Juanita Schwartzkopf
Senior Managing Director
Focus Management Group

By Juanita Schwartzkopf, Senior Managing Director, Focus Management Group

With Black Friday and Cyber Monday behind us, Juanita Schwartzkopf takes a look at what retailers are concerned about right now.

According to preliminary data from Sensormatic Solutions, in-store shopping on Black Friday showed a 2.9% foot-traffic increase over 2021 and in-store shopping on Thanksgiving showed a 19.7% increase over 2021. In addition, mall traffic increased 1.2% and non-mall traffic increased 4.7% over 2021. Similarly, Mastercard SpendingPulse reported that in-store and online sales were up 12% (not adjusted for inflation) over 2021, with apparel, electronics, and restaurants among the top performers.

On the digital side, according to Adobe Analytics, online sales on Black Friday reached $9.1 million, which was a 2.3% increase over last year, though that percent increase was less than the 8% inflation rate. In addition, some estimates put Cyber Monday sales at $11.3 billion, up 5.3% over last year, with that sales increase also below the level of inflation.

This data seems to indicate consumers are still buying and are taking advantage of retailers’ needs to reduce investment in inventory. But consumer spending is not keeping pace with inflation. These factors are concerning to retailers because many are experiencing stuffed supply chains, incorrect product mix and rising purchase prices for salable goods. The fact that consumers are not increasing spending as much as inflation is rising (and many retailers have increased their discounts and extended the discount periods) means the financial performance of retailers will be tricky for Q4/22 and in to 2023.

Trends to Be Aware Of

From a retailer’s perspective, there are a two key trends to be aware of in 2022: organized retail theft and the migration to more rural areas.

Organized retail theft, sometimes referred to as ORT or ORC, is crime managed by criminal organizations who organize groups of people to steal goods from retailers and then resell the goods to consumers. This is not retail theft by consumers who need or use the goods that are stolen; this is organized crime to generate revenue via product resale, specifically in states or locales where prosecution of retail theft is not as robust. According to the National Retail Federation this organized retail theft can cost U.S. retailers $700,000 per billion dollars in sales or 0.07% of sales. While this percentage may be small compared to overall sales, the trend has a significant impact on stores and the employees and owners of those retailers. From 2017 to 2022, organized retail theft has doubled in impact. The National Retail Federation reported the retail losses to overall theft were estimated at $69 billion in 2019 and increased to $94.5 billion in 2021, with some attributing some of the continued growth in online sales to the safety concerns at retail shops specifically resulting from organized retail theft.

Looking at stores opening and closing by year, the COVID-19 pandemic shutdown year was the worst for retail store closures in recent memory with 12,200 reported closures (Forbes Magazine). But it is interesting to look at demographic trends and their impact on retail locations. The Association of Equipment Manufacturers reported that the net flow of people out of urban neighborhoods between 2017 and 2019 averaged 28,000 people per month. After the pandemic hit in March 2020, the outflow of people increased to 56,000 per month. This means stores are closing in some areas and opening in others. For example, yahoo Finance has reported increasing store openings by discount operations such as Dollar General.

The combination of organized retail theft and the existing trend to online retailers seems to be further increasing the stress on individual businesses. The news media regularly reports on business owners who elect to shut down their brick-and-mortar locations due to theft losses and safety fears, with 54% of small businesses reporting an increase in shoplifting during 2021.

The increased online sales during the 2022 holiday shopping season of Black Friday/Cyber Monday bear out many of these observations listed above.

What Does This Mean for Working Capital Management?

Whenever inventory is discussed, working capital management needs to be considered. We continue to see increased inventory levels, higher per unit values and more units on hand, and these factors are stressing working capital.

Many retailers will use Q4/22 as an opportunity to reduce investment in inventory and that will help working capital management. Moving into 2023, the product mix and delivery systems to consumers will continue to evolve as consumers deal with the impacts of inflation, so forecasting working capital management through Q1/23 will be a key component of a successful working capital management plans.

This article first appeared at focusmg.com.

Juanita Schwartzkopf is senior managing director of Focus Management Group.

Schwartzkopf has more than 35 years of experience in commercial banking, business management and financial and management consulting. During her career, she has handled projects involving financing strategies, strategic planning, forecasting, cash management, creditor relationships, information management, bankruptcy, crisis management and business plan development.

Schwartzkopf has held key operating and management positions in many types of companies, from startup to mature businesses. Throughout her career, she has worked on improving performance in severely troubled and stable, healthy companies. She has negotiated lending arrangements on behalf of both creditors and debtors.