Cost Concerns Challenge the Retail Sector

It’s no secret that higher gas prices and the rising cost of raw materials have brought pricing pressures to the forefront of industry discourse. For retailers looking for ways to handle rising costs, the Partners in the Retail and Consumer Product Practice of BDO recommend the consideration of a few strategies:
  • Continue to look at sourcing alternatives. While private label retailers will be sourcing directly and China is seeing pricing pressure, geographies like Vietnam, Indonesia and Pakistan are viable options.
  • Be wary of rationalizing vendors too extremely. The struggle to effectively streamline inventory in a time of increased demand is apparent.
  • Seek transparency. It is critical to push for greater transparency from your vendors and contract manufacturers.  This entails drilling down into the loaded or landed costs in order to understand the raw materials, labor, overhead and transportation, components and then assessing whether there are more cost efficient approaches for the non-raw materials pieces.
  • Review LIFO. LIFO, which stands for “last in first out”, is an inventory accounting in which the most recently acquired items are assumed to be the first sold. Retailers who are on LIFO may benefit from revisions to their tax methodology to take advantage of cash flow benefits.
  • Gradually test new markets. Producing in new markets is not a faucet to switch on and off.  Retailers cannot afford to make radical changes given the importance of the supply chain and product quality. China’s sophisticated infrastructure and the quality/capacity/sound supply chain logistics of their warehouses is known.
  • Take small steps before major changes. It is critical to test small quantities first, build relationships and expand the supplier base or see if those existing suppliers could expand capacity. 

With several companies already ramping up prices, a challenging quarter for the sector may be ahead. It’s important to consult with a sound advisor on the best ways to address and manage the unique complexities of current market.