If we want to build a fashion industry that’s sustainably conscious, let’s start by producing a lot less goods. No amount of effort towards creating, sourcing, and using sustainable fabrics and production facilities will have a meaningful effect if the industry continues to over produce and retailers continue to overstock.
Sustainability + Overproduction Cannot Coexist
Think about these two things: First, the global garment industry produces more than 150 billion garments every year, yet there are roughly only 3 billion people who have the means to consume those goods. One billion people on the planet still have no access to drinkable water.
Second, most global brands and retailers carry more than 120 days of inventory in their stores, on their stockroom shelves, and in their warehouses. Meanwhile Walmart, which is about as big as all the other retailers combined, manages less than 45 days of inventory. The same is true of Amazon. Ford and GM keeps roughly 30 days worth of inventory.
Fashion should be a fast turning business. It currently turns about 2.7X a year. It should turn +6.0X a year. What would happen if the amount of inventory in stores and on-hand decreased from 120 days to less than 60? What would happen if the industry produced just 120 billion garments instead of well over 150 billion garments? You can be sure of these four things:
- Sales would improve
- Margins would expand
- Demand would increase
- Sustainability would be massively improved
Brands and retailers can do much, much more with far, far less. By aligning what is made with what can be consumed, the industry can make a giant dent towards sustainability. Plus the tremendously improved profits margins that will be gained can be put back into people, technology, and environments.
If I were Dorthy and could click my heals together while saying “there’s no place like home, there’s no place like home” in order to get home from a terrible and tumultuous journey, I would say the following rule is exactly that scenario for ails of the fashion industry today. Fashion continues to struggle. Stores are closing. Brands are collapsing. No one is winning. And there’s certainly no yellow brick road.
As someone who deeply understands the benefits of what the science of fashion can do when combined with the art of what fashion should be, I fully understand and appreciate the efforts of what a capable merchandise planning MINDSET can do to help the industry today.
I say mindset because it is exactly that. Merchandise planning isn’t a people or a team so much as the mindset of a brand that wishes to build raving fans and succeed at making great product that consumers love. Merchandise planning is a mindset that a fashion business has throughout its organization, which is promoted and driven by a team of people with skills and ideas as necessary as the smartest CEO, the most gifted designer, the sharpest marketer, and the most capable of capable of all the tremendously talented and dedicated people necessary to make this industry thrive.
There are roughly 5 rules that I believe every merchandise planning team needs to embrace in order to be fully enabled and articulate. Brands and retailers that enable these 5 key rules are always high performers and outpace the industry sizably. I can think of only a few brands and one retailer that has a decent portion of these 5 ideals enabled at this time.
I will discuss the other ideals on later posts, but this first rule is critical. A brand or retailer’s departure from it has everything to do with how healthy or unhealthy that business is. This rule is to the fashion industry what calories are to your health. And while your body and health may require a different amount of calories than does your neighbor’s, if you consume more calories than are needed you will gain weight; if you consume fewer calories than necessary you will lose weight.
This rule is about calorie consumption and the fashion industry is morbidly obese. H&M alone has billions worth of unsold inventory according to this NYT article. While I think the article misrepresents the amount of unsellable merchandise for H&M, my own analysis of the fashion industry finds that there is easily $16 billion in excess, unsellable, unnecessary, and dead inventory in the industry right now. In fact the global apparel industry produces more than 150 billion garments each year for a consuming public that equals roughly 3 billion people. Do that math. It does not work. I wrote about this in 2016 in my post titled Wholesale Isn’t Broken, Just Poorly Managed.
Clearly the fashion industry consumes more calories than can be digested. Getting this first rule instilled in your mindset to be a merchandise planning organization is ground-zero to your path towards building a better business that out-paces, out-performs, and out-lasts all others.
Rule #1: SALES + MARKDOWNS = RECEIPTS
This is a pretty straightforward and simple rule that every fashion business fails miserably. It is without a doubt the first thing I look at when advising a brand and retailer. This rule is the single most important concept any business can understand in order to improve business immediately and materially. It is at the core of a merchandise planning mindset.
Let’s be clear about two things here. Firstly, sales are only related to what consumers buy. This is a critical piece of the formula. If you are a wholesaler, these sales are in no way related to what you sell to a retail partner; those are called orders and they are recognized as receipts for the retailer and herein. Secondly, and most importantly, receipts are the value of the goods you deliver and make available for sale to your consumers at their full retail value (MSRP). Kapish? Sales are what consumers consumer and receipts are what you deliver and make available to be consumed.
The amount of goods you make available for consumption less the amount goods consumed reasonably thereafter will absolutely equal the value of the reductions you took to have those goods consumed. If you don’t clear them, they pile up. If they pile up, you don’t have that cash to use elsewhere. It’s like steaks in the fridge. You can buy 20 steaks to eat in one week, but you won’t. You can put some of those steaks in the freezer, but they won’t taste as good; some will be discarded in the trash six months from now when you clean out said freezer. As importantly if not more so, because you paid for all those steaks today, you may not be able to buy the milk you need tomorrow. (The author of this article would like to point out that he is vegan and that steaks are not in his fridge or freezer.)
A better way to think about Rule #1 is: RECEIPTS – SALES = MARKDOWNS!!
Now don’t be fooled into thinking that this rule doesn’t apply to your business. Don’t start to rationalize little head games to drives sales that cannot be delivered. The merchandise planning mindset knows that you can do much more with far less.
If you are a retailer, don’t think you can return these unsold goods back to your wholesale brand and be whole; you won’t. Your valuable store personnel will spend way too much time doing paperwork and packing boxes then engaging with consumers and building fans. Likewise, if you’re a vertical retailer without a wholesaler to fall back on, don’t think you can transfer these goods to your outlet stores and be cleared of them; you can’t and they won’t. That’s lazy and ignorant thinking that is absolutely at odds with a merchandise planning mindset. What goes into a location, should go out of a location.
If you are a wholesaler, don’t think you can drive more goods into your retail partner to place on top of a consumption path that does not exist. Gross sales do not equal net sales. If you have to give your retail partner an allowance, net sales shrink. If your retail partner catches a cold, you get pneumonia. Furthermore, if you’re a wholesaler, don’t think you can bring back things that didn’t sell-thru at your retail partner. You might think you can sell it in then bring it back; that’s asinine. Even if you can bring it back then sell it to an off-price retailer, that’s really stupid. You paid to ship the goods to your retail partner; you bring it back; restock it in the warehouse; sell it again to a discount retail partner; then ship it at a huge discount to that retailer, which only clears excess stuff you created and then ultimately destroys your brand’s reputation.
Be smart and embrace a business mindset and acumen that is founded in utilizing the ideals of merchandise planning properly. Nothing about the conditions above makes sense and none of it is part of a mindset conducive to being properly merchandise planned.
HIGH MARKDOWNS = LOW PERCEIVED VALUE TO THE CONSUMER
HIGH MARKDOWNS = LOW GROSS MARGIN
LOW GROSS MARGIN = POOR INVESTMENT IN PEOPLE, PRODUCTS, ENVIRONMENTS, AND TECHNOLOGY
ALL OF THE ABOVE CONDITIONS ARE UNSUSTAINABLE
SUSTAINABILITY AND OVERPRODUCTION CANNOT COEXIST
The question the fashion industry needs to ask itself is “who’s fooling who?” The best thing any brand or retailer in the fashion industry can do to improve business significantly is to find the proper level of sales that can be reasonably generated without excessive markdowns and then set in stone the right amount of receipts necessary to drive those sales. This is your merchandise planner’s expertise. Use it judiciously.
A Merchandise Planner is the fashion industry’s critical component in seeking clarity to an incredibly complex industry. Your brand has a lot of competition. Consumers have a lot of choices and other ways to spend their money. Fashion is a highly complex business. Your brand has to have a good assortment of goods available in a broad range of styles and colors, bought in many sizes, distributed with pin-point accuracy to many, many doors or locations, and flowed at times most conducive to generating sales to consumers who have many, many, many choices and opportunities to do otherwise.
Do much more with far less and incorporate a mindset that enables, encourages, and is conducive to your merchandise planning team members. Share your thoughts. If you have ideas, let’s hear them. If you know someone who could benefit from these discussions, send them this article and ask them to join the discussion. Likewise, if you find benefit from these posts, be sure to follow this blog.
Merchandise planning has been a tool and resource for the fashion industry for many years. It was developed out of the need for wholesale brands to be able to the speak department store language, and for both of those parties to focus as much on the science of the business as much the art of the product. The idea was that if both wholesaler and retailer could begin to talk the same language of sales, markdowns, receipts, and turn; both could flourish from speaking about sell-thru instead of sell-in.
Essentially we wanted to turn the process of buyers buying and sellers selling inside out. Prior to merchandise planning, buyers from department stores would go to a brand or manufacturer’s showroom to look at product and buy it as they saw it. Buyers didn’t necessarily know if they’d spend $1 or $1 million until they saw the product. Sellers only knew they had to sell as much as possible so they could buy a new car. Merchandise planning, on the other hand, was created to determine the ideal flow and placement of products by month and store so we could deliver sales growth with minimal markdowns and promotions that erode gross margins. Instead of buyers going to market and writing orders later, orders were planned before going to market and completed therein. Science was matched with art.
Strong merchandise planning was behind the rise of the biggest, strongest, and most profitable brands since the 1990’s. Poor merchandise planning is behind much of the weak conditions in the fashion industry today.
Shifting consumer habits and fashion trends have been an issue for 1000’s of years. Consumers today have more choices and places to buy goods than ever. We don’t have to travel to malls or stores to get what we want. We have tools and technologies that show us whats in and what’s out quicker than ever. And consumers also have other priorities by which to spend their money. So what? These are exactly the things that “merchandise planning” seeks to solve for–and it absolutely does not involve a crystal ball. Good merchandise planning starts with producing the right amount of goods according to the appropriate amount of sales possible.
Technology is a remarkable thing; minutia is a terrible thing. At a time when we have more information and knowledge available to us at our finger tips than at anytime other time during our existence as humans on this planet, the fashion industry is going backwards instead of forwards. The single best question the fashion industry can ask itself is what is merchandise planning and how can we enable it so our businesses can thrive again? Designers should design, marketers should market, CEO’s should plan. Most brands and retailers have a process or team of merchandise planners in place. None are using it properly.
So what is Merchandise Planning?
Merchandise planning is the effort to optimally plan the amount and placement of product so it is prepared to generate the highest level of full-priced sales possible. Strong merchandise planning ensures that a brand’s assortment and sensibility is fully realized everywhere a fan or consumer of the products may find those goods. It places products into channels, doors, and locations so they sell-thru quickly; with few markdowns and promotions, and without the need to redistribute those goods elsewhere at a later date. What goes in, goes through quickly.
Products are awesome when they sell-thru. They’re “off-trend” when they don’t. Both of those functions are the result of the amount and placement of products more so than the product itself. Good merchandise planning seeks to find and forecast “real” sales potential and then matches, as close as possible, the amount of goods necessary to generate those sales at full-price by style, size, door, and location at the right time. Inventory is expensive when it has to be marked down; it’s a calamity when it’s stored forever, and it’s a shame when it’s redistributed.
Here’s what merchandise planning is not: merchandise planning is not a sales assistant; it’s not a buyer’s assistant. Merchandise planning doesn’t report to sales, nor does it report to buyers. It also doesn’t report to finance or merchandising. Merchandise planning is just merchandise planning. It’s as important as a sales team; as critical as a buying team, and as vital as any design and merchandising team. Merchandise planning drives net sales and gross margins.
Merchandise planning orchestrates How Much, When, and Where. If sales are strong and gross margins are high, it’s because of solid merchandise planning. If sales are weak and gross margins are stunted, it’s because of poor merchandise planning. If inventory turns quickly, it’s because of thoughtful merchandise planning. If inventory turns slowly, it’s because of careless merchandise planning. If you are delivering the products today that consumers want tomorrow, it’s because of an aware merchandise planner. If you are delivering products today that consumers likely won’t buy until next month or thereafter, it’s because merchandise planning has not be enabled.
Merchandise planning seeks to simplify. It doesn’t look to complicate. Merchandise planning uses history to inform and foresight to drive. Most importantly merchandise planning isn’t a “people”. It’s not a “technology”. Merchandise planning is a MINDSET. It gets the right goods in the right locations at the right time.
So how do you know if a brand or retailer has enabled strong merchandise planning? It’s really quite simple; sales would be strong, gross margins would be high, inventory would turn fast, and fans would be raving.
How does a traditional department store retailer like Macy’s take on and compete with the tech titan Amazon? It’s not by trying to catch-up to Amazon’s technology, distribution, and logistics. That would be futile. It is, of course, by creating a compelling experience so consumers want to spend time in stores. But that’s obvious; that’s not a strategy, it’s a requirement.
So what is it that department stores can do to gain some grip again with consumers and stakeholders? It’s not what most would find natural, and it would certainly involve a radical change in mindset.
Department stores rely on brands. Brands rely on department stores. Together they can be very good partners, but for the most part they haven’t been. Many brands, including major ones like Coach, Ralph Lauren, and Michael Kors have gravitated away from and out of the department store channel. That’s entirely due to too much promotional activity driven by the department stores that destroys a brand’s clout and kills its profitability. No consumer covets a brand that’s on sale all the time, and no brand wants to work with a retail partner that loses their money all the time.
So let’s fix that.
Retailers, and especially department stores, would benefit immensely if they focused on building healthy, fast-turning, high margin businesses for the brands they sell. As much as many brands don’t like selling to department stores, they are equally uncertain of working with and selling through Amazon. So use that. Department stores should focus on nurturing brands, not killing them and pushing them away. High-impact retailers should look to turn their consumers AND their brands into raving, raging fans.
Granted this may seem simple, but it’s quite the opposite. One of the hardest things for any legacy business or operator to do is to change mindset. It’s not easy to change teams of buyers at department stores from thinking about how to drive sales regardless of the cost to thinking about how to build high-margin, full-impact businesses that drive raving fans and brands. It’s not easy to convert consumers from “seeking discounts” to “wanting brands”. And it’s not easy to say “let me help you build your business” when you’re used to asking “what margin can you guarantee me”.
Likewise its not easy for wholesale teams and leadership to change their mindset from driving bookings with little regard for what can be consumed to focusing on building upon high-margin net sales that pay the bills and enables investment to grow and innovate. It’s not easy for them to think about their businesses at the consumer level as opposed to the account level. And it’s not easy for wholesalers to strategically plan focused, fast-turning businesses as opposed to jamming in broad assortments of stuff that stunts demand, enables markdowns, and baffles consumers.
Regardless of how difficult all this may be, it is absolutely critical for any retailer or wholesaler looking to keep itself from falling further and further down the slippery slope that’s being created by Amazon. Doing this is absolutely worth the effort. And let’s be clear, wholesale isn’t going away; that’s what doing business with Amazon is. So at the end of the day, the only thing that is truly difficult is continuing to do that which does not work.
Let’s fix this now.
Photo by Macy’s Backstage/facebook
The first step in thinking differently is finding a sense of curiosity. You can’t think different if you’re not willing to learn, and you can’t learn if you lack the curiosity to do so. Brands and retailers should stop assuming they know what customers want. They don’t. But they can have the curiosity to engage with customers and ask them. Learn what they want.
The second step to thinking differently is gaining a broad set of experiences. Leonardo da Vinci was primarily interested in science and engineering. He was a reluctant artist at best. Yet it was the experience and knowledge he gained from dissecting more than 30 bodies that allowed him to paint Mona Lisa’s smile.
As a brand or retailer, you don’t necessarily have to seek outsiders with different experiences to add value to the whole. Encourage everyone in the company to pursue a life well lived. After all, a life well lived brings a bounty of rewards to everyone. No one has done well living under a rock. Equally as important to encouraging your teams to gain outside experiences, you absolutely must seek diversity of people and thought. Mix it up. There is no room for a lack of diversity by race, gender, age, and education. Likewise mix up your teams. Design should live no more in a bubble than finance.
The third step toward thinking differently is compassion. There’s an old saying that you can’t argue with stupid. Well I have come to learn that that’s a stupid thing to say. It’s not that other people are stupid. They may not have gained the comfort or capacity to appreciate steps one and two herein. Encourage them to do so. But let them do so on their terms. More likely than not though, their curiosity and experiences have provided them a different lens by which to think differently, from you. This, by the way, is where the magic happens. It’s called collaboration.
When all of us are curious, and when all of us seek different experiences, it’s leads us to the sharing of information and knowledge. You can’t grow if you don’t learn and share. Likewise your brand can’t grow if doesn’t stimulate curiosity and collaboration among many points of view from a diverse set of people who are hungry for learning and excited for experiences.
There’s a seismic difference between gross sales and net sales for a wholesale brand. It’s called discounts and allowances.
Gross sales are fake sales. They’re not real. They don’t go into your pocket. They don’t pay bills, and they’re irrelevant. Gross sales are just shipments to retail partners who aren’t going to pay you the full value of those shipments, ever. Yet many brands continue to get this dead wrong. It’s destroying a lot of businesses.
What doesn’t sell-thru, eventually comes back. Sales teams at the brand are constantly pushed to sell more stuff to more retail partners. It’s done in an effort to drive more goods into more retail stores to ultimately try to hit what are almost always unrealistic wholesale revenue targets. Buyers at the retail partners, on the other hand, don’t mind taking the goods. Why should they? If the goods don’t sell-thru or the margins don’t meet plan, the brand picks of the tab regardless–as they should. So who’s fooling who? Does anyone really think this is a good process? If a customer doesn’t buy the product, it doesn’t become a sale. If a tree falls in a forest, and we’re not there, we won’t hear it.
Net sales are real sales. They are the dollars that go into your pocket. They pay for the products you made, the talent you pay, the marketing you do, the technology you should have, and the experiences you must create. When net sales are aligned with what’s sold-thru, gross margins skyrocket. Gross margin is the money left after the goods you made are paid for. The more crap you make, the more $$ you pay. And the more $$ you pay for the goods you made to do the sales you didn’t do, the less you keep to use for those valued employees, that useful technology you could have, and those experiences you should create.
You don’t need $100 worth of goods to do $10 worth of sales. Nothing about that is reasonable. Wholesalers need to manage their channels RADICALLY better if they want to be successful. Incremental change to this effort is useless. Lower gross sales does not mean less net sales. That’s a complete and total fallacy for 99% of the wholesale brands in the fashion industry today. Quite the contrary–lower gross sales translates into higher net sales with stronger gross margins.
Focusing on net sales with high gross margins is the HABIT of high-impact brands. Driving gross sales is at odds with that effort.