We've all heard by now that The Department of Commerce recently reported the inventory-to-sales ratio to be at an all-time high since 2009. But, what does this actually mean?
Generally, we think of a high number as good for sales, but in this case, it's all but that. In short, businesses stocked more than they could sell. And now they're stuck trying to move their existing inventory out the door to make room for the newer, more exciting merchandise that customers are craving.
To gain some insight on this new sales buzz topic, I spoke with Kevin Cundiff, VP of Warranty Retail for Fortegra. At Fortegra, a leading provider of specialty program underwriting, credit protection and warranty solutions, Kevin leads customer experience and partner relationships. Before merging with Fortegra, he helped retailers better align resources to maximize sales as the National Sales Director at ProtectCELL.
Kevin shared his thoughts about the sales economy and the implications this recent spike in the inventory-to-sales ratio could have on the future.
Me: Businesses upped their inventory in preparation for the holidays, but were met by less-than-impressive sales this year. Do you think there are any other factors adding to this skyrocketed inventory-to-sales ratio?
Kevin: Yes, and it starts with consumers being unwilling to spend. Cheaper energy costs have helped, but they aren't offsetting the jittery ride on Wall Street. Couple that with the impact of Chinese exports on the global market, and it's a nasty one-two punch to retailers.
Me: What are some sales tactics that can help move existing inventory out the door?
Kevin: I prefer solutions-based selling. Retailers can start by identifying items that are sitting heavy on shelves, and harvesting raw transaction data to identify specific consumer segments. Then, use that data for targeted outreach and marketing campaigns that can lessen the inventory load.
Me: Are there certain types of products that retailers can stock to help balance out the inventory-to-sales ratio?
Kevin: Zero cost or non-inventory products can really balance out the ratio. Focusing sales efforts around attaching these non-inventory, typically high-margin items (like extended warranties and insurance products) can help improve revenue without tightening cash flow--unlike extra inventory.
Me: Do you think overstocking or understocking inventory is more damaging to a business? Why?
Kevin: Although neither is great for business, understocking has the potential to do more damage long term. When a customer arrives at your doorstep and asks for an item, you only get one chance to get it right.
Me: After businesses realized the heightened inventory-to-sales ratio, manufacturing took a hit. Do you think other industries will be affected by this slow in new inventory orders? Which ones and why?
Kevin: There will absolutely be a ripple effect. Raw goods suppliers are next on the list and will likely feel the squeeze of the manufacturing slowdown. Not to mention that cheaper Chinese exports and the potential for deflation are also real issues that could magnify the impact of this downtrend.
As businesses move forward into Q2, this high inventory-to-sales ratio will certainly have an impact on sales strategy, but doesn't have to force them into a corner. By acknowledging its effects and planning accordingly, businesses can move past this slow in sales and starting cycling inventory out again to turn the sales economy toward a brighter future.