When Howard Meitiner was president and chief executive officer of Sephora USA, he used to present his annual budgets to the company’s board with a warning. “Any prediction for the holiday season will be wrong,” says Meitiner, who is now managing director at Carl Marks Advisors, a New York-based investment bank that provides financial and operational advisory services. “You just hope it’s more accurate than not.”
That exact degree of accuracy or inaccuracy determines whether a company finishes the year in the red or the black, essentially. In the past, large retailers tended to experience similar fates. But this year, Meitiner predicts, there will be a wider spread between those who win and lose in the guessing game.
That’s because things have changed. To be sure, the end-of-year peak season has always exacerbated the year-round unpredictability of sales. Retailers mostly worried about what type, exactly, of goods would sell; were they betting on the right Barbie doll or style of sweater? But the COVID-19 pandemic brought not only a wild ride through a rapidly changing landscape of demand. It also brought massive uncertainties, hiccups and snafus when it came to supply, too. Those last two problems are here to stay, Meitiner says.
Already, unpredicted swings in demand are visible, and affecting results. According to data released August 15 by the Commerce Department, U.S. retail sales rose in July by more than forecast in a variety of sales categories, including sporting goods stores, clothing outlets and restaurants and bars. The rising tide didn’t lift all boats, however. Home Depot Inc. announced Q2 earnings that exceeded the average analyst estimate, and Walmart reported similarly positive results in online sales. But Target’s Q2 revenues fell. As NBC News commented, the contrasting results illustrate some of the companies’ fundamental differences, but also capture how some retailers are having more success than others.
Smart companies are investing in supply chain expertise in order to better control supply, and also in artificial intelligence to better track and predict demand at the SKU level, Meitiner adds. “I think what’s happened is in the big picture companies have paid much more attention to supply chain and logistics issues, both in terms of sourcing and lead times. The focus in the past was more about the product from a buying perspective, and about the sales and marketing. Now, there’s another leg to the stool.”
Changing patterns in sales cycles are also a problem. “In retail, you’ve always had a percentage of inventory, large or small, that doesn’t sell,” Meitiner says. “That in the past spurred discounting at the end of season. That’s always been there. But I think it’s becoming an increasing problem in terms of profitability for companies.”
Meitiner points to a recent CNBC survey that found 43% of retailers said they’re ordering less inventory this year than last year. “I think that’s smart, because if you end up with too much inventory at the end of the season, you ordered too much or bought the wrong stuff,” he says. “People are trying to be a little more accurate or conservative in their predictions, because getting rid of this excess stock at the end of the season is never a good thing.”
It’s not all about supply and demand, however. Meitiner thinks we’re going to see a lot of companies go out of business that are trying to prop up a business model that simply doesn’t work anymore. He holds up department stores as an example; although U.S. retail sales in July were up 3% year-on-year, they were 3.4% down if you looked just at department stores.
Consumers want an omnichannel, integrated experience, Meitiner says. “Companies that pivot to suit changing consumer habits will do well. Some are going to do very well, and others are going to really struggle. You have to look at each company individually to see who are the winners and who are the losers.”
Other strategic shifts will spread out the field, Meitiner says. The winners this season are going to be companies that keep their loyal customers close, and maintain a real focus on customer service, he predicts. He also applauds the formation of strategic partnerships that serve the benefits of both parties, such as that between Amazon.com and Kohl’s that allows Amazon customers to return items at Kohl’s stores. Kohl’s needed more people in its stores, and Amazon benefited from a larger return infrastructure.
Meitiner also anticipates a substantial effect from generative AI, which will help people find and buy products they might not otherwise have been aware of. “A lot of people are doing their research online, and AI will help people discover products,” Meitiner says. He adds that, already, 17% of consumers are using ChatGPT or similar generative AI tools to look for products, with 10% using the technology to compile holiday gift lists.
Furthermore, predictive AI is going to offer far more accurate predictions of what people are going to buy. Again, there will be winners and losers, because not everyone is integrating AI with the same enthusiasm, Meitiner warns. “What happened in COVID was at first people had too much inventory, then demand came back, and they’d been conservative and didn’t have enough,” he says. “It really is like putting money on a roulette wheel. You’re never quite sure what’s going to happen. That’s why Walmart and Amazon have created the research engines that help them and third parties to form these predictive AI platforms, and are selling them to other people.”
The stakes are high, Meitiner says. “Many companies are on a fragile foundation where they’re not making enough money,” he observes. “Lenders and investors are going to be calling management to task. We’ve seen a huge amount of closures and bankruptcies, and I think we’ll see more.”
