We keep hearing about the impending recession which would mean a pull back in consumer demand just in time for the holiday season. But recent industry reports are showing a “business as usual” behavior both with shoppers and with manufacturers. Amazon’s Prime Day topped $12 billion dollars and combined retail and food service sales grew +8.4 percent for the same month of June YOY. These reports are providing some breathing room for brands who are coming off of a two-year pandemic, broken supply chains and, as they say, unprecedented times. But is this really a rebound or an illusion due to 9 percent growth in inflation resulting in higher costs which are inflating sales? Regardless, while economists and business planners are searching for answers, merchandisers really need to start to plan for even more uncertainty.
The product process may begin at ideation, but merchandisers are the liaison between design and sales and are the source of driving business opportunities while safeguarding against business interruptions. The art vs commerce debate has yet to be won, and a shift in power emerging from marketplace circumstances is for certain. And it is time for merchandisers to take a leading role.
Like any business model, there is no one way to operate and your approach should vary based on your sector and consumer base. Merchandising needs to embrace strategy shifts between seasonal and core assortments, essentials and close-outs. The team needs to identify innovating fashion trends or chase fast fashion fads. All while monitoring the market, sales channel needs and consumer demand. Indeed, there is no more challenging time than now for merchandisers to predict the business two months out, not the mention 12-18 months out.
Some of the variables impacting plans include:
- Increased energy costs, inflating costs throughout the sourcing and supply chain.
- Continued supply chain bottlenecks impacting speed to store/shelf/site.
- Decreasing consumer savings and potential increases in consumer debt.
- Post pandemic market mentality and shopping behaviors.
- Sustainability considerations.
- Omnichannel inventory and demand needs.
- Reductions in the labor market from factory to selling floor.
- Work-at-home and shifting business casual wardrobe needs vs return to office new norms.
- Stock market performance and its impact on perceived wealth and discretionary income.
- Elections and leadership changes affecting population sentiment and consumer confidence levels.
- Retail and brand mergers/acquisitions and other shifting distribution channel occurrences.
Honestly, with all of these variables circulating in the market, it’s a wonder how merchandisers maintain any rate of accuracy season over season.
Safeguarding the Business
So, how can merchants safeguard their businesses during inflationary times?
- The first step is to prioritize investments and make sure you have entry-level and key target price points covered. Don’t rely on prior costing models to anniversary your next seasons’ needs; instead, re-merchandise the assortment and determine if inflation pricing/costs will impact your target retail.
- Next is to assess your consumer base and determine if and how resilient they are on core vs fashion items. Most brands average 70 percent core and 30 percent fashion in their assortment; there may be opportunity to shift a little more into core to protect slower turns and avoid excess end of season inventory and markdowns. In turn, your customer may be less price resistant and willing to pay more for iconic/heritage items. Luxury items and aspirational brands tend to have consumers who are willing to trade-off other purchases to protect their fashion/accessory loyalties. Mass/value consumers, however, maybe much less brand loyal and focused on lowest unit cost—thus, making you less competitive against cheaper products.
- The third step is to revisit the designs of and specs for items deemed to be price sensitive. Partner with your designers and manufacturers/mills to determine:
- Are there more accessible/less expensive textiles that can be used?
- Are there alternative, more cost-effective hardware elements that can replace custom more expensive options?
- Can the design withstand eliminating some embellishments without sacrificing the aesthetic? One pocket, special stitching, trim?
- Question the color assortment and SKU count needs; can you build the line with a more neutral, less-fashion/season-driven palette to elongate the selling season if needed?
- What is the current end-to-end supply chain timing? If a particular factory or country is having more challenges making deadlines and deliverables, can you shift part of the line to another factory or tweak the assortment to be less reliant on that line to still make the business plan? Even one-week delays on a selling floor/web site can greatly impact full price selling and overall sell through percentages.
- Also, can you command higher prices for plus size assortments? With increases in textiles, is it time for you to introduce premium pricing where more fabric is required?
- Ask: Do you have enough attainable priced items in your line? Accessories and cosmetics tend to be more recession-proof as consumers still want to consume but look for lower ticket items. Make sure your assortment has enough relevant items and that they are properly merchandised visually in store and online to maintain conversion even at lower AOV levels.
Protecting Margins and Profitability
What other ways can businesses protect their margins and profitability amidst higher costs and inflationary consumer behaviors? In general, fashion brands have not elevated prices across the board to offset increased expenses in transportation, labor, and product costing. Package goods brands, however, have been adjusting units, weight and even packaging dimensions to protect retail prices (often resulting in less product or weight per unit). The consumer is getting more and more savvy to these subtle changes and is starting to notice shrinking box sizes, fewer chips in their bag and shrinking donut and snack cake sizes. But how can fashion adjust? You simply can’t shorten a sleeve to save on fabric.
- One area that brands should be assessing is their promotional depth and frequency. Limited inventory would require less discounting earlier in the season and more full-price selling can off-set overall lower margins. Retailers should also be looking at tiered price points for promotions—buy more save more. If an iconic item cannot be offered at a critical price target on a single unit basis, can you incent the consumer to buy 2 or more and off-set the promotion?
- In addition to promotions, retailers need to take a look at complementary services. While these are critical to the customer experience, brands should revisit whether they can actually afford to offer things like free gift wrap or tailoring on all items. Perhaps there is an opportunity to offer the service with a spend level or only on higher margin/ticket items like suits vs all pants (in the case of tailoring services)?
- Other services like BOPIS (buy online pick up in store) may also need to be evaluated for profitability. Some retailers are introducing surcharges on this service. Similarly, free shipping thresholds can provide another means to offset cost increases without having to raise product pricing across the board. Most customers rate free shipping and speed of delivery as critical decision points in making a purchase but tweaking the level for free shipping and offering relevant recommended product can be deemed a personalized engagement and provide value if done well.
Not All Doom and Gloom
There seems to be a dichotomy to what we are seeing and reading vs how consumers are actually behaving. Analysts agree that we are in a record inflationary period, but people are still spending. This is not an ideal state for the retail industry to enter into the holiday season, but with caution and preparedness, the industry can still thrive. In fact, the NRF just released the results on spending behaviors of 7,000 consumers for back-to-class shopping (BTS and BTC) and the results are positive with back-to-school spend at $864 per HH (up from prior year) and back-to-college spend at $1,199 (flat to last year). The only caution was the amount of savings consumption and new debt accumulation in addition to 17 percent of shoppers using deferred payment programs. That said, the outlook is still brighter than the market would suggest.
- Protect your key product investments/target mandatory price-points and higher margin line items.
- Track and secure your supply chain to ensure critical assortments are delivered in full and on time.
- Assess your promotional strategy to maximize sell-thru and profitability.
- Revisit services and fees, if brand and business appropriate.
- Embrace the new unknown and merchandise future lines with a critical lens on cost engineering without product sacrifice.
The good news is that brands and retailers have gone through changes and economic disruption before. The industry has adapted and transformed to welcome changing consumer demands, pivoted to balance the emergence of digital commerce, addressed the need to become more sustainable and, most recently, managed through global health constraints. In the grand scheme of things, our current economic conditions don’t have to be derailing. Instead, the industry should use this moment to be more resilient and more efficient to come out even stronger than before.