Friday Rant: Retail Matters — A Funny Thing Happened on the Way Through the Recession …

Today I'd like to welcome my old friend, Paula Rosenblum, to Spend Matters. Paula is a lead analyst at Retail Systems Research and, in my humble opinion, one of the best analysts out there when it comes to retail research. What makes her doubly dangerous is that she has an intricate understanding of sourcing and supply chain in the retail sector as well. Please join me in welcoming Paula to Spend Matters.

For as long as I can remember, when asked to select their worst inventory nightmare, retailers always picked out-of-stocks. More than too many markdowns, too much inventory, even more important than quality problems, out-of-stocks were considered the worst of all retailing sin.

There's nothing like a credit crisis to give you an attitude adjustment. Our company, Retail Systems Research (or RSR) is preparing a benchmark report on Inventory Management (Inventory Management in the Age of Localization -- to be published in early August). Preliminary findings, based on 78 respondents, indicate retailers' number one concern is the complete unpredictability of consumer demand. Seventy-six percent report this as a top-three business challenge. Retailers are now concerned that they have too much of the wrong inventory, rather than not enough of the right inventory. In the most exquisite of ironies, eighty-one percent of these retailers believe their best inventory management opportunity lies in reducing excess inventory both at stores and distribution centers to get a better return on their inventory investment.

Frankly, a casual walk through the mall will show you retailers are taking this to heart. In most segments, store inventories are down, way down. On the surface, this seems fine. But here's the fly in the ointment, particularly in the United States: the consumer is battered, unemployment is high, but consumers are getting itchy to spend. In fact, by now, after ten straight months of negative comparable store sales, they probably actually NEED a few things. And the holiday season is coming.

It is our contention that retailers may find themselves in the worst of all possible situations this holiday season. Consumers are still looking for a deal. A weak Black Friday weekend will drive panicking retailers to start deep discounting ... but a lack of inventory will also find them out of stock by the middle of December. Yup, retailers will take it on the chin on both the top and bottom lines if they're not careful.

What does this have to do with sourcing and procurement? It's simple really. An all Asia, all the time sourcing strategy dramatically limits retailers' ability to react. They may see themselves running out of hot product, but they just will not be able to do anything about it. Many of us have railed for years about hedging sourcing bets. We've suggested retailers use technology to support replenishment operations nearer to the point of demand -- call it just-in-time or just-in-case. There are at least two trade associations that would like to help them do that. Most retailers have chosen not to do so ... chasing lowest cost or highest Initial Mark-up above all else.

I hope we're wrong about this holiday season. The last thing retailers need is another down year. But something has to drive change. We're not talking protectionism here -- just some pragmatic hedging of bets. Working with factories in this hemisphere may seem to be a pain in the neck ... but it might make the difference between success and failure -- especially in the apparel sector. Once again, retailers have to change.

Spend Matters would like to thank Paula for sharing her thoughts. She can be reached by email: prosenblum (at) rsrresearch (dot) com

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