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Keeping Tabs on Margins, Sustainability and AI
Vicki M. Young
6 min read
So far, so good.
Indications are that many retailers’ gross margins appear to be in a good place, helped by their ability to raise prices, hold fewer promotions and maintain cleaner inventory levels as retailers’ began the new retail calendar cycle.
But margin pressures are expected to continue, and data analytics from Coresight Research indicates that retailers and brands will continue to move toward digitalization to help control operational planning costs.
Data analytics, including artificial intelligence (AI) applications, are also expected to be the new tools increasingly relied upon by wholesalers to guide decisions on which products to stock and promote. And with consumers becoming more conscious of sustainability, a study from NuOrder by Lightspeed predicts wholesalers—including retailers who sell their own private label lines—will prioritize suppliers and manufacturers who adhere to sustainable practices.
For now, retailers have edge in pricing power
A research report from UBS retail analysts led by Jay Sole said its proprietary data shows U.S. retailers were able to raise prices year-over-year in January, with the out-the-door price of the average item up 1 percent.
“This means even though promotions are up, ticket prices are up even more,” Sole wrote. “We believe this is a sign the consumer spending environment remains decent. If consumers were feeling financially stretched, retailers would have likely experienced a big negative impact on prices or unit volumes, and it seems neither happened.”
The pricing data was viewed as a positive for three reasons. Higher prices give retailers the ability to boost their gross margins, and it suggests that the consumer spending environment is okay. Moreover, the rate of change in price increases is improving.
Softline retailers raised ticket prices in 2022 and 2023 in response to high cost inflation. Retailers thus far have been able to maintain those price gains. And for softline firms, “lower raw material costs continue to positively impact cost of goods sold,” Sole said.
According to UBS, The Children’s Place, PVH Corp. and Carter’s Inc. have had some of the biggest year-over-year jumps in promotions as of January. In contrast, Abercrombie & Fitch Co., Skechers USA Inc., Nordstrom Inc. and Victoria’s Secret & Co. have had some of the biggest year-over-year declines in promotions.
But Sole did have one caveat, and that is that the out-of-door prices could start falling at any time because the historical trend in the industry deflation.
Wells Fargo’s Ike Boruchow noted that the promotional environment post holiday has eased, with the level of “more” promotional weeks at 37 percent in 2023 versus 43 percent in 2022, representing the lowest level seen since October 2022.
“Overall, inventory appears clean across the space today, with retailers curtailing order books and companies managing margin in today’s relatively slow demand backdrop,” he said.
Boruchow and the Wells Fargo retail team expect margin expansion to be the biggest theme of 2024. A few of the team’s top picks include PVH, Tapestry Inc., Burlington Stores Inc., Nike Inc. and Academy Sports and Outdoors Inc. These are the firms with the largest recovery potential with leverage from freight recapture, favorable inventory dynamics, declining average unit costs and cost restructuring.
Managing costs amid margin pressures
Coresight Research data indicates the current economic backdrop will see companies in the retail sector face escalating margin pressures from rising input costs, including higher wages to retain talent. Because of inflation’s impact on consumer sentiment and spending, retailers—and even brands—need to rethink their approaches to pricing and cost management. A Coresight study concluded that there will be a strategic shift toward digitalization to prepare for upcoming margin pressures.
Fifty-four percent of respondents stated that the biggest challenge for retail companies over the past year has been controlling operational planning costs. The move to omnichannel retailing has added to the complexity of managing inventory, logistics and customer engagement. Meanwhile, operational planning costs have resulted in new issues due to to the unpredictability of modern demand patterns and the volatile economy. And unexpected costs also have had a notable impact on retail margins.
In addition, 61 percent cited access to real-time trend insights as a hurdle to adapting their operations to adjust to a changing retail environment. The study also found that more firms in the retail sector are adopting new digital technologies, moving away from legacy systems and spreadsheets. Respondents who said they use financial planning software also reported an improvement in company margins by 13.3 percent on average.
The move to digitalization is expected to allow retailers and brands to harness the power of data to make better informed decisions, streamline operations, created personalized customer experiences and increase their profitability. Moreover, a comprehensive digital transformation approach, one that includes AI-driven insights, is essential for survival and growth in 2024 and beyond, data analytics firm said.
Data to drive decisions in wholesale
A key business trend in wholesale includes a desire for more actionable data to drive decision-making. Another is the expectation for growth in online ordering, both for direct-to-consumer and business-to-business channels. And with inventory management a key area for investment in wholesale, AI applications could play a big role in wholesale as well as disrupt the industry from inventory management to supply chain to deeper customer personalization.
The NuOrder survey asked 65 brands and retailers about how technology is expected to impact the retail backdrop, how brands and retailers are improving their collaboration, and how the companies are adapting to constant change.
Rising business costs and supply chain disruptions in manufacturing are expected to continue through 2024, with businesses in need to find ways to safeguard operations. As brands and retailers share more data on distribution and sales, a move to better integration of e-commerce platforms and point-of-sale systems can be a collaborative way to improve demand forecasting, reduce stockouts and provide more tailored product offerings. And given supply chain disruptions and fast-changing consumer behaviors, retailers and brands are expected to incorporate more flexible terms, such as shorter contracts, flexible return policies or consignment-based arrangements.
As consumers become more conscious of sustainability and ethical production, retailers and brands are likely to adhere to a set of standards pertaining to sustainable sourcing, production and distribution. Wholesalers will prioritize suppliers and manufacturers who adhere to sustainable practices, such as whether they source raw materials that renewable, organic or have lower environmental impact. This includes retailers taking a closer look at their private label suppliers. In addition, wholesalers will conduct lifecycle analysis of its products to understand the environmental impact from production to disposal, which could also guide decisions on which products to stock and promote.
Thus far, respondents in the NuOrder study reported strong collaboration and communication in wholesale partnerships. Brands and retailers are creating shared goals, have regular check-ins and are keeping open communications channels. One change involves joint problem solving instead of focusing on where to place blame. What’s also helpful is the use of key metrics for tracking sell-throughs, gross margins, reorder rate, and average order value, among other date points.
