‘Heavy price to pay’ for retailers who get Peak 2023 wrong

2022 WAS a tough year for Retail, with high inflation rates and declining consumer confidence contributing to low sales growth. Recent figures published by the BRC suggest that this picture will remain throughout 2023, with retail sales only forecast to grow between 2.3% to 3.5%. Of course, in an environment of high price inflation, this means that volumes will fall in absolute terms.

Sales are expected to pick up in the second half of 2023 as inflation slows and consumer confidence improves, with the BRC forecasting growth of 3.6% to 4.7% compared with 1% to 2.3% in the first half. But this outlook is still uncertain and prone to fluctuations in the global economic environment, further volatility in fuel prices, and the potential for a perpetuation of current global supply chain disruption.

This has led to an increasingly budget conscious and savvy consumer, making tactical changes to the way they shop; pulling back on the luxuries to focus on the necessities. However, Christmas 2022 delivered a far more positive trading result than many expected, fuelled by consumers who were prepared to spend in spite of the doom and gloom in the press and increasing pressures on household spending.

So, how do Retailers approach planning for Christmas 2023?

What is clear is that there is a very high price to pay if retailers get their Christmas 2023 plans wrong. If sales don’t materialise at the checkout, residual stocks, heavy mark-downs and lack of cash flow could see heavy retail casualties in Q1 2024 as the impact of Christmas trading flows through into the normal Q1 operating cost pressures associated with landlord rents becoming due.

Against that background, how can retailers maximise their chances of success for peak 2023?

Agile supply chains

One of the biggest challenges facing retailers at peak is how to maximise sales and basket size without risking significant levels of residual stock.

The question of where to deploy inventory to maximise stock availability, whilst not burdening the business with excess stock, leading to working capital, cash flow and potential mark-down and clearance issues, is critical.

On the face of it, the answer is simple; put the right stock in the right store at the right time. However, the reality is different. ‘Traditional’ approaches to store replenishment involve large seasonal buys, brought into the business pre-season, with around 60% of expected seasonal sales being allocated to store before the first product is even sold. Retailers are having to take a punt on which stock will sell where and in what quantities.

In reality, what we see is differential rates of sale across the store estate, some in line with forecast, most outside it, leading to the seemingly implausible situations of having both significant issues with out of stocks and lost sales in parts of the retail estate whilst in other stores, significant levels of over-stock that requires mark-down to clear at anything from 30% to 70% discount post-Christmas.

The answer is to achieve greater inventory velocity in store to maximise full price sell through and minimise mark-down and clearance. This is delivered by turning the ‘conventional’ seasonal replenishment model on its head. Initial allocations should cover display stock and only 2-3 weeks of forward sales cover. This enables stores to fulfil the initial sales demand but requires that stock is then replenished rapidly to replace the stock that has sold, ensuring stock is directed to the stores that are actually selling, whilst avoiding overstock in those that are not.

Sounds simple, yet in trials with our clients, we have seen a 10% increase in full price sell-through, which delivers the equivalent of c. 3% of margin to the bottom line. In retailers that are typically only returning 7-10% points of net-profit, that is a potentially huge figure.

But to achieve this requires significant changes to existing retail supply chains. Firstly, stock has to be held back in the supply chain for longer and fed in to store in a more agile and flexible way, closer to the point of sale. This requires:

- Greater visibility of inbound supply chains;

- The ability to store stock for longer within the Regional Distribution Centre network;

- Rapid store order replenishment lead times to enable fast replenishment of stock once sold and;

- Flexible transport schedules that are able to flex to the needs of the moment rather than being locked into a fixed schedule as many currently are

Inventory velocity can also be improved though the creation of a single stock pool to service the needs of all sales channels. By using sophisticated Order Management Systems (OMS), retailers can direct online orders to those stores with overstocks that may otherwise result in end-of-season markdowns and use these to manage online order fulfilment. By fulfilling from store stock, the dispatch location is often closer to the end customer delivery point, providing opportunities for fast-track delivery as a competitive edge.

Improved Stock Visibility

Both of the above require a more accurate view of store stock levels. This can be done through the adoption of RFID technology to track individual products within the supply chain. Not only does this provide the improved stock file accuracy needed, but it can also be utilised to deliver wider supply chain operating cost reductions and improve the customer journey in store through the use of technologies such as virtual changing rooms or augmented reality displays.

Pricing

Effective management and control of seasonal pricing and mark-down is critical to the execution of a successful peak campaign, and yet we see too many retailers falling into the trap of delaying promotional activity and therefore squandering the opportunity of high pre-Christmas footfall. 

We see many retailers using metrics like %margin or %full margin sell-through, which actively discourages early responses to sales that are lagging forecast. This can lead to extensive post-Christmas inventory levels that need heavy investment in mark-down and clearance.

Managing the season for total cash return can deliver significantly better seasonal results and much lower inventory risk than conventional approaches. Here, sales are monitored against weekly profiles that reflect anticipated footfall growth as Christmas approaches. 

Cumulative sales to date are continuously reviewed and forecast deviations identified early, with small adjustments being made to pricing dynamically, early in the cycle, and ideally at a local level rather than a national one. This enables retailers to ‘nudge’ demand levels back to forecast without the need for large scale investment in mark-down post peak.

Of course, some retailers behave at the other end of the spectrum, with continual promotional activity surrounding Black Friday and beyond. Here, there is a risk of promotion fatigue. Retailers who saw strong 2022 Peak driven by promotional activity should be cautious about buying stock to achieve similar levels of sell through and might be wiser planning for 1-2 weeks’ leaner inventory to achieve better %sell-through and, hopefully, better cashflow.

Summary

Peak trading in 2023 will layer on even more levels of uncertainty on top of an already complex trading environment. Those retailers that do not adapt their approaches to become more agile in demand management, inventory deployment and sell-through, are literally betting the business when it comes to golden quarter sales and profit performance. 

The risks of poor peak cash flow and quarterly rental payment dates in January 2024 provide a metaphorical cliff edge for many retailers. The opportunity exists to avoid this precipice, but action must be taken now, to plan and execute peak for agility, if disaster is to be averted.

Stuart Higgins, partner, BearingPoint

For more information, visit www.bearingpoint.com