Scenario modelling: The next best thing to a crystal ball for retailers

It’s safe to say retail has never been so volatile. Changing markets, global pandemics, shifts in customer behaviour, climate change, and economic uncertainty have made forecasting comparable to predicting the weather. How do we prepare without a crystal ball? We scenario model with fashion technology. Here’s how.

First, the COVID-19 pandemic turned retail on its head. Global lockdowns forced bricks and mortar to shut down, while the swing in buyer behaviour was unprecedented. The customer had nowhere to go and ordered a closet full of loungewear. Formal wear and face masks were the new best seller. The businesses that could pivot into new categories quickly capitalised during this time.

Then in 2021, the mega-container vessel Evergreen blocked the Suez Canal, delaying 400 million an hour in trade. It took 6 days to clear the blockage, and that’s not even half of it. The impact had a domino effect on supply chains around the world, further clogging backlogged ports and creating a shortage of shipping containers. The consequences on the retail industry were monumental.

For retail businesses and merchandisers to remain agile during periods of uncertainty, the ability to make decisions quickly is fundamental for success.

Here, we explore how scenario modelling and visual range planning tools can assist retail businesses and ensure they have their finger on the ever-changing retail pulse.

What is scenario modelling?

Scenario modelling is a process that analyses potential future events based on assumptions and quantifies the financial and operational implications of change. It allows merchandisers to mitigate risks to sales, and plan for changes in forecasting.

Merchandisers usually model three scenarios for each circumstance to present to management.

1. Base case scenario - If business continues on the current trend with no change. Forms the basis for the best and worst-case scenarios

2. Best case scenario - Is the ideal outcome for the business and the plan that is usually put into action

3. Worst case scenario - Is the most severe outcome for the business and the one to avoid, but to be aware of so risks can be mitigated

In these instances, it’s important for retailers to be able to act quickly and make decisions on the spot. Not only are financials important, but having visibility of your range means smart decisions can be made quickly.

You can think of it simply as forecasted heavy rain. Your base case is that it rains like the weatherman said it would and eventually stops. Your best case is that it doesn’t rain, and your worst case is that it floods. How and what you plan for each of these scenarios, will determine how you move forward from the outcome of any given forecast. Take it from Noah and his ark.

And if you’re going to be kept on your toes, you better find some sturdy shoes. Fortunately, Style Arcade’s Range Plan allows businesses to view all financials and images of products in one place. Need to pull a style forward? Easy, just drag and drop and watch the figures update, so you can view instantly what the range will look like when it launches, and make decisions instantly saving valuable time.

Drag & drop products between months, and see your buy units, spend and margins all update instantly

What are the benefits of scenario modelling for fashion merchandising?

Unless you’d rather “miss the boat” and watch your hard work go under, you should be able to:

• Increase business agility - being able to adapt quickly is paramount in today’s environment

• Mitigate risk - identify risks before they arise and have plans in place for worst-case outcomes

• Enable business growth - just because the scene changes, doesn't mean there aren't trade and category opportunities to maximise

Now let’s jump into some very real scenarios.

Scenario One - Increased sales targets

The problem - The business is trading well and cash flow is good. Management has decided to increase the sales targets and ask the merchandise planner how much more inventory needs to be purchased in order to hit the new sales targets.

The answer - The merchandise planner refers to their financial planning tool Weekly Sales Stock and Intake tool (WSSI) to determine how much more inventory they need to purchase based on the new sales targets.

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Upon deciding this, the planner must run some analysis to know in which categories the additional inventory must be bought, and decide exactly how many new options need to be purchased. It’s important the planner considers not only the category contributions, but also how balanced the range will look.

A not-so balanced range 😬

Style Arcade automatically indicates category mixes so you can immediately view over and underperforming categories when logging into your discover tab making it easy to identify future category investment opportuni