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Deflation and Decreases

  
  
  

There's been a fair amount of talk lately about the risk of deflation. What are the risks for small retailers?

In the short term, unit costs are pretty well established, although the drop in oil prices is going to help out in freight expenses. Still, any pressures that do occur will likely be on prices as retailers compete to maintain market share. As we get further into spring, I would expect that the strengthening dollar will have translated into more cost easing on imported products. By next fall, all of the stimulus may have an inflationary effect, if the recession turns out to be shorter and shallower than expected.

But there's a lot of ifs there. I believe that in this environment, you have to plan prudently. I don't believe it's prudent to plan an increase if the current trend has been a decrease, even if the comparables seem favorable. I have advised my clients to remain cautious until the customer clearly signals she is ready to spend more, to not plan an increase until an increase occurs. To plan otherwise is to unwisely increase markdown risk, and imperil margins.

The frequent response I hear  back is that if you don't plan for an increase, you won't get an increase, but there are very few categories right now that look like there might be breakout increases on the horizon. More commonly, any potential increases appear to be fairly modest, and in most every case additional inventory simply isn't necessary in the short term to capitalize on that potential. Most small and independent retailers can run an increase of a few percentage points over plan for the several months necessary to increase inventory levels.

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