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 & 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 👇.