June 5, 2020
The COVID-19 pandemic continues to ravage the health of individuals, communities, and economic sectors—including retail. Around the globe, normal life has changed dramatically, resulting in store closures (temporary and permanent), employee layoffs, and people focused on essential needs. Apparel, shoes and nonessentials dropped down the list of purchasing priorities.
Most retailers were already under intense margin and revenue pressure before this crisis hit. Now one of the news financial burdens resulting from the pandemic is an abundance of inventory trapped throughout the supply chain. The good news: there are a variety of options for retailers to work through the excesses. The optimal combination depends on each retailer’s unique situation. As the global economy reopens, retailers have 5 major opportunities for resolving overstock.
1. Partner with suppliers
Retailers can start by dealing with inventory they haven’t received yet. Companies can work with suppliers to cancel orders or push to later delivery dates. While some retailers like Kiabi and Target are planning to take ownership of their orders, others like Tapestry, Inc. (Coach and Kate Spade) and Ross Stores are cancelling to limit inventory investment. Another option is to partner with suppliers to return merchandise, especially basic inventory that can reordered and sold later.
Not all brand suppliers will embrace this level of partnership as it will impact their revenue stream as well, but they may be willing to extend payment terms or negotiate payment schedules to preserve the business relationship.
2. Sell it now
The quickest and most common approach to reducing inventory is through promotions and end-of-season markdowns. Propelled by the pandemic, retailers have increased the markdown madness, inundating consumers with promotions ranging from deep discounts to free shipping. To reach customers, retailers are pushing sale events through smartphone apps, social media, email blasts, increasing online presence and other types of advertising. Saks Fifth Avenue offers flash sales to its SaksFirst customers, while Target and others offer frequent flash sales to all customers, luring them to shop online.
To capture the attention of the consumer and entice them to shop, retailers must get creative with in-store events such as doorbusters, tent sales, sidewalk sales, in-store demonstrations, giveaways, even fashion shows that draw customers into stores. When permitted, Dick’s Sporting Goods plans to have tent sales. Promotions may include coupons and red tag events, which offer additional discounts on top of sale merchandise.
Another option is to package several styles or items together to make the bundle more attractive. The bundle could be merchandised as a gift with purchase (GWP), like a gift set, or at a tempting price point or assembling out-of-season merchandise with a current style.
Larger retailers can share inventory across multiple banners and e-commerce websites they own, essentially combining customer bases to liquate the inventory efficiently. For example, JD Group in Europe can sell its inventory across the sports fashion and the outdoor brands, such as JD Sport, Size? and others. This approach would allow the group to sell inventory in one store/channel instead of ordering more from the vendor, thus reducing overall inventory position.
Lastly, retailers can unload inventory to off-price retailers such as TJX Companies and Ross Stores, where they sell popular brands at everyday discounted prices or in the retailer’s own outlet division, if available. In addition, online auctions allow retailers to take bids from companies with the goal of getting the highest price possible for the inventory.
Retailers like American Eagle, Victoria’s Secret and Gap have offered discounts off everything in store, used outlet stores as well as off-price retailers to reduce inventories. Promotions and markdowns negatively impact margins but generates revenue while reducing inventory ownership. One challenge is when shoppers begin to wait for deeper discounts before shopping, which can damage the retailer/brand image. If that’s a concern, the off-price route eliminates the in-store markdowns while reducing store inventory.
3. Sell it next year
Pack-and-hold is a viable strategy for some retailers’ merchandise types. When stores reopen, consumers will slowly begin to shop again. By the time they’re shopping in earnest, the spring/summer season may be over. Do customers have pent up demand for this merchandise, or will they shift their attention to the next season? Gap, for example, will be discounting some spring/summer styles while also packing and holding others. “While there are some costs to storing inventory, in many cases, that's a much-preferred economic option to the potential margin drain of needing to clear through those. The additional benefit of pack-and-hold is that it frees up working capital for the first half of 2021 as well,” says Katrina O'Connell, Chief Financial Officer at Gap, Inc.
4. Embrace channels & fulfillment
Given social distancing and closures of stores, retailers may need to adopt a few new contactless options for satisfying customer demand. Retailers such as Michaels offer same-day delivery, which was not available before the pandemic, going from test to launch in a matter of weeks. Kohl’s, Dicks’ Sporting Goods and others rushed to launch “contactless curbside pickup” service, even while their stores were closed for in-store shopping. Offering customers flexible fulfillment could generate both revenue as well as good will.
Reaching consumers in the traditional way may need to be revised by retailers and brands looking to marketplaces such as Amazon, Walmart, Shopify, Alibaba and others to sell inventory. Retailers can create their own online marketplace to sell inventory along with other like-minded brands or participate in an existing marketplace. Urban Outfitters created its own online marketplace and also sells its styles on third-party ASOS Marketplace, expanding customer exposure. Marketplaces allow retailers of any size, national or local, to reach customers to generate revenue and move through inventory.
The option to donate, or write-off, excess inventory is a path toward reducing stock, gaining a tax deduction, and helping local and global communities. Due to COVID-19, Two Ten Footwear Foundation has seen a tremendous spike in families needing financial assistance as well as generous donations from retailers and brands such as Brooks Running and Wolverine Brands. Some companies are donating to their local hospitals and charities. Donating is also great marketing for retailers/brands as consumers learn about their generosity, which can lead to new, loyal customers.
Life and shopping are transforming at unprecedented speed. We don’t know which shopping behaviors will stick and which will return to their pre-pandemic ways. But we do know that retailers must deal with excess inventory. While the pandemic is likely to further strain retailers/brands financially, successful companies will use a variety of tools to engage customers, entice them to shop, erase overstocks, and enrich relationships in the community. Just as COVID-19 mutates to survive, so will retailers.