The Great Inventory Correction (Again)

Back at the very end of 2008 I pondered what seemed to be a huge Inventory Correction. Four months on it is clear I was right and economic activity across many industries has been hit hard by inventory slashing of pandemic proportions as discussed in two Financial Times articles today which can be read here and here.

We have not been immune from this trend and have seen sales hit in particular parts of the business. Oddly the very ones that the economists will tell me should be prospering in a downturn. You know, the kind of things that people trade down to rather than the other way.

I think there are three reasons why this has happened.

The first is the great inventory correction effect. When inventory is being managed at sub replenishment levels (i.e. being driven down) your sales fall even if your customer's sales are steady.

The second is the reaction of others whose sales are being hit for the reason stated above. For example if I supply a value for money equivalent of a leading brand (as say, a supermarket own brand for example) and the leading brand in question moves £10million from TV into price slashing promotions to buy some volume there is very little I can do about it. The effects may be short term but they hit my sales all the same.

The third is miscellaneous other factors outside of my control. These effect demand for the kind of products that the contract manufacturing part of my business make and supply. For example: if my customer pushed their prices up to insure their cash margins against falling demand this may drive my sales down further whilst delivering an acceptable amount of cash to my customer. By attempting to insure against falling volume they guarantee a fall in volume but compensate themselves for this regardless of the impact on us.

We have encountered examples of all three so far in 2009 but are nonetheless holding our own. We have widened our distribution base steadily over the past 2 years and this is serving us well. Growth of our flagship Sarah Smith brand remains strong with annualised growth of 26% despite a set back or two along the way!

But if the tide turns in the inventory correction it will be welcome all the same!