Why Retailers Will Continue To Struggle To Find The Baseline
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Back in 2021, my partner Paula Rosenblum wrote in RSR’s merchandising benchmark (The Agile Merchandising Lifecycle In The Age Of Disruption, December 2021), that “the global pandemic affected sales in abnormal ways, and as a result even if consumer shopping demand returns to something like the old ‘normal’, baseline forecasts will be skewed for the next two years at least.”
“Demand” is a difficult thing to foretell, even in the best of times – and these are not those. In a more recent commentary, Paula wrote:
“I knew it… retailers would presume demand would go on forever, post-pandemic. Even as a technologist, I knew forecast engines just weren’t going to help. I kept calling the return to stores a ‘rebound romance’. And sure enough, some retailers are now drowning in inventory. Nothing goes on forever.”
Consumers are currently dealing with the effects of inflation- and that of course affects demand. After fuel prices rose earlier this year, consumer sentiment hit new lows in June. So even though unemployment is at a historic low in the U.S., consumers have redirected their shopping towards needs more than wants. For companies like Walmart, that’s good news; according to financial news website CNBC:
“<Walmart> is wooing more middle- and higher-income customers who have turned to the discounter for low-priced food and essentials because of inflation.”
For other retailers, the shift is a problem. For example, Target recently reported poor earnings, even as the company hinted that it was poised to improve in the near future. News site CNN reported that,
“Target’s profit plunge came from the deep discounts it had to offer on much of its general merchandise, such as clothing, electronics, and home goods. The hit to earnings from such deep discounting was unavoidable. But company executives insist it was the right choice. ‘Consider the alternative: we could have held on to excess inventory and attempted to deal with it slowly, over multiple quarters or even years. While that might have reduced the near-term financial impact, it would have held back our business over time,’ said CEO Brian Cornell to investors. ‘The vast majority of the financial impact of these inventory actions is now behind us.’ He predicts a meaningful improvement in operating margin rates in the fall season.”
The RSR team believes that in the next year or even two, retailers will continue to struggle with their forecasts to the point where they will be more of a guess than a plan. How can we say this with confidence? Let’s consider the factors:
First, the current year’s baseline is a mess. 2022 plans were based on 2021 results, and those factored in Paula’s “rebound romance”. But that romance was interrupted by supply chain challenges in 2021 and raging inflation in 2022. The result was inventory arriving late for demand that was no longer there (the Target problem).
That will result in factor #2: discounting will affect the all-important upcoming holiday season in big ways. Retailers must get rid of excess inventory, and most industry-watchers expect to see steep discounting starting early. Sales will be driven up, even if profits are pushed down.
Third, when and how inflation will slow down is anybody’s guess. Beyond raising the interest rate, there’s only a little that government action can do about this, no matter what all the loud voices in the political arena say. Consumers seem to have adjusted their spending towards more fundamentals and away from discretionary items. But overall, they’re still spending. But there’s only so many moves available to consumers; if inflation persists, consumer cutbacks in overall spending are inevitable.
Fourth, “back to school” is important this year. Remember, school-age children have been e-learning at home via one video conferencing app or another for two years (btw, this has created a real growth market for e-learning “LMS” platforms). Now they need new school supplies: computers, backpacks, writing material, clothing, sports equipment, etc.
Fifth, supply chain issues are hardly solved – they’re just mitigated. Global supply chains are just that – “global”, and disruptions from severe weather, pestilence, civil unrest, and war are affecting them.
Finally, consumer expectations are changing before our eyes. This has to do with another societal shift that COVID accelerated: the generational shift. Big-spending Boomers are retiring while Gen-Zers are sinking roots. The behavioral differences between those generations couldn’t be more different.
Here’s a story that highlights that (bear with me on this one). Over the weekend I volunteered to be an usher at the local Performing Arts Center at a concert featuring Gen-Z song man Mac DeMarco. The audience of 750 was almost exclusively Gen-Z with just a few young Alpha generation kids mixed in. At the end of the gig, the audience picked the place up, separated recyclables from trash, and put everything in the appropriate bins. There was almost nothing for us to pick up! A couple of other Boomer volunteers and I marveled at this, remembering how our generation would have trashed the place.
So why is that story even relevant? It is because it points out younger consumers’ awareness of sustainability – and that awareness affects what retailers can sell to them.
All these factors come before we get to the business-as-usual factors like new products and fashions, promotional advertising, competitive pressure, etc. Those factors were real before the pandemic, and they’re still real today.
What It All Means
In the 2021 Merchandising study, we concluded that:
“<In the absence of a solid baseline to work from> there’s still a lot of work that retailers can do now to prepare to improve forecasting in the future. For example, planning by category is no longer accurate enough – retailers should be planning at a detailed level. Additionally, retailers should be investing now in analytical capabilities that enable them to see early indicators of demand (external data like consumer sentiment, market, and environmental signals, etc.).”
The consumer economy world won’t settle down anytime soon. As financial network CNBC reported on August 18:
“<CNBC analyst> Jim Cramer on Thursday advised investors to accept that companies will most likely continue struggling to plan for the future as they adjust to quick, constantly evolving changes in the economy.”.
What Cramer was talking about is agility. And that remains retailers’ best strategy.