The challenge of matching Christmas 2009’s strong like-for-like sales and contending with the looming VAT rise means retailers must take extra care when planning their seasonal stock and pricing levels
Last Christmas, fashion retailers played a cautious buying game as they sought to avoid the overstocks that plagued them when the financial crisis impacted on Christmas 2008. And in general their prudence worked, with most going into Sale with a lower level of discounting and less stock to clear.
But, as the 2010 peak trading period rapidly approaches, how is this Christmas looking? It seems it is a mixed bag, with some retailers raising stock levels and others keeping them flat.
“We’re really optimistic for Christmas. We’ve had a good spring 10 and think the collection we have will create some excitement, says Paul Petts, head of group logistics at premium retailer Reiss.
However, Sarah Rajani, head of investor relations at fast-fashion chain New Look, says: “While the combination of value and fashion proved resilient last year, we have planned cautiously for the current year, not
least because we are trading against strong comparatives.” As a result, stock levels are expected to be similar to Christmas 2009.
The VAT increase which will come into effect in January 2011 will have a knock-on effect on trade pre-Christmas, as shoppers rush to avoid the rise to 20%. Ruis says: “The VAT rise will drive footfall to electrical and big-ticket items in our store and that will drive people into fashion too.”
The managing director of a large international fashion group agrees: “There will be a lot of advertising [ahead of] the VAT rise so I think there will be a buzz this year,” he says.
He also believes that customers’ post-election nervousness should settle over the coming weeks, despite some people’s fears of a double-dip recession. “People have got over the whole problem of the economy slowing down and now that the Government has put measures in place, people have got five months to adjust their lifestyles to suit.”
From an operational point of view, Sam Jackson, managing director of Prologic, a provider of software and services for the fashion industry, says retailers now have the processes in place to deal with the VAT changes but that it may mean retailers raise prices as early as autumn 10. He says: “Retailers will be thinking about that as they will be losing margin come January.”
New Look is planning to freeze prices on 20% of its products, including its most popular lines, but will most likely increase other prices due to rising cost pressures from higher energy costs, rising wages in China and a weaker pound.
This Christmas the importance of having the right stock in the right place at the right time is higher than ever. Steve Howells, director of merchandise visibility at retail loss-prevention firm Checkpoint Systems, says better data is vital to improving the supply chain and maximising profit: “Developments in technology, like radio-frequency identification (RFID), are paving the way for this.”
Derek Hunt, operations director of logistics company Clipper Logistics, says: “The focus will be on service and tight stock control.” However, he says that should be normal practice: “Christmas is high pressure but the disciplines and processes are no different to the rest of the year.”
Striking a balance
Howells believes retailers must be careful about implementing defensive inventory strategies that could impact on the bottom line. “A defensive strategy will result in out-of-stocks because staff can’t replenish shelves quickly enough, if at all. At a time when consumers are minimising the number of trips to the shops, a retailer that is focusing too heavily on reducing the risk of overstocks will subconsciously be contributing to an increase in dissatisfied customers [due to staff being too busy to replenish] and consequently lose sales,” he says.
Many retailers are adapting their supply chains to cope with the uncertainty. Says Ruis: “We have enough flexibility between brands and own brands to drive it closer to the time”. With the majority of own-brand product sourced from Europe, John Lewis also has a shorter lead time of two to three weeks.
It is a similar picture at womenswear boutique The Dressing Room in St Albans. Owner Deryane Tadd says: “I’ve completed all my buying for Christmas but always keep about 30% of my budget back each season for short order.”
But retailers relying on such models need to beware of the likelihood of further rises in freight costs; ocean freight tariffs are already at record highs and further rises are possible in September. Some shipping lines are also adding record peak season surcharges. Grant Liddell, retail director at logistics company Uniserve, says: “They need to make back their losses from last year.”
The problem is compounded by the fact that many shipping lines have slowed vessels by about 25% - adding another four or five days on transit times and decreasing the availability of shipping containers for retailers to transport their goods.
Air freight price rises are also likely to follow. Says Liddell: “A lot of retailers are ordering pretty late using the just-in-time model, as they’ve tried to reduce inventory from their 2008 levels, so we anticipate air freight prices rising as it will be very congested and carriers aren’t really recommissioning parked aircraft and space, resulting in a shortfall in supply.”
Last Christmas, Mark Bage, owner of premium indie Sarah Coggles in York, took a bold stance: “I read that everyone was cutting their budgets so I did the reverse, and we were about the only people with stock.” Although he will be a little more cautious this year, he expects to increase stock levels by about 10%.
The importance of good forecasting is more vital than ever this Christmas, and retailers should be using analytics to forward forecast as well as looking back on previous trends. Sarah Taylor, senior director for the retail industry at business software firm Oracle, says: “They are going to have to be much more precise to be in and out of Christmas and Sale by January 4 to maximise opportunities.”
Richard Cooper, business development director of retail at analytics solutions provider SAS, adds: “People are less likely to take the big risks they have in the past. If you can get a combination of statistics and a buyer’s gut feeling, then it’s likely it will work.”
Taylor says retailers are realising the need for more detailed stock strategies: “There is a huge awareness now that analysis and granular analysis is absolutely essential. Backward-looking planning is not providing fashion retailers with what they need to cater for a hugely informed, more complex market that has more options than ever. They are at a point now where they can’t afford to live without the analytics required for a sales optimisation and clearance strategy.”
Retailers have had to quickly learn the lessons of better stock control. Says Liddell: “The supply chain and inventory holding is at the lowest it’s been for a long time.”