In the age of Amazon and e-commerce fulfillment, many retailers are struggling to stay afloat. Others are on a trajectory to thrive. For investors, the ability to identify which retailers will achieve higher profits and market valuation is the currency of gold. Learn how to accurately predict future retailer performance – and what that means for you and for your portfolio.
The age of Amazon and e-commerce anywhere-anytime fulfillment have brought unprecedented opportunities and challenges to retailers and investors alike. The dynamics of the retailing industry have never been more complex or more fluid.
So how do you determine which retailers to invest in? Which companies are primed to achieve substantially higher bottom-line profits and market valuation?
4R Systems, which specializes in inventory optimization but does so exclusively within the context of meeting core companywide bottom-line financial goals, has developed a series of proven metrics and analytical tools to evaluate, precisely, which retailers have the greatest potential for market growth.
By pinpointing and suggesting precise changes to inventory practices down to the individual item level, 4R helps retailers achieve ideal financial results for the entire company, said Kevin Stadler, CEO, 4R Systems.
In one case, the company’s targeted suggestions enabled to one major retailer to double net profits – an increase of more than $10 million – and achieve a substantially higher valuation when it went public. The same or similar results are true for 4R’s other retail clients. In all cases, 4R is able to analyze past and current financial performance, inventory productivity and risk vs. reward positioning at the item level, and potential for profit improvement.
Unlike other solution providers business models, 4R Systems stands by it’s promise: Meaning the company works with retailers on a gain-share model by which 4R earns a portion of the net profit performance increase the company predicts and the retailer achieves.
4R Systems almost uniquely can operate on a gain-share model because it knows the results, within a very narrow range, in advance. “It is of paramount importance to know that there are ways to evaluate and accurately predict future value,” Stadler said. “We make recommendations to determine ideal inventory levels, to balance risk of overstocks vs. out-of-stocks for the full range of items and situations to meet specific strategic financial goals that our clients have set and we have analyzed and determined are obtainable,” he said.
The company works with retailers in all sectors, from automotive and food/supermarket to specialty and discount, and engages brands generating $200-$300 million in sales to the largest global players in the industry.
4R’s scientific analyses and inventory process improvement metrics were developed out of groundbreaking work conducted by Dr. Marshall Fisher, Professor of Operations, Information and Decisions, Wharton School, and Dr. Ananth Raman, Professor of Business Logistics, Harvard Business School.
“Just as Wall Street was transformed in the 1970’s by the influx of physicists, engineers, and ‘rocket scientists’ with mathematical techniques that allowed the harnessing of vast, complicated transaction data, so too retailing is now ready, and in fact beginning a “rocket science revolution,’” they stated.
4R also subscribes to the Markowitz model of reducing risk and optimizing earnings. “The quick and dirty secret is we analyze the business to identify risk. For example, the more seasonal the product is, the more risky it is. The more expensive it is to carry, the more risky it is,” Stadler said.
An optimal retail portfolio balances high risk, high return items with low risk, low return items to produce the right mix. And to have the exact right amount of product, by SKU, in the right places, for the highest return on investment and profit.
Theory of course is one thing. Predicting and achieving retail profits is quite another. That is precisely where 4R shines. “It is only recently that you can solve this problem and then all but guarantee the financial performance results as we do. It is only with the advent of big data and corrections modeling combined with advanced analytics and data and machine learning that you predict and achieve accurate bottom-line financial results. That is what we do,” the CEO explained.
4R determines the potential for improvement before engaging with potential retail clients. Some companies are ripe for substantial profit growth. Others have much less potential or worse. “There is huge value to private equity investors in what we do, because we now can know in advance the precise increase in valuation retailers will achieve if they work with us,” said Stadler.