Ending the cycle of carryover dead stock and shifting investments towards a market-responsive product mix in a given changed cost structure. The products sitting on shelves in January are never just random occurrences. They're a symptom of a problem with assortment, which builds and builds over a year.

The South African Cost Structure Shock: Why Yesterday's Assumptions No Longer Apply

Businesses that manage inventory in South Africa have found themselves in a rather uncomfortable position over the past months with regards to the cost of imports. While this wasn't a function of local tariffs increasing, a variety of factors have impacted the cost of imports in a dramatic way. The cost of a RAND to a USD settlement increased substantially because of a substantial weakening of the RAND/USD exchange rate. Global supply chain-driven inflation, fueled in turn by disrupted tariffs in countries such as the USA, reduced production capacity, leading to higher pricing. Container shipping prices remained high due to global supply chain pressure.

Taken in combination, these elements have precipitated a 20-40% increase in total landed cost for imported merchandise. Items which offered viability in existing pricing schemes prior to 2023 pricing models are now margin-destroyers. Businesses have continued to stock these products based on established demand channels, believing demand will present itself when retail pricing alters. Such a mismatch between cost structure and consumption pattern gives way to a situation where a "structural dead stock" exists, the inventory never justified in light of the present cost structure. While a seasonal dead stock indicates a disparity between product performance and market requirements, a "structural dead stock" implies a mispositioning of a product in the market. The identification of inventory with a potential to be a "structural dead stock" is facilitated by an analysis of ABC items.

The Math of Hesitation: What Inaction Costs

A case in point is a Johannesburg distributor carrying 200 SKUs, with 80 of them moving less than 3 items in a month. At a cost of R25 per item due to present weaknesses in the Rand and subsequent supply-side inflation, these 80 slow-moving items are an investment of R160,000. With an annual storage cost of 25%, this results in a storage cost of R10,000 a month for items which are not in demand. In six months before taking meaningful action, this incurs a cost of R60,000 solely on waste.

However, the hidden cost goes much deeper. The storage space allocated to slow moving goods is an opportunity cost in terms of storage space for fast moving and profitable products. In prime real estate such as Johannesburg's northern suburbs or Cape Town's distribution areas, such an opportunity cost escalates dramatically.

Why ABC Analysis Becomes a Strategy in Newest Reality

What most South African retailers do with ABC analysis is see it as a reporting tool, an IT product that is produced quarterly and is placed in a file. Forward-thinking companies see it as a survival compass. The numbers aren't fascinating in their own right but rather an indication of which products are feasible at current prices. When you do an ABC analysis and see that your C-category, which comprises 50-60% of your product offerings, is making negative or break-even returns after taking into consideration an impact on landed cost, this is not a point to be noted, but this is an strategic problem crying for a solution from your executives. A product which makes you good margin at R18 landing cost can be totally non-viable at R25 landing cost.

Regional Complexity: One-Size-Fits-All Assortment Strategy Fails

The challenge presented by this geographic diversity in South Africa is such that an offering which can profit in a concentrated retail area such as Johannesburg, where customer density can support higher pricing, will simply not work in a smaller city such as Durban or Port Elizabeth, where customers are more budget-conscious. However, most companies roll out uniform strategies with very minor regional variations.

Such critical differences are uncovered not by an analysis of ABC within a company by region, but rather by an analysis by region, in addition to an analysis by corporate headquarters. A product or product category underperforming 20% on a national basis may underperform 45% in Cape Town because competitive or price-sensitive factors preclude increasing retail prices to compensate for higher direct costs.

The Execution Problem: The Cost of Identification without Execution

The time to make decisions is now, particularly in the first 30 days after identification. The implementation plan is simple: where in week one a product has been determined via ABC analysis to have no viability, these products need to be disposed of, redistributed in regions, or removed from reorder in week four. Liquidation channels are formal liquidators, discount shops such as PEP and Cashbuild, SADC export partners, and bulk sale sites. The trick is to pick an appropriate channel for each commodity, don't try and push all products through a single route. Some items can regain value through redistribution, but others need quick liquidation to stem the loss.

The Competitive Landscape Accelerating Transformation in Retail

The retail market in South Africa is moving quickly towards a transformation because of cost structure shifts in retailing. Online players such as Takealot are pressuring legacy players to rethink their product assortment strategies, with smaller product offerings, higher turnover, and a focus on responding to real-time shifts in demand rather than time-honored planning horizons. Companies sticking with yesterday's product assortment strategy (keeping 200+ SKUs with 30% underperforming) won't be able to compete with nimble rivals.

ABC analysis isn't an option for sophisticated big-box retailers; it's a survivability tool for any business with multiple stores or complicated supply chains in a world where landed cost fundamentals have changed.

Right-Size to Current Economic

Reality with the Rand continuing to trade at lower levels and a new cost structure emerging in global supply chains, South African retailers find themselves with a simple option: overstock in hope of a strengthening Rand and a subsequent reduction in cost, or simply adjust inventory to represent a new reality. The financial math is simple. Dead inventory with today’s cost of delivery in product is a cost nightmare. Holding inventory at R25 per piece, which incurs R1.50 in quarterly charges, is simply not feasible when it produces no revenue. Enter the analysis tool, the ABC evaluation, that leads to make or break decisions.

The companies which succeed during challenging transitions are not the ones which have all their parameters right in the first place, because they are the companies which notice a mismatch through data analysis and adjust accordingly. In order to succeed in a different cost environment in retail, companies need to do an ABC analysis every month (as against quarterly analysis) and implement recommendations in 30 days. Assortments need to become a quarterly process, not an event for an entire year which is finalized before a complete understanding of different costs can be achieved.

The contrast between a right-sized business inventory based on current landed cost and a business with over-assorted inventory is the contrast between a healthy and profitable business and a slow leak of capital into goods that no one wants at today's price points.