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.

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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

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

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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.

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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.

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 opportunities.

This is approved by management and the buyer gets to work on buying the new options 🥳.

Some retailers won’t have the luxury of this flexibility but others can thrive off this speed-to-market approach.  

Best case scenario - The buyer is able to secure additional stock as per the new inventory budget to support the new sales target

Worst case scenario - New stock is unable to be purchased due to supply issues. Sales increase from the base leaving the department with out-of-stock issues and missed sales

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Scenario Two - Global pandemic

The problem - A global pandemic hits and sales start to decline rapidly. Management asks the buying team to cancel as many products as possible.

The answer - don’t panic, be strategic, and think long-term.

• Think about how the customers' purchasing behavior will change. Stay on top by analysing your data regularly. Have your category contributions changed?  Of course, they have. Your customer is no longer hitting the club, she’s all locked up and living in her lounge and activewear.
• Work WITH your suppliers not against them. Is it possible to swap out items on order so the supplier is not hit financially? In this case, dresses for loungewear?
• Watch your competitors closely, are they selling out of products that you don’t stock? Is there a category you don’t stock but could launch quickly to remain relevant?  During the peak of the pandemic, fabric face masks were flying off the shelves.
• Scenario different versions of the plan so you are prepared to act if things get worse or improve.

Best case scenario - Stock is able to be swapped out for products and categories that are trending, allowing trade to continue at a lowered rate. Some future orders are able to be reduced before going into production and eCommerce sales pick up.

Worst case scenario - Stock is unable to be cancelled or swapped for trending categories, leaving the business heavily overstocked.  Unfortunately if those are the cards dealt, perhaps plan to repurposing these products in future ranges with marketing support, then look at immediate assortment and double down on other volume drivers to drive full price sales.

Scenario Three - Shipping delays

Delivery dates are constantly moving due to unstable supply chains, wreaking havoc on your once-perfect assortment plan. Managing intake while delivering a cohesive range has never been more difficult.

The problem - Two items out of a collection of 10 are held up in a separate shipping container to the rest of the collection. Do you launch without them or push the whole range back? What does this mean not only from a financial perspective what is the impact on visual merchandising and marketing plans?

The answer - Visual range planning tools can really assist here. Being able to quickly identify the late items, view their importance to the collection, and move them to the allocated delivery months while immediately viewing financials, in a matter of seconds, is a game-changer and enables decisions to be made on the spot.

Consider seasonal products:

Very delayed shipments can cause issues with seasonal products. A late winter shipment when you are about to launch summer would be problematic and could lead to an overstock issue that would require markdown spend to clear. The markdown spend and time to clear through the stock would need to be considered along with the initial loss for sales.

Best case scenario - The whole collection is able to be moved out one month and some other products brought forward to fill the sales gap.

Worst case scenario - The shipment is more delayed than expected, the whole collection becomes an overstock issue, requiring markdown spend to clear impacting the allocated spend for the next season.

The retail industry has never been so unpredictable and it feels like new challenges are presenting themselves weekly. If the last three years are anything to go by, it’s safe to say we just don’t know what could be lurking around the corner.

Although it’s impossible to predict the future, it is possible to model scenarios frequently when unforeseen challenges arise. It’s better to be prepared than remain a sitting duck.

Fashion technology such as Style Arcade’s Range Plan can assist businesses to make decisions regarding financials while viewing the impact on range side-by-side.  This instantly takes the headache out of what can be a very time-consuming task that is required more and more frequently given the current state of things.

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