The decisions Canadian retailers make now will have a direct impact on their future results. Remaining resilient in the face of so much complexity requires retailers here to take three critical actions:
- Treat allocation of working capital more seriously to make all inventory dollars work harder and reconsider cost-first trade-off decisions. Dollars trapped in inventory would be better deployed with investments in customer experience.
- Enhance visibility to cashflow through more granular forecasting and upgrading models that make use of external macro information over historical models. This will provide greater insights to treasury and financial planning and analysis (FP&A) for managing liquidity.
- Embed cashflow into decision-making through all functional areas, including the merchant and operations teams, and be willing to make course corrections as the environment changes to balance both short- and long-term results.
Of course, rolling out a strategy to tackle these three areas requires a coordinated approach, one that connects these levers with an eye to making a holistic impact.
What should Canadian retailers keep in mind to make the most positive possible impact and build the greatest possible resilience?
1. Capital deployment needs a broader lens
Capital availability will be a differentiator for retailer performance in Canada. In a softer market, capital allocation becomes even more critical. Every inventory dollar must work harder. We know that cost of capital is increasing and will remain higher for the longer term. On the one hand, emerging technologies and tools offer up new routes to productivity and profitability. On the other, cash deployment into investments is going to be under more scrutiny and potentially require quicker payback.
For example, generative artificial intelligence (gen AI) has the potential to help retailers across a range of use cases, from customer experience and engagement through to operational efficiency and discounting strategies. But early adopters are bearing significant costs and there may not be short-term payback. Embracing gen AI requires technology and application investments at a time when capital is more expensive and available cash is already under pressure.
Meanwhile, retailers also face challenges balancing inventory correctly, with long planning horizons and equally long supply chains and purchasing commitments with manufacturing partners. The most recent quarterly results saw 41% of North American retailers report an average days inventory outstanding increase of 15 days.³
Canadian retailers fared worse, with 73% of retailers experiencing an average 13-day increase, suggesting a more challenging environment north of the border. With cash conversion cycles extending, this will put more pressure on free cashflow in the runup to year ends.
Clearly, it isn’t easy to determine how to navigate competing priorities in this environment to maximize return on investment.
How can Canadian retailers take strategic steps to build resilience now?
- Take a differentiated approach across the product portfolio to balance risks and enhance medium-term forecasting insights. This can make high-turning items readily available.
- With inventory flowing or sitting in warehouses and stores, carry out a more critical analysis on how discounts could help move high or excess inventory, with a special focus on identified products expected to remain in excess in the months ahead.
- Be prepared to challenge historical pricing and promotion strategies and differentiate to protect margin on more resilient products. A fair balance will need to be struck between dead net profit and inventory turns.
- Refresh thinking around how you work with suppliers. With the pace of change, shorter product lifecycles, more tailored demands and traditional minimum order quantities, lead times may need to change and become more agile. In addition, review the working capital requirements of agreements between inventory and payment terms to understand whether they can be driven towards cash neutrality.
- Explore overall contractual relationships, including pricing, allowances and payment terms, to find ways to balance capital demands without significantly impacting landed product margin.
2. Forecasting requires a more granular approach
Absent a crystal ball, data can help retailers in Canada make more realistic decisions. That’s crucial in this environment, where right-sizing demand can make all the difference between short- and long-term wins.
Successful retailers put the consumer at the heart of their strategy. That said, consumers are becoming increasingly difficult to predict, with changing preferences, shortening product lifecycles and increasing optionality. In this softening market, that makes it even harder to balance variability of demand with the requirement to meet customer experience expectations. Forecasting demand — and with it, the expectations on how sales will ultimately turn to cash — has never been more complex.
The good news is that enhanced demand planning solutions, even those supported by AI, do not require a new ERP or planning solutions. Simpler applications and analytic tools can now employ a broader data array, functionality to integrate a greater spectrum of demand signals, local consumer behaviours and macroeconomic trends. This helps make forecasting more accurate. Incorporating enhanced predictive analytics in inventory management could result in forecasting improvements of 20% to 27% and boost sales by 2% to 15%.⁴