Inflation + Changing Consumer Preferences = Inventory Glut for Retail

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The robust shopping frenzy of the past two years appears to be behind us. Not only are remarkably higher gasoline and food prices causing their own problems, but also sales of once hot categories such as casual clothes, appliances, and home décor have cooled significantly. The press has been rife with stories reporting how retailers, caught on the back foot, are now suddenly over-bought in these categories, which is wreaking havoc on operating margins. This perfect storm of supply chain crisis, inflation, and the easing of COVID restrictions offers a real-time example of why advanced analytics are necessary for navigating today’s rapidly changing retail landscape.

How Inventory Glut Became a Problem

As First Insight’s CEO Greg Petro wrote in Forbes in December 2021, retailers saw profits surge late last year—because they were understocked. Most retailers had a significant amount of holiday merchandise on containers, somewhere out at sea. As those containers finally started to arrive at their destinations, holiday 2021 was a distant memory and the consumer had moved on. But factories continued manufacturing more inventory to deal with what appeared to be a low stock situation. This is known as the bullwhip effect—manufacturing is alerted to diminishing inventory stocks, so production is ramped up, without recognizing that there’s no longer a market for those goods.

Target announced on June 7th that its quarterly profits will take a hit because they had stocked up on too much of the wrong products. The company has now cancelled orders and will try to move the excess inventory by slashing prices. Macy’s acknowledged that they hadn’t anticipated the consumer moving away from casual clothes, appliances, and home décor items as quickly as they did and that they, too, have too much of the wrong merchandise. Retailers are giving back their profits from the past two years due to a combustible combination of rising labor costs, ongoing supply chain issues, and inflation mixed with consumers’ desire to get out of their houses and start spending on experiences again.

Earlier in the month, Old Navy reported the same outcome—too much merchandise—but for a very different reason. The consumers were shopping but were unable to find their size in the styles they wanted. In an effort to be more size-inclusive, the retailer had started producing all of its apparel in every size, including what used to be called plus sizes. While this is an admirable way to promote body positivity, it’s a terrible way to do business unless the margin hit is being charged to the Marketing or CSR department. Producing larger-sized clothes is more expensive—primarily because they require more fabric. Then these more expensive items didn’t sell through because the sizing assortment wasn’t aligned with consumer demand. Not enough “middle” sizes were ordered, which meant that most consumers had only very small or very large items to choose from when they got to the store. The Old Navy scenario has created multiple problems, starting with disappointing the customer and ending with disappointing Gap’s shareholders.

supply and demand scale with supply outpacing demandReducing Surpluses with Predictive VoC Tools

Both of these situations could have been avoided with the right tools. Predictive analytics can help mitigate the unknowns in retail forecasting by giving key insights into consumer demand quickly and accurately.

  • Managing supply chain inefficiencies is easier when retailers know what consumers will be looking for—or what they are no longer interested in. InsightSelection can help retailers design and select winning products. First Insight utilizes real-time data analytics and customer feedback to optimize product assortment and identify winning products before costly investment decisions are made.
  • Assortment planning software can help reduce inventory glut. First Insight’s InsightSuite software platform can optimize retail assortments using powerful predictive tools. It can deliver remarkably accurate predictions for product assortment selection. It maximizes reach, identifies high-value and complementary products, and helps retailers avoid producing products that won’t perform.
  • The right pricing strategy can help retailers protect gross margin. InsightPricing allows retailers and brands to quickly quantify retail market demand for items at each price point, forecast average selling price with a price elasticity curve, and identify margin-mover products that can bear a higher starting price point than originally planned.
  • First Insight’s Product Experience Management Solution empowers retailers to realize higher success rates for new offerings. It anticipates customers’ needs while also reducing product development, sample costs, and inventory while increasing sell-through.

Utilizing machine learning, demand forecasting, and product optimization tools will help retailers remain competitive, even in challenging market conditions. The world moves so quickly today that retailers must begin to rely on more than instinct and last season’s sales results in order to be successful.

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consumer preferences  Product Selection  price optimization  inventory management  Consumer Purchase Behavior  inflation

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