Do Retailers Really Need to Carry All That Inventory?
I suppose that seems like a stupid question. But having just been through another Christmas shopping (and return) season, I’m not so sure it is. I’ve shopped on line. I’ve been to too many malls too often (I confess it- I hate shopping). In those malls I saw way too much product on sale at way larger discounts than I like to see before Christmas.
As an aside, I’m wondering if the increased holiday sales being trumpeted by the media were at prices which will generate bottom line profit which, I take as a matter of faith, is still the idea.
I’ve made an effort this week, as I usually do this time of year, to catch up on my reading. Some of that reading included retail trends, pop up stores, inventory management, Sears closing 100 plus stores, and various other mostly business and action sports related topics. It all got me thinking about the retail environment.
Inventory is where retailers tie up most of their working capital. Retailers (and brands) have made heroic efforts to control inventory in recent years, but I think there might be still an opportunity for improvement by following the ongoing process of integration between brick and mortar and online retailing. I want to talk about that and ask what you think.
The Online Experience
I’m not going to tell you anything here you don’t know, but I want to build a (hopefully) logical argument. Consumers like online shopping because it’s efficient, it allows ease of comparison, it may be cheaper, and you don’t have to leave the comfort of your desk chair.
They dislike it because they can’t physically interact with the product (which is more or less important depending on the product), and they don’t get it the moment they buy it. They may also miss the personal interaction with a sales person. Or not.
The improved functionality of web sites and the development of logistics to get products to the customer (and back from them if necessary) faster and easier has accentuated the reasons for the consumer to shop on line, and reduced the reasons not to. You need look no further than the growth in online sales in a soft economy to know that’s true.
Brands and retailers (remember it’s getting harder and harder to differentiate between the two) see a role for web sites and social media in brand building. The competitive environment requires them to be on line and sell there either independently or in coordination with retailers.
Building, maintaining and keeping fresh a quality web site with ecommerce capabilities cost a bunch of money. The expense is not just in designing and creating it, but in keeping it up. Servicing online customers generates additional expense.
See- I told you I wasn’t going to tell you anything you didn’t already know. Let’s continue.
Is the brand building from being online worth it? That is, does it generate enough new customers, or increased sales to existing customers, to pay for all the incremental expense? Being the way I am, I guess I’d ask if it generated enough gross profit dollars.
Maybe you sell to new customers who are too far away to get to your store. Maybe your online communications program increases traffic and/or the average sale. Maybe, as a brand, you sell products in your line that retailers didn’t typically have room to carry and consumers didn’t previously know much about. Maybe a lot of things. Or maybe not.
So, competitive pressures require you to be online. Being online in a competitive way is expensive. You have to earn enough incremental gross profit to at least pay for the cost of being online. Cannibalizing brick and mortar sales for online won’t do it. If you accept those points, then you have to agree that total sales, including online, have to rise enough to pay for the online expense or overall industry profit will fall.
Let’s say that again in a slightly different way. With the existence of online retail, in the absence of any change in the brick and mortal expense structure, sales have to rise just to break even because of the additional expense of being online. And not, I’d estimate, by a trivial amount.
But consumers don’t automatically and graciously just spend more just because we’ve boosted our expense structure. What might we do about that structure?
A Lesson from the Airport
Last time I was at the airport (not over the holidays happily), I was struck by how the airlines have learned to use online to manage their business “in their store” so to speak. Pretty much everything happens at the monitor unless you’re changing your flight, checking baggage, or have some other variety of crises. You can do most of it at home, or you can wait and do it at the airport. At the airport or at home is pretty much the same for the airline and its passengers. They’ve gone a long way towards integrating brick and mortar, if I can call it that, and online. And they’ve done it in a way that the passengers seem to like. Although now, instead of standing in line at the airline counter, we stand in line to get through security. Oh well.
How does this translate to our retail business?
Taking Trends the Next Step
Retailers are already giving consumers the online or in store choice. They are dealing with the brands they carry (when the brand and the retailer are not one and the same) through not only the traditional model of purchasing inventory but of taking it on consignment or even having the brand run its own store in their existing store. My point (and once again, you already know this) is that the traditional model of see it, order it, receive it, sell it, pay for it is evolving.
In general terms, what I’m seeing is independent retailers take less and less inventory risk. The brands may not like this but have been dragged towards supporting it. Bluntly, they can’t afford to sell product to retailers who can be hard pressed to pay them, may dispose of the merchandise at prices and through channels the brand would prefer they didn’t use, and can’t really merchandise the complete line the way the brand wants.
We’ve got retailers becoming brands and brands becoming retailers. Zumiez, to use one example, thinks of itself as a brand. And go look at a Buckles someday. I’ve got to write about that.
We’ve got the merging of online with brick and mortar and the rapid growth of online sales. Through pop up stores, renting space in existing retailers, consignment and other gyrations we’ve got inventory risk migrating to brands. The relationship between brands and retailers is more codependent than it used to be. Brands want to capture the higher retail margins, and have the ability to better control and accelerate the process of creating and getting product into stores. Retailers are selling their own brands.
We tend to look at these developments as independent events. I don’t think they are. How might they be addressed in a positive, structured way?
Here’s a Wild Idea
What if a brick and mortar retailer cut the inventory it kept in half? Maybe by two thirds. Like the airlines, they let their customer decide whether they want to “check in” at home or at the airport (the store) and handle various purchases or changes at either place. The customer can come into the store, see the product and decide what they want to buy, but it gets shipped that day to their home (or they can come back to the store and pick it up).
Yeah, yeah, I know, I’m crazy. And the world is flat and real estate prices only go up. Maybe I am crazy. That’s why I’m asking you.
Maybe for the first time a retailer, due to the much lower inventory I’m proposing, is able (and can afford) to display most of a brand’s line rather than just the pieces they bought because they thought that was what would sell and it was all they had room for. The quality of the presentation, and the customer experience, might increase significantly. Part of the reason brands want to get into the retail business is so their brands can be controlled and presented the way they want.
The customer would come to the store either because they want help and like the in store experience (which I’m suggesting would improve), or because it’s a product they don’t want to buy without seeing and touching it. But they wouldn’t necessarily walk out with it. The very broad but not deep inventory would mean that the product would not necessarily be available for the customer to take home. The customer, after having had the opportunity to look at the biggest selection of a particular product they’ve ever seen, would make a selection and have the clerk swipe their card and tell them, “It will ship to your home tonight.”
The biggest objection, I suppose, is that customers who come into stores want to take the product with them. But we know that more and more customers are making the decision to wait a few days for their product. We also know that they are coming into stores to evaluate products then going home and ordering on line. And there is some benefit to not having to carry the product around with you.
Another interesting problem would be for the retailer to determine (in consultation with the brands it carries) exactly what to carry in inventory and how to price it. Do you charge some percentage more for product people walk out with? Which products will people be most determined to take with them? How do inventories get replenished under this situation of in store scarcity? Will you need to replace the product on the floor because people are playing with it so much? The gross margin return on inventory investment approach I’ve discussed before might be a tool that could add some value in figuring some of this out.
What I’m proposing is an approach to brick and mortar retailing where the role of online and the melding of brands with retailers is recognized. The retailer would tie up a bunch less working capital in inventory. The quality of their merchandising could improve and I think the customer would have a better experience. Thinking globally for a minute, this might also play to the U.S.’s competitive strengths in logistics and distribution.
Brands would take less collection risk and would be better presented at retail. They’d have more inventory risk but, as I said, that seems to be where we’re heading anyway.
I don’t want to trivialize what I’m suggesting. There would have to be some interesting negotiations between brands and retailers to sort out a lot of details. Retailers would have to invest in some new fixtures and other merchandising expense. In addition, I imagine there’d be some in store technology costs. Hopefully this is more than made up for by a massively lower inventory investment.
I’m suggesting this brick and mortar low inventory internet fulfillment approach because that’s where I see the trends taking us anyway. I figure you might as well ride the wave rather than have it break on your head and drive you into the sand. If the trends I’ve highlighted are valid, I’m not sure there’s much of a choice.
Isn’t this already the type of model that outdoor Eco-fashion brand, Nau, implements in their brick and mortar locations?
Hi Corey,
I don’t actually know. I’ve never been in one of their stores and I can’t seem to find their brick and mortar locations on the Nau web site. It just lists the retailers who carry their product, at least in the Seattle area where I live. If you’ve got some additional information, please share it.
Thanks for the comment.
J.
I’ve noticed some Brand/Retailers are controlling their inventory by going the other way and only offering certain merchandise (like the really nice stuff) on their website or through their catalog. For example, J. Crew only offers certain coats, suits, jackets, and knits online, leaving t-shirts and button-ups for the brick and mortar.
I buy online mostly to avoid the shopping mall hassle so if I were to make a trip, find something I like, then find out it’s not in stock I would be a bit irritated. But, if I knew I’d get my purchase the next day I’d be ok with it as long as it’s guaranteed or free like my 30-min pizza delivery.
Hi Chad,
That seems like it might be a valid model to me. Currently, almost no brand can carry, much less merchandise, the complete line of even a single significant brand. And I’ve talked to a couple of brands who are using their web presence to sell products that consumers seem to like but aren’t really aware of because retailers aren’t carrying them. I don’t claim the model I’ve suggested is how things will actually go or is the best/right solution. I imagine it will be different for each brand and each retailer depending, as always, on their customer base. But I hope I made the point that something has to change (is changing I mean) and it seems to me the fulcrum of the change is in how inventory is managed.
Thanks for the comment,
J.
In my industry, concept stores are gaining ground on brick and mortar/mom and pop retailers. I’m not sure of this ratio, like what was shown in the last Transworld Biz of Big Box growth vs brick and mortar, but these concept brands are offering up sort of what you’ve mentioned.
In an effort for the retailer to not loose sales of [the concept brand’s] accessories, and knowing the retailer cannot stock everything, the consumer can order the accessories online, the concept brand ships it to the customer, the retailer is paid the profit for the item(s) sold.
I haven’t any feedback on how it’s going so far but I’m definitely interested in seeing the long term affect this has on the retailer’s customer base and spending habits on higher ticket items which can’t be shipped out for under $40 freight.
I don’t have any numbers I consider solid either. There’s some new model of cooperative inventory management between the brand and the retailers (when they aren’t the same) but I’m not completely sure how it will work out. What the shipping costs are will certainly figure into it. I also think it will depend on the margin dollars that can be earned on a particular item.
Thanks for the comment.
J.
http://www.fastcompany.com/magazine/116/features-leap-of-faith.html
Jeff, this article covers Nau’s original retail concept. However, since the brand has changed hands dating back a few years now, in all likelihood, this retail model went the way of the dodo.
Corey,
Great article. I may send it out to my whole mailing list. Nau has obviously put a whole lot more thought into the operational model which I described in general terms, but the benefits seem to be the same ones I suggested you might get. But of course, they are doing it spending a lot of time figuring out who their customer is and what their market position is. What I remembered as I read that, but didn’t really say in my article, is that you may cut your inventory and costs, but you still need a viable competitive position. They also had what is an advantage in some ways of starting from scratch though, as we read in the article, that involves a lot of work and a great deal of stress and uncertainty.
I guess I’ll have to visit the Bellevue store now that I know they have one.
Thanks!
J.
Corey,
I was writing about Nau, but when I couldn’t find the retail locations referred to in the article on the Nau web site, I called them. It seems all their retail locations have been closed so I’m guessing it didn’t work out quite as they would have liked when that article was written back in 2007.
Thanks,
J.