Inside of fashion retailers
Fashion industry insiders will recall 2016 as the tipping point in online fashion retail, when Amazon's apparel sales first outstripped the combined performance of its chief competitors. Indeed, the rise of e-commerce has left brick-and-mortar retailers struggling to attract shoppers and revise their sales strategy. By mid-2019, the troubled retail sector saw the closure of 7,500 stores in 2019 in the United States, compared to 5,864 store closures for the full year in 2018. Many of the chains shuttering locations are apparel specialty stores, as well as department stores like Macy’s. In July 2019, high-end apparel retailer Barneys became the latest iconic department store to file for bankruptcy, following the permanent closure of all Henri Bendel store locations just six months prior. Since the acceleration of Amazon and Walmart’s online apparel strategies, remaining profitable has proved even more challenging for fashion brands and retailers. Among the forces at work are consumers’ growing tendency to research purchases through both store visits and browsing on multiple devices. A study by Deloitte found that digital browsing and information-gathering now influence 56% of all women's fashion purchases. Survey respondents stated that they find the “inspiration step” critical, with the majority expressing a preference for a self-guided purchasing journey. The growing popularity of challenger brands with a digital-first strategy would also appear to indicate that consumers are increasingly drawn to smaller brands with compelling and authentic narratives. These shifts in consumer behavior are only the tip of the iceberg. The falling foot traffic and flagging sales impacting many fashion retailers have a knock-on effect on operating flexibilities and overhead expenses due to an outdated “push” retailing model that is often out of step with what consumers really want. As a result of miscalculated fashion forecasts, operating margins remain under constant pressure.
Loss of profits for retailers
A first source of operating margin pressure attributable to miscalculated fashion forecasts is overstock. A report by Coresight Research found that markdowns cost non-grocery retailers in the United States $300 billion—12% of total sales—in lost revenue in 2018. According to survey respondents, excessive markdowns and incorrect merchandising decisions were to blame for most major inventory management issues, especially “dead stock” that results in a write-off. The most high-profile example of excess inventory in recent memory is Hennes & Mauritz, which ended Q1 2018 with $4.3 billion in unsold merchandise following the company’s first quarterly drop in sales. Aggressive expansion had left the fashion retailer with a global network of 4,700 stores. Between 2014 and 2018, inventory levels for its massive store footprint doubled due to designs out of step with style trends and consumer demand.
Overproduction and overstock are two major causes of waste. By lean manufacturing standards, overproduction is considered the worst of the seven main sources of waste because it creates unnecessary inventories, conceals quality problems and generates effort. Increased production costs additionally have an unfavorable impact on operating margin. Industry professionals refer to these miscalculated expenses as “dead cash” – funds that are not available to reinvest in operations or pay bills. Because insufficient working capital limits operating flexibilities, excess inventory is also a drag on business productivity. In some cases overproduction and overstock even lead to debt, leaving many retailers’ cash positions much weaker than is advisable.
Disrupting business model
So which brands are succeeding in these tough times? Many are new entrants whose business models are exclusively digital, enabling far more agile, engaged interaction with consumers. In response to this new breed of emerging digitally native brands, established brands are beginning to disrupt their own business models. The first established brands to execute a digital growth strategy already have results to show for their efforts. To understand the consistent upward growth trend observed in value and discount fashion retailing, it is worth noting that two major brands from these segments have already begun a major organizational transformation. Here, we will take a close look at a well-known market disruptor and three established brands at varying stages of digital disruption.