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Critical Mass: Weak Consumer Spending Prompts Reduced Inventory

Still, experts caution that a delicate balance must be struck to avoid out-of-stocks that could send shoppers to competitors’ stores or online.

NEW YORK — Doing more with less.

Economic indicators suggest consumers are pulling back on spending through the rest of the year, prompting mass-market retailers to reduce inventory on hand.

But experts caution that a delicate balance must be struck to avoid out-of-stocks that could send shoppers to competitors’ stores or online.

“Beauty products are commodities, and you can get them anywhere. The fear is if you are out of a shade, a customer will go across the street and never come back,” said Michael McGrail, managing director of the Tiger Group, which provides asset valuation, advisory and disposition services to a broad range of retail, wholesale and industrial clients. “But generally a lot of dollars are tied up in cosmetics inventory, so it is easy to try to fix slow turns with minimized inventories, but you have to get the right balance. It is like a seesaw.”

The seesaw is tipping downward, according to commerce department figures released last week, which showed the smallest gains in spending in the past four months. Those results come on the heels of tepid back-to-school shopping, which rose 3.6 percent versus 6 percent in 2012, according to the International Council of Shopping Centers.

“The economy continues to recover slowly, but shoppers remain cautious and aren’t ready to splurge,” explained Bill Martin, ShopperTrak founder, who added there is a shorter window, with one less shopping week between Black Friday and Christmas, suggesting retailers can’t procrastinate and must have plans ready to go early in November.

But some suppliers said chains are not gearing up for the holidays as much as hoped. Over the last few months, Coty has seen “a deceleration of market growth in the U.S. and Europe, triggering significant trade de-stocking activity, particularly by U.S. mass retailers,” chief executive officer Michele Scannavini said during a recent conference call. Most of Coty’s top U.S. mass-market retail customers are cutting back on inventory across all of the company’s product segments, he said.

There’s also a dip in sales of beauty products, industry experts noticed, as big chains such as Walgreens and Sears ramp up loyalty programs and shift from buy-one-get-one reduced deals and low-price promotions to a merchandise mix driven by data gleaned from frequent shopper preferences. “In theory, loyalty programs don’t decrease your sales, but for a few months you lose some of the customers that just shopped your sales,” said a former loyalty program executive who admitted inventory levels vacillate as programs are implemented.

“Retailers in general have been reducing inventories, in some cases to the point where everyone has experienced some degree of lost sales,” explained Joel Carden, executive vice president at Pacific World. “At this point, retailers and suppliers are focused on getting the right levels of inventory on the right items in the right stores to ensure that a continued loss and slowdown of sales is not something that the industry brings upon itself.”

Beauty buyers sensed that slowdown over the summer, especially in the nail category, which had driven mammoth gains for the last two years, and many said goals for next year include reducing inventory on hand and lessening reliance on promotions. For the 12-week period ended Aug. 11, nail color dollar sales declined 1.18 percent to $414 million in multioutlets, which include drugstore, supermarket, mass, military commissaries and select club and dollar retail chains, according to IRI. Unit sales dipped 2.2 percent. Eye color sales were up less than 2 percent versus much higher gains last year to $432 million. Across the board, IRI numbers show beauty gains lower than last year at the same 12-week time frame.

“I think drugstore sales are slow, particularly in the front end. Generally, the only way to be more profitable is running higher turn rates and low inventories,” said industry expert Allan Mottus.

While retailers were looking to do more with less, they also said they want to hop off the promotional treadmill by reducing the reliance on buy-one-get-one deals. That, in fact, is a goal of the ever-growing use of loyalty programs. But instituting those programs creates hiccups in front-end sales, as shoppers have to be weaned off of sales. Greg Wasson, president and ceo of Walgreen Co., said in an analyst call in June that front-end sales were impacted by a consumer slowdown in buying and that the company began tweaking its pricing and promotional strategy in an effort to boost foot traffic and basket size, drawing from data compiled through its rewards program, which now has more than 83 million members. As part of that strategy, Walgreens is funneling more money into digital and loyalty-based marketing and away from its legacy Sunday newspaper print circulars.

The costs of getting programs up and humming can sap the bottom line. While Sears’ Shop Your Way program members generated 65 percent of sales in the quarter, associated marketing costs weighed on profit, Sears said.

 

Walgreens, Sears and Kohl’s are merchants revving up customer loyalty programs. CVS already has one of the strongest and is doing more with its ExtraCare program, especially in pharmacy and beauty.

At the other end of the spectrum, some supermarket chains just exited their loyalty programs. Shaw’s, Albertsons, Acme Markets and Jewel-Osco eliminated theirs in favor of everyday best prices. Shaw’s said the card “wasn’t special anymore.”

According to the former loyalty program executive, supermarkets that chopped the card did so because they weren’t using the data that was accumulated. “Loyalty programs are designed to get your better shoppers, not the bargain customer, into your store more. Readjusting from a high-low strategy does tie up inventory, but in the end, the information gained is so valuable.”

Successful loyalty programs, buyers said, should help them strike the right inventory balance and keep their best customers even during sales slowdowns.