Retailer Recalibration Can Address Shifting Consumer Preferences, Costs and Revenue Drivers

Steve Katz  

Hi everybody, and thanks for taking time out of your busy schedule to listen in on our Hilco global smarter perspective podcast. As return listeners know, I’m your host, Steve Katz. And if this is your first time with us, well then welcome. We’re glad you could tune in. Today we’re regrouping with our friends from Getzler Henrich, Mark, Samson, Michael Appel and Charvi Gupta to talk about some of the biggest challenges facing retailers as we enter Q3 of 2023. For frequent listeners, and those that may want to go back and review previous podcasts, this is a follow up to our last discussion with Gensler, which focused primarily on the trouble that returns were causing an industry. And we’re going to pick up with that same topic here and dig into some other areas of concern. So Mark, Michael, Charvi, thanks for joining us again.

Mark Samson  

Thanks very much for having us. I’m sure the others will thank you as you asked him questions, as well.

Steve Katz  

Yes, exactly. So Mark, listen, clearly, when we spoke last time, the cost associate associated with returns, we’re really starting to create some serious issues for operators. I know a lot of companies have new return policies and practices that are in place. Can you catch us up on where things stand today and how these businesses are managing the returns be so to speak?

Mark Samson  

Yeah, sure, Steve. You know, just to refresh online returns represents approximately 25% of more than a trillion dollars of revenue. 2023 looks like still on track to do a trillion dollars. In fact, the first quarter of 2023, there was approximately $250 billion in sales. This of course, excludes brick and mortar sales, product returns hurt every single business, online more so because of the huge shipping costs, which hurts the bottom line. And just by the way, for every $100 returned $10 is fraudulent. Recently, all the public companies who reported Q1 results have been pretty vocal about returns that hit the bottom lines, just to name a few target, Amazon, Zara, Kohls, Lululemon, they all announced stricter return policies, Amazon announced a $1 fee on UPS returns. However, if UPS comes to your door, they’ll charge the dollar. But to be clear, if you drop off your product at a Whole Foods, or at a UPS store, it’s still free. But this creates a great message for smaller businesses because smaller businesses orders and they now realize that it’s not wrong to actually charge for returns, whether it’s $1, or whether it’s the whole cost. Amazon course through algorithms, they track their customers and everybody that’s abusing the system, are very quickly kicked out. One example I just want to give you is that I had to return something and I went to Whole Foods the other day, they made me walk up two flights of steps and they had the returns at the back of the store. Another good example Lululemon, actually suspended returns for the full month, so they could catch up. But to be clear, they honored all returns, but they had to reorganize the controls and procedures. Retailers have to balance the desire to keep the customers versus preserving profits. There’s always a compromise. Huge in the news is Bed Bath and Beyond, which is in bankruptcy. And all locations are currently being liquidated. They were destroyed by coupons and liberal return policies. Very few people were shopping without coupons. In fact, Getzler Henrich were fortunate enough to also have restaurant client. And we’ve stopped coupons with our clients at restaurants. And it’s helped. I need to emphasize that companies that have a gross margin in excess of 70% are able to offer free returns as it’s built into their selling price is they know the customers it’s the companies who are still trying to buy market share with lower selling prices and free shipping that will continue to lose money invention.

Steve Katz  

Yeah, listen, it’s so true especially Bed Bath and Beyond. I remember shopping at Bed Bath and Beyond, you know 5,6,7 years ago, going in not having a coupon and then the the person at checkout saying “oh, well here let me scan a coupon for you”. So I mean it the policies can just get out of control and create issues as you pointed out, Mark also I know Getzler Henrich has a lot of clients in the online space. What can you tell us about how they, in many cases with your help, have gone about addressing the profitability issues associated with returns there, the rising issue of pilferage, which we’ve been hearing more and more about in San Francisco, for example, and how inflationary pressures are factoring into all of that?

Mark Samson  

Yeah, that’s a great question, Steve. You know, you don’t Getzler Henrich is a team, we’re guided our clients with the three main fixes. The first one is free shipping threshold, several of our clients raise money shopping between 50 and 75%, with very little resistance. A quick example, is if the average selling price of a specific product or the transaction value in 2022 was 100 dollars with free shipping threshold at 100 dollars, our clients raised the free shipping threshold to between 150 and $199. And we saw very little resistance. Apparel is the largest contributor returns and footwear, as a category is 40%. So we really were successful in educating our client in terms of the free shipping threshold. Restocking fees, we also told them is that if a customer is going to return something, because it stems from good, it’s free. But if you charge a customer to return $5 on $100 item, it’s not going to hurt them, there’s going to be very little resistance. And we found this to be true as well. For many years, appliance stores have had restocking fees of 25%. This makes the customer Think twice before sending it back. The last one was educating the customer, this we thought was going to be the biggest challenge. But guess what? You switch on the news channel, be at a regional channel, or nationwide, every single day was the high rates of returns inflation. And so there hasn’t been a company that hasn’t been hurt by returns. With regards to the inflation restart at least 10 to 15%. The price increases that have been passed on to the consumer, as you know, were at highest rate of inflation 40 years selling prices, they just had to be raised. Getzler Henrich, we assist the companies by micromanaging prices every single SKU The unfortunate part of inflation is it’s hitting low income families the hardest. food inflation is way higher than the average 40 year high inflation. Supermarket prices have risen way above the 9% reported average, and in some cases 25% depending on the category have have been up more than 150% before last week’s reduction for the first time by approximately 14%. Inflation has caused the consumer to spend less on certain categories like electronics and spending more on essential products. In fact, I read today that families are holding back, fearing that back to school prices are going to be at least 15%. Inflation as the government told us last week is moderating that maybe it’s the calm before the storm. As mentioned every local national news channels discussion inflation, which leads me to pilferage which is adding fuel to the fire. There’s been a whopping 26% increase in voltage, which is up from approximately 80 billion to approximately 100 billion. This excludes the organized smash and grab crime happening at high end retailers, where individual items cost 1000s of dollars toward but recently announced the write off of 500 million because of pilferage bombs in supermarkets or keeping even moderately priced desirable products blocked. This is due to the relaxation of prosecuting shoplifters, as well as self service, which has caused a huge uptick in stealing. Another interesting fact is the Westfield Shopping Mall, we know, used to manage the World Trade Center two weeks ago gave the keys back to the lender because of the huge potential client issues in San Francisco. And I’m sure Michael can add all the facts that I’ve just mentioned.

Steve Katz  

Yeah, I mean, that’s that’s quite a quite a collection there. And as you said, the pilferage issue seems to be growing we hear more and more about it every every week it seems in San Francisco seems to be unfortunately leading in that area. So Michael Yeah, given all this, how would you characterize the prognosis? For the balance of 2023?

Michael Appel  

Okay, well, thank you, Steven. Thank you, Mark. And following up on, on, you know, Mark’s discussion of some of the major issues as well as the headwinds that are facing retailers. You know, this has been going on now, really, since the whole year of 2022. And we’re now seeing it continue in 2023. And so, based on these headwinds of, you know, inflation and increase in interest rates, etc, I mean, what customers are doing is saying, you know, given the discretionary wallet that they have, they’re becoming much more discriminating, and how and where they will spend their money. And, you know, the value quotient is becoming more and more important, and it’s not just deals it should value for the money. So in addition to that, you know, what’s sort of interesting is that the economy itself is really not that bad. But despite the fact that unemployment is low, and that we’ve been seeing wage increases across the board, consumer sentiment is at a six month low, and added to that it seems like almost every day, there’s a new story in the media talking about that. And the latest one, I think, really is the discussion of the fact that student loan repayments are going to resume on August 30. And that’s going to present another headwind in terms of those, those consumers that have to resume their student loan repayments, which are not inconsiderable, despite the fact that the Q1 results for many retailers were were top challenging and that they’re revising their guidance downward for the rest of the year. There are some winners and some sectors that are winning. And so if you look at the winners, you can see people like Lululemon Aritzia, Ulta, Walmart and the off prices, which is not surprising that when we’re when, you know, when, when consumers are value driven, they’re going to the off prices. And even in luxury goods, we’re seeing a slowdown, they’re still doing fine. But they’re not increasing at the rate that they were in 2022. And when you’re looking at the categories by categories, because of the increase in interest rates, and the fact that people were cooped up for a couple of years with COVID, and we’re buying home, you know, all the home categories, pretty much across the board are being challenged. And so where they would have benefited the stimulus. They’re now facing headwinds. And then looking at looking at it from that perspective as well is with with the reopening of the economy from the pandemic winding down. Lifestyle changes are driving consumer behavior. So whereas people, you know, weren’t traveling weren’t eating out. I mean, we’re seeing record travel rates for July 4 weekend, and restaurants are both and people are spending their money on more socializing activities like that.

Steve Katz  

Yeah, yeah. Look at I mean, the News is reporting record travel. The I mean, obviously, we’ve had some weather issues recently with these problems from Canada. But, I mean, you’ve got so many people traveling so many people trying to get in these experiential type opportunities that they missed out on in COVID. So as you know, as we look ahead, with all of this in mind, what’s the answer for retailers? You know, where should their efforts be focused, generally speaking? And how are you in the team advising them in terms of driving efficiencies, and attacking ongoing threats and costs to their profitability? Moving ahead?

Michael Appel  

Right. And listen, that’s certainly on the mind of almost every retailer today. And I think that, you know, from our perspective, what we’re saying and advising our clients is that you can’t sit back and be reactive, you have to be proactive in really serving your customers in terms of passion, value, and fit. All those things are critical. And, you know, you’ve got to be facing the fact that from a macro perspective, the highest cost of doing business, as omni channel continues to grow, puts pressure on margin and EBITDA, because, you know, in the old days, it was okay. You know, you had a fleet of stores, and maybe you had a catalog Business are small direct response business. But today, you know, Omni channel means that customers are shopping in stores online, are accessing social media, and also are expecting to receive more services as part of the shopping experience. And that is via online pick up in store, ship from store, curbside picked up. And of course, we spoke about the more liberal return and shipping policies. And, and at the same time, in addition to that, alright, to add more fuel to the fire, frontline workers are catching up on wages. And that and you can see across the board, regardless of whether your mass, or discount, or luxury, frontline workers are catching up on wages. So overall, the overall cost of doing business is rising faster than revenues. And so in order to, to win, right, or even stay even, from where they were, you know, 10 years ago, that retailers must use more levers to drive efficiencies. So you’ve got to drive more efficiencies out of out of your existing business model. And still, at the same time, make sure that the customer facing activities are giving the customer what they want. And so therefore, you know, retailers must be proactive to attack the cost and revenue drivers. And so what we’re seeing almost every day, we’re seeing another news article about how retailers are proactively cutting expenses, particularly, we’re seeing it in terms of corporate headcount, almost every day, we’ve been seeing another major retailer announced that. As a matter of fact, Children’s Place today, something turning 70% of the corporate staff. And yeah, and so and we’re not talking about and what they’re looking at, it’s a combination of two things. One is higher cost of doing business, and the fact that they’re facing tough business ahead, that they feel that way. So in order to get ahead of the curve, they’re doing that. And what they want to do also is they feel they can cut corporate, but at the same time, they they really do not want to cut the frontline employee situation. But when we look at the E-commerce part of the business, again, what Mark spoke about in terms of reevaluating and reducing delivery and return expense, because that’s another opportunity area to do that. And we’re seeing that the customers are accepting that as long as they consider it to be fair and reasonable. And, you know, the thing too, is you’ve got to use your analytic tools, as Mark talked about in terms of what what should the shipping threshold be? Right? If you’re if your average order size is, you know, $150? Why are you doing free shipping at 100? All right, it should be 175, or 200. In that regard, and we, we have worked with our, with our clients, in helping them to, to really dig down, analyze and come up with, with those types of responses. The next piece, of course, is a leaner, but more focused inventories. And the the thing about it is that we just came out of a situation where, where, during COVID, we have sourced, you know, sourcing issues and supply chain issues, and the retailers reacted and ended up with inventories that were, you know, at historic highs, I think Nike was talking about the fact that their inventories were right, 40%, more than than the year before, well, Nike can get their way out of that. But in the long run, you can’t do that. And at the same time, you’ve got to reduce your inventories, but you also have to focus them in such a way that you’re giving the consumer what they want. And I think that, you know, in this environment, when when customers are really looking at how they spend their money, the natural inclination, in the past that many retailers tend to sort of play it safe, right, tried and true. But actually, when when businesses comp and customers are discriminating, what you have to do is you have to give them fashion and newness and exciting excitement in order to get them to open up their, their their wallets, because that that woman is going to you know, she’s got a pair of black pants in her closet. She doesn’t need another one. But she but she’s gonna want to get a new blouse or new accessories to dress that up and and have her wallet stretch further. And then of course, and I can’t stress this too much is utilizing AI learning platforms to really to really train and engage frontline employees and provide better services to the customers and there are AI platforms that that I have have introduced company is betting had terrific effect, both in terms of really getting more productivity and engagement for employees, but also reducing turnover, which is very high in retail. And if you can reduce for every percent, you can reduce turnover, that goes right down to the bottom. So, again, looking ahead in terms of the second half of the year, I think that the strong promotional focus that we’ve been seeing will continue and may even intensify in the fourth quarter, we’re going to see, based on back to school sales, you know that that gives you an indication, but it’s not the, it’s not a complete predictor of what’s going to happen for the quarter, where retailers, most retailers make most if not all of their money back. Now, in order to do that, in order to be promotional and, and make money, alright, instead of give away your margins, retailers must be proactive in planning promotions with their vendors and supply chain, to ensure margins yet drive volume and send out a value message. So if you know that the environment is going to be highly promotional, and I’m positive that’s the case, then you’ve got to work, you’ve got to look ahead, work with your supply chain, if you’re if you’re, you know, a brand, or with your vendor base, if you buy from the market to plan it. And so that you’re you’re in control of what’s going on. And and I also think that, you know, the retailers that over the last five years have really invested in technology will continue to deliver better results, because they they really have the analytic tools to be able to to analyze and drive results. And I think what you’re also going to see is just a continuation of the bifurcation in results between winners and losers. And that’s going to continue in the fourth quarter, and we continue to see that those retailers that that really have a strong focus on their consumer, have invested in technology, and really are proactive in terms of how they present themselves to consumers and deliver to them the value and experience they’re receiving will continue to do really well. And those retailers who haven’t, are going to find themselves by the wayside, so I think, you know, in summary, what you can see is that retailers at this point, based on results here today will continue to be cautious going in going into holiday and into the first half of 2024. Now, if business opens at holiday, the fourth quarter and some people think that may happen, then then that may that that caution may change a bit. But it’s really too soon to tell.

Steve Katz  

Okay, a lot of good messages there. proactivity seems to be maybe the biggest watchword. Thanks so much for all those insights, Michael and Mark and Jarvey. I know you’ve been sitting sitting tight, patiently there. We’re kind of running out of time here. So let’s plan to continue this discussion and our next podcast, which I think is going to take place in a couple months. But maybe you can give us a little bit of a preview of what you’re planning to discuss for that.

Charvi Gupta  

Sure Steve, I hope listeners will tune in when we get back together because I’ll be discussing the importance of business planning and forecasting for retailers in this challenging environment. These days, it’s quite common to hear about retailers getting forced to quickly address liquidity concerns, companies often resort to asset sales, site closures, layoffs, vendor negotiations, and so on. Retailers spend a lot of time and effort in figuring out strategies for Cash Generation and preservation. Given the cash really is the lifeblood of any business, it’s quite important for management to really plan in advance for both short and long term. In the short term, we recommend using this tool called 13 week cash flow that provides an excellent overview of how liquidity could look like for a while. So it basically provides a forecast of cash receipts and disbursements and really helps in answering questions such as well, we have been hitting these huge sales targets during the holiday season. Why is cash in the bank so low? Or our annual insurance payments are due in January, Do we have sufficient funds for that? Or we low on cash in week seven? Can we push out a vendor payment from week seven to week eight maybe. So it’s a great tool for adding that weekly visibility, that accurate enough for you to identify medium term liquidity issues. And 13 weeks provide ample time to really take action and resolve things. Now in the long term, we want retailers to really ask the question, what do we need today to accomplish our three to five year goal. Having a long term business plan is an important step towards accomplishing that. This can literally be a back of the envelope plan, where you know what you want, and we’re making sure that each day you’re working towards it, or it can also be a very well thought out tactical plan that will make it a smoother ride.

Steve Katz  

All right, great insights. Thanks so much for those. Michael and Mark and Charlie, thanks for giving us a little preview of what you’re gonna talk about next time. I know listeners will be very interested and I also know that they’re probably going to want to follow up with some of you. So would somebody just like to serve as point person for that maybe Michael, you can give your contact info and if anybody has a question they can go through you.

Mark Samson  

Thank you, Steve. And thank you for your for your great moderate moderation of this of this podcast. You could reach me at my email address at Getzler Henrich which is mappel@getzlerhenrich.com. And by phone on my mobile at 917-789-3615.

Steve Katz  

All right, Michael, thank you perfect and listeners. As always, we hope that this Smarter Perspective podcast provided you with at least one key takeaway that you can 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 remember that you can check out more great podcasts and articles featuring timely insights from Hilco experts at HilcoGlobal.com/smarter-perspectives. Until next time for Hilco Global I’m Steve Katz.