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Calculating Footwear Inventories and Pricing in 2017

When it’s deliver-or-die, supply chains become the lifeblood of a company. To that end, the fashion industry has embraced technology to navigate today’s hyper-complicated supply chain, with myriad solutions shaping the first, middle and last mile. Call it Sourcing 2.0.

The last 18 months have been quite a challenge for footwear retailers as consumer demand continues to evolve. Increasingly, Americans want fresh products on each visit to their favorite shoe stores, creating supply chain and inventory management challenges. This has also caused disruption to company budgets as shoppers now expect discounts and sales as a starting point, rather than the more traditional discounting at the end of the season.

Shoe stores and companies, who once had a fixed game plan on discounting and sales and a better idea on what inventories were needed to meet demand, are coming around to this new normal. Retailers need to look more intently at footwear import data to better adjudge what inventories by footwear segment might be light and which may be bloated. FDRA analyzes such data each month and has some key insights for retailers as they look to a more balanced 2017.

FDRA’s most recent monthly footwear price report noted that 2016 saw subdued changes in retail prices for most footwear categories compared to recent years. Year-to-date prices for children’s footwear increased nearly 0.8%, offsetting a -0.3% decline in year-to-date womenswear prices and pushed overall footwear prices 0.2% higher through October. At this rate, children’s footwear prices in 2016 are set to prod overall footwear prices higher for the third straight year, albeit modestly. With overall footwear prices set to expand only modestly in 2016, retailers still have little leeway to raise prices appreciably to combat higher input costs.

As we look ahead to 2017, we spotlight the relationship between footwear inventory and demand to speculate on pricing trends in the new year. Since 99 percent of all footwear sold at retail in the U.S. is sourced abroad, imports provide a viable proxy on the amount of footwear supplied to U.S. retailers. Using reports on the dollar amount of footwear spending from the Bureau of Economic Analysis, we can compare and contrast changes in annual footwear demand to annual footwear imports to gauge any ‘tightness’ or ‘looseness’ in the market. What we found is instructive to every retailer.

As Graph 1 demonstrates, over the last two decades annual imports and spending on footwear typically have expanded and contracted largely in step with one another. For example, during the dark days of the Great Recession in 2008-2009, footwear imports and spending both contracted sharply, only to rebound soon afterward. In 2016 the year-to-date volume of imports was off -7.7% from the same first ten months the year prior, a tumble set to rival the biggest annual drop in 20 years. At the same time, consumer demand for footwear in 2016 increased 3.1%, on track for its best showing in five years.

We compare the relative rates of growth or contraction between footwear imports and demand by subtracting one from the other. In the case of 2016, consumer demand outperformed imports by 10.8% points, the biggest gap in recent memory.

Graph 2 shows that this difference tends to move in tandem with the year-over-year change in footwear prices, lagged by one year. Put another way, when imports rise faster (or sink slower) than demand, the gray line turns negative and footwear prices (pink line) tend to fall.

Conversely, if imports underperform demand for footwear like what is occurring this year, the gray line turns positive and footwear prices (pink line) tend to rise. In fact, the sharp divergence between footwear imports and consumer demand for footwear noted this year’s results in the highest reading for the gray line in recent memory. In turn, this indicator suggests footwear prices are poised to rebound appreciably in 2017 after growing less than 1 percent each of the last three years.

This model of course does not take into account a myriad of other factors at play in footwear pricing, including labor costs, input costs and exchange rates, key issues with a direct impact on retail prices. Yet, this is a major factor many retailers never consider when it comes to their inventory management programs.

In particular, the dollar has been on a tear in recent months against a range of other currencies. Typically, a stronger domestic currency makes imports relatively cheaper, which could have a major impact on imported footwear costs. At the same time, FDRA’s most recent footwear materials report shows prices for a range of commodities used in footwear manufacturing are higher year-over-year, offsetting downward price pressure on imports from the stronger dollar.

The bottom-line is while other factors like exchange rates and input costs may impact retail footwear prices in 2017, the wide chasm between rising demand and sinking imports this year suggests U.S. shoppers may see higher footwear prices in 2017. Footwear retailers and sales teams should plan accordingly.

This is an op-ed from the FDRA, the footwear industry’s voice in Washington. In all, it supports over 130 companies and 250 brands, or over 80 percent of the total U.S. footwear sales, making it America’s largest and most respected footwear trade organization.

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