The AlixPartners Retail Restart Playbook is a special weekly series of our Retail Viewpoint newsletter that provides in-depth answers and operational considerations for retailers as they reopen stores and restart business post COVID-19 closures.
You’re bringing back employees, adapting to new pickup and delivery options, and safely reopening stores. It’s a gradual plan that keeps customers and employees safe and informed, as we discussed last week in the first chapter of our Retail Restart Playbook. If you’re a retailer that was forced to close stores for the last two months, you’re fighting on three fronts: customers have less money for discretionary spending, what customers are choosing to spend their money on has changed, and you now have a glut of unsold inventory sitting in your stores and distribution centers.
This mountain of unsold spring and summer inventory as a result of the pause in bricks and mortar sales will also have a significant domino effect on looming winter and holiday assortments. Making sense of the situation means reversing the usual top-down approach to merchandise financial planning. Especially for public retailers trying to communicate with investors, it may be tempting to develop a plan in the C-suite and send it downstream, but the results may not reflect the current reality of the business. Instead, just as you are making individual store decisions based on on-the-ground intel, it is essential that planning decisions also be based on feedback aggregated from stores, merchants, and planners—the experts throughout your organization.
To build a new plan in these uncertain times, it is crucial to have open communication between stores, category planners, and the finance team. Set up your plan to accept new and constantly changing variables—including the staggered store opening dates, fluctuating local traffic levels, inventory movement, and category and channel are trends. Consider additional input from external sources, such as consumer insights, data from locations that have already reopened, and macro demand trends. Both your plan and your planning process should be modified to become more dynamic and more frequently updated. Accurate and up-to-the-minute updates may make all the difference. So, where do you begin?
Set your priorities: Start by remaking your plan, which should be rational and reflect current realities. Being overly optimistic with your assumptions may make a bad inventory situation worse for longer:
- Chasing healthy sales, margins, and inventory levels all at the same time may be impractical in the current scenario and lead to achieving none of the three.
- Start by constructing a baseline plan that you can then build upon and modify regularly and that serves as the one decision-making source of the truth. This bottom-up plan should account for current inventory levels and segmentation by location, inbound order quantities, estimated reopen dates, and historical demand by location.
- Establish a cross-functional team that is accountable to inputs, assumptions, and any changes or discounts to the baseline. How will the channel mix shift and what is the likely impact to margins? How long would it take for demand to ramp up by location? What are the likely changes to the category mix and their impacts to the margin? How promotionally competitive could your retail segment be?
- Determine the appropriate balance of sales, margin, and inventory to meet your strategy goals and adjust your levels of product newness, promotions, and markdowns accordingly.
The output of this refined plan must reframe realistic key performance indicator targets that get clearly communicated throughout the enterprise to rally teams around a set of common goals.
- Strategies and decisions must be right for your brand. Any damage done to your brand value perception may be irreparable. Retailers are still recovering from the promotional necessities following the 2008 recession.
Manage your inventory effectively: Knowing what inventory you have on hand and adjusting future assortments, buying practices, and allocation will be key:
- Establish an inventory baseline and provide visibility into its composition for all teams to track. This helps teams get aligned and brings accountability to decision making.
- Segment all existing inventory into buckets by potential action criterion, including carryover, pack and hold, markdown, and liquidation. Be willing to modify historical norms and criteria for this segmentation knowing that consumer dynamics have changed.
- Clearly define potential actions and levers by each bucket. Teams should maximize profitability when determining what extent of markdowns to take where.
- Consider more tactics for clearing inventory at elevated markdown levels, such as the use of additional clearance channel retailers or online marketplaces.
- Adjust channel allocation assumptions and create operational flexibility for shifting inventory across channels. Continually assess strategy to maximize margins and traffic.
- Align retail allocations with store ramp-up assumptions and leverage increased hold and flow for flexibility.
- Regularly track your inventory and actions. Drive accountability and establish owners within the organization. Consistently reevaluate sell-through and inventory at the store level and keep the plan current.
- Provide teams visibility into promotional effectiveness and add in flexibility to adjust promotions more frequently based on weekly business reviews.
- Prepare for a higher-than-normal return rate as a result of increased ecommerce sales and relaxed return policies.
- Heighten inventory controls and frequency of open-to-buy reviews.
How to plan for the fall season and beyond: Once the immediate inventory situation is understood and a preliminary plan is in place, carefully plan your assortment for future seasons to adapt to changed needs:
- Recalculate your category mix based on the most accurate data possible. This may come from the last four to five weeks of ecommerce selling or from predictive modeling based on consumer insights and preferences.
- Account for the likely higher-than-normal level of carryover and reduce assortment risk by reducing overall breadth, shifting to a higher penetration of basics, and being conservative with good/better/best price mix.
- Identify current fabric and other raw material liabilities and challenge teams to design into them.
- Buy discipline is more important than ever. Align your buying algorithms with new assumptions for velocity and sell-through.
- Delay buys as much as possible, working with vendors to reserve capacity and shorten lead times, but be mindful of their cash position as well.
The problem of excess inventory and planning with unknown demand is not limited to any one retailer. It’s an industrywide issue that is weighing on everyone from luxury brands to department stores to off-price retailers. Quickly assessing where you stand and adjusting your plans appropriately is essential in giving your customers what they want as demand levels continue to fluctuate over the next few months. And getting a grasp over existing inventory levels will play into creating your strategy around bringing new product to market, a topic we will focus on next in our Retail Restart Playbook.