COVID-19: a perspective for retailers
COVID-19: a perspective for retailers
The economic impact of COVID-19 has demonstrated how retailers must respond to supply chain and demand disruption.
Recent events have demonstrated how vulnerable our global supply chains are to any sort of disruption, be it political, economic or human. Retailers of all sizes and complexity need to take time to fully understand the risks inherent and consider how to respond decisively and proportionately if disruption emerges in the supply chain or should demand for good be impacted.
UK retailers will need to consider the implications of a drop in demand or shortage in supply should the disruption persist:
- Supply chain disruption: UK retailers have so far been largely insulated from the full impact of the extended disruption, due to shipping lead times and the timing of the Tet holiday in East Asia which most retailers have planned for in advance. As the situation evolves, there is potential for significant variation in both the magnitude and timing of supply chain disruption across geographies and subsectors. For example, fashion retailers may find more disruption is likely for their Autumn/Winter 2020 collections than for current product lines, much of which has been manufactured and is already in transit.
- Drop in demand for discretionary purchases: according to a survey published by Retail Economics almost half of consumers (49%) indicated they would avoid physical destinations by shopping online, with a further 25% of consumers suggesting they would avoid shopping destinations altogether if the virus persists.
- Surge in demand for essential supplies: there is already evidence of surging demand for essential household supplies, leading to stock shortages of specific product lines. Retailers focused on Fast Moving Consumer Goods (FMCG) and Food & Drink have a critical public service role to play, ensuring supplies reach consumers quickly and are managing stock levels effectively. This includes avoiding any suggestion of ‘price gouging’ – even if input and distribution costs are increasing, which may itself impact margins.
- Release of suppressed demand: there is a potential for suppressed demand to create supply shortages in the future as normal trading conditions return, particularly if this coincides with the summer and holiday period.
Retailers will need to reforecast various cash flow and profitability scenarios to ensure they understand impact of both supply chain disruptions but also demand fluctuations.
What can retailers do?
Today, retailers need to ask some critical questions of their own supply chains and demand forecasts and whilst some may seem obvious, getting clear answers can often prove challenging.
- Do you understand where your input goods are made or produced? Whilst this may seem easy enough, the complexity starts when you move down below your own tier 1 suppliers. Who supplies the raw material or sub-assembly components that goes into their products?
- Have all of your significant suppliers undertaken a similar assessment – do they know where their inputs are sourced from? Don’t be caught out by an indirect exposure.
- Do you know what the logistics route looks like? Having working capital tied up in stock sat on docksides can be challenging from both an operational and liquidity perspective. In such situations, are there alternative transport routes available and what are the cost implications?
- Do you have any contingency supply options? For example, are there alternative suppliers and/or manufacturing facilities that could be called upon and if so, how quickly and at what cost? Are you able to increase order levels for product lines where demand is growing?
- Digging a little further, have those contingency options already reached capacity or been contractually secured by others (e.g. ‘first movers’ in the contingency planning race) and, critically, do they have similar supply chain issues emanating from a different source? A contingency plan may be seem great on paper but activating it at speed may prove challenging.
- Have you considered the implications to both profit and cash flow from a drop in demand domestically and internationally?
As well as the operational impact, retailers also need to consider the impact of potential supply chain disruption and waning demand on their bottom line.
The first step is pin-pointing the orders affected by any disruption to supply, as well as the impact this will have on existing inventory run down. Without knowing the scale of the issue at hand, it’s very difficult to make robust operational or financial decisions. As any disruption evolves, updating this assessment with an iterative risk management process should be a key component of managing through the situation.
Where it’s possible, the margin and credit implications of sourcing from alternative suppliers on a temporary basis also need to be considered. Using a local supplier may result in an uplift in costs – whilst that might be easily absorbed on a handful of lines this may become increasingly difficult if supply disruption affects a large proportion of SKUs or inputs. Identifying how these costs may (or may not) be transferred to the customer may also help prioritise your response.
The next step to consider is to translate these into a revised liquidity profile, which includes assessing any new working capital dynamics and maintaining a short term cash forecast, almost certainly with a range of possible overlay risk and contingency/mitigation scenarios. This will be essential to provide external funders and other stakeholders with confidence in a management team’s grasp of the situation and potential outcomes. Where a liquidity shortfall becomes part of the realistic potential scenario spectrum, engaging in early dialogue with advisors and funders, will always provide a stronger footing than making an emergency ‘cap in hand’ request at the 11th hour.
If you would like to talk to us about any of the above, please get in touch.
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