Maximizing margins: Why fashion retailers need to rethink inventory in 2024
The days of holding large inventories is gone
Fashion retail by its very nature has always been subject to fluctuations and uncertainties. However, in recent years, the level of uncertainty has reached unprecedented heights, now compounded by interest rates and inflation that are at 20-year highs. High interest rates make it more expensive for retailers to borrow money, leading to increased costs and reduced profitability. Similarly, high inflation erodes the purchasing power of consumers, making it harder for retailers to maintain sales volumes and margins. Together these put the liquidity of inventory into the spotlight and onto the CFO’s agenda.
In this article, we explore three additional near-term challenges facing fashion and the strategies that retailers can employ to rethink their inventory to ensure a return on their investments.
Challenge #1: “SoftwareRetailers” transform fashion
The fashion retail landscape has evolved into a bustling, fiercely competitive arena with new, disruptive entrants and established players expanding their horizons transforming the industry. The days when pure online retailers were the sole disruptors now feels like a distant memory.
Fresh approaches, exemplified by Shein, are redefining the status quo with its lighting-quick speed-to-market and unbelievably low prices. Similarly, established UK fashion and homewares retailer Next is gobbling up the UK High Street, acquiring retailers and making it easier than ever for them to get online with websites, marketing, warehousing, distribution networks and even contact centers through its Next Total Platform.
These innovators not only excel in retail but also demonstrate remarkable tech prowess.
Yet, for many other retailers with large brick and mortar networks digital transformation stopped with the introduction of an online channel. Often conservative in tech investments, they will now need to over invest to catch-up with the capabilities of trailblazers, especially in terms of data management. Leading players excel in data management across their entire value chain, which, in turn, enhances decision-making speed and accuracy.
To keep up with this new competition, fashion retailers must blend automation and data capabilities with the “art” of product creation and placement to empower and reshape traditional roles such as product managers and merchandisers.
Challenge #2: Weathering the storm of climate change
Extreme temperatures, storms, and other weather abnormalities are also creating uncertainty for fashion retailers.
Recent examples include the UK where hot weather early in the summer was followed by a wet July and August, weakening warm-weather apparel sales, whereas an unseasonably warm autumn in Spain has slowed down sales of winter garments, creating significant overstock in autumn-winter collections.
While predicting weather patterns long into the future is beyond our control, retailers must adopt a more agile approach to inventory planning and distribution that’s continuously aligned with demand. By accurately forecasting demand and using intelligent solutions to optimize inventory levels, retailers can minimize the impact of weather abnormalities.
Challenge #3: Supply chain disruptions the new norm
The ever-evolving landscape of supply chains, coupled with the geopolitical shifts, marks the conclusion of the previous era of globalization. Disruptions in the supply chain are profoundly affecting the ability of many retailers to deliver products to customers on time and in desired quantities.
Additionally, shifts in transportation costs, trade regulations, and supplier dynamics can all significantly increase cost-to-serve.
To overcome these challenges, retailers must be proactive in managing their supply chains. Striking the right balance in inventory levels across entire networks will be crucial to ensuring seamless operations and agile responses.
Reducing missed sales opportunities while maintaining minimum inventory levels sounds easier than it is. The solution, which might seem counterintuitive, is to hold back as much inventory as possible up in the supply chain while ensuring that each subsequent level has enough to cover demand.
Healthy margins require continuous inventory alignment
The three challenges highlighted in this blog together with high interest and inflation rates all challenge retail margins and highlight the need for a more agile, continuous approach to merchandise and inventory planning.
Mastering inventory distribution enables swift adaptation to shifting demand, which ultimately bolsters margins. A well-honed inventory planning and distribution system ensures capital is efficiently allocated, striking a balance between meeting customer demands and minimizing excess, as has been the case for fashion retailers like Style Union. This precision not only fortifies the bottom line but also grants the financial resilience needed to thrive amidst market uncertainties.
Levers to mitigate uncertainty: Forecasting & optimization
At the very heart of powerful inventory planning are demand forecasting and optimization algorithms. They are critical levers to navigating uncertainty and succeeding in a rapidly changing market. By accurately forecasting demand at the most granular level, such as by item, color, size and point of sale, retailers can make more informed decisions about inventory levels. This minimizes stockouts, reduces excess inventory and maximizes full-price sell through.
Yet a robust demand forecast is only part of the equation – it’s what you do with the forecast, that matters.
Retailers should also leverage advanced inventory optimization techniques to streamline their operations and decision-making while ensuring their specific business rules, such as visual merchandising criteria, are respected. By combining demand forecasting with intelligent optimization, retailers can make data-driven decisions that drive business growth and mitigate the impact of uncertainty.
Where to start? 3 approaches for rethinking your inventory
To evolve and succeed amidst uncertainty, retailers can begin to rethink their inventory by prioritizing the following:
Remove barriers to sensing and meeting demand:
Fashion retailers must continuously align their pre-and in-season decisions with demand to ensure the profitability of their inventory investments.
Continuous alignment sounds obvious, but with the sheer amount of data being amassed across the industry, the only way to manage such complexity is through technologies such as AI, data analytics and decision automation that can quickly collect and process billions of data points simultaneously and at scale.
Identify quick wins in-season:
By the time your inventory arrives, you’ve already placed your bets and made your inventory investments. Now, you must maximize full-price sellthrough by ensuring that each item is available exactly when and where it is most likely to sell to minimize missed sales opportunities, continuously aligning allocation, replenishment and rebalancing with ongoing demand.
Hint – consider rebalancing inventory across points of sale as a first step. It’s not as costly or time consuming as you may think.
Once in-season inventory distribution is aced, adjust assortment and buying decisions:
With a clearer picture of demand for your items, you can leverage historical product/point of sale performance data to fine-tune future buying and assortment decisions, focusing on items that are likely to perform well in addition to setting up new items for success.
State-of-the-art merchandise planning solutions automate this process meaning what took weeks, can be available in minutes.
Final thoughts on how to rethink inventory in 2024
Evolving up-stream activities (assortment & buying) without well-oiled inventory planning and distribution is a recipe for disaster as it will not only reduce sales but create excess leftovers.
In an era of uncertainty, retailers must be agile, innovative, and proactive to thrive. By embracing technology, prioritizing automation and AI-aided decision-making and optimizing costs, retailers can navigate the unknown and position themselves for success.
The retail industry will continue to evolve, but with the right strategies and tools in place, retailers can rethink their inventory and transform uncertainty into opportunity.
If you’re ready to take the next step in transforming your fashion retail operations, here are 7 essential considerations for what to look for in a merchandise planning platform.
