Companies need to reduce complexity and find ways to increase full-price sell-through to reduce inventory levels by taking a demand-focused approach to their assortment strategy while boosting flexible in-season reactivity for both new products and replenishment.
Even before Covid-19, the business industry had been edging towards a dangerous threshold. Excessive inventories and widespread markdowns proliferated to the extent that just 60 percent of garments were sold at full price, creating billions of dollars of lost revenues and margin. During the pandemic, the situation worsened. Inventory levels increased significantly despite brands’ and retailers’ scrambles to implement damage control. Inventory turnover fell by 33 percent in the first three months of 2020, and orders were down nearly a third year-on-year by the end of April.
Few business players were immune as markdowns proliferated across all value segments and product categories. Gap, LVMH, and Brunello Cucinelli are among those to have announced substantial inventory impairments as a result of the pandemic. While some businesses found creative ways to clear unwanted stock — such as dedicated websites like Ganni’s, which sell past seasons’ collections at a discount, or through pop-up outlets like Harrods — other brands, from PVH and Michael Kors to Gap and Versace, are holding onto excess inventories in the hope of an uptick next year.
The overstock issue will only get worse in the future if companies fail to adapt to the consumer’s new mindset. Consumer attitudes are changing in the wake of the pandemic, as many embrace, a “less is more” approach that coincides with industry changes in the business cycle. Some 65 percent of consumers in a survey conducted during the Covid-19 crisis said they plan to purchase more long-lasting, high-quality items, and overall, consumers considered “newness” one of the least important factors in making purchases.
The pandemic has not only accelerated a pre-existing critique of consumerism, but also the increased importance of sustainability in purchasing decisions, and the rise of circular business models (especially resale). Due to these and other factors, brands will need to focus on three key priorities in the year ahead: accelerate their shift toward a demand-led model, reduce assortment complexity and address the recalibration of the price-volume equation.
In a bid to better match consumer preferences, brands will increasingly leverage technology and analytics to gauge consumer sentiment prior to production. Several brands have already taken steps toward basing product development on consumer insights and analytics and, at times, coupling these with made-to-order models. “The higher the percentage of the made-to-order business, the less overproduction you’re going to get involved with. That’s the first thing that luxury needs to concentrate on; smaller runs, ideally a run of one.”
Meanwhile, Reebok has tested its designs with consumer votes, making production contingent on votes passing a minimum threshold of demand. At the same time, made-to-order models adopted by smaller brands like French label MaisonCléo or US brand Stòffa are increasingly being trialed by larger brands. Several others, including Nike and Telfar, have leveraged pre-orders and just-in-time production models, in which consumers purchase items before they are produced and receive them several weeks or even months later. Analytics and artificial intelligence will also gain traction in the product development process as data becomes more available to brands and designers become more skilled at using data. Footwear and apparel brand Wolverine plans to optimize assortments with digital consumer testing based on First Insight’s predictive analytics, where the voice of the customer (VoC) feedback is combined with artificial intelligence.
With 60 percent of business executives in Survey planning to implement improved analytics for consumer insights and 43 percent planning to reduce product development lead times to avoid Overstock. It is clear that there is a movement underway to transform the supply chain. Wholesale pre-orders will increasingly be kept low while open-to-buys will increase, creating an opportunity to bring in the latest products consumers want or to replenish bestsellers. The reduction of SKUs is mentioned by more executives (61 percent) in the survey, as complex assortments are inherently problematic. Such assortments create long tails of unproductive SKUs, detract from core products and cause bottlenecks in the system and in-store. They also muddy the waters in respect of strategy, communication, and formats. Nonetheless, brands have continued to expand their assortments in recent years, often due to the “fear of missing out” on new trends, or in order to launch a new item during a key sales period.
In the following year, we will see brands applying smarter approaches to assortment, aiming to reduce complexity and realign collection drops with clear consumer opportunities. Some brands that have already begun this process include Victoria Beckham, which has said it will cut SKUs by 30 to 40 percent, Nike, which has streamlined product lines to improve SKU productivity by 15 percent, and Coach, which plans to cut 50 percent of its holiday season collection. In July, the SMCP group announced it would cut its inventory purchases by 30 percent for the FW20 season.
In 2022, we will see brands applying smarter approaches to assortment, aiming to reduce complexity and realign collection drops with clear consumer opportunities. Another way brands are streamlining their assortment is by breaking the shackles of the traditional business calendar. Indeed, the current number of collections across the seasonal calendar is increasingly seen as an impediment to a demand-focused approach. Echoing the sentiment of 30 percent of executives responding to our survey, Off-White, Tory Burch, and Mugler are among the brands that have announced departures from the seasonal schedule, enabling them to regain control of in-store delivery. As luxury players focus their energies on fewer yearly collections, some are shifting away from cruise and resort collections. As the trend continues into next year, brands heavily reliant on these inter-seasonal collections will face the challenge of having to adapt to a reduced business calendar. Gucci announced it would be scaling back the rhythm of its collections from five to just two per year, reflecting a growing movement toward seasonless business among retailers; this is underlined by results from Survey, which reveals that two-fifths of executives plan to make the move. This adds to a growing chorus of brands and designers calling for the business calendar to be rewired, such as the Dries Van Noten-led Forum Letter to the business industry.
However, to solve the underlying overstock problem brands need to capture more value, and this means striking a new balance between pricing and volume. There are two levers at their disposal: the reduction of discounts and the optimization of prices (price increases for brands that have not yet reached the limit of fair value). After the discount drive of the early phase of Covid-19, the next phase saw a revision of price points and the implementation of “no sale” strategies to safeguard margins. Some direct-to-consumer brands, including US-based Dôen and French label Sézane, have built their success on the absence of end-of-season markdowns, relying only on occasional “archives” and sample sales. Some luxury brands, meanwhile, have room to leverage their desirability to lift prices. Although these strategies overlap with brands’ broader price harmonization plans, the willingness to capture more value from key products appears to be the main rationale of recent price increases.
We believe that the practice of markdowns and price reductions in the full-price stores has [a] negative effect on long-term business; we constantly discuss it with our colleagues. Value and mid-market brands have been more reluctant to ditch markdowns. However, they are adopting more sophisticated, tailored pricing strategies with levels and duration of discounts informed by market and consumer data harvested by analytics and artificial intelligence. Levi’s has reported significant benefits from its optimized, data-driven approach to markdowns, with some promotion events generating four times the profit of similar initiatives from the previous year. Meanwhile, some smaller labels have taken more control of pricing with concession models on online marketplaces.
The events of 2020 have highlighted that more is not always better. Indeed, they have shown that brands that reduce complexity and rely less on discounting as a way to prop up sales often outperform those that do not. When combined with a demand-focused approach and intelligent assortment management, the overall impact is a more streamlined business model that is better suited to the global market. In 2022, we expect brands to sharpen their assortment using high-quality analytics, and to test more products with consumers ahead of production. Brands will focus on accelerating speed to market and on aligning launches and product drops with their customers’ needs rather than the traditional business calendar. This will lead to a permanent change in mindset among consumers. Moreover, brands will need to become nimbler to pursue price optimization and manage markdowns in a smarter way as they adopt a more measured and sensible approach to production in the wake of the industry’s new mantra: “less is more.”