Are Traasdahl, CEO, Crisp
Retailers must feel like they’re in a Dickens novel – it was the best of times; it was the worst of times. After riding high on pandemic sales and struggling to maintain full inventory levels, many are now on the backswing – too much inventory and loads of debt-ridden consumers who aren’t willing to spend freely in a chaotic economy.
In fact, data from the most recent CNBC Supply Chain Survey reports that the biggest challenge for the retail industry is oversupply. The study finds that 71% of retail industry leaders are concerned that U.S. consumers will cut back spending in the last quarter of 2023 as inflation worries continue to take hold of consumers.
So, what can retailers do to ride out the storm in the coming months and prepare for the holiday shopping season? Here are three ways retailers can adapt to the changing environment and improve their profitability in the second half of the year:
Diversify revenue streams
Given continued inflation concerns, a potential recession, and tightening consumer demand, retailers that rely solely on product sales are at risk of eating further into their already razor-thin margins. Retailers increasingly need to find other avenues for profitability.
That's what Amazon did, exceeding expectations for its revenue reported in the first quarter this year due in part to its expanding advertising business. Revenue from Amazon's advertising business surpassed expectations, growing to $9.5 billion, representing a 21% increase compared to last year.
Walmart has similarly focused on expanding its advertising segment, helping them to sustain growth in the face of a slowing economy. In the first quarter of its fiscal year 2024, Walmart’s global advertising business grew by over 30%, while its U.S. advertising division grew by a whopping 40%.
As consumers continue to pull back on discretionary spending, pursuing additional revenue streams will be even more essential for retailers.
Optimize inventory levels
Earlier this year, optimizing inventory levels emerged as companies’ top priority in an annual survey of business executives conducted by The Hackett Group.
Companies are heavily discounting and dumping inventory to free up cash. But this effort may be too little, too late. Even with a renewed focus on better managing supply chains to address actual, real-time demand, much of the damage has been done. And it will take some creative management to undo it.
Some retailers saw this coming and took early action. For example, Target Corp. stated in its first-quarter earnings call that it had reduced inventory levels by 16 percent in the period, compared with a year ago, which contributed to improved cash flow. This preemptive focus on inventory optimization should help the company better compete and be more responsive to consumer demand, Target reps said in the call.
Likewise, Big Lots reported inventory costs were down 18.8 percent in its fiscal first quarter, compared with year-ago levels, helping it maintain liquidity.
Increasingly, retailers are sharing real-time data with their suppliers to understand the latest buying behaviors and plan inventory accordingly. This practice has been booming among food suppliers who learned some fast and challenging lessons in the first year of the pandemic. Now, more nonfood and mixed inventory retailers are picking up on the practice and applying intelligent analytics to inform when, why, and what to buy and supply to stores.
Direct promotions where products are on shelves
Beyond finding new ways to add to their topline, retailers need to maximize their use of resources and seek innovative approaches to reduce costs even further to stay profitable. This includes maximizing the effectiveness of their in-store promotions to manage inventory levels more strategically.
By leveraging data and collaborating more closely with suppliers, retailers can help manage their inventory levels while avoiding the promotion of products that are out of stock, which not only wastes costly resources but frustrates consumers. This requires real-time data and insights on what’s actually in store so that retailers can pivot when needed to redirect promotions and manage inventory levels better.
A data-driven future
So, can retail be saved? McKinsey described the situation resulting from the pandemic as a “once-in-a-generation opportunity to future-proof their supply chains.” They foresee an evolution strategy in which supply chain resilience, agility, and sustainability are strategic considerations alongside traditional focus areas including service, quality, and costs/capital. And all this relies on deep data to move with the markets.
To weather through this, retailers will need more than consumer interest in buying again—they’ll need to follow the lead of CPG and retail brands using reams of aggregated data to drive supply chain decisions that will optimize on-shelf availability and offset slowing sales.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.