One of the biggest problems for retailers, especially as we approach Christmas, will be trying to estimate demand. At this time of year the stores are generally filling with seasonal lines at full price. This year many of these products are already offered at a discount in an attempt to boost sales.
Petrol prices may be on the way down and, according to some commentators, food inflation may have “peaked” but with house prices continuing to fall and consumers worried about the safety of their savings, there is very little of the “feel good factor” around. Add to that the current round of burgeoning utility bills and the badly burned fingers of anyone with investments in stocks and shares and it is hardly surprising that the vast majority of shoppers are looking for ways to economise.
Reports in recent months have highlighted the shift towards grocery discounters and the less pricey supermarkets. According to market analysts TNS, Aldi’s sales were up by 20.8 per cent in the 12 weeks to 9th September, while Lidl saw an 11.1 per cent growth. Meanwhile, Asda and Morrisons recorded growth rates of 9.2 per cent and 9.1 per cent respectively in the same time period. In contrast Waitrose reported falls of one per cent while Tesco posted its weakest first half figures for eight years. Even Lib Dem leader Nick Clegg was feeling the pinch – admitting in a newspaper interview to, “gravitating away from Ocado towards Sainsbury’s, just on price”.
But at least people still have to eat. When it comes to discretionary spending sales are even harder to come by: John Lewis’s department stores – generally regarded as the high street’s bellwether – were down by eight per cent in September, Marks & Spencer was down by slightly more than six per cent and MFI is expected to shut 100 stores this month to stay in business – unless it can negotiate a major delay in its quarterly rent payments.
So – how will this consumer reluctance to part with cash affect retail supply chains? One of the biggest problems for retailers, especially as we approach Christmas, will be trying to estimate demand. At this time of year the stores are generally filling with seasonal lines at full price. This year many of these products are already offered at a discount in an attempt to boost sales. If these items still don’t sell, then there will be major problems over the next few weeks as the already-ordered Christmas merchandise continues to arrive and the shops run out of shelves on which to stack it.
Sales of autumn fashions have already been badly hit with Debenhams currently offering up to 70 per cent off its seasonal clothing lines. Again, space is going to be a big issue as the Christmas party frocks will soon be delivered and the racks will still be full of autumn skirts and suits.
Will it be a boom time for anyone with a spare few square metres of warehousing space to store the surplus? Possibly, but much of this merchandise is time-sensitive and cannot be left languishing in distribution centres as the supply chain backs up. Some products will inevitably head towards the off-price shopping malls – but more products than discount shops seems likely. Unless orders can be cancelled at this late stage and product assortments trimmed, then write-offs rather than write-downs seem inevitable.
Orders would certainly appear to be being cut back: already there have been reports of falling freight costs as Western demand for Far Eastern consumer goods wanes. Danish shipping bank – Danmarks Skibskredit – recently predicted a ten per cent fall in freight costs in 2009, for example. A few months ago commentators were expressing concern that China’s industrial freeze during the Beijing Olympics would lead to shortages in the West. Today many importers must be rather relieved that those Chinese convoys have eased.
Seasonal merchandise aside, the downturn is already transforming where we shop and what we buy. When it comes to food, “value” is the name of the game. During the summer there have been numerous reports of shoppers cutting back on both organic and fresh produce as they look for ways to economise. Organic products form only a small part of the market, worth around £1bn, but TNS suggests an 18 per cent fall so far this year, while specialist supplier Abel and Cole admits to a “slowing” in the market. Many of the companies involved in this sector are small and depend on “weekly box” deliveries of products direct to consumers. A downturn here may affect home delivery firms although with Christmas on its way and internet sales holding up well, this is unlikely to be a major issue. Fresh produce has suffered from rising prices, due to freight costs and poor weather affecting yields, and is also an area where wastage is high and losses from poorly estimating demand can be considerable.
It would seem likely that supermarkets would look for greater flexibility in supply chains here to improve “just-in-time” ordering to respond to changing patterns of consumer demand. Various waste-reduction projects in recent years have focused on smaller size outers and part packs to match supply to demand and cut wastage. With demand falling and unpredictable, keeping the shelves full, but not over-filled, is going to be challenging. Certainly fresh produce shelves in some of the supermarkets I’ve visited recently seem less well stocked than they did a year or so ago so perhaps canny produce managers are delaying re-ordering to cut waste.
Fresh produce, especially all those pre-packed and prepared salads and vegetables are premium products offering higher margins. Replace them with more basic value lines – one recent report noted a boom in turnip sales, for example – and margins will be squeezed. Inevitably retailers will start looking for cost savings elsewhere: waiting to mark down prices until a product is actually at its sell-by date rather than doing so the day before, perhaps? Less frequent deliveries, perhaps, or a greater tolerance of out-of-stocks especially less popular premium products? Or trying to trim transport costs further?
More “value products” can be expected, too, in the ambient and chill markets. Tesco has just introduced a range of discount goods and cut hundreds of prices to regain shoppers lost to the likes of Aldi and Lidl. The “Discount Brands at Tesco” range covers around 350 products and includes such things as tea bags, biscuits, shampoo and washing-up liquid.
Finding space for a large number of new low price lines obviously means pushing other products off the shelves and it is interesting that companies like Couponstar – which distributes promotional coupons via the Internet for shoppers to print out at home – is currently reporting a massive upsurge in interest from the branded FMCG suppliers it works with. Redemption rates for these DIY coupons are showing a 652 per cent increase year-on-year with a 513 per cent increase in the numbers of coupons shoppers are choosing to print out. Obviously cash-strapped consumers looking for a bargain have something to do with this surge, but the increase in branded manufacturers seeking to distribute the coupons (for which Couponstar will guarantee a level of redemption so that sales of 25,000 items or whatever can be assured) suggests they are also focusing on brand loyalty and demand to combat the risk of delisting.
As with fresh produce, selling lower cost basics does little for margins. On the plus side, however, are reports that because people are eating out less they are buying luxury items as an occasional “eat-in” treat. These should offer rather better margins but both Marks & Spencer and Waitrose have started packaging weekend “food deals” of two two-course ready meals and a bottle of wine for £10: it might boost sales but probably does very little for margin.
The problems are rather different when it comes to non-foods. Furniture sales, which always increase when people move house, have – unsurprisingly – fallen steadily for the past eight months: 22 per cent down year-on-year at John Lewis during a particularly bad week in September, for example. Mixed reports elsewhere, too: while clothing sales were ten per cent down year-on-year in September, mobile phones were six per cent up; and while Game Group reported a 54 per cent upturn in business, thanks largely to Nintendo Wii, PC World was 12 per cent down in the four months to August 23.
The results for supply chains are clearly mixed. Furniture and big ticket items tend to be dispatched direct from factories or RDCs rather than via a store so falling sales here must affect any third party logistics providers focusing on this market – especially those offering premium “two-man” services to deliver the bigger items. Further back along the pipeline falling sales to consumers means less demand for raw materials and factories on short-time. The Baltic Dry Index of the 22 main dry bulk routes shipping raw materials fell 52 per cent in September as freight prices plummeted in response to falling demand.
While the high street clothing sector is clearly suffering, sales continue to rise online – especially for those focusing on young fashions like Asos (up 104 per cent in the six months to the end of September). For multi-channel operators having the right goods in the right place is vital with no-one wanting to see out-of-stocks online and surpluses in remote high street branches. Again, greater flexibility in supply chain operations could be important with a single rather than separate fulfilment centres for real world and online as well as a review of inter-branch transfers of merchandise or direct to consumer dispatches from over-stocked stores.
Slower sell-through in stores also means less need for frequent replenishment: busy stores which once welcomed a daily delivery of new merchandise may find this becoming a weekly affair with an inevitable cut-back in use of third party logistics operations.
The more pessimistic are already predicting that UK unemployment could reach two million by Christmas. While not immune to this onslaught retail supply chains at least have the hoped-for annual surge in sales in the run-up to Christmas to look forward to. If Christmas trade follows current trends, however, it could be very different and MFI will not be the only one desperately looking for rent money.