Profitability: the holy grail of business. We know the formula: Reduce operational expenses, get more customers, increase average transaction size, avoid markdowns, and control inventory. That all sounds easy, right?! It’s easy to take a formulaic approach and stick to what the math says, but we all know this isn’t “easy.” There continues to be an art required to balance the science. Today’s social and economic environment can bring new and unforeseen challenges. An impact, good or bad, can be one social post, supply chain hiccup, or personnel decision away. So how do you navigate these waters? How can we as leaders protect our profits and promote growth as consistently as possible?

Let’s discuss a few areas that can aid in this journey and be part of your toolkit.

If it Touches Inventory

Inventory is one of the costliest assets a company can have. Too little and you lose sales; too much and you pay carrying costs and increase markdown spend. Inventory is one of the trickiest assets to navigate since it relies on knowing exactly what the customer wants at the right time. This has been more of a challenge since 2020 and is particularly burdensome with today’s interest rates. Having a robust inventory management process and playbook is needed, but ensuring your process and tools are evolving with customer shopping habits is essential. Traditional in-season planning processes are now lackluster. Evolving to a collaborative approach and integrated business planning model is quickly becoming table stakes. Merchants and planners can no longer manage this process alone. Input from operational partners and external partners must be considered.

Technology Investment

On the one hand, investing in new technology increases costs. However, with new technology and related improvements in capabilities, a retailer should be able to improve productivity and allow key decision makers to focus on analyzing and running their business vs. legacy challenges of manual entry, gaps in capabilities, and reliance on spreadsheets. The balance is ensuring the technology is supporting leading practices in the right area and not just another shiny object in yet another nonintegrated silo. Understanding the operational costs of legacy solutions can automatically help evaluate target areas.

Technology debt is real and shouldn’t only be considered when something breaks. We work with many clients to develop a capability road map that allows them to look holistically across various functions, identifying priority needs with dependencies. This exercise helps to ensure costs can be controlled while making significant capability improvements. Nobody likes expensive, unplanned technology spend. It’s an immediate profitability crusher!

Process Efficiency

As noted above, new solutions can help support improved process efficiency. Starting with evaluating business processes can be a great first step in finding some profitability nuggets. It’s not always about technology or the newest shiny objects. It’s important to note, however, that a new solution also requires business users to review and understand likely changes in business processes and behavior. This applies to end users — understanding how they’re operating differently and especially where there are touchpoints and collaboration that didn’t previously exist. And just as importantly, new behavior is required from leadership, resetting their expectations of information flow, metrics, and questions they should (or shouldn’t) be asking. Start by asking questions about roadblocks or major pain points and problem solve from there. You’ll find out a lot about your operational model and expenditures just by asking a few questions. Solve for root cause but avoid trying to eat the whole elephant at once.

In Closing

The complexity of operating with improved revenue and margin is a challenge for any retailer, but even in today’s environment it’s possible to grow and perform profitably. Abercrombie & Fitch has been a highlight over the past year or so, especially impressive in the specialty fashion space. Furthermore, Target recently announced sales and earnings above expectations due to improved in-stocks, lower markdowns, and overall lower costs. It may not seem “leading practice,” but there’s still something to be said about basic retail principles and consistent execution.