The race for retail profitability: How to meet shifting consumer demand

Amid the maelstrom of evolving consumer spending habits and macro-economic shifts, such as rising interest rates and inflation, retailers are facing a new breed of shoppers: the Zero Consumer. McKinsey identifies these as brand-agnostic consumers who prioritize speed, convenience, and value above all else. In this blog post, we’ll explore how you need to adjust your merchandise strategy to meet the demands of the Zero Consumer and maximize your profit opportunity throughout a product’s lifecycle.

Demand is changing rapidly

The Zero Consumer lives for the moment, wants a seamless, omnichannel shopping experience, and prefers to splash out on premium brands for some things, while searching for the cheapest option for others. They’ve become accustomed to trying alternative brands, particularly when a product isn’t immediately available, rather than sticking loyally to favorites. They seek products that align to health, sustainability, provenance, and transparency.

Today’s harsh economic pressures also influence the change in consumer behavior. The poverty line in San Francisco and New York is $85,000 per year and the average family spends $709 per month more to get the same goods and services as they did two years ago. As a result, consumers are rethinking certain purchases if they are not urgent and are buying more on credit cards in response to the cost-of-living crunch.

In short, consumers are no longer predictable or loyal. And as a result, traditional approaches to merchandise planning and inventory management based on long-term forecasting and bulk purchasing are ineffective. Instead, retailers need to undergo a strategic overhaul. This involves introducing agile and data-driven methods that prioritize responsiveness and flexibility in merchandise management.

Retailers are feeling the squeeze

For retailers like you, the same economic factors of high interest rates and inflation mean that inventory carrying costs are higher and the cost of borrowing has increased.

Simply speaking, miscalculating your inventory needs comes at a cost. By overstocking you lock up working capital that could otherwise be deployed for growth initiatives, investments, or other operational needs. You can also incur carrying costs such as storage, insurance, and obsolescence, further eroding profitability. You might be forced to adopt aggressive price reductions to shift units, which cuts into your profit margins.

Conversely, underestimating stock levels poses its own set of challenges. Increased demand outstrips available inventory leading to stockouts, lost sales opportunities, and dissatisfied customers. This can damage your brand reputation and customer loyalty, as consumers seek alternative brands. At the other end of the chain, poor operational efficiency and strained relationships with suppliers can lead to delays, increased costs, and compromised product quality.

The role of a solid merchandising strategy

It’s critical for retail leaders to assess not only their forecasting process but also the external market forces that suddenly drive demand. When talking about unpredictable consumer demand, we only need to look at the seemingly overnight success of the Stanley cup that sold out in minutes thanks to a viral TikTok video.

A fully connected merchandise planning strategy enables you to sidestep unexpected inventory surprises, align inventory with customer demands, and collaborate organization-wide in real time to achieve business objectives. This agile responsiveness allows you to optimize inventory levels based on demand forecasts and sales trends, which in turn enhances profitability and fosters product innovation.  

Merchandise Financial Planning (MFP), sometimes referred to as financial cost-driven inventory, meticulously examines the entire product life cycle, from inception to discontinuation. It aligns this trajectory with a financial model to guarantee sustained profitability while dynamically adjusting inventory to meet ever-evolving consumer demand patterns.

What capabilities do you need to realize these benefits?

1. Base your forecasting on demand signals in the moment

Today’s quick shifts in consumer buying behavior mean that historical data trends — and your years of experience in the industry — are no longer a reliable indicator of future demand for goods. A traditional automated replenishment approach, still used by many retailers, is no longer fit for purpose because it focuses only on inventory levels without looking at the retail behaviors needed to turn them at a profit.

Triggering additional product deliveries once inventory reaches a minimal point is based on the assumption that demand is a stable constant, something the Zero Consumer has rendered problematic. The effectiveness of rolling forecasts only work if demand is stable, and as we’ve established, it no longer is. You need to be able to capitalize on the demand signal before the consumer buys elsewhere, which means having full visibility and the ability to make real-time adjustments.

2. Share data for effective collaboration

Different stakeholders adopt different tactics to drive sales and profitability. While finance leaders are trying to optimize costs by streamlining product offerings, sales leaders are focused on building their customer base. At the same time, merchandise leaders are prioritizing the availability of key products throughout the year.

To make this a more collaborative environment, you need to encourage data sharing and integrated planning across departments, using a platform that acts as a single source of truth. This platform can serve as a centralized repository to house company data, external data, and information from third parties such as suppliers and partners.

3. Identify hidden opportunities with scenario modelling

Dependency on outdated methods or individual productivity software such as Excel can impede swift decision-making. ‘What-if' scenario modelling allows you to rapidly create scenarios and cascade seamlessly to strategic plans.

This means you can uncover overlooked areas and unexplored potentials rather than relying solely on eventual outcomes. You can make informed, in-flight decisions about product assortment, pricing strategies, and promotional activities to target the demands of Zero Consumers.

4. Make decisions in real time

With a single interface, you can visualize omnichannel sell-through and inventory in real-time, providing the necessary insight to answer questions such as:

• What is the cost of carrying that inventory?
• How can you keep that inventory profitable through its entire life cycle?
• Is there another product that could turn more quickly for greater value?
• How is new consumer spending reshaping demand, accelerating change, and putting greater pressure on your inventory turn?

A connected approach to MFP gives you a financially grounded lens to identify opportunities to move the stock. You no longer need to tie up working capital in safety stock, or risk missing out on peak periods of consumer demand that you can’t meet. Instead, you can move inventory in line with what's happening in the moment, in real time.

Reimagine your merchandise planning strategy

In a retail landscape dominated by Zero Consumers who are constantly throwing change at retailers, the key to profitability lies in quickly adapting the planning processes in real time to align to their preferences and behaviours. By reimagining merchandise planning strategies to prioritize agility, data-driven decision-making, and seamless omnichannel experiences, you can effectively shorten the time to profitability.

Learn more about Merchandise Finance Planning for Retailers.