Four Questions Retailers Should Ask Themselves to Improve Stability

As industries around the world struggle under the weight of high inflation, energy shortages, and supply chain disruption, individual markets are feeling the impact in unique ways.

Perhaps nowhere is this more apparent than among stationary (brick-and-mortar) retailers in Germany. Some find themselves in a severe liquidity crunch as consumer spending starts to slow and inventory piles up. This has resulted in an existential crisis within the sector with concerns about short-term survival.

As with every economic downturn, there will be casualties. But by answering the four questions below, stationary retailers can take actions that can enhance short- and long-term stability — while potentially putting themselves in a better position to serve customers when the crisis is over.

Question #1: Should I discount my inventory to gain liquidity?

The answer depends on a number of aspects, among them are the class of goods you sell and your market power. Retailers with a high degree of seasonal goods and/or fashion (e.g., apparel and home segments) need to move merchandise out before they can purchase and stock next season’s line. If you are a smaller retailer offering these types of lines, you will want to consider markdowns (see question 2 on timing). Larger retailers with strong verticality may be able to weather the immediate crisis and wait to discount. Retailers who sell non-seasonal goods, such as timeless design classics, may also be able to hold off.

Question #2: If I decide to discount my inventory, when should I do it?

Many considerations go into answering this question. Seasonal and fashion retailers have only a limited window of time to sell their merchandise. They must reduce their inventories through markdowns or through sales to secondary sellers to ensure adequate liquidity to purchase next season’s merchandise. Given that the economy is expected to continue its downturn at the start of 2023, selling off merchandise before Christmas 2022 is particularly relevant.

However, no answer applies across the board about when sales should start and to what extent merchandise should be marked down. For instance, if sales start too early and are too extensive, that will have a negative effect on both profitability and brand image (which retailers may not be able to recover from). But retailers who hesitate risk customer churn and insufficient reduction of inventories — they will essentially be stuck sitting on their goods.

Bottom line, defining the right time and price points for discounting comes down to liquidity requirements (e.g., as defined by financiers) and the specific competitive environment.

Question #3: What other measures should I consider to free up trapped liquidity?

Two measures apply here. The first focuses on securing financing for the season:

External financing: This can ease short-term pressure by allowing you to pre-finance upcoming seasonal credit lines.
Internal financing: Improving management of working capital can free up funds. For instance, you might speed up collections on accounts receivables, delay accounts payable (after negotiating with creditors) or optimise inventory (e.g., hold a “fire sale”). While the latter may not be ideal given potential harm to brand image, under emergency circumstances it might be necessary for buying more time.

The second measure focuses on pricing and related future-forward strategies:

Develop parameters for dynamic pricing and/or negotiate using algorithms to continually adjust the parameters. That would include:
Developing a pricing system that integrates market information such as supply and demand; continually shift timing of markdowns within a season in real time based on available customer data.
Performing market and competitive analysis (when the market is normal again) to set prices according to strategic orientation.
Making 2023 future forecast planning more realistic and dynamic.

Question #4: How should I think about long-term stability?

It may seem odd, but this moment might be a good time to consider the kinds of actions that can transform your store for the future. As we know, stationary retailers have been experiencing severe market pressures from the boom in online shopping and related consumer behaviours. To adapt, stationary retailers should think about their unique selling proposition as it relates to targeting and emphasising e-commerce. The objective is to create synergies between the store and online retail to create a cross-channel customer journey.

As the entire retail sector transforms in this direction, it becomes increasingly important for stationary stores to understand the roles that branding, individualisation, and sustainability play in staying ahead of competitors. The ability to respond quickly to trends will influence the long-term relevance of the brand.

Conclusion

There is no denying that many of Germany’s retailers — not just stationary —are experiencing unprecedented economic pressures and pain right now. Yet each retailer is different in its own right. By considering the above four questions, however, stationary retailers may find the relief that also allows them the breathing room to strategise after the crisis is a thing of the past.

© Copyright 2022. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.

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Published

November 30, 2022

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Dorothée Fritsch

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William Kaffka

Senior Consultant