David Hawkings, Senior Vice President, EMEA, [antuit.ai?]antuit.ai?, a Zebra Technologies Company
Retailers don’t like inventory shortages any more than consumers do. So, when surge demand became sustained demand, pandemic lockdowns started lingering, truck driver shortages worsened and inflation skyrocketed, many retailers rushed to right-size shelf stock the only way they knew how: by ordering anything and everything they could get their hands on.
Most would agree it was a smart move at the time, especially since consumer spending was consistently trending up. UK retail sales rose 7.8% in 2021 and were projected to see around 2% growth in 2022. As the saying goes, ‘It is better to be prepared for an opportunity and not have one than to have an opportunity and not be prepared.’ Plus, many risk-benefit analyses likely showed the risks of shortages to be greater than overstocks throughout 2021 and heading into 2022.
Retailers had to do what they thought was best based on the information they had available – or at least their understanding of the information. But that doesn’t mean that we should accept the current situation as unavoidable.
The problem with human data analysis and decision-making is that people have cognitive limitations. We can’t foresee the future with any certainty because we struggle to sort all the information available to us. Even if we can aggregate and organize it, our interpretation may be biased or short-sighted. Therefore, everything we do on our own – every decision we make without the help of artificial intelligence (AI) – is a gamble.
That’s why retailers with ‘too much stuff’ must lean into AI solutions, whether they think they’re ready or not. They need a way to factor for all the variables that may stimulate or slow down consumer spending alongside current supply and availability of first-mile inventory. More importantly, they need a way to effectively set pricing once goods are in their possession. That is the only way to move goods and preserve revenue, after all.
AI Can Save You More Than It Costs You
Given the massive number of overstocks now being reported from London to Amsterdam to New York, some might say retailers repeatedly made the wrong call with recent orders, but those recent efforts to course-correct are going to lead to long-term losses. I get it. Retailers are doing their best to avoid fire sales right now, but they will no doubt have to adjust pricing for some goods to a ‘consumer value’ level – meaning the rate at which consumers say, “this is a good deal.” That will likely result in lower-than-anticipated revenue for some items.
However, I wouldn’t call pricing reductions a total loss for retailers. At least they’re selling through goods versus dealing with total inventory stagnation. And though profits may not be as high as hoped on these overstocked goods, the next round of items to fill those shelves may sell at full retail price, resulting in better margins. But all of this is contingent on retailers getting pricing right – on both clearance and incoming goods. That’s why retailers can no longer afford to undervalue AI, especially when it comes to pricing applications.
Traditional pricing decisions have tended to be heavily manual and based on historical trends. Today’s world is unlike anything we’ve seen in history, and manual processes and spreadsheets cannot handle the scale, frequency, or granularity that is needed. In order to maximize profitability when demand is changing so rapidly and supply is so unpredictable, retailers must embrace advanced capabilities such as AI.
With an AI platform, retailers can simulate weekly, in-season sales based on current demand profiles. Retailers can also ask AI platforms to compare different promotional vehicles and offers against the optimized price by locations, product groups, styles, or individual items before deciding on which to leverage. Furthermore, AI can recommend discounts that help grow or maintain sales velocity throughout the selling period, even if it’s an off-season sell-off.
For example, instead of marking the entire patio department down 50%, steeper discounts can be applied to furniture while prices for plant pots and other gardening items – which may have longer relevance – can remain at full price. Or rather than marking down summer seasonal apparel in all stores simultaneously or based on the pre-season plan, locations that are still seeing strong demand can remain at full price or close to full price, while other locations can do deeper discounting to move their remaining merchandise, driving toward a higher overall sell-through.
In other words, AI saves retailers from having to apply sweeping markdowns so they can preserve as much revenue as possible. That’s not all, though. Today’s AI software can look at omnichannel demand and spell out how clearance pricing and promotions should be optimised for all channels, locations and brands so retailers don’t end up with dead inventory.
The Bottom Line
Sales volumes are naturally softening due to inflation, and the unpredictability of how quickly things can get made and transported remains uncertain, meaning it’s likely this cycle of inventory shortages and overages will continue for a while.
Even as AI-based demand planning software is brought into the fold to improve the accuracy of in-store and e-commerce replenishment orders, we have no idea if retailers will actually be able to stock what consumers want, when they want it. Nor do we know if consumers will want what retailers have in stock three, six or 12 months from now given how long it takes for goods to arrive on shelves. Retailers can’t control what happens once orders are placed until they arrive at their warehouse. They don’t know if manufacturers are going to be able to fill orders in full or if shippers and distributors are going to be able to deliver on time. So, it’s likely they’ll find themselves dealing with misaligned supply and demand until all these other adjacent issues are resolved, at least for seasonal inventory.
That means the only way retailers can really take back control, while getting rid of all this excess stuff they have and preserving revenue, is with pricing. And the best way to get a grip on pricing – to avoid selling at a loss and undercutting an already tight profit margin – is to use AI to quickly analyse and understand true demand and find the optimal pricing strategy to maximize profitability and sell-through. By turning to AI in high-pressure situations, we increase the odds that merchandisers will make the right decision – one that benefits price-sensitive retailers and consumers alike.
To learn more about the AI-powered pricing and promotion tools available to retailers, click here.
