Do CFOs Underestimate the Positive Impact of Off-Price on Their Business?
Yes.
It's really that simple. Off-price chains, which lure customers away from department stores with prices up to 70% lower than traditional retail, are one of a few bright spots in a seemingly bleak retail environment. While traditional department stores are experiencing reduced foot traffic, lower sales and store closings, the off-price chains and off-price divisions of traditional chains are poised to thrive.
Burlington, Nordstrom, Ross and TJX all recently announced significant earnings gains compared to last year. And projections going forward were equally optimistic. In fact, at the UBS Consumer & Retail Conference earlier this year, the CFO of Macy's pointed out that off-price retailers are a bigger threat to Macy's than online retailers. In a world where everyone fears the "Amazon Effect," that's a very powerful statement.
Retail CFOs shouldn’t look at the potential in the off-price market as a threat, but rather as an opportunity. By embracing and growing their off-price business, traditional retailers can mitigate the financial burden of both their excess inventory and the general softening of the traditional retail market.
Excess Inventory Hurts the Bottom Line
Given that the primary goal in retail is to sell product, it should be fairly intuitive that inventory costs companies money. But company executives may not appreciate just how significant the carrying costs of excess inventory are:
Accrued interest - on most corporate balance sheets, there is debt associated with the purchase of inventory. In a perfect world, companies use cash flow generated from sales to pay back debt and mitigate interest payments. When inventory doesn't sell, companies don't have cash flow to repay their loans and interest accrues. This can be very costly.
Write-down expenses - inventory that remains unsold typically depreciates in value exponentially as it becomes less current and potentially out of season. When the value of unsold inventory drops below the price at which it was purchased, the inventory must be written down by the value of the difference in price. Write-downs must be reflected as an expense on an income statement.
Increased warehouse and personnel costs - excess inventory takes up valuable and costly warehouse space that could otherwise be used for revenue generating products. At half a penny per product per day, a single item can cost around $2 per year, which quickly erodes any marginal benefit from holding the inventory. Furthermore, slow moving inventory requires costly personnel to manage its place in the supply chain.
So Why Haven’t CFOs Embraced Off-Price?
That's a really good question considering the benefits are so numerous. But the history of off-price probably accounts for the majority of the hesitation.
Logistics - until recently, the off-price industry was a painstakingly manual and arduous process. Brands with excess inventory had to manually enter product information into spreadsheets that were shared with off-price buyers in a very linear fashion. Product information was extremely limited, product images were non-existent and the entire process was prone to human error.
Recent innovations in the industry have changed all that. Products now exist that make buying and selling excess inventory simple, timely, accurate and efficient, for both buyer and seller. Excess inventory, replete with product information and images, can now be easily shared with multiple buyers simultaneously. User-friendly dashboards allow brands and retailers to maintain control of the entire process including pricing, currency, timing, end users and locations.
The process of selling excess inventory to off-price buyers is now so efficient and simple that there is no reason for retail CFOs to hide from this $250 billion market.
Image - while some executives worry that the reputation of off-price merchandise may compromise their brand, this is no longer a concern.
Available technology now allows brands to control exactly which markets and channels their merchandise is sold into, thus assuring brands that off-price merchandise isn't competing directly with full-price merchandise currently in-store. Brands can now also maintain control over when the off-price buyer sells product so that off-price merchandise doesn't compete directly with product while it's still “in season” at department stores or online.
Interestingly, selling off-price can actually introduce brands to consumers who have not previously been customers, thus increasing demand for the brand at full price. Nordstrom in particular has seen great growth with their spokesperson Naomi Tobis regarding Nordstrom Rack as a “key part of our overall business and growth strategy overall for Nordstrom.”
Low priority - while focusing on the disposition of excess inventory has traditionally been low on CFO’s priority lists, it's high time that changes. Given the recent performance of off-price retailers and off-price divisions of department stores, selling into the off-price market needs to become a priority as an additional distribution channel.
Inventory is the largest expense for every retailer. The financial strain resulting from slow moving and excess inventory as well as from multiple markdowns can put a serious financial strain on brands' bottom lines. Recapturing a portion of that initial investment by selling into the off-price market can provide a significant financial boost and free up capital.
Off-Price is Here to Stay
With all major off-price chains reporting solid growth and more department stores relying on the performance of their off-price businesses, the off-price market has clearly emerged as a shining light in an otherwise dark retail industry. And the reasons for its continued success are obvious.
Company executives should reallocate time and resources to leverage this large and growing market. Selling excess inventory to off-price buyers generates cash flow, reduces debt service, and improves the overall financial performance of a company. With innovative new technologies available today, selling off-price no longer threatens the reputation of the brand. Furthermore, selling to off-price retailers can expand the brand by exposing it to consumers who wouldn't traditionally shop in full-price department stores.
CFOs no longer need to leave money on the table. Selling excess inventory is an easy way to offset the challenges in the retail market while maintaining the reputation of their brand.
It's really that simple. Off-price chains, which lure customers away from department stores with prices up to 70% lower than traditional retail, are one of a few bright spots in a seemingly bleak retail environment. While traditional department stores are experiencing reduced foot traffic, lower sales and store closings, the off-price chains and off-price divisions of traditional chains are poised to thrive.
Burlington, Nordstrom, Ross and TJX all recently announced significant earnings gains compared to last year. And projections going forward were equally optimistic. In fact, at the UBS Consumer & Retail Conference earlier this year, the CFO of Macy's pointed out that off-price retailers are a bigger threat to Macy's than online retailers. In a world where everyone fears the "Amazon Effect," that's a very powerful statement.
Retail CFOs shouldn’t look at the potential in the off-price market as a threat, but rather as an opportunity. By embracing and growing their off-price business, traditional retailers can mitigate the financial burden of both their excess inventory and the general softening of the traditional retail market.
Excess Inventory Hurts the Bottom Line
Given that the primary goal in retail is to sell product, it should be fairly intuitive that inventory costs companies money. But company executives may not appreciate just how significant the carrying costs of excess inventory are:
Accrued interest - on most corporate balance sheets, there is debt associated with the purchase of inventory. In a perfect world, companies use cash flow generated from sales to pay back debt and mitigate interest payments. When inventory doesn't sell, companies don't have cash flow to repay their loans and interest accrues. This can be very costly.
Write-down expenses - inventory that remains unsold typically depreciates in value exponentially as it becomes less current and potentially out of season. When the value of unsold inventory drops below the price at which it was purchased, the inventory must be written down by the value of the difference in price. Write-downs must be reflected as an expense on an income statement.
Increased warehouse and personnel costs - excess inventory takes up valuable and costly warehouse space that could otherwise be used for revenue generating products. At half a penny per product per day, a single item can cost around $2 per year, which quickly erodes any marginal benefit from holding the inventory. Furthermore, slow moving inventory requires costly personnel to manage its place in the supply chain.
So Why Haven’t CFOs Embraced Off-Price?
That's a really good question considering the benefits are so numerous. But the history of off-price probably accounts for the majority of the hesitation.
Logistics - until recently, the off-price industry was a painstakingly manual and arduous process. Brands with excess inventory had to manually enter product information into spreadsheets that were shared with off-price buyers in a very linear fashion. Product information was extremely limited, product images were non-existent and the entire process was prone to human error.
Recent innovations in the industry have changed all that. Products now exist that make buying and selling excess inventory simple, timely, accurate and efficient, for both buyer and seller. Excess inventory, replete with product information and images, can now be easily shared with multiple buyers simultaneously. User-friendly dashboards allow brands and retailers to maintain control of the entire process including pricing, currency, timing, end users and locations.
The process of selling excess inventory to off-price buyers is now so efficient and simple that there is no reason for retail CFOs to hide from this $250 billion market.
Image - while some executives worry that the reputation of off-price merchandise may compromise their brand, this is no longer a concern.
Available technology now allows brands to control exactly which markets and channels their merchandise is sold into, thus assuring brands that off-price merchandise isn't competing directly with full-price merchandise currently in-store. Brands can now also maintain control over when the off-price buyer sells product so that off-price merchandise doesn't compete directly with product while it's still “in season” at department stores or online.
Interestingly, selling off-price can actually introduce brands to consumers who have not previously been customers, thus increasing demand for the brand at full price. Nordstrom in particular has seen great growth with their spokesperson Naomi Tobis regarding Nordstrom Rack as a “key part of our overall business and growth strategy overall for Nordstrom.”
Low priority - while focusing on the disposition of excess inventory has traditionally been low on CFO’s priority lists, it's high time that changes. Given the recent performance of off-price retailers and off-price divisions of department stores, selling into the off-price market needs to become a priority as an additional distribution channel.
Inventory is the largest expense for every retailer. The financial strain resulting from slow moving and excess inventory as well as from multiple markdowns can put a serious financial strain on brands' bottom lines. Recapturing a portion of that initial investment by selling into the off-price market can provide a significant financial boost and free up capital.
Off-Price is Here to Stay
With all major off-price chains reporting solid growth and more department stores relying on the performance of their off-price businesses, the off-price market has clearly emerged as a shining light in an otherwise dark retail industry. And the reasons for its continued success are obvious.
Company executives should reallocate time and resources to leverage this large and growing market. Selling excess inventory to off-price buyers generates cash flow, reduces debt service, and improves the overall financial performance of a company. With innovative new technologies available today, selling off-price no longer threatens the reputation of the brand. Furthermore, selling to off-price retailers can expand the brand by exposing it to consumers who wouldn't traditionally shop in full-price department stores.
CFOs no longer need to leave money on the table. Selling excess inventory is an easy way to offset the challenges in the retail market while maintaining the reputation of their brand.