The #1 question we’ve been fielding at Karnan Associates over the past 60 days is, “How long is this going to last?” Of course, every business is up compared to March-April 2020. That was a forgone conclusion. But a surprising number of stores experienced their biggest March in history, and April didn’t slow down the way it often does after a big spike. What appears to be happening is a series of waves crashing into specialty running stores in succession resulting in sales growth that will continue at least through the 3rd quarter and probably into next year. Wave 1 was another round of stimulus payments. Wave 2 is the vaccine rollout. Wave 3 is the anticipation of a summer vacation. Wave 4 is the promise of fall events, and wave 5 is a bona fide back to school. If you just read these opening sentences, and it sounds like you are living in a different economy, don’t fret. Most likely you are in a colder metro market. The course of the sales growth trend began in rural markets and is moving to urban and began in warmer climates and is moving to colder. High levels of consumer savings are genuine, and the spending will hit your market. A recent New York Times article reported that household savings is $4.1 trillion today compared to $1.2 trillion before the pandemic.
So, what can get in the way of a record year at specialty? There are several factors to keep an eye on. Some we can control. Some we can’t.
1: Redirected consumer spending on Services—Spending on goods rose 5.4% in the US while spending on services only grew by 1.1% in the first quarter.* The pent-up demand on services and entertainment may get the lion share of disposable income this summer. Americans have had some opportunity to revenge spend on consumer goods since last June. They have not had the chance to do the same on travel, entertainment, and services. When this spending is unleashed, there may be an inevitable slowdown on the sale of goods. Travel and Leisure has generally favored the specialty running store. People wear what we sell when they travel. More importantly race participation makes up a part of this untapped demand, which benefits specialty retailers directly. There is enough good news here to believe that our industry will continue to grow in Q2 and Q3, but it is good to recognize that shortly we will not have the undivided attention of our customer’s disposable dollar.
2: Supply Chain Scarcity—Can you imagine trying to forecast this year’s Q3 and Q4 demand last August? Our vendors needed that crystal ball, but it was murky at best. Wildly optimistic forecasts would have seemed irresponsible, and so the most bullish suppliers placed cautiously optimistic PO’s with their factories for Fall ‘21 product. Currently, stores are experiencing growth of 20% over pre-pandemic levels in markets that have ‘heated up’. As the rest of the country follows suit, demand will outpace supply until the vendors can adjust. Scarcity will help margins and keep our industry from overheating, but it could also prevent us from reaching 2021 potential. The appropriate action for product line managers is to stock up now if you have the capacity to do so. This advice is contrary to conventional inventory management practices. RIA members will remember a great discussion a few months back about the right inventory footwear turnover for our industry. The range varied from 4 to 8 turns annually, but the consensus was that product velocity is important to maintain cash flow. Today, a bird in the hand is more important. With the long runway of summer ahead of us, an extra month supply of top sellers that may not be available down the road is a good investment for your business.
3: Inflation—The financial world is divided today about whether inflation or deflation is a greater economic threat. I am not an economist, and when I pretend to be one, I get in trouble. However, in the spirit of simplifying a complicated issue there are two opposing thought groups. People in the inflation group believe that money supply, household wealth, loose central banks, and supply shocks will wash through the economy and push prices up. Those in the deflation group believes that money hording, household fear, loose labor markets, and excess capacity will drive prices down. The initial reading on our industry’s first quarter performance indicates that the inflation group might be winning the argument. While shop owners can’t control inflation, they can set themselves up for it. For starters convert short-term high interest rate debt into fixed rate long-term debt. The SBA recently increased loan limits for EIDL loans allowing for business owners to apply for loan increases or get an initial loan at a 3.75% fixed rate. If there is no short-term debt to convert, a fixed 3.75% interest rate is still cheap money if inflation is on the horizon.
4: Inertia—We got it done last year. From online to appointment and from courier to curbside, we adapted our businesses to meet the customer any way they wanted. As industry consultants, the Karnan Associates team witnessed your pivots, responses, and investments. You didn’t just survive. You thrived. Over the past 60 days in-store transactions have been ahead of typical March and April levels. Slamming Saturdays are back. Directing store leadership’s attention to the showroom floor makes sense and is only natural, but not at the expense of the nimbleness you established in 2020. At Market Week in January, the content focused on 3 next-level objectives which remain keys to long term growth.
Marketing as a Core Competency at Specialty Run
Streamlining Omnichannel Experience
Continuing Team Development
As you plan your summer projects, keep the long view. Experience is the retail differentiator and the way to achieve this is through personalization and seamlessness. Spontaneous purchases are giving way to considerate purchases as consumers carefully select who they want to shop with based on how they connect with the brand. Multiple convenient shopping platforms, timely and personalized messages, and brand communications that express your core values all weigh-in to this selection. We don’t have much control over some of the factors listed, but our efforts can be a force that changes inertia.
As an industry we have a lot to look forward to. The next few months will be fast paced and will bring new highs to many stores. Sales growth remains an important indicator of success, but the next level requires looking beyond today’s growth. If you really want this to last, invest in the people and infrastructure that will differentiate your experience in the years to come.
Parker Karnan
Parker Karnan, founder of Karnan Associates, has worked in the specialty run industry for the past 30 years. Parker and his team spend their days working with specialty run retailers across the country doing their part to help each store Run Great! Question for Parker? Email at parker@karnanassociates.com.