How to navigate rising financial costs as a midmarket retailer

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This edition was written by Andy Eastes, Chief Strategy Officer at Linnworks.

The credit climate for midmarket ecommerce retailers is tough. Rising interest rates are pushing up the cost of commercial loans, making it harder for them to finance their growth targets.

It’s especially challenging for a generation of executives that came of age during historically low interest rates. But the era of easy money is well and truly over.

Is there a way out for the midmarket? And if so, what does that look like?

This post has 6 answers to those questions. So keep reading.

But first…how in the hell did we end up here in the first place?

COVID leads to an overstocking nightmare

That’s the question on the lips of many retail business owners and managers. After all, the majority of today’s leading entrepreneurs, CFOs and CEOs worked their way up the ranks in an era of easy lending and low interest rates – the polar opposite of where we’re at now.?

But when COVID-19 hit, most retailers faced significant challenges in managing their inventory due to the unprecedented and rapidly changing circumstances. Here’s a brief overview of what happened…

1. Panic Buying and Supply Chain Disruptions

At the onset of the pandemic, there was a surge in panic buying as consumers rushed to stock up on essential items such as toilet paper, hand sanitizers, and non-perishable foods. Retailers who had underestimated the demand for these products found themselves understocked. Simultaneously, supply chain disruptions caused delays in replenishing inventory.

2. Inventory Overbuying

To prevent future shortages and meet the increased demand, some retailers responded by overcompensating and ordering excessive quantities of goods. This led to an overstocking issue, with many retailers purchasing more than they could sell in the short term.

3. Shifts in Consumer Behavior

As lockdowns and social distancing measures persisted, consumer behavior shifted dramatically. While sales for most categories grew faster during the initial lockdown periods, sales growth eventually hit a plateau and stopped increasing at the same rate. Paired with the supply chain issues mentioned above, retailers were hit with excess inventory they couldn't move.

4. Reduced Foot Traffic

Many physical retail stores experienced reduced foot traffic or temporary closures during lockdowns, which further hindered their ability to sell excess inventory. Some retailers shifted to online sales, but competition in the ecommerce space intensified, making it challenging to move surplus goods.

5. Discounting and Losses

To clear excess inventory, retailers often resorted to heavy discounting and promotions. While this helped reduce inventory levels, it often came at the cost of lower profit margins and, in some cases, losses.

6. Storage Costs

Holding excess inventory incurs additional costs in terms of storage, which can strain a retailer's finances. Warehousing and storing unsold goods can be expensive, especially if the surplus inventory is perishable or takes up valuable warehouse space.

7. Seasonal Challenges

Retailers with seasonal products faced additional challenges. For instance, fashion retailers with excess inventory of out-of-season clothing struggled to sell it at regular prices, leading to clearance sales and further margin erosion.

What is happening in the midmarket?

The long and short of it? Zero interest rates are a thing of the past, and rising interest rates are pushing up the cost of commercial loans for inventory.?

For many midmarket operators, this makes covering current operational costs and financing future expansion challenging – especially for those with existing loans that have already been rolled over with a significantly higher repayment interest rate.?

As an immediate result of the decrease in available funding, many midmarket operators are looking toward nontraditional bank lending to boost their balances. But such funding options typically lack the regulatory framework and fail-safes of traditional lending methods, there’s a significant risk that higher interest premiums could spell even more financial strain going forward.

So, what’s the solution?

For retailers struggling with high interest rates and the decreased ability to secure cost-effective inventory financing, there’s one standout solution that offers maximum stability coupled with the lowest risk: tighter inventory control.?

Better inventory planning and management allows retailers to optimize their working capital, reduce costs, and pivot more easily in the face of changing market conditions.?

Here's how:

1. More accurate forecasting

Accurate sales forecasting is one of the cornerstones of inventory management. In times of financial uncertainty, precise forecasts are essential for making informed, data-driven inventory decisions. Tighter inventory control allows mid-market retailers to gather historical sales data, analyze trends, and predict future demand more accurately.

2. Reduced holding costs

Storage, insurance, and depreciation costs can mount up quickly, which is far from ideal during periods of financial uncertainty. Tighter inventory control minimizes excess stock, which reduces holding costs – and also frees up working capital to replace off-trend and dead stock with newer/more relevant products that are more likely to drive revenue.

3. Improved working capital management

The primary goal is to reduce average inventory levels while simultaneously maintaining or improving sales quotas. By reducing the amount of funding tied up in unsold inventory, retailers can optimize their working capital by allocating budgets to other critical areas of their business, such as debt repayment or investment in growth.

4. Responsiveness to market fluctuations

Improved inventory management makes it easier to adapt to sudden changes in consumer demand and deal with supply chain disruptions, etc. During an economic downturn, a data-driven approach allows stock levels to be scaled down with confidence to avoid overcommitting capital to inventory while still avoiding dreaded out-of-stock scenarios that lead to lost sales and customer disappointment.?

5. Improved supplier relationships

Retailers with tighter inventory control mechanisms can foster stronger relationships with suppliers by providing more accurate demand forecasts and consistently paying for their orders on time. By building a solid foundation of trust as a reliable customer, it’s often possible to negotiate more favorable terms, discounts, credit extensions, and priority access to limited stock, etc. – all of which can be crucial to success in a tight financial environment.

6. Cost reduction through technology

Implementing inventory management software and automation tools streamlines processes, reduces human errors, and enhances the overall efficiency of inventory control. Take Chrome Battery - they achieved $300,000 in annual savings and managed to increase sales by 22% thanks to technology and better inventory control.

In the end, in tighter financial markets, it's all about tighter inventory control. Which you can achieve pretty easily with the right tech in place. Hint hint.

Next issue? We'll show you how to minimize inventory errors made by temporary staff that you bring on to cope with peak season demand.

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