Clothing retailers are trying to cut their way to higher profits

Discussion
Photo: Getty Images/idealistock
Feb 10, 2021
George Anderson

Cut, cut, cut. Retailers are looking to cut their way to higher profits.

Merchants, on one hand, are reducing orders from factories for the spring and summer, Reuters reports. On the other, many selling online are pursuing ways to reduce product returns that drive up costs and eat into profits, according to The Wall Street Journal.

The moves to reduce the size of factory orders are a direct result of actions taken by retailers last year to carry over merchandise that went unsold due to the novel coronavirus pandemic breaking out.

Reuters cites a McKinsey & Company estimate that puts the present value of unsold clothing inventories in stores and warehouses at between $168 billion and $192 billion, twice as high as is normally carried. The fast-fashion chain Primark is currently holding unsold merchandise for the spring and summer seasons valued at $205 million and another $277 million worth of goods for the fall and winter.

Miran Ali, who owns four plants in Bangladesh and represents the Star Network, an alliance of manufacturers in six Asian countries, told Reuters that under normal circumstances his factories would be working at full capacity for the spring and summer and already looking at sizable orders for the fall and winter.

Today, however, Mr. Ali said, “Brands are buying less from fewer people.”

Factory ordering is not the only place where retailers are trying to cut costs. The Wall Street Journal points to steps that companies are taking to reduce product returns, a problem that has an even greater bottom line effect with online orders growing significantly for most retailers since the pandemic hit.

The product return rate on online purchases is about three times higher than when goods are bought in stores. As online sales increase, the cost of returns becomes more of a burden for retailers. While merchants remain hopeful that customers will sooner rather than later return to stores at near pre-pandemic levels, the reality is that many expect that items ordered online will continue to grow as a percentage of their overall sales.

Retailers are turning to various virtual try-on technologies to help consumers get a better idea of how products including clothing, makeup and glasses will fit and look on them. While the utility of these programs has shown some benefit, there is still plenty of room for improvement with fewer returns as the goal.

DISCUSS QUESTIONS: Do you see retailers, particularly in categories like clothing, significantly cutting orders for the balance of 2021 and early 2022, and how will that shake out for retailers and brands? What do you think is needed to reduce the numbers of online order returns?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"The overproduction of fashion is coming to an end."
"Consumers don’t want to return products, especially in these COVID-19 days, so any digital assistance in improving accuracy will be greatly appreciated."
"What should really shock people is the level of carry over stock normally held in retail. More than $80 billion is a huge sum and is a massive hit on retailers’ profits."

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26 Comments on "Clothing retailers are trying to cut their way to higher profits"


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Mark Ryski
BrainTrust

This is a delicate balance retailers need to walk. With signs of the pandemic getting under control, there are good reasons for optimism, and consequently increasing inventory – carefully. I think the remainder of 2021 will be a bit of a crap-shoot for apparel retailers, as demand will be difficult to predict.

Returns from online orders is a killer, and while new technologies for determining sizes are helpful, they are far from fool-proof. The best way to minimize returns is to have stores open so customers can try on goods – like back in the old, pre-pandemic days.

Gene Detroyer
BrainTrust

My wife and I just bought two pairs of sneakers each from Zappos. To choose those, we ordered 16 pairs between us. We returned 12 pairs. Was that a killer for Zappos? Or, in fact, did we behave the way they encouraged us to? Would they have sold the two pairs to each of us if returns were limited in any way?

Mark Ryski
BrainTrust

Gene, I’m not making a value judgement here, but it was certainly a killer for the environment. I don’t disagree that your shopping behavior was inconsistent with how Zappos encourages customers to buy/try, but I doubt that they would consider shipping 16 pairs to sell 4 pairs a win.

Gene Detroyer
BrainTrust

1.) Killer for the environment versus getting in a car and driving to the mall? 2.) If Zappos didn’t want us to order 16 pairs, they would limit it.

storewanderer
Guest
14 days 17 hours ago

This is the reality of selling online for items like shoes, which are particularly difficult to gauge proper fit on. You either eat a lot of returns or you don’t make the sale.

Not sure I see the environmental impact so much — suspect those returns went back into the box(es) they came in and back to the shipper that way. But I sure see the cost savings of not having an employee in a store spending an hour with each of the customers to bring out pair after pair, lace them up, and help the two customers decide on those 2 pair of shoes, so the savings in labor probably more than made up for the shipping costs there and back.

Gene Detroyer
BrainTrust

Yes, you must good at the entire process. Sometimes, when we look at online, we forget that stores have costs as well.

Mark Ryski
BrainTrust

1) I presume the shoes were shipped to you via air/truck? 2) I’m sure Zappos was delighted that you ordered 16 pairs (why would they ever want to limit that?), but I’m also sure they hoped you wouldn’t send 12 pairs back — oh, another ride in a truck and potentially off to the landfill if they can’t resell them — so, yes killer for the environment. Again, not making a value judgement here, Gene.

Gene Detroyer
BrainTrust

I gave an example of ordering 4 pair and bought one, would you have reacted the same way?

Neil Saunders
BrainTrust

In the U.S., overall apparel sales fell by around 25 percent last year. Volumes plummeted to a similar degree. Retailers adapted their forward orders accordingly, but were left with a glut of inventory from early in the year. Given this backlog, and the fact that apparel sales volumes will remain suppressed over normal levels in 2021, it is hardly surprising that factory orders are down. Once the glut from last year has worked its way through, orders will pick up a bit.

The good news is that a lot of retailers have strengthened margins as they had less inventory on the shop floor during the fall/winter season and were not having to discount to shift excess stock. This is a lesson that will stick and I expect a lot of apparel retailers to take the “less is more” approach going forward.

Doug Garnett
BrainTrust

Great point, Neil. And I hope retailers come to grips with how to focus on what really matters to customers in taking the “less is more” approach.

Sergio Zyman observed that in the absence of meaning, consumers fall back on price. His observation is that if we create meaning, the whole channel does better.

I wonder if there’s a corollary here with fashion — something about in the absence of meaning retailers have fallen back on overwhelming quantity. If retailers learn how to create meaning amid their clothing offerings, they won’t need to overstock so much.

Bob Phibbs
BrainTrust

Shoppers will be back and those brands who know who they are and what their customers desire, and who have a plan how to sell it, will be poised for a fast recovery. Those who hold over yet another season will learn the hard way – merchandise is like milk, it doesn’t get better with age.

Cathy Hotka
BrainTrust

Let’s look at categories. Athleisure is soaring, but no one needs an evening gown right now. Assortment planning has never been more important.

Gene Detroyer
BrainTrust

20 percent off! 30 percent off! 50 percent off! 70 percent off!

There is only one reason for that. In my 50 years of observation of retail the Achilles’ heel of retail operations has been the inability (mindset) to balance inventory and demand. During that time there have been no lessons learned.

Retailers, particularly in apparel, plan on selling a high percentage of their goods at ticket and then a low percentage with a minimum of discounting. Yet year after year, it is quite the opposite.

And this mindset isn’t just in retail. I have seen companies project 5 percent growth in a market that is projected to grow 2 percent. When questioned, the answer is always, “we will grow market share.” When I have asked, “is your competition going to let you do that?” I get get looks like I am speaking another language.

Hello department stores! There is NOTHING that can help the profitability of retail more than balancing inventory with demand and reducing price cutting off the ticket. NOTHING!

Jeff Sward
BrainTrust

…!!!

Suresh Chaganti
BrainTrust

This is a negative cycle in the making. It is possible to be profitable in the short term, at the cost of reduced growth. But one can only cut so much. The factories will go out of business. Designers will be laid off. I hope the cuts are well thought out, strategic and in categories that do not hurt in the long term.

Jeff Sward
BrainTrust

Cuts to factory orders based on carryover inventory are no surprise to anybody. They can be planned around and not necessarily repeated. Cuts made in order to avoid end-of-season residue inventory are completely different and long overdue. I’ve looked very carefully at EOM January inventory at several retailers two years in a row. Retailers like AEO and Loft that were smart in January 2020 were even smarter in January 2021. Retailers like Talbots and Express had rooms bulging with unsold inventory both years. If a pandemic doesn’t push a retailer into a more cautionary mode, what would? End of season inventory that has to be sold at 60 percent to 80 percent off is one of the biggest profit drains a retailer has. What is it going to take to get retailers to take their foot off the gas a little — pandemic or not?

Ryan Mathews
BrainTrust
I think orders will be sharply curtailed for a number of reasons. First, nobody knows if the current pandemic will be under control this year, with the most optimistic estimates now pointing to August at the earliest. Secondly, there is significant evidence that we are quickly moving from pandemic to endemic, with the threat of new variants keeping all of us tied to an ongoing series of booster shots for the foreseeable future. And, perhaps even more importantly over the long haul, purchase patterns have changed – perhaps forever. If or when the pandemic is over life won’t be going back to “normal.” Lots of workers will continue to work remotely for any number of reasons, and most of them will continue to favor “Zoomwear” over my high-style clothing choices. The market for athleisure? Hot! The market for suits and ties? Not so much. As to the online returns problem, if I actually knew the answer to that I’d be unplugged in Tahiti now. What I do know is that an effective answer isn’t on… Read more »
Brian Cluster
BrainTrust

The source of high returns has been well documented as primarily driven by poor or incomplete product descriptions and imagery. According to a Power Reviews survey, the top irritation when researching products online is Poor Product Descriptions – 43 percent of consumers. Yet too often we see clothing on some sites with maybe two pictures and limited information on materials or size. There also may be a need to have a size guide with measurements for various types of clothing on the website because sizes vary by manufacturer. We’ve documented at our company that better data product information can reduce returns.

Retailers may also want to experiment with virtual sizings or have a promotion to invite their best customers in for sizing when it is safe to do so. This information can then be added to customers’ personal profiles so they can access the information wherever they shop and potentially reduce the hassle of returns for the customer and the retailer.

Di Di Chan
BrainTrust

The overproduction of fashion is coming to an end. Previously, brands could afford a lot of waste and still make a profit. Now that people are going out less and buying less, garments’ overproduction shifted from a sustainable theory for intellectual discussions into a real bottom-line-impacting business pain-point. When brands are forced to cut orders to self-sustain, the adoption of innovative fashion technology solutions is accelerated. Circular economy and digital fashion are now in fashion. For example, H&M partnered with Flux for digital rewards and Loop for recycling clothes. Adidas, Macy’s, and Modcloth worked with Zeekit for virtual fitting. Levi announced the launch of a new buyback and resale program to reduce denim waste. COS launched resell collection with Reflaunt. The Fabricant collaborated with DressX and made the first digital fashion for this month’s L’Officiel Ukraine cover page. Change of Paradigm produced a virtual gallery/3-D interactive experience showcase with Spring Studios.

Andrew Blatherwick
BrainTrust
What should really shock people is the level of carry over stock normally held in retail. More than $80 billion is a huge sum and is a massive hit on retailers’ profits. This year is an exception and it is not surprising that retailers are cutting their orders. However what needs to change is the inefficiency of the process used by fashion retailers that could save millions of dollars and also massively reduce the impact on the environment of buying so much excess stock. The return of online purchased stock cannot be a surprise to anyone in retail. It is one of the costs of running an online business. It is also one of the reasons why online retail is less efficient than traditional retail and so getting people back out to the shops is vital for all retailers. The fact marketing people use this as a tool is even more amazing. They do not understand the cost of “free returns.” They may be free to the customer but cost the retailer plenty. Let’s hope… Read more »
Mark Price
BrainTrust

Retailers are learning lessons about a long fixed supply chain model that will change ordering over the long term. The new model will focus on being more nimble, ordering more frequently in smaller quantities and being able to pivot to reflect an uncertain and fast-changing retail environment. This approach will inevitably result in higher costs for the retailers on a per unit basis, but will benefit them by having greatly reduced overages.

Consumers don’t want to return products, especially in these COVID-19 days, so any digital assistance in improving accuracy will be greatly appreciated.

storewanderer
Guest
14 days 17 hours ago
And how will this impact the off-price retailers? Not sure about the sales results but the TJ Maxx/Marshalls and Burlington Stores in my area were very busy through the holiday period and remain relatively busy at this time, and continue to run with extended hours (TJ Maxx/Marshalls until 9 or 9:30 and Burlington until 11 PM). Ross is stocked poorly but it too has decent traffic and extended hours (until 11 PM). I can’t find anything to buy in any of these places but a lot of people are buying from them and buying in large stacks of product. Also I think Target is doing quite well with the clothing category and Walmart keeps lumbering along with their clothing category — both show no signs of cutting orders with full sales floors, clearance racks, etc. So this order cutting thing seems to be an issue specific to the primarily mall-based clothing retailers and department stores like Kohl’s. Yes they are struggling. They have lost the foot traffic. They have made a number of mistakes and… Read more »
Peter Charness
BrainTrust

Some day it will be acceptable to do a quarterly review that says:

  1. We planned down 10%;
  2. We achieved our planned lower sales, with associated costs and margins as per plan;
  3. Intentionally, we didn’t chase winners and missed out in some high growth categories by choosing to stay on the sidelines, and “ignored” some large potential increases.
Michelle Collins
Guest

The facts are that this needs a customer strategy that should include micro-fulfillment center experiences. BOPIS with fitting rooms which deliver real time data and exchange on-site capabilities alongside with customer service tactics that leverage the best of immersive consumer experience marketing. Incentivize them to pick up/try on and share feedback that is integrated in real time with e-comm.

Craig Sundstrom
Guest

Be careful what you ask for: the best — easiest — way to reduce returns is to have people buy less; (I doubt that’s the approach that will find much favor).

We’ve discussed already a lot how to handle this dilemma, and IIRC the consensus, to the extent that one exists, is for more consistency in sizing, and more accuracy in descriptions. The former, unfortunately, is something that needs to be handled at the industry level, but the latter is something within the control of each seller.

Yogesh Kulkarni
BrainTrust
Yogesh Kulkarni
Chief Operating Officer, Antuit.ai
14 days 12 hours ago

Returns present a real problem for many retailers, especially as return percentages are at high levels due to online ordering. When it comes to virtual try-ons, the experience isn’t quite the same. I tried it on Warby and Adidas as I was looking for new glasses and shoes, but knowing the product actually fits is still a big issue.

Also, the reverse logistics for returns is very expensive and most of the times retailers cannot find an easy way to re-merchandise returned items properly. Sure, retailers can try to engage the customer who is back for returns with a compelling store experience to entice them to buy more. After all, most retailers are happy to drive traffic into the store for any possible reason. In fact, Kohl’s tried that with the Amazon return counter. Seems like that hasn’t worked well either.

wpDiscuz
Braintrust
"The overproduction of fashion is coming to an end."
"Consumers don’t want to return products, especially in these COVID-19 days, so any digital assistance in improving accuracy will be greatly appreciated."
"What should really shock people is the level of carry over stock normally held in retail. More than $80 billion is a huge sum and is a massive hit on retailers’ profits."

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