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Could Old Supply Chains Put a Chill on an Otherwise Promising Holiday?

With the midyear mark a distant memory and August quickly approaching, the holidays are closer at hand than the sweltering temperatures blanketing much of the U.S. would attest to. But now is the time for retailers to be plotting strategies toward driving excitement, traffic and sales in Q4.

With a strong economic tailwind, early indicators seem to be pointing toward a robust holiday. However the end of the year is always tricky with uncooperative weather and unpredictable spikes in demand putting supply chains to the test. Add to that the unexpectedly robust holiday performance last year, which will provide tougher compares this time around.

Plus, not all retailers are expected to experience the same level of holiday cheer.

“We see the gap between winners and losers at retailer continuing to get wider by Amazonian proportions,” said Roshan Varma, director, New York at AlixPartners. “The ones that are going to win—and that means do above the percent growth—they need to be able to continue to build their brands, connect with their customers, operate efficiently and actually execute on the promises.”

For the last year, most major retailers have been working through one type of transformation plan or another in an attempt to quickly adapt to the rapidly changing digital world. The result has been winnowed down store fleets, beefed up fulfillment options, reimagined assortments and overhauled loyalty programs. Many of these players have been pointing to early signs that the steps are working but Tiffany Hogan, senior analyst, apparel at Kantar Consulting, said the holidays will tell the real tale.

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She said the fourth quarter will separate those that are truly on the road to recovery from the ones who have been getting a free ride on the robust economic indicators.

“[The metrics will] be deeper than the usual total sales and online growth, that’s bound to increase for many retailers,” she said. “If they can see a turnaround or increase in in-store sales, that will be a good metric to see if the rationalization at department stores especially is working and if they’ve been able to improve that in-store experience and drive shoppers back to stores.”

While the typical carrot—discounts—will still be in play this holiday, Hogan expects some retailers to attempt to ease their dependence on the markdown mania this year. “You might see stores like Kohls still hit hard on Black Friday with discounts and others like Macy’s might lean more on that loyalty program and move away from the Saturday sales and one-day sales and really try to beef up that AUR a bit through the season.”

As for Black Friday, that single day that used to mark the make-or-break period for retailers, both Varma and Hogan agree it’s still in play, though weakened.

Temperamental temps

And with Q4 comes the invariable worry over the weather. Will it be unseasonably warm, tanking boot and mitten sales? Or besieged by snowstorms, stranding shoppers at home and freezing out any chance of in-store foot traffic? It’s a perennial problem that keep retailers glued to the Weather Channel in fear that they’ll be buried under an avalanche of heavyweight knits in the New Year.

While it’s too soon to know whether the weather man will be kind, there are ways for store executives to prepare for the unpredictable, and it starts with becoming nimble and responsive.

“It’s difficult because it relies a lot on the supply chain, which hasn’t changed a lot,” Hogan said, adding only Zara has the process in place to be able to react the moment the first snowflake falls. “It’s nearly impossible to predict what the weather’s going to be when you’re ordering six months out. What they’re going to have to do is have good relationships with their suppliers and be able to place orders more frequently and closer to those trigger days when they need things in store.”

To insulate themselves against inventory pileups on the one hand and stockouts on the other, Hogan says more and more stores are looking to seasonless categories like home and beauty.

Varma said it’s not just about getting the product made in time, it’s about being able to pinpoint those goods to the right place on the map.

“The interesting thing is that whether weather happens or not, it’s different by region so those retailers shouldn’t think of the weather in general, they need to think of it more regionally based and use their distribution networks to adjust on a geographic basis to capture demand when the weather shifts in a specific location,” he said.

Ultimately, how retailers plan for a range of temperature possibilities isn’t that different from the strategy that will allow them to capitalize on hot items during the fleeting holiday window, Varma said.

It’s a two-part process: working closer to market when you can and honing your allocation capabilities.

“There’s still significant opportunity for retailers to design their supply chains, networks, distributions, 3PLs and their actual organizational execution to hold their inventory effectively, use demand forecasting to determine what’s going to sell and when it’s going to sell, and adjust on a dime to have it in the right stores in the right place so they don’t have to spend a lot of margin dollars on store to store transfers and ship from stores or in store online ordering to get it to a customer,” he said.

Ultimately, he says the capabilities are there. What most stores lack are the “culture and operational execution to do that cost effectively.”