Despite rising fuel prices, US retailers are predicting strong sales growth for the 2006 holiday season compared to 2005, with many projecting sales growth between 5% and 9%, according to a study published by Oracle.
At the same time, however, nearly 90% of retailers surveyed predict flat or declining profit margins, largely due to rising energy costs. These findings indicate that retailers plan to continue absorbing increased transportation costs instead of passing them along to consumers, ultimately affecting the bottom line.
The study also found that retail companies are investing in technology solutions to improve operational efficiency and enhance the customer experience to ensure a successful holiday season and ongoing profitability.
According to Duncan Angove, Oracle's retail global business unit's general manager, "Retailers are focusing more than ever on the objectives of increasing operational efficiency in order to enhance the customer experience. As they attempt to minimize the impact of rising costs, retailers seek tools that help them transform operations, understand and predict customer demand and improve performance at every customer touch point - key factors in building and maintaining customer loyalty."
Drivers and inhibitors
Approximately half of retailers (51%) surveyed projected solid comparable-store sales growth (between 5% and 9%) for the 2006 holiday season compared to 2005, and 5% anticipated an exceptional year (more than 10% growth).
But not all retailers were so optimistic, with 39% predicting flat sales, and 5% projecting declining sales. Retailers targeting a robust season cited "continued strength of the economy" and "the introduction of new merchandising strategies" as key factors, while the more pessimistic ones cited "rising fuel prices" as a consumer spending inhibitor.
Despite optimism about sales, retailers project a margin squeeze for the 2006 holiday season, driven by higher transportation costs and pressure for deep and early markdowns.
Sixty-one percent of respondents predicted flat margins, and 27% projected lower margins for the 2006 holiday season. Executive management and IT management were more pessimistic about margins than senior management (merchandising, planning, and marketing managers) and store operations respondents.
According to Angove, "Retailers have fought for every point of margin as real estate and workforce costs skyrocketed. And they want choices in the tools they use to create new efficiencies in operational costs they can control. As a result, we see the introduction of better merchandising and pricing strategies, tighter store and inventory management, as well close collaboration with manufacturers and partners to transform the supply chain."
Among their many strategies for future success, retailers are also seeking out new technologies to help them increase operational efficiency, counteract rising costs, and enhance the customer experience.
Survey respondents cited "the ability to project product demand", "markdown optimization" and "staffing issues" as their greatest challenges for the 2006 holiday season. Among its main findings, the survey noted that:
- 45% of retailers said that the ability to project product demand would be among their greatest challenges for the 2006 holiday season;
- 38% cited both "optimizing the timing and level of markdowns" and "staffing issues" as significant challenges;
- Over half (52%) of respondents have already implemented some type of inventory management system to help ensure a successful holiday season;
- 41% have installed merchandising planning and optimization systems;
- 40% have deployed workforce management systems;
- 38% have implemented advanced inventory planning systems;
- Looking ahead, 35% said they planned to implement inventory planning and management systems within the coming 12 months;
- 34% of respondents said that, in terms of payback on improvement initiatives, staff training delivers the best return on investment;
- 25% said that inventory planning and management systems deliver the greatest ROI;
- 12% said that advertising and marketing initiatives deliver the best ROI;
- 10% said that pricing optimization solutions deliver the best ROI;
- In terms of the impact of IT within retail operations, 37% of respondents thought that IT systems make their greatest impact by helping retailers ensure sufficient inventory to meet demand;
- 32% of respondents indicate that IT is most effective in helping them provide faster service and reduce checkout waiting time;
- 27% of respondents said that IT's ability to help retailers tailor the product mix to customer demographics at the store level is its greatest benefit.