By  on October 25, 2010

Retailers have shifted their focus from downsizing their businesses to downsizing the risks associated with renewed but slow growth.

That was among the conclusions of the third annual survey of chief financial officers conducted by PricewaterhouseCoopers LLC’s Retailing Consulting Services. The study found that cfo’s were using many of the skills picked up during the economic downturn to maximize sales on minimal inventory, tighten up their supply chains and even look for ways to make their investments in marketing and advertising more productive in the wake of the worst recession in more than a generation.

Survey results were gleaned from 32 retail cfo’s, 21 in North America and 11 abroad, and include department stores as well as apparel, jewelry and footwear specialty stores ranging in volume from $200 million to more than $10 billion.

Among those queried, 24 percent said that use of more precise and conservative “re-forecasts” has led to a strategic reduction in open-to-buy quantities, with adjustments in sales plans constituting the most critical factor in managing their inventories. Nearly as many — 23 percent — said that adjusting sales plans more frequently had allowed them to flow goods closer to demand rather than bringing all or most of their merchandise in at the start of a season. Assortment and vendor editing ranked third, with 22 percent of respondents selecting that option.

“The whole process of pre-season and in-season planning has become much more challenging because you have, in some cases, 25 percent less inventory and 10 percent less sales,” said Antony Karabus, leader of PwC Canada Retail Consulting Services, formerly Karabus Management. “Stores had way too much inventory in 2007, but last year they had great full-price selling because they cut back so far they had nothing to mark down.”

Karabus noted there is a natural dynamic tension within retail between cfo’s, trained to focus on the bottom line, and buyers, “who tend to be optimistic and upbeat by nature. The cfo’s are forcing re-forecasts on a more regular basis, looking to make sure that the store is flowing goods closer to need rather than bringing them in and stacking them high.”

The emphasis on limiting inventory investments has created a “scarcity value,” he said, “making it more urgent for consumers to buy when they see something.”

As senior management looks to balance the imperative to keep inventories lean with the need to maximize sales, Karabus said they’re asking themselves the same question repeatedly: “Just how much inventory do I have to carry?”

The debate is taking place during a time when customers are coming back to the stores, but hardly in droves. Among the cfo’s, 63 percent said they believed customers are feeling a bit more optimistic about their financial circumstances and have slowly begun to buy again, but at a lower level than the retail industry’s 2007 peak.

An exception to this emphasis on lean inventory — and certainly a hot spot for apparel discounting — is the teen market, which Karabus termed “a whole different market than it’s ever been. Forever 21 has created a far bigger supply of stores and goods. It’s just about the only market where net square footage is still expanding, but there’ll be a shakeout in time.”

Another area pressured by the recession was marketing and advertising, and it appears cfo’s and their superiors came out of the financial crisis with an increased appreciation for efficiency in this area. Twenty-eight percent of the cfo’s told PwC that they had reduced their total marketing and advertising spend, but just 9 percent felt the reduction hurt traffic, sales or both. The same percentage said they’d reduced their dependence on traditional marketing and advertising expenditures but increased their focus on more targeted promotions. Twenty-five percent indicated they’d increased their marketing expenditures in order to gain market share, five times the percentage who indicated as much in the 2009 survey.

“With just about all the cfo’s we talked to, the breadth of advertising targets narrowed and there was a more tactical focus on getting value for the marketing spend,” Karabus said, noting that one cfo told him the store had reduced such expenditures by 40 percent without a loss of outreach as it focused more on customer retention and less on customer acquisition.

The study, a more comprehensive version of which will be unveiled at the World Retail Congress in Berlin this week, shows brick-and-mortar retailers with lots of room for improvement in e-commerce. Fully 30 percent of respondents didn’t have a functional e-commerce site but were planning to enter that realm in the next year. The average respondent had been selling on the Web for just under four years and can expect to reach “meaningful” profitability three to six years from inception.

On average, those surveyed have been selling on the Web for almost four years and derive about 4 percent of sales from their Internet presence. However, those selling on the Internet for more than four years generate about 9 percent of total sales through e-commerce.

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