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The Catch 22 of Retail Comp Planning

By Michele Tezer

Most retail leaders can vent about the challenge of having to lock to unrealistic budget numbers when current trend KPIs are indicating the opposite. Even in the current ‘retail apocalypse’ environment, there are companies being pushed by their boards and financial teams to plan for positive comp growth, but to those inside our industry, these numbers are highly suspect. Certainly, there are companies that should be planning for growth: companies with extensive new categories, newer digital based retailers that are still gaining exposure, or companies that are smart enough to have their ‘Uber-like’ disruption plans at the ready. For other Retailers though, planning positive comps without creating a bridge to a very different budget approach confounds logic. When was the last year most Retailers delivered positive comp numbers? Was it true comp, without highly beneficial holiday shifts or hiding behind underpenetrated Ecom channels? Are we retailers knowingly signing up for positive growth targets only to avoid having to revamp our budget structure?  If we are, then how can we do it with more conscious intent? What steps can a company take to mitigate risk to bottom line profitability? How can a company be more strategic in planning for expense reductions? What actions will help leadership teams prepare for the operationally slick Retail world of tomorrow?

Embracing the Inevitable

Retail is forever rooted in the blend of art and science, but the reality of capitalism is that Wall Street, and shareholders do not readily accept the need to compromise in order to achieve balance for both. Teams can present the math that unequivocally shows that even a flat comp is actually positive when accounting for holiday shifts, or the lack of a 53rd week, or that the epic growth from an Ecom channel is past, but public companies cannot sell that mindset to shareholders focused on quarterly results. Similarly, leaders may know that they need to spend on infrastructure projects that will never be approved without higher projected revenue targets. When the conflicting realities of these points converge, leadership debates the necessary Sales, Margin and Inventory targets that will support an expense structure that cannot be cut enough to deliver the analysts’ expected bottom line profits. Inevitably, leaders have to sign up for positive comps, even if they are clearly unachievable.

As a result, companies often over buy inventory, perpetuating the multiple cycles of discounting. Layoffs and store payroll cuts become a necessary evil to show that leadership is taking action and that they are aligned on reaching bottom line revenue targets to the expectations set by Analysts. Fewer companies actually commit to laying out the long-term plans that will help them pivot to a healthier retail future, but all of them should. So this is the current environment: some companies are focusing on near-term risks and hoping the long term will improve, and other companies started planning years ago for the reality of a turn-around that was going to be essential. The latter companies are now delivering better results, and if they have great leadership, they are tackling both topline growth and bottom line cost management with some fairly creative strategies.

Mitigating Risk

For mid-sized vertical retailers, it’s not unusual for at least one cycle of ‘buys’ (i.e. the commitment to production of goods) to have to be completed before budgets have been started, let alone finalized. If systems are aligned, then reconciling financial budgets, channel / location plans, and merchandise plans should be somewhat efficient, even if it’s not easy. Unfortunately, many companies are still stuck with Excel solutions, which intensify the challenges of creating ‘what if’ scenarios with plans that don’t aggregate. When done manually, the entire planning reconciliation process becomes a massive, anxiety producing, time intensive undertaking. What are some tactics a company can leverage to mitigate risk while the budget debate is still raging or if sales plans seem inflated?

  • Invest time in planning for a realistic product & vendor mix. Ideally it should limit the risk of upfront inventory investments and maximize chase options, but be wary of creating a ‘boring’ assortment.  Mitigate exposure to emerging trend products if they have low margins that will not support price reductions.
  • Analyze size offerings or product extensions. Are extra SKUs really buying the Company sales volume and customer good will? Would it be better to offer free shipping and returns for products only available on the web?
  • Recognize the need to aggregate and check buys across channels to ensure that teams are not accidently overinvesting in similar products.
  • Dedicate effort to deliver shared pools of inventory across channels.
  • Review product flow cadence for stores. Would more frequent, smaller product flows create exposure to newness for loyal customers while reducing the need to deliver riskier newness?
  • Assess the possibility of taking less visible markdowns by adjusting locations, day of the week, or the number of weeks that products are at full price. This weans customers off the constant expectation of new markdowns and the assumption that every product will eventually be available at markdown.
  • Plan “B”; develop an inventory clearance option. Possibilities include secret sales with limited exposure, secured employee sale sites, offering limited upscale products on consignment sites like The RealReal, converting a store to a clearance location, or selling into remote secondary markets.

Maintaining inventory flexibility is the single most important tactic a retailer can deploy during times of uncertainty, regardless of their size or systematic capabilities. It is a hard decision to consciously plan to turn inventory faster and it requires teams to react very quickly, but it is safer than the alternative.

Dynamic Budgeting

Forward-looking leaders are taking advantage of this adjustment cycle to restructure organizations, close underperforming stores, remove wholesale relationships that are unprofitable, etc. For an organization to be competitive in post-Amazon retail, leaders need to restructure budgets to support expenses that help evolve businesses and make them more nimble. What options would allow a company to run with reduced overhead and improved ROI?

  • Designing stores for lower maintenance costs, especially lighting or visual standards.
  • Leveraging Store technologies that optimize staffing payroll.
  • Investing in RFID-based replenishment software to ensure full sizing and optimal inventory by fixture.
  • Reducing distribution center and inventory movement costs; Amazon is investing in automation and delivery technology for a reason.
  • Offering same day or next day delivery in large metro markets to limit inventory ownership. Nordstrom’s new ‘Local’ concept will offer up stylists, product try-on, and pamper services, with fulfillment from multi-channels. Rapid delivery is not specified, however, it’s not a stretch to believe that customers in major markets will expect it.
  • Launching ‘virtual’ Markets with wholesale accounts to limit travel expenses.
  • Utilizing hosted websites rather than owned platforms reduces upgrade efforts and focuses talent in product management expert roles instead.
  • Integrating virtual SKU offerings can reduce capital outlay, offering products in web-based assortments with inventory owned and fulfilled by a 3rd party. At times, these offerings can even jumpstart a new product category.
  • Partnering with marketing optimization services that deliver clear revenue results for a fee.
  • Exploring employee rewards for cost reduction ideas that are implemented; ideas generated from this type of crowdsourcing often yield excellent results.

These approaches may require shifting some budget expenditures from capital to expense, which can be a tough internal discussion, but having budgets dictate business approach is short sighted, and frankly outdated.

Be Courageous

Those outside the world of Retail – journalists, financial analysts, even friends – are amazed at the complexity of our industry. The global collaboration that it takes to bring products to market is mystifying to any individual not initiated into our worldview. It’s not surprising then that budgeting for this level of complex enterprise is challenging, but that does not obviate the responsibility that leaders have to make decisions that will deliver a more vibrant future for their business, especially in times of distress. It’s easy to say, ‘Cut 10%’ to every business leader, but it’s hardly strategic, and cutting with a scalpel is still cutting. Can’t we realistically address the long-term health of our business? In this volatile environment, do we have the courage to tackle tough decisions with thoughtful far-reaching strategies?