Why Retailers Should Make Tough Decisions Now Rather Than Pushing Them Out

Steve Katz  0:10
Hi everybody, and thanks for taking time out of your busy schedule to listen in on our Hilco global smarter perspective podcasts. I’m your host, Steve Katz. And we’re glad you could tune in today, we’re going to be taking a look at what we saw occur in the retail industry over the course of 2022. And we’ll also be talking about what lies ahead in the coming year. And then we’ll discuss some steps that retail operators can and should be taking to help ensure success in the year ahead during this podcast. So with us today for that conversation is returning podcast guest and president of Hilco retail group. In Frederick Ian, welcome back to the podcast. I know it’s a busy time for you guys. So thanks for squeezing it in. And we’re looking forward to you sharing some of your thoughts and recommendations today.

Ian Fredericks  0:57
My pleasure. Good morning, Steve. Thanks for having me.

Steve Katz  0:59
Yeah, great. All right. Well, let’s jump right into it. In this year, I would say kind of reminds me of a two part miniseries on TV, we had the first half of the year with like the high consumer demand flat fuel prices, low interest rates. And then there was, you know, cute, the dramatic music here. Don’t Don’t Don’t the second half of the year, which was quite different. Can you talk about how this landscape shifted? And how that all is affecting the retail market this year? And what’s what’s likely to happen in the coming year?

Ian Fredericks  1:33
Great question, I think it’s important to maybe back up and just provide a little bit of context, to frame how we got to where we are today. So if you think about the pre COVID period in retail, you know, words like retail apocalypse, were thrown around. And while things had somewhat stabilized, call it in 2019. And going into 2020, everything got put on pause with COVID in 2020. And then coming out of 2020, there were different demand cycles that we saw. So early coming out of the what I’ll call the lockdown period early in 2020. And continuing through most of q2, there was significant pent up demand relative to stuff for your home. So whether that was soft home, or renovations, Home Improvement, things like that, and you saw tremendous demand for that. And businesses like Home Depot and Lowe’s did really well, furniture businesses did really well. And so you know, that was sort of the first demand cycle we saw. And then as people started to return to work, call it in 2021, the demand cycle shifted over to apparel. And at the same time that that was happening, there was also shortages. And those shortages were things due to supply chain disruption, just, you know, retailers not necessarily sure when they would be able to, you know, go back to full stock. So as a result of that pent up demand, and supply shortages, retailers did not have to discount as much as they maybe typically would have the consumer was willing to pay full price the consumer was willing to maybe buy last year’s goods that were seasonally appropriate. And that carried all the way through 2021. And I recall some of the articles and certainly the Wall Street analysts talking about just how great everything was in retail and how rosy it was. And to me you were just dealing with two different demand cycles. And nobody really understood coming into 2022, exactly how to forecast was the demand going to continue and if it was going to continue how long it was going to continue. And I think more companies erred on the side of assuming that the demand would continue. And early in 2022, we did see some of that the carryover from 2021 continued certainly into the first calendar quarter of 2022. But then we started seeing interest rate hikes from the Fed, we started seeing, you know, inflation start to rise, you know more than it had even risen in, you know, the fall/winter of 2021. And all of a sudden, people were starting to talk about the fact that this was not transitory inflation or inflation that’s caused by outside forces. This maybe was going to be real inflation. And I was certainly somebody who had believed from the first time that Fed Chairman Powell commented that this would be transitory inflation, that there was nothing transitory about this. We were seeing real inflation and that inflation was going to be with us for a while. And in large part it was caused not by outside forces, other than the federal government just printing too much money in response to COVID and flooding the economy with too much money. So that’s how we kind of get to where we are today.

Steve Katz  4:58
Yep, yep. And then you have this this year, you have, like we said, the first half of the year, things were looking pretty good, you know, you had this, you know, continue to lower interest rates, fuel prices weren’t too high. And then the second year, second half of the year changed. So, you know, over the course of this past year, how have retailers been working through some of the challenges that they’ve seen occur, and I know, you know, for example, one of them is, you know, consumers just can’t just walk into a store and find, you know, an everlasting, stack up everything they ever wanted to see there. It’s not it’s not happening. But and retailers have to deal with that to correct that.

Ian Fredericks  5:45
And I think retailers have tried to tackle it, at least initially, in the first half of the year in two different ways. They were, for the most part, they were all over inventory. And to a certain extent, they were all over inventory with the wrong inventory. So if you walked into certain stores, the store might look full, but it didn’t necessarily have the inventory that the consumer wanted the consumer, as inflation was rising, an interest rates were going up. And the consumer had largely spent, you know, started dipping into their savings and other, you know, in other things, and they weren’t getting the same COVID related federal government relief, you know, they started being a lot more particular about where they were and how they wanted to spend their money. Some of that shifted over to experiential, and some of it just said, I’m only going to buy the goods that I actually want, as opposed to buying things that may be more, you know, more aspirational. In doing that retailers took two approaches, some of them said, we’re just going to clear through this inventory, it’s a problem, let’s just take the hit. Now, let’s discount it, let’s try to discount our way out of it. And, you know, then we’ll be healthier. On the other end, some retailers took the approach of let’s do packaway goods. And my concern. One of the things that retailer said, in doing that is we learned in 2020, how to pack away goods properly. And I’m skeptical of that you won’t figure out if the packaway worked until probably sometime next year or the years after. But I’m very reluctant to use any strategy that was implemented in 2020, as a result of a pretty unprecedented pandemic, and try to apply that in a normal course, or quote unquote, normal course environment with consumers, I’m just not sure they’re going to react the same way, when it comes back in the store and see 2022 or 2021 styles on the shelves in 2023 or beyond. So it’ll be interesting to see him who was right, we’ll figure it out probably sometime next year. But I tend to believe that the retailers that sort of decided to discount their way out of it and will come out the other end with new fresh goods seasonably appropriate are probably going to do better. And if I shift to the second half of the year, what you’re seeing now in the holidays, and what you’ve been, you’ve been seeing this trend recently for sort of the holiday shopping season to be moved up into the year, you know, as opposed to starting around Black Friday and continuing through Christmas. Now, they’re starting almost in October. You know, I think things came out of the gate, you know, fairly strong. I think in general, you saw some mixed results around Black Friday. EECOM certainly seem to do pretty well over the Black Friday, Cyber Monday holiday weekend, I’m not sure brick and mortar fared quite as well. As we’re getting closer to the holidays, I’ve been visiting malls and stores, they just don’t seem as full as they should have, or they should be during this time of year. And I think that’s a product of the fact that by moving the holidays up, you’re not necessarily driving more holiday sales, you’re just spreading the holiday sales over a longer period. And then I think one of the things to always focus on in this highly inflationary environment is just because sales beat forecast or sales beat li in terms of the aggregate economy, you know, that’s to be expected if we’re having seven plus percent inflation and retail sales beat last year by two or 3%. That’s still lagging behind what it should be when you factor in inflation. So I’m always skeptical of the articles or the predictions that we’re going to beat li sales, we have to beat ally sales by more than 7% to even come close to matching what the inflationary environment is giving us.

Steve Katz  9:51
Yeah, sometimes I think, you know, we’re the unwitting victims of the how media spin some of this stuff and you know, you can make numbers reading anyway you want to but that’s, I think, an excellent point. So I am thinking, you know about this article that you that you put out about a month or so ago. And in that article, you talked about the economic outlook for 2023, as, you know, partly sunny forecasts, which, which I think is encouraging to a lot of people. But then you also pointed out in that same article that partly sunny means partly cloudy too, which is true, because, you know, you get these weatherman who are optimistic and they say it’s partly sunny, others say, it’s partly cloudy. So let’s depends, again, just like we’re talking about the media, how you’re looking at things. So can you elaborate on that thinking as it pertains to the economy in 2023 now, and implications for retail operators moving ahead?

Ian Fredericks  10:49
Sure. I think that the economy as a whole, you know, has some Partly sunny, partly cloudy aspects, one of the very positive things is that we’re still at pretty much record low unemployment. And overall, that’s a great place to be when you start moving into a recessionary period or, you know, a tightening of the economy, things like that. And there’s debate over whether we’re in a recession, whether we’ll be in a recession next year, and I’m not going to pretend to predict whether or not we’re in one or whether we’ll be in one, I think in some respects, that depends on the definition you use. But I think everyone would agree that we’re in certainly seeing a tightening, and the consumer, consumer confidence is not great, the consumer is certainly dipping into their savings, while there is continued wage inflation. And that’s great that there’s, you know, in general wage inflation for the average consumer, on the flip side, that wave and inflation has not necessarily kept up with the overall inflation. So even though, you know, the average person may see a 5% lift in, you know, in wages, if you’re battling a 7% lift in inflation, and that’s just sort of an average, you know, if you think about grocery and things like that inflation could, you know, could be significantly higher on food. And if that’s the case, it’s still a net negative for the average consumer. You know, I think for you know, for retail, if the job market starts to tighten, I think that’s going to make it easier for retailers to fill those frontline jobs, which is, from my perspective, you know, the most in one of the most important human resources within a, within a retailer are those frontline people in the stores. And I think so often they’re overlooked or overworked. But from my perspective, that’s the retailer’s connection to the customer in so many respects, and really getting the right people in training the people correctly and giving them the right tools to be successful, can help overall combat some of that partly cloudy aspect. And I think, you know, what I’ve seen over and over again, and going to stores and in, you know, moving around malls is that morale can be a bit mixed. But I think one of the areas that retailers can really should focus on in 2023. And beyond is boosting that morale in those frontline stores and making trying in whatever way you can to make their lives better, and really embrace them as a big part of the culture and the team. And I think overall, you know, there’s a big opportunity there, you improve your morale in the stores, your customer is going to have a better experience, drive more sales, etc, etc.

Steve Katz  13:34
Yeah, great, great point. I know, just this overall communication with store employees, and how read, you know, regional managers and store managers communicate sort of up and down the line. And I know you guys, and this isn’t the focus of this our discussion today, but maybe, you know, sometime early next year, we can talk about it, you have some technology you’re working with that helps empower the store employees and, and sort of organize their efforts and make merchandising a little more consistent across the enterprise, particularly taking advantage of some of the some of the successes that certain stores may have had over others and, and sharing that across the business. So maybe we can talk about that, because I think that’s part of it, too. You know, given what your what you said here, are there specific things that retail operators should be looking at or doing early on and 2023. I’m assuming some of these things might be kind of tough decisions to make, you know, bite the bullet now, again, kind of kind of what you were saying earlier in the discussion versus letting it drag out and create a problem down the line.

Ian Fredericks  14:46
For our technology solution, we should definitely focus on that on another one. I’m not you know, I wasn’t trying to use this as a sales pitch for that. But I think for retailers, I think there are some things they can do and some of the Is may appear a little bit too late in the cycle to do it, but I want to, I want to focus on them. And I want to stress that it’s never too late. And the biggest one is to kind of shore up liquidity. So typically, this time of year is going to see a retailer with the most liquidity, their liquidity is going to be at the highest. And that’s a combination of this is their peak selling period. So they’re going to be flushed with as much cash as they can be. And typically, they use that to pay down their revolving lines of credit. So they’re going to have a combination of, you know, some cash, maybe a zero balance on the line of credit, or maybe a really low line of credit, you know, and a little bit of cash because they’ve used that to pay down. But I think focusing on trying to shore up long term liquidity as soon as you can, is the right approach. And I think if you if you follow me, you saw just in at the end of November, express stores actually did just that, they were able to increase their line of credit. And they also did a loan, and they did it from smack dab in the middle of, you know, the holiday season, I think looking at that as an example, as you come out of this year’s holidays. And before you maybe report your end of year results, or your fourth quarter results, use the beginning of January to try to say, am I is my liquidity maximized? Or should I be trying to upsize my ABL? Maybe should I be looking for, you know, an upside term loan, you know, should I redo my appraisals? Now, you know, and things like that on my intellectual property and or my working capital. But I think really trying to get everything into, you know, the best place it can be as quickly as possible is a critical step for retailers at a macro level, I think is you look at some of the other areas where you may be able to improve, I think, really looking at a SKU rationalization and looking at reducing the number of SKUs, you know, is something that retailers should absolutely be doing. And the reason for this, I think, is twofold. Number one, the Consumer Preview pre COVID was conditioned to having everything in stock all of the time mentality. And I think what COVID has done, that’s a benefit to retailers has said, or, you know, there’s been a benefit to resellers is that the consumer has been conditioned down to the fact that not everything’s in stock exactly when they want it, they’re going to be shipping delays. And so take advantage of that reduce your skews, look at skews that just aren’t driving much in the form of sales or margin. And you don’t necessarily even have to cut those completely, you can make them available, but you can make them available over, you know, that requires a longer period of time. So maybe you can dropship from the manufacturer directly to them. Or maybe it just makes sense to cut your skews. And it’s that old 8020 rule 80% of your sales probably comes from 20% of your inventory. So really focus on that, because that’s a way that you can save significant costs and not have to put as much into clearance later. So I think, you know, really taking a hard look at your skews and how many SKUs you want to carry and where you’re you know, where your real income and sales comes from is important. You know, we talked a little bit about technology, I think there are some easy technology solutions that retailers can implement to make overall improve their business improve their business at store level. You know, I don’t think that I’m probably in the minority on this. I don’t think e commerce is the end all be all and you know, the saving grace for retail, I think what I’ve really looked at over the last several years is costs have continued to gone up, it’s much easier for costs to be increased over a faster period of time, if you think about how digital marketing works. And you know, having to advertise on Facebook or Amazon or Google, they have real time information, you know, data and algorithms that is helping them dictate with precision what the right right price is for marketing. And that can go up really quickly. It usually doesn’t go down very quickly. But if it does go down, then more people probably buy those keywords, etc. And it goes back up. So that dynamic ability for them to increase price, you know, poses challenges for those costs. You know, additionally, shipping costs just continue to go up. I know we’re seeing, you know, container costs come down and you know, ports open up and things like that. But you know, the FedEx is ups as of the world they’re sleeping, they’re facing the same wage inflation that everybody else is. And in some ways those workers are actually you know, earning outsized rates or outsize wages because relative to some other, you know, some other job categories because it requires more skilled labor. So, we’re not going to see that last mile or delivery from the local warehouse to the consumer go down. So I think those input costs are going to continue to rise. And I think just overall ecommerce companies to look need to look at their ecommerce and say our E commerce needs to be profitable, just like our stores would, you know, companies often trim their store fleet based on for wall EBIT, da or whether the stores for wall profitable, you need to really take a hard look at your ecommerce platform and figure out how to make that profitable and make sure you’re including all of the costs, you know, so often some of the SG and a is just, you know, is really ecommerce related expense that’s included in SG and a, but as you’re evaluating your E commerce market, you know, or your E commerce site and its profitability, make sure you’re allocating the appropriate amount of SGA to running that. And I would say, you know, lastly is, you know, you really have to make sure you know that you are focused on the consumer, your consumer, the consumer is becoming more and more finicky. They’re demanding more and more from the places where they spend their money. And losing sight of that and not focusing on your consumer, you know, will be a big mistake. So I would say really doubling down on your consumer and making sure that they’re having a great experience, and you’re giving them what they want, is critical to success through 2023 and beyond.

Steve Katz  21:29
Yeah, and that last point, I think it’s a really good one, because a lot of companies have focused on getting the E commerce up to speed and the sort of the interplay on the omni channel. But in the mix, you know, as you’re focused on the operational aspects of that you can forget about who you’re serving the consumer. So you got to, you got to really stay focused on it. Because without the consumer, there’s, there’s no, there’s no reason to have a store and actually, or an online store. So listen, we’re running out of time. But any anything else you wanted to call out regarding, you know, addressing what’s happening in the market, either for operators, or maybe, you know, maybe for lenders in terms of how they’re interacting with borrowers in the space right now, given some of the things you talked about?

Ian Fredericks  22:15
Yeah, one of the interesting things and, you know, this, this world just happened recently is, you know, it is, you know, inflation in November went from in October was 7.7%, year over year was down to 7.1%. You know, in November, I’m probably one of the few people that’s really looking at inflation since COVID, in a two year environment. And so I’ll look at it and say, Okay, what was October 2021, inflation, which covered the period between October 2020, and October 2021. And then October 2021, you October 2022. And if you combine those numbers you’re at, I believe it’s 13.9%, inflation, you know, over that two year period, if you do the same thing with November 2022 numbers, and, you know, but from November 2020, all the way through November 22, you’re at 13.9% inflation. So, while these headlines are good, that inflation is going down month over month, if you really are looking at it in this sort of two year period, which I think is critical, because so much of this happened as a result of COVID, you’re seeing that it’s starting to flatten out. And that’s great, as opposed to continuing to, you know, go off, but it has come down a little bit since you know, from June and in terms of a two year period. So keep that in perspective, I think is important, you know, your watch your borrowing costs, as they’re going to continue to rise as the Fed funds rate increases, and I believe the Fed in December is going to increase by a half point and as opposed to three quarters of a point which has been the you know, the increase for the last four months, but that is going to have an impact on your your liquidity because your base rate is going to increase. So don’t be as focused on when certain depth and mature because you may need to try to refi and increase your liquidity or bring down your cost of capital as much as you can now, as opposed to waiting till you get closer to maturity, just so that you have that. You know, so you’re taking into account what’s likely going to be additional, you know, Fed funds rate increases over the course of 2023 I sort of expected that, you know, the Fed funds rate lands somewhere between you know, call it five and five and a half percent in 2023. So, factor that in and you know, make some good assumptions around that to make sure that you don’t get caught in a situation where all of a sudden you know, the Fed rate increases have Created liquidity problems for you and you weren’t focused on it. So definitely look at that as well.

Steve Katz  25:06
All right. Thanks again, for joining us. I know as I said earlier, you’re pretty pretty busy guy. So really appreciate the observations and those insights on some of the tough decisions operators had to be making. So great to have you with us.

Ian Fredericks  25:21
Yep. Thanks so much to you anytime. Good luck, everybody. And happy holidays.

Steve Katz  25:26
Yeah, yeah. All right. And listen, all of our listeners, I want to give you Ian’s contact info. So you have that in case you want to reach out with any other questions. Yeah. And can you provide that?

Ian Fredericks  25:37
Sure. I can always be reached by phone or email, my phones 847-687-9375 or my email is I Fredericks at hilco global dot com. That’s I F R E D E R I C K S at hilco global dot com.

Steve Katz  26:01
Perfecto. Thank you very much en and listeners, I hope that you will take the opportunity to reach out to en because he and the retail team have a lot of industry knowledge and capabilities that can really be very helpful to you, depending on what your challenge right now is. And as always, we hope that this smarter perspective podcast provided you with at least one key takeaway that you put to good use in your business or share with a colleague or client to help make them that much more successful moving forward. And lastly, please remember that you can always check out more great podcasts and articles featuring timely insights from Hilco experts like Ian at Hilco global.com forward slash smarter dash perspectives. Until next time for Hilco global I’m Steve Katz.