Written by John Pitman, CEO of Krunchbox
September 7th, 2023
Retailers the world over always knew that the COVID related bumper sales party would come to an end. 2023 has seen a return to a relatively more normal pattern, if the concept of normal has any residual value. Consumers are once again travelling and going out, which means that discretionary dollars are being spent on dining out, entertainment, and holidays as opposed to housewares, consumer electronics and hardgoods. Add to the mix a healthy dose of higher costs in the way of wages, rent and energy prices, and you have a perfect storm for some retail channels.
Little wonder then that we are hearing more and more mutterings from suppliers, about retail buyers cutting back Open-to-buy. With slowing sales translating into bloated inventories, there is a ripple effect moving up the supply chain, with the breaks being applied to replenishment plans.
So, what to do when your Retail Buyer says, ‘I’m sorry, but circumstances have changed. I no longer have the budget to purchase what I had planned. I’m cutting back your OTB’!
The first thing to do is take a deep breath before responding. Before protesting, seek to understand the reasons for the cutback. Empathy can take you a long way. Is it due to declining sales, excessive inventory, changes in consumer trends, change in retail strategy, new financial constraints imposed at a corporate level – or all of the above? The answer may help guide you in regard to the best approach to mitigate the effects.
As always, it pays to be armed with good quality data analysis. How are your ranges performing in absolute terms and relative to the category? If certain parts of the range are under performing you need to consider what you can do to help your Retail partner, for example offering some support for markdowns or promotions in order to shift the excess inventory. Another example would be to negotiate some off location displays to help drive higher sales volume and reduce inventory.
Let’s assume that your ranges are performing at least OK relative to the category and within the context of the overall economic picture. The focus now is to optimise the precious OTB that you are going to be allocated, albeit less than the OTB you had hoped for. The key words now are collaborative inventory management.
We are going to break this down into three sections – Dead Stock, Clustering and Pareto.
Every retailer has dead stock; it is a fact of life. As a vendor it is your responsibility to identify dead stock and recommend ways of shifting it off the books. Whilst dead stock is inevitably associated with poor sellers / slow movers it is not always the case. You might have a good seller that doesn’t perform in certain locations, whether due to demographic profile of that store, competitive set or even store layout. That same item may be regularly out of stock in other better performing locations. Either way, it pays to liquidate the stock with appropriate incentives / markdowns and reinvest those dollars in better sellers and/or better store locations. In other words you can free up more OTB for yourselves by taking a proactive approach to fixing dead stock issues.
Krunchbox has a suite of Dead Stock reports that can be run either by product or by location. In each case, the list is default sorted by the highest value opportunities so that you can highlight to your buyer the quantum of stock dollars tied up and not turning. Carefully targeted markdowns can quickly free up significant incremental OTB.
Retail store clustering is performed at very different levels of granularity. If you perform your own store grading based on your categories or better still on a cluster of key products, chances are your clustering will look very different from your retailer’s clustering. (There should also be a fair degree of overlap by the way.) The key is to identify the major discrepancies. For example, you may classify Store 1234 as an ‘A’ grade store from the point of view of the sales velocity of your ranges, but the retailer might simultaneously have the same store graded as a ‘C’ store because of its location or footprint. That mismatch inevitably results in less than perfect inventory allocations and distorted min/max replenishment triggers.
Remember that the objective in this whole drama is to make sure that with limited OTB, every dollar is being focused on the right product in the right store with appropriate inventory. So if your clustering analysis can show that allocating more dollars to certain product/store combinations, and less dollars to other combinations (that would have received more allocation based on the flawed clustering) then each of those retail dollars is going to turn faster and generate more cash.
Again, krunchbox can greatly simplify the process of grading stores based on different criteria, and within the Store Master the same store can hold multiple different store grades according to different categories, giving you the power to optimise inventory according to sales potential rather than a past compromised rate of sale.
One of the least well understood yet most powerful tools in your armoury, is the Pareto analysis. This tool more than any other, can highlight where the Buyer’s OTB is sitting redundant, tying up valuable working capital, whilst other stores are screaming for inventory to meet demand.
The Pareto tool ranks every one of your store locations and every product in the range and then slots them into a four-by-four matrix. In the top corner you have the best sellers in the best stores. In the bottom corner you have your poorest sellers in the lowest traffic stores.
The key is comparing the share of sales each quadrant generates to the share of stock supporting those sales. It is not uncommon to find that your top quadrant is made up of the products and store combinations that generate 15% of sales, but they hold less then 2% of the inventory. Likewise, your bottom quadrant is made up of lots of ‘rats and mice’. They might generate only 5% of sales but be sitting on 20% of the available inventory.
Imagine how the profile of the business would change if you had that amount of inventory in the top quadrant – the one where inventory arrives and sells out straight away!
Being able to illustrate this graphically to a buyer can help change the conversation from one of simply cutting back OTB to one of re-allocating precious OTB in a more targeted fashion to drive stock turn (thus freeing up cash to invest in more inventory). This is the secret behind the virtuous inventory cycle.
In summary, all is not lost if you find yourself in the unpleasant position of being told by your Retail Buyer that your OTB is being cut back. By being proactive, analytical, adaptable and collaborative, you can navigate successful outcomes and even achieve unexpectedly improved results. In any case, retail is highly dynamic, so nothing stays the same for long!
About the Author:
John Pitman, CEO of Krunchbox |
a global retail data analytics provider
Krunchbox is a global Retail Point-of-Sale analytics platform for retailers and their suppliers, which transforms retail data into insights, actions, and results. Krunchbox collates data from over 200 retailers across the globe every week and is the analytics partner of choice for many of the world’s most recognized CPG companies. Contact us at firstname.lastname@example.org