Fashion companies might sell dreams, but they’re in the business of making the looks those dreams hang on.
And business has been tricky.
The stop and go of the pandemic made an almost impossible situation for brands and retailers. First, pandemic-driven supply chain backups kept goods from stores. Then a bounce back — and some overenthusiastic buying — created a glut that retailers have spent the last year clearing out.
It’s a project that’s only partially completed. A sample reading of 20 top retailers by WWD found that only a quarter managed to actually reduce inventories last year, while a majority still had inventories up more than 20 percent.
The caveat is that not every business is the same — some had more inventory than others last year and some are trying to keep up with more growth. But it’s an issue that almost every fashion company faces one way or the other today.
VF Corp. is a good example.
The company, parent to The North Face, Vans, Dickies and more, has long burnished its reputation as a savvy operator but logged nearly $2.6 billion in inventory on its books at the end of its third quarter, a year-over-year increase of 101 percent.
Inventory was up 67 percent adjusting for a vendor financing program that changed when VF technically took ownership of the goods, but that’s still a big increase and a problem that passed from the former chief executive officer Steve Rendle to interim CEO Benno Dorer.
“Lengthened manufacturing and freight lead times, larger upfront product buys, unpredicted demand spikes from elevated promotional activity in the quarter, plus higher than normal customer order cancellations add up to unsatisfactory customer service, elevated inventory and significantly higher costs,” Dorer told analysts after reporting quarterly results.
He said the company was taking “aggressive actions” and would work down inventories to “more normalized levels” by the end of the current quarter.
VF’s laundry list of inventory woes is one that will seem familiar in C-suites across the industry, where a shift of focus is finally putting the back of house front of mind.
“Before COVID-19, the main focus in retail, especially in fashion, was promotion and getting the products to the consumer in the right fashion, all kinds of personalization,” said Inna Kuznetsova, CEO of supply chain planning firm ToolsGroup. “Being able to deliver that customer a consistent experience became less of a differentiator and more table stakes for a lot of fashion retailers.”
As retailers raced to optimize the shopping experience, supply chains took a back seat or plugged in holes, for instance, with excess goods ready to be shipped to keep up with customer expectations.
“That made sense during the last few years, due to all kinds of disruptions in shipping and growing lead times in China,” Kuznetsova said.
Now that shoppers have pulled back — with inflation making everything more expensive and the threat of recession still in the air — merchants are starting to become more mindful.
Kuznetsova said AI powered planning and allocation can help merchants be much more precise, keeping stores ahead of the consumer curve while also operating more efficiently and sustainably.
“If you do not plan on how many items will be sold, if you do not work on reducing the excess inventory, if you do not plan it well, you are doomed to add shipments back from the stores to other stores and every shipment means CO2 emissions,” he said.
Getting it right — or as right as possible — is something that only some brands have put real emphasis on.
“We still do see some retailers trying to do their planning on Excel sheets,” Kuznetsova said. “There’s a reason why you may not find a certain brand on the shelves of TJX” the off-price giant that buys goods that full price stores have trouble clearing.
Consultant Timothy Derr, a partner in Kearney’s consumer practice, agreed that the trick — or part of it — is to both have some kind of “demand sensing” to understand what’s needed where and then a way to act on that information.
Easy enough to say, harder to make work in the long and complex process of getting inventory from factory to storefront.
Derr said companies are pushing ahead with both short- and long-term solutions.
“We’ve been implementing inventory war rooms to tackle the upswing in inventory,” he said. “But it’s also about making these longer term decisions. You can liquidate all you want, but for a lot of companies, it’s getting this overall operating model set.”
It’s a big ask after the marathon of the pandemic, financial crisis and corporate reinvention.
“A lot of these companies have tried to fight fires and stay stable during COVID-19, which is a daunting task in itself,” Derr said.
But the world won’t stop and wait for fashion to catch up.
“The biggest piece is having an operating model that can pivot when you have demand sensing,” he said. “The idea of, what levers can you pull? We have the inventory coming in. Is it pricing and promotion [that will address any disconnects]? Is it early enough in the process that we need to reduce buys? Do we need to think about how we manage our inventory versus core product and seasonal product in the future?
“This is the number-one priority for a lot of retail leadership teams and I think you’re going to see that step change this year,” Derr said.