Wondering why your colleagues in retail are on edge? Just whisper the word ‘inventory’.
Inventory has plagued retailers for the past two years. In 2021, it was a matter of not having enough stock to keep up with demand. In 2022, it seems the opposite problem is taking place — retailers have too much stock and not enough demand.
Richard Hayne, CEO of Urban Outfitters, sums it up best here:
“I hesitate to call it a blood bath, but it’s going to be ugly in terms of the amount of discounting and markdowns”.
These aren’t the only situations where inventory can turn nightmarish (we’ve identified seven different inventory risks). In this article, we analyze five retail inventory nightmares. We also offer solutions to help you avoid facing these nightmares yourself.
The Excess Inventory Nightmare
In Q2 2022, Target reported that its profit dropped by 90% year-over-year. The reason? It forecasted too much inventory and had to mark down stock to get it off its hands.
To put things in perspective, at the end of Q122, Target had $15.1 billion in inventory, which was 43% higher than how much it held at the same time in 2021.
While having a higher level of inventory in itself isn’t a negative sign, it turns out that Target had too much of the wrong inventory. As James Brumley points out, Target’s inventory levels at the end of Q122 were 60% of its sales.
The Solution: Beware of the bullwhip effect
Target looked at the demand for its products in 2021 and purchased inventory based on that demand, which caused it to overcorrect. It’s a common inventory management problem known as the bullwhip effect.
Some ways that retailers can counteract the bullwhip effect to avoid having excess inventory are:
- More transparency with partners: When retailers share their demand data with distributors and manufacturers, they can show why there’s an increase in demand.
These parties further up in the supply chain can benchmark this data against data from their other partners and determine whether this increase is a temporary spike or an ongoing trend. - Vendor-managed inventory: With vendor-managed inventory, retailers share real-time inventory and order data of a supplier’s products they carry with the vendor so that the vendor can ship reorders as needed. Retailers like Target use EDI in their inventory management systems to share this information with vendors to accomplish this.
- Limiting excessive promotions: Frequent product promotions can distort the true demand for products. Retailers should consider testing a product’s performance with and without promotions and incorporate promotion data into their inventory forecast.
The Wrong Inventory Nightmare
In August 2021, Gap Inc. decided to offer women’s clothing under its Old Navy brand across a wider range of sizes, from XS to 4XL. With this move, Gap believed it could increase its sales by broadening its appeal to customers typically served by specialty retailers.
Less than a year after the rollout, however, Gap decided to scale back the project. After introducing its inclusive sizes, Gap’s sales in Q122 dropped by 13% and it reported a net loss of $162 million in the period vs. a profit of $166 million during the same period the year before.
Gap’s inclusive sizing experiment led to too much of the wrong inventory. Stores ran out of inventory for their popular sizes and they didn’t have enough demand for anything else. They couldn’t restock popular sizes and had to sell their smaller and larger size SKUs at significant markdowns.
The Solution: Hedge risky inventory bets
Gap went all in on a risky inventory bet that didn’t pay off. While they conducted extensive research on whether customers would be willing to pay for them, customers can often say one thing but do something else entirely.
One way Gap could have hedged this inventory bet is by introducing a limited time online partnership with well known, size inclusive brands like Universal Standard or 11 Honoré, and promoting it in certain markets to test demand.
Another takeaway from this example you can apply to your own business is to ensure that your best SKUs aren’t jeopardized in favor of riskier ones. Gap would have been in a better financial position if it had stocked its popular sizes accurately — it lost ~$300 million dollars in Q321 because of inventory stockouts alone.
The Private Label Nightmare
It’s no secret that private labels are an important strategy for retailers to capture more profit margin from customers. Customers are also able to get a better deal because retailers have more control over the price of their private label brands.
The best recent success story of private labels in retail is Target. They’ve launched 45+ private label brands that bring $30 billion plus in revenue for the business.
Bed Bath & Beyond believed that private labels would be a key tactic to turnaround its declining revenues in 2019. The company hired former Target chief merchandising officer Mark Tritton to execute this strategy; he was responsible for launching 30 private label brands during his time at Target.
With its private label strategy, Target was able to change customer loyalties from national brands to its in house labels. BB&B attempted the same bet, but wasn’t able to bring its customers over to its owned brands.
As it pursued its private label strategy, BB&B also reduced its inventory of third-party brands in stores. It left customers confused about where they could find their favorite home essentials products.
The result contributed to BB&B declining revenues. In Q122, net sales dropped by 25% and its net losses grew by over 700% to $358 million over the previous year.
The Solution: Focus on your core assortment before moving to private label
While the strategy made sense on paper, BB&B’s private label play led to lost sales in its core assortment.
Even though the strategy was inspired by Target’s success, it’s important to note that Target’s private label merchandise brings in a third of its revenues. BB&B went all-in on private labels, which affected sales of its core third-party inventory.
The decision to go private label or not comes down to what customers expect of you and what you promise to them. Historically, BB&B promised a bargain on great brands in its stores. By suddenly pivoting to unknown brands, its customers ended up buying less from them.
The Product Category Expansion Nightmare
In September 2021, footwear retailer Allbirds announced it would expand to activewear as a product category.
Less than a year later, it announced that it would be liquidating its activewear inventory at a cost of $11.6 million and would change its apparel focus to more evergreen styles like T-shirts.
Allbirds’ experience with activewear is an example of a retailer expanding into a new product category that isn’t their core assortment and having it backfire on them.
The Solution: Test new product categories through dropship
Expanding into a new product category is a capital intensive endeavor that carries a high degree of risk.
One way we’ve seen retailers reduce the risk associated with product category expansion is through dropship. Luxury menswear retailer Harry Rosen chose this path when it expanded into men’s grooming products in 2021. They sourced 50+ brands to dropship with them through Convictional. This reduced their risk to test this new product category.
A similar example of this strategy comes from Amazon. They regularly evaluate which products and categories are performing well on their platform before choosing to manufacture and sell an Amazon Basics product. They have the ability to make data-driven bets that result in successful private label plays of their own.
The Inventory Stockout Nightmare
In Q421, Best Buy reported that its sales dropped by 2.3% compared to the previous year and operating income had fallen by 20%. The culprit? Inventory stockouts.
Best Buy isn’t the only retailer that suffered from stockouts in 2021’s holiday season. PYMNTS estimates that stockouts cost retailers $4.6 billion in lost Black Friday sales. And it isn’t just holiday shopping — essential products like baby formula have been in short supply too.
The Solution: Product substitutions for stocked out items
The obvious solution to inventory stockouts is better inventory management i.e. understanding your inventory turnover ratio and stocking inventory to meet your demand.
But in an environment where supply chain issues mean longer lead times for your products, staying in stock on time is easier said than done.
One solution to deal with stockouts is product substitutions. Retailers can partner with vendors to provide a limited set of products as alternatives to their flagship items in select categories. If a customer finds a product in that category to be out of stock, they have a substitute product they might choose to purchase instead.
To further de-risk your inventory exposure for substitutions, you can opt for a dropship partnership with your vendors here. You can save inventory space for the products you know you can sell, but have substitute products available to customers if you’re stocked out.
Avoid every nightmare by holding less inventory
Now that you know how to avoid the most common retail inventory nightmares, we hope you feel less haunted by them.
The best solution for every inventory nightmare is to hold less inventory. That reduces the risk of overstocking and understocking and enables you to test new product categories with greater flexibility.
Increasing your sales without your inventory is easier than ever with virtual inventory and dropship. If you want to get started, Convictional is here to help. Contact our sales team to get started today.
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