When will retailers stop seeing their shadow?

Rethinking outdated buying, sourcing and product assortment practices to reduce excess andincrease profitability // By Liza Amlani, Principal and Founder, Retail Strategy Group

Groundhog Day. The annual tradition on February 2nd is when the semi-mythical groundhog, Punxsutawney Phil, emerges from his burrow. Early spring is on its way if he does not see his shadow. Winter is extended by another six weeks if he does. Or, so the story goes.

Retailers and brands, knowingly or not, cast their own shadows. Unlike Phil, where there is a chance that he won't see his shadow, retailers see theirs every season.

The shadow for the retailer is outdated practices for buying, sourcing and assorting products. With that comes excess inventory and the eventual cadence of markdowns to salvage profit. In turn, full-price sales decrease, and there is a severe hit to gross margins.

We speak to brands often, and they tell us that retailers are rapidly scaling back today. In response, vendors are dropping prices as they sit on canceled orders. Customers are starting to tighten their belts and are spending less in stores. Supply chain disorder, raw material costs and availability, and increases in lead times are forcing price increases. As a result, inventory sales ratios are growing while spending plateaus. However, even these conditions won’t force a change in retail’s reactive behaviour.

Much like Bill Murray in the classic movie also entitled Groundhog Day, he couldn't escape to February 3rd, so he did whatever he felt. Eventually, this wore on him. And, to wake up to a new day, he needed to change his behavior. This begs the question - what leads to retailers casting a shadow to begin with?

Brands and retailers continue to overbuy.

Excess piles up because brands and retailers buy too much. Finance teams project sales plans by adding an increase to the previous year's results, essentially looking to the past to predict the future. Product teams need to buy into the forecast, literally. And organizations as a whole need to pay more consideration to feedback provided by frontline employees.

Plus, there is a need to meet the minimum factory order quantities while guessing how many units will sell next year.

It takes too long to get to market

Retailers and brands plan product assortments too far ahead of the selling season with 52 weeks being the norm for apparel, 90 weeks or so for footwear, and 3 years or more for the most innovative products. When we are so far away from the season, it's difficult to know if the product will hit the mark once in the market. It's also impossible to respond when the customer changes behaviour. Markdowns are almost assured, and that translates to a hit in profitability.

Product creation calendars are inefficient

Product creation calendars are outdated and full of redundant process steps. Teams do not work efficiently, and the calendar is padded with extra time to ensure everyone hits their deadlines, adding barriers to an already slow process.

For example, a brand we spoke to has product, planning, merchandising and insights teams working in isolation from each other. Internally, they say that insights are being "held hostage." In other words, insights from customers are not making their way back to all teams. Although those holding the insights intend to share, they do not know the best way or moment to do it.

Old is old

As a bonus, retailers have moved into triage mode due to the current economic downturn. We have heard that many will be taking a "wait and see" approach and are planning to ride things out. Others are sitting on excess goods and are looking to survey customers to determine how much they would be willing to pay for those items. However, these responses will reinforce outdated ways of working and the retailer will continue to see its shadow.

We propose that retailers should "act and see." The current downturn is the opportunity needed to improve the product assortment process well before an economic recovery. Here's how to banish the shadow - we have broken it into shortterm and long-term plays.

First, the short-term plays: we suggest actions that are implemented rapidly with minimal disruption.

Renegotiate with partners - Consider working closely with vendor and factor partners to pack and hold core/seasonless materials and styles.

Calendar optimization - Get functional teams in a room to eliminate redundant processes and clarify ownership of milestones.

Integration - Formalize innovation and insights into the product creation calendar.

Here's an example of a short-term play: we facilitated an audit of calendar moments for a large outdoor brand in recent work we completed. Within 90 days, we could survey all cross-functional teams and understand the specific challenges of each. Redundancies were identified, ownership of tasks was clearly defined, and accountabilities were ready to be assigned to specific teams. After bringing all teams in one room to meet, they left knowing exactly what to work on, when to execute, and when to converge.

Second, the long-term plays: actions that need more time to bear fruit. It's good fruit, though.

Develop a multi-track calendar - Capture material and product innovation, R&D and long lead time developments. The multi-track calendar sits in parallel with the seasonal product creation calendar and ranges from 3 to 10 years.

Invest in insights technology - Help drive innovative product and assortment decisions.

Vendor optimization - reduce the number of vendors to the most valuable ones. Redefine the relationship with vendors from a service provider to a true partner. Then, enable digital transformation within the partnership to increase real-time decision-making across production, testing and fit.

How about an example of a long-term play: A major brand investing the time to establish a physical/digital materials library. The library would host pre-approved materials from which product creation teams could pull, leading to increased material adoption rates. Moreover, this ensures that teams are working on high-value tasks versus creating something already existing. This is valuable long-term work because of the gains in efficiency. Since overdevelopment is reduced, there is also a benefit from a sustainability perspective.

Going forward

Sure enough, in February 2022, Phil the groundhog emerged from his hole and saw his shadow. The folklore tells us this meant six more weeks of winter.

Coincidentally, retailers have been releasing their quarterly reports and making headlines with hits in profit, slashing guidance, and scrambling not to leave more money on the table. Every report pushes us closer to the cusp of (if we are not already in) a recession, and the shadow grows a bit taller.

However, it doesn’t need to be that way. Retailers can take the necessary action immediately to diminish the shadow and reap the benefits of being closer to their customers and getting faster to market. Doing things in this way, the excess is reduced, and profitability is preserved. In groundhog-speak, that means an early spring for retailers.