Managing Bib Short Inventory in a Quantitative Tightening Environment
Disclaimer : The author is not a macro-economist. This blog post is merely to inform the reader about the author's personal outlook on today's economic climate and how that will affect inventory levels at RedWhite Apparel. Nothing in this blog should be taken as financial advice.
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Since 2020, RedWhite Apparel has been on an inventory expansion phase. There was an influx of new customers throughout COVID as more people picked up the hobby. In order to meet this growing demand, inventory levels were raised progressively.
The current level of inventory was always meant to be temporary. Growing demand that exceeds the rate of capital deployed (corporate speak for : RW grew more than the actual investment in growth during COVID) is hardly sustainable. My suspicion has always been that the various forms of quantitative easing in RedWhite's key markets generated demand that exceeded typical levels.
When COVID started easing and many countries began normalising, inflation started materialising in one form or another. There are many reasons for this and I won't be going into them for now. I brought this up for the next point.
Quantitative Tightening.
For better or worse, governments are now tightening monetary policy to get inflation under control. The US Fed for example has committed to removing $2-3 Trillion from its balance sheet. It remains unclear how this will be done and what the effects will be on the global economy. We are now in uncharted waters.
I am proceeding with caution and expecting the worst - a meaningful reduction in consumer spending, broadly in proportion to the Fed's balance sheet reduction. This might impact RedWhite sometime in the near future.
RedWhite's Inventory Tightening
Logically, if a consumer spend decline is expected, RedWhite's sales will decline. In order to maintain the business' financial health, I will be proactively reducing inventory levels of all bibshorts and tights.
This process began in early 2022 when I announced a trimming of RedWhite's product lines.
Inventory was reallocated to RedWhite's most popular bibshorts - The BIB Stealth & The Cargo Bib Short with Pockets. This trimming of products offered and shifting of inventory lightened RedWhite's capital requirements.
I am now ready to enter phase 2 which is to gradually reduce inventory of even these popular items. This will reduce RedWhite's capital needs even further and allow the business to weather a potential consumer recession.
A Consumer Recession? Perhaps.
If Quantitative Tightening produces a worst case outcome, businesses could face higher borrowing costs (cost of capital). In order to reduce reliance on debt, they have to trim costs. When businesses start trimming costs, the job market tightens.
When jobs become scarce, consumers reduce their spending.
RedWhite Bib Shorts are relatively well priced, But they still cost US$130 which is an expense that can be cut from a customer's shopping list.
If this scenario does unfold (Consumer Recession), RedWhite needs to be in a financially healthy shape to take on a sales decline. One way to do that is to proactively reduce inventory levels.
This does mean some upside risk. I will be giving up potential sales by not carrying adequate inventory. However, I am also a firm believer in capping downside risk. Hence this move.
What does this mean for you and what's the point of this blog post?
In the short term, this means there will be more frequent incidents of "Out of Stock" products. I will make inventory stocking errors since anticipating demand in such a macro economic environment isn't easy.
If you come to RedWhite's website in the coming months and see an "Out of Stock" product, it probably means that I mis-anticipated demand and something sold out faster than I could restock it. An inevitable outcome from carrying lower levels of stock.
I would like to pro-actively apologise for that and ask for your patience. A restock will usually happen in a 1-2 month cycle.
Will RedWhite be running a Sale?
I get asked this surprisingly often during the summer / spring / sales periods. RedWhite will not be running any sale this summer.
Rather than setting a high purchase price and discounting later during "Sale Season", RedWhite Apparel's products are priced to always give customers good value, all year around. Pricing is strictly a function of COGS (cost of goods sold), advertising costs, shipping fees and a reasonable profit margin. I personally believe in offering customers fair pricing throughout the year. You can always pick up a pair of RW at any time without fear that it'll get cheaper during a sale period.
I do have a way for customers to get 20% off their purchase. This can be done by purchasing with friends using The Team Bundle.
The Team Bundle has a minimum of 4 bibshorts. A bulk order like this lowers shipping & fulfilment costs per bibshort, allowing me to offer a discount at a sustainable margin. A win-win for everyone :)
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Love to know your thoughts. Are you anticipating a recession? Are you cutting costs somewhere in your life? Or do you think all this is just hogwash and a recession won't materialise?
A discussion about economic situations as a result of government policy can become politically charged. This is a gentle reminder to keep comments free of politics.
Leave comments below 👇.
17 comments
@GREGG SAUNDERS : Really happy you like the bibs and these candid blog posts. This blog post’s purpose is to set expectations from customers when things inevitably go out of stock now and then. An inevitable byproduct of trying to optimise inventory levels in a potential declining demand environment. I could be wrong obviously in which case I will course correct quickly.
Such a refreshing email to receive. Thank you for the in-depth transparency, which btw you always have been. Being a long term customer with three types of products (love the winter tights for riding in Wyoming and Idaho even in June this year!!) in my stable I appreciate knowing the what and why of the business I support. You deliver high quality products that have always arrived ahead of the delivery date I expected. Thank you for all you do for us riders out across the world.
@JOHN HAWKINS : I’m going to be a bit out of my depth here, but i’ll take a crack at commenting about fed policy. I think Powell is trying his best to avoid a repeat of the 40s and 70s by taking a measured approach. The Fed can only react to fiscal policy set by the government of the day. In this case, it was the COVID pandemic that made it necessary to get money into Main Street. Inflation was inevitable in one way or another because of supply chain shortages (very tough for the government to predict this) and a war (which drove commodity prices up). Also tough to predict.
All the Fed can do now is to try to get a grip on inflation by destroying demand by sucking liquidity out of the market. This does mean tremendous short term pain, but a healthy reset for the economy. I think the Fed is also adopting a “wait and see” plan. They aren’t hiking super fast and are following data as much as possible.
I am speculating of course. Only the Fed knows what the Fed is thinking and we only have FOMC meetings to gain insight. All I can do is to anticipate the worst case scenario (consumer demand recession) and prepare accordingly.
This has happened before and all I can do is learn from the past and try to position the business to weather a possible drop in sales.
It’s good to see you’re being prudent Yuva.
The Fed and most other central banks’ management of the current inflationary surge is of concern to me, as it is generated by short term supply shortages, not overheated demand, and they’re using a sledgehammer to crack a walnut.
I suspect we are about to learn a lesson that will inform the future study of economic history about the risks of setting central bank policy focus too narrowly, by confining it to dealing with inflation only. I suspect both the US Fed and the Australian RBA are about to inflict significant and lasting damage.
It all depends on how long China persists with its Zero Covid policies, and how long it takes the rest of the world to mitigate its single-point-of-failure supply chain risks and diversify supply to other jurisdictions.
@MIKE : I doubt i’d do well in office haha. Am a centrist and probably won’t appeal to enough folk to win votes. Am also a pragmatist which can rub people the wrong way. Really appreciate your vote of confidence and thank you for being such a loyal customer :)
@HENRY HODGSON, RICHIE RICARDO, @DAN : Thank you for the very kind words Henry, Richie & Dan
@BO MILLER : Amazon takes a 17% fee on top of fulfilment costs. This fee tends to rise over time (it used to be 15%). I think it’s a fair fee in exchange for gaining access to Prime customers within Amazon’s ecosystem. However, I chose to build my own webstore and service customers directly through my CRM rather than rely on Amazon to be the intermediary. I believe this is a better long term strategy. By owning a direct relationship to the customer, the business is more resilient (than having Amazon as the intermediary).
@NORBERT : I assume you invest actively? It’s certainly been turbulent and usually I ignore the noise and invest. However, Quantitative Tightening on the scaled planned by the Fed has never been done before. There was an attempt in 2018-2019 which was abandoned halfway. The 3/4 Summer Bib Tights is still scheduled for release. I am proceeding with caution, but I am still proceeding rather than grinding everything down to a halt. As long as the balance sheet can support investments in new products, I will continue making them.
@BEN SCHOLL : Really glad you like this read Ben.
@ALAN : I hope this move helps the business prosper long term too. I’m not a fan of reigning things in, but sometimes it might be wise to give up some growth to de-risk things.
@CHRISTOPHER HEREFORD : Really happy you enjoyed the read. Writing about the business helps me to improve my thinking. Having customers give their feedback certainly helps a lot as well.
The down turn has already started and will get much worse before it’s over. You have a good plan you should run for office we need to replace a lot of idiots. I have four pair in use probably will pick up another . Thanks for sharing.
I’m still amazed and impressed that you share your business management knowledge and actions with us. It’s rare for a consumer to ever see this dialogue, makes me feel appreciated.
My five pair of your bibs are still in use, either I’m not riding enough or it’s the result of quality materials and construction.
Chris
Thank you, Yuva, for the insightful post. The transparency and candour you provide in these blog posts always make for an interesting read. Certainly understand the impetus for the recent changes and hope this sets RW up for future long-term success.
Thanks for the interesting post! It’s refreshing to learn about an honest take and learn about small businesses working in this crazy market.
(Oops; somehow my comment posted before I was finished ) Q-1 and 2 of 2022 have been very turbulent in the markets and other investment sectors so it is difficult to rely on any of the usual barometers. But for small businesses it is certainly good to err on the ‘safe side’ and do just what you are doing, even if it impacts customer satisfaction temporarily.
Hah; I’m still awaiting my ‘long’ summer bibs and I wonder if that project is now on hold? I’d be happy with one of your prototypes, Yuva, even if they are on the longer side .. ??
Norbert
It’s wonderful to hear your always very lucid thoughts on your fiscal strategies, Yuva ! I wish others would be so ‘responsible’ in their management, then maybe we wouldn’t be in htis mess..
Thanks for the thoughtful post – you have a solid plan and it sounds like you will weather a downturn if it comes along. Love my RW bibs.
Have you ever considered selling through a dedicated Amazon store? Not sure what your cost to do that would be, but trade off of better logistics and higher customer base? Just wondering.
Thanks for a great product! I have loved my Stealth Bibs.
Thanks Yuva appreciate the update and understand. Looking forward to continuing to support Red White in the future cheers
Thanks Yuva appreciate the update and understand. Looking forward to continuing to support Red White in the future cheers
A good post from an obviously astute businessman
Good luck in the times ahead, many of us enjoy supporting smaller not big brand businesses that offer a great product at a good price