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Risk management: Hedging your bets

Phil Mullis

09 January 2017

We’ve all considered taking a coat or umbrella with us somewhere if it looks like the good old British weather is going to let us down. If you have done this then you made a hedging decision – in other words you have reduced your risk of getting drenched by avoiding commitment to one uncertain outcome. But, why do businesses hedge and why is this particularly useful for retail?

Quick thinking

The weather is often cited as one of the causes of sluggish fashion sales. Clothing retailer Zara has led the way in addressing this issue by increasing its ability to generate faster turnover of merchandise. This was achieved through a constant exchange of information between themselves and their supply chain to speed up the process from concept to shop floor.

In a previous blog we thought about how more fashion retailers needed to adopt this ‘depeche mode’ idea to drive decision making regarding stock turnover. Retailers should use forecasting to predict the stocks needed for their business.  For example, if the weather suddenly turns warmer or colder than expected the stock may quickly become redundant; no one is buying overcoats in a heatwave!  By adopting a depeche mode technique, retailers can hedge the risk of lost sales and profits caused by the vagaries of the British weather.

Love it or hate it

It is not just the weather that gets retailers hedging; financial influences also have an impact. Retail businesses are exposed to risks such as exchange rate, interest rate and commodity prices. In the second half of 2016 we experienced a weakening in Sterling which now looks like it is feeding through to both finished product and raw materials costs (remember Marmitegate!).  Although it is difficult to influence the macro economy, retailers can shape their own world by considering taking out forward foreign currency contracts to a) set the forward price of purchased product and b) not be left with any nasty financial surprises.

What’s the plan Stan?

One of the challenges for retailers is profit protection; however, a solid risk management plan, which covers hedging risks, will definitely help protect the bottom line. The plan should also include how you respond to other risks such as staff or stock shortages and relationships with suppliers (think about continuity of supply); and remember, it is a living and evolving plan.

If you would like further advice on how to make the most of your retail risk management plan this New Year, then why not get in touch with the Retail and Wholesale team at Wilkins Kennedy to see how we can help.

About Phil Mullis

Phil Mullis

Phil joined the firm in 2008, became a Partner in 2012 and heads up the Retail and Wholesale sector team for Wilkins Kennedy. Phil advises companies, predominately from retail, fast moving consumer goods (FMCG) and food brokerage companies. He is passionate about helping the small guy win out against the big guy with bottomless marketing budgets. It is fair to say that most people see Phil as an unnatural accountant – it’s not about the numbers for him, it’s about working with the people and helping them grow and realise the potential of their business.

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