not in a good way.
In fact, as people dredge up Great Depression history and analogies, I keep thinking that what we need is not a bank holiday, but a news holiday. If the news media weren’t grinding out story after story about the horrors and the recession and foreclosures and people losing their jobs, I think 90% of Americans would look around at their personal situation and say, I’ll probably come through this OK. Instead, surrounded by relentless bad news blown to hysterical proportions, we have a self-fulfilling prophecy, where 90% of Americans are looking around and saying, I have to prepare myself for financial Armageddon. And thus, retail sales fell of a cliff in October.
The bigger question in my mind is, what will falling gas prices do to this mix? I filled up my SUV for under $40 this week. As those lower prices roll out into commodity prices, will that encourage consumers to spend a bit more? Only time will tell. Add in some positive news–the election is over and actually went off without a hitch, Circuit City didn’t have to liquidate because they were able to pull together financing for a Ch. 11, gas may fall below $2 a gallon real quick…. The biggest stimulus this economy needs is an injection of confidence. Hopefully we’ll get one in time for the holidays.
A long time ago in a galaxy far far away when I was a manager trainee, a crusty old store manager gave me 3 possible solutions for excess overstock: sell it, store it or burn it. Obviously we are not going to explore the last solution but I suspect there are many a store manager stocking up on kerosene and flares. Storing it is way too expensive and we are in the selling business, not the storage business. So that leaves selling the stuff.
We need to be more flexible when merchandising and displaying inventory. If its not selling in the back, move it to the front. If the price point is too high, cut it down gradually until you reach the magic number.
The bottom line is that merchandising is an organic process especially in the seasonal end of the business.
So now Doron wants me to spend more money on labor? Sounds ugly at first but when your seasonal is gone and turned into cash, spending a bit more to manage the goods doesn’t sound like such a bad idea.
It’s very difficult to place any blame for being over-inventoried on any retail planner this year. The drops were unprecedented and therefore impossible to forecast. In any case, there’s too much inventory out there.
So given the above, the real question is; what of Holiday? October is usually a key indicator of what December is going to look like. But, my prediction is; NOT in this case. I don’t think December’s going to be as bad as we think right now. Again, there’s really no reason to shop in October in the first place so, if retail was ever going to ‘crash’, October (or perhaps January) would be the month. But December? No matter how bad things are, there’s a reason to shop that month…we all will be out there buying, it’s just what we do. Will it be bad/worse than last year? Yes. Will it be as bad as we think right now? No. Nothing can top last month’s debacle. Plan on it.
Merry Christmas, retail!
“Irrational exuberance” has come home to haunt us. Did we ever envision that the honeymoon of increasing sales would ever come to an end? Or that escalating percentage-off promotions would finally fall flat on the consumer we conditioned to expect greater and greater discounts? The great Pogo warned us when he sagely said, “We’ve seen the enemy and it is us.”
Now to the $64,000 question: Who is going to pull retailing out of the wilderness?
The economy is clearly becoming a discount economy. I see more and more people looking for price breaks in every product segment, and in every retail establishment. I was in a discount shoe store the other day that was offering a buy one pair, get the second pair at 20% off sale. A younger couple asked an associate that if they bought three pairs, could they get thirty percent off the third pair? The answer was no, of course, but the point is, would these people have asked that question even as recently as six months ago? Probably not.
We have a problem in this country whereby credit has become the main media in tendering most sales, both on the wholesale, as well as the retail level of business. The credit is gone, and while this situation was in fact predicted as being inevitable a few years ago, most people ignored the warnings. Including retailers.
So now we are in a situation where many of us have no way of buying new stock, and no one buying the stock we have, unless we are willing to sell at a discount. Tightening cash flows do not bode well for KPIs. Unfortunately, while cutting a price below cost may put cash in the drawer, it also reduces your ability to buy replenishment, which also affects your future sales figures. I see too many stores offering discount prices that really have no sound basis to do so. People are going to buy what they need in a down economy, no matter the price, instead of what they want.
I believe it makes more sense to sit on slow moving product and concentrate on the staple items that drive a store’s business. Discount products that have a shelf life coming to an end, perishables and dated products such as software and fad related items, but limit the discount policy to what one would normally expect discounts on.
Statistics show that consumer borrowing started to rebound in September, but the flow of credit was not going towards spending, but rather towards debt realignment, such as paying off larger balances on cards with high interest rates. Things will turn around and the market will rebound, and those of us who stay the course and refuse to act in panic will come out ahead of the game in the long run.
Through September, I felt that many retailers had done a pretty good job scaling back their inventory levels after the excesses of last year. Then business simply rolled over in October in an unprecedented way. Now, when I’m out shopping, many of those retailers don’t look quite so sharp.
It’s still too early to tell if October was an aberration or a harbinger of things to come. I’m hopeful that October represents the bottom, and that the holiday season will hold some upside surprises. But I’m an optimist by nature.
The challenge for retailers is going to be in how they adjust their spring purchases. I would anticipate that they’ll be cutting back further in order to protect their cash positions. I think that even the category leaders are likely to be far less aggressive in using the recession to expand market share than we’ve seen in the past.
From my blog post yesterday.
…. It’s like 50% off is the new 20% off. When demand is down, you typically are cutting your profits without generating additional sales. That means you probably are still selling the same numbers of units but without additional profits.
I learned this in the hotel business when the owner wanted to cut rates to increase occupancy. What happened? Occupancy moved up 2%, which was insignificant. What did happen is the people who would have paid more got a deal and profits fell. I can’t bring people to the beach in the winter with a discount. What we needed to do was get more money out of those who came.
And you know what? We were able to double our average daily rate, put more money into the rooms to justify higher rates and occupancy and profits soared. But it took discipline and avoidance of the discount philosophy so prevalent in the news today.
We are a nation of shoppers looking to discover something new, something different and presented in such a way we have to have it. If you aren’t willing to commit to that, you’ll be just like Macy’s – loaded with employees, with merch, with customers and with discounts but no profits. That’s nothing less than a complete collapse of a selling culture, not customers.
It’s hard to judge in early November whether stores have over-invested in fall and holiday inventory, but stores reporting earnings this week will have their 3rd quarter-ending inventory levels under a microscope. It’s a balancing act: Are single-digit comp store reductions in stock levels “enough” considering how tough October was, or do stores run the risk of running out of desirable goods in the event of a slight uptick in demand?
As to the deep discounts: At least for stores pursuing a high-low promotional strategy (think Penney, Kohl’s, Macy’s), the depth of discounting doesn’t seem out of the ordinary. And that may be a problem: If your store has routinely driven traffic through 30-40% discounts, how low do you need to go in order to attract attention? And, at the end of the day, did you have the right content and depth of key items that the consumer wants this year?
Has anyone considered insufficient inventory as a bigger problem than superfluous inventory? Out-of-stocks have long been the bugaboo of retail, but never more than now. Certainly in the soft/hard goods bidnesses the chance to manage inventory for the holidays passed months or even a year ago. But in food stores inventory management is week-to-week and even day-to-day. However, just a couple of days ago in the middle of their ad week, I cruised past the Marie Callender “display” in the frozen food section of my Safeway and it was empty. Torn up. Vacant. Three for $5 vacant. Poorly-planned vacant. That’s seriously wiped out, but indicates that shoppers are ready to buy.
Forward-buy purchasing skills have grown soft and ineffective during our recently-abided retail heyday. Buying and prognostication talents must be improved and sharpened in all retail sectors. “Buyer” must cease being a titular retail career steppingstone and become more of an honored destination career. More times than not, the retail question is not IF shoppers will buy, but WHAT they will buy.
An earlier commenter decried the role of the media in stoking fear concerning the economy which thereby affects consumer confidence. While this may indeed be valid, we should not overlook the aura of fear and desperation being ladled out by retailers themselves. Of the slick ads which fell out from my Sunday paper just a couple days ago only one did not have something akin to bold 30%-50% headlines in even larger print than the stores’ name and logo. The impact of the offered discounts on consumers has simply disappeared into the cacophony because the discounts are so unimaginative and ubiquitous.
This past week, I have been picking up my neighbor’s mail while they are away. It is staggering how many coupons, “special event” postcards, and brochures which announce teasers and enormous discounts from many area retailers (not to mention several shopping centers and nearby downtown shopping areas) we received between our two mailboxes in just seven days. This is a relatively affluent market, yet one can almost smell the retailers’ fear.
Why will savvy consumers not wait for even larger discounts to magically appear? And after the immediate crisis has passed how will retailers ever be able to pull back from a discounting strategy now that their consumers “have seen Paree”?
Mr. Banks, I agree with you wholeheartedly which is why I run a professional sourcing company. Getting the right inventory mix based on market and customer intelligence, accurate forecasts and customer requirements is seemingly a challenge. Factor in price being the only differentiator and it’s a small surprise. Without the surprise financial meltdown we see many companies get the inventory mix wrong, buying on promotion and selling on promotion because it helps the PPV targets. Return logistics and warehousing are the ugly cousin, ignored and not seen very often.
How big an impact will an extremely slow Fall have on retailers this holiday season? Combine lingering inventory with new holiday inventory and the recent retail report indicating that gift cards will be the leading gift this holiday (click here for the story), and the answer is “nightmarishly bad,” unless retailers move quickly to get their marketing databases lined up to hit gift card recipients specifically, and indeed their entire customer base, with highly relevant product and experience offers and promotions that drives traffic back in to the stores and online for purchases.
Going in to 2009, personalization of offers, knowing thy customer, and remaining both top of mind and relevant should be the mantra of every retailer.