Wisdom from Phil Knight, creator of Nike

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“Supply and demand is always the root problem in business. It’s been true since Phoenician traders raced to bring Rome the coveted purple dye that colored the clothing of royals and rich people; there was never enough purple to go around. It’s hard enough to invent and manufacture and market a product, but then the logistics, the mechanics, the hydraulics of getting it to the people who want it, when they want it—this is how companies die, how ulcers are born.”

— from Phil Knight, “Shoe Dog: A Memoir by the Creator of Nike”

Be sure to read this memoir by Phil Knight of Nike. It’s a great look into what it takes to create and build a world-class brand like Nike. Anyone interested in starting a business will quickly appreciate that luck, drive, grit, and determination all played a major role in the birth and growth of Nike. You’ll need all of those to build your business too. And for anyone in the fashion or consumer industry, the above quote is gold. The “HOW MUCH, WHEN, AND WHERE” is equally as important as the “WHAT”. It’s doesn’t matter how much data you read, it’s what you do with it that counts.

photo: Simon & Schuster

It’s Not Science, It’s Fashion. 3 Things to Improve Biz

Wierd-AlThere’s three things I think brands and retailers need to start getting better at if they want to improve business right now. We know you have to create great product and you have to have an awesome marketing campaign, but you also have to manage the amount of product you produce and create a sense of demand.

I cannot even begin to tell you how many times I’ve listened to people say that this product didn’t sell well or that item was a bomb. Team after team, brand after brand, and retailer after retailer continue to over develop, over assort, and under perform. It’s not because of uncooperative weather or bad product or new trends or whatever excuse is made at the time; it’s because too much product was made and bad bets were placed against the wrong styles within that inventory. Too much, too often, not focused…

Here’s an important fact: no brand or retailer has ever gone out of business because they had too little inventory–it’s the opposite.

Here are three things to get serious about if you want to be a player and have a product, brand, or business that consumers want with passion.

 

#1 GET REAL ABOUT YOUR SALES ESTIMATES. First things first, sales are the amount of products consumers buy of the things you make. It doesn’t matter if it’s consumed online or in store. It also doesn’t matter if you’re a wholesaler or retailer. You have to know how much goods you sell to consumers. If you don’t, figure it out fast.

Now that that’s out of the way, let’s recall Sir Isaac Newton’s first law of motion, which is a body in motion tends to remain in motion unless acted upon by an outside force. If you need further insight on this matter, I’d recommend reading the amazing book by Neal Stephensen called Seveneves. In it you can read all about orbital paths and the forces necessary to disrupt those paths and cause meteors or other bodies to behave like a good pet and do as you say. It’s a book recommended by Bill Gates for crying out loud so you know it’s awesome–and geeky.

Anyhow back to reality, like the first law of motion, the same is effectively true with sales. Something big had to happen to go from selling nothing to selling something. You had to create or disrupt another force. Trends fade due to other trends gaining momentum. Think of trends like friction–it just is and you have to account for it.

Now don’t be fooled, sales are highly predictable especially when you have an existing business with data. They are like orbital paths. I’ve worked with teams and we have consistently projected sales 18 to 24 months into the future that have actuated at plus or minus 2% (that’s freaking amazing) barring any major events like 9/11. In all the years of estimating forward sales, we have found that unless something significant and meaningful happens, those sales continue along a very predictable path much like a body in motion against the normal forces of gravity and friction–economics and trends.

Another point here is that the larger the body, or sales volume in our case, the more of an outside force or action is needed to change its course. For physics buffs, this is Newton’s second law of inertia–big stuff needs a greater force to move it than does little stuff. You should be able to quantify any meaningful effort to change the path of your business—new shops, stores, distribution, market reach, etc. More inventory and more iterations of the same products does little to affect change. It’s just more mass. In order for change to happen, the disruption has to be material and it has to be an investment in time, money, and resources.

As the saying goes, “hope is not a strategy”. You cannot “will” your way into gaining more sales anymore than you can use your mind to move a stone.

Get real about your estimates and know that hope is not a strategy.

 

#2 CUT INVENTORY IN HALF. Yes you heard me and no I’m not kidding. The global apparel industry produces more than 150 billion garments every year and there’s only around 2 billion people with the means to consume those goods! The ratio of what you produce to what you actually sell at margin probably isn’t much better. Take a look and see how many units you make in a year compared to how many units CONSUMERS purchase at viable margin in a year. I promise it will be staggering.

If you took the time and figured out how much you honestly expect to be able to sell in a year or period, why would you buy 2 or 3 times the inventory you need to generate those sales? It’s a waste of money and resources plus it stunts demand. When we buy too much inventory, we flood the marketplace with goods and destroy any sense of demand. Don’t be afraid to let your consumers WANT your products.

As a rule of thumb, what you plan to sell plus how much you can responsibly take in markdowns, equals the amount of receipts you need to deliver. It’s just math. Don’t make it complicated. If you expect to do sales of $100 and want a markdown rate of 30%, buy $130 worth of product. Why would you buy $500 worth of stuff to sell $100 worth of products?

Hear’s a cheat sheet: if the product you produce has a lot of sizes, e.g., footwear and apparel, you should buy no more than 1.4x sales. If your products don’t have sizes, e.g., handbags and jewelry, receipts should be no more than 1.2x sales.

This shouldn’t be looked at as tough medicine. It should be viewed as religion. It should be CORE to your business acumen. You can do sales with a lot less goods. And guess what? Doing that only creates demand, it generates a lot more gross margin, let’s more people keep their jobs, and it’s the right thing to do for our environment.

Stop being afraid and do more with less.

 

#3 PLACE MEANINGFUL BETS. A lot of brands and retailers hedge their buys. Instead of taking big bets, they buy a little bit of everything–and a little bit of everything results in a whole lot of nothing.

After you’ve completed step 2 above and buy a lot less goods in general, now you have to buy more of the right stuff and less of the wrong stuff. If you have data and if you’re engaging your customers, this is easy. Don’t make it more complicated than it is.

Here’s the point, you have to figure out what is going to drive sales and buy a lot of those products. You also have to figure out what is going to excite your audience and splash those products around. Don’t buy all your SKU’s equal. Don’t even let them get close. Pareto’s principle states that 80% of effects come from 20% of causes, which in our case means 20% of your SKU’s will likely generate 80% of your sales. Don’t fight it. It works. The beauty of this also is that it doesn’t mean you can’t or shouldn’t have breadth of an assortment. Go at it. Have a broad assortment of goods. Just make sure that a small portion of those SKU’s account for most of your inventory. What consumers see and what you have in the stockroom should be two completely different things–an optical illusion. That’s what inventory management is all about.

If you’re not buying your top SKU’s exponentially deeper than your bottom SKU’s, you’re destroying your business and it’s your fault. It’s not the weather. It’s not the economy’s. It’s not the design team’s fault. And it’s not trends. It’s you, and I mean that if you’re a planner who figures out how much to buy for when, an allocator that distributes the product, a merchandiser that figures out what to buy, a marketer that looks at what to promote, or a leader that looks to build a healthy business that people want to be a part of. If you were a portfolio manager at an investment company, which essentially we all are in some manner or another, your success would depend on how well you place your bets and beat the market or your competition.

 

HERE’S THE GUARANTEE. If you are realistic and honest about how much consumers are likely to buy of your products, buy just enough inventory to generate those sales, and place big bets inside that inventory, I guarantee you will drive significantly more sales, capture more gross margin than you know what to do with, and your consumers will want your products more than ever before.

Final food for thought: if we produced 10% fewer garments each year, that would equal 15 BILLION fewer garments going to landfill. That’s 15 billion less in materials production, which results in waste, pollution and toxins. Furthermore, none of that would be lost sales. All of it would be an increase of profit in terms of margin, our environment, demand from consumers, and strength of our industry.

IT’S NOT THE PRODUCT, IT’S THE THINKING

Einstein-FrameIt’s been another challenging year for retailers, department stores, and brands. Mall traffic was down 10.7% this holiday season according to RetailNext. That decrease is on top of the high-single digit decrease last year, and mid-single digits decrease the year before that. But hey, digital is up. And guess what–all told, sales this holiday season were ok.

Macy’s reported comp store sales down almost 5% November and December and attributed 80% of that decrease to unseasonable weather conditions. According to a WSJ article, Macy’s CEO Terry Lundgren said “although consumer spending seemed healthy, people were buying items that department stores don’t sell, such as cars, electronic gadgets and home improvement projects.”

So fewer people are going to malls and department stores, and more consumers are buying items not available in those stores. Is this a matter of people not wanting those products or is it more a matter of brands not adapting to the new consumer?

A lot of effort is being done to try to figure out how to better utilize digital tools and fuse them with brick-and-mortar businesses. Brands are trying out Snapchat, jumping all over Instagram, and ultimately trying every promotion possible to get people to buy their goods.

So in this regard, it appears new ideas are being attempted. But aren’t these all really just iterations of the same? Aren’t they all just repackaged push-marketing strategies designed to sell consumers products already bought, made, and delivered into thousands of stores across the country?

The truth is the industry still produces products with long lead-times and then pushes those products to consumers. No one has yet come to the realization that maybe the problem isn’t the creativity, marketing, and product, but rather the massive amounts of inventory being bought and produced with virtually no involvement from the customer before hand. Maybe it’s not a problem of WHAT, but rather of problem of HOW MUCH to WHOM.

In 2010 the global apparel industry produced over 150 billion garments. Should I say that again? More than 150 BILLION GARMENTS ARE PRODUCED EACH YEAR, and it’s growing. The question we need to ask is FOR WHOM ARE THESE 150 BILLION GARMENTS BEING MADE?

There are only around 7 billion people on this planet now, which is more than 20 garments for every man, woman and child on Earth. Seems like a lot to me! But lets also keep in mind that roughly two-thirds of the population isn’t a consuming class of people. Fewer than 2.5 billion people do virtually all the consumption on this planet. There are 1 billion people still not able to get good drinking water. Let’s face it, most people don’t have the means, wants, or needs to consume anywhere near the amount you and I do.

So who’s buying 150 billion garments each year? The answer surely is not all the people on planet earth. And whether one wants to argue about the impact of this excess production in terms of what goes into landfills, how much is lost in profits, or how this destroys brands, it’s a clear indicator of how saturated the industry is with inventory. It’s not the product, it’s the thinking.

I think most brands and retailers would find similarly startling results if they were to look at UNITS PRODUCED COMPARED TO UNITS BOUGHT BY CUSTOMERS at viable margin.

Retailers, department store, fashion and specialty store businesses have to pivot their thinking. It’s what we’re doing at PreeLine by building a platform that engages modern consumers so we can learn what they want, when they want it, and how to get it to them efficiently. We think the solution to building a brand isn’t more products, higher inventory levels, and deeper discounts. It’s not more stores, more advertising, and more messaging. Those efforts have been done over and over again. And to Einstein’s point on insanity, the results aren’t even staying the same—they’re getting worse. We’re past being insane, doing these things over and over again is delusional at best and criminal at worst.

Product differentiation at this point is negligible. Literally all the products at stores like Macy’s are iterations of what is, was, or has been. Marketing through new social media channels is a given–you’re supposed to do that. The pivot is how you approach managing the millions or billions of dollars in inventory.

Is the “Yogafication” of America waning?

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The team at PreeLine took a look at how users of our new platform were responding to future products coming this fall and found signs that casual looks could be waning. During the month of August, in both mens and women’s categories, they saw reflection scores on products tagged with casual words like leggings, hoodies, track pants, sweats and windbreakers weaken compared to prior months.

Reflection scores are an algorithm the team uses to understand a combined socialization effort on an item. This includes a range of efforts users undertake on a product like what they love or hate, what they comment on and with whom, as well as what they share to external social media outlets like Facebook, Pinterest, Twitter, and Instagram. The more positive a reflection score, the more people are sharing and socializing an item or group of items that they like and that those items are validated positively by peers.

Meanwhile during the month of August, products with more styled looks and tagged with words like embellished, leather, and fur gained reflection score momentum from prior months. In menswear, we saw a clear gain in scores on items tagged as Tailored. John Varvatos and Ralph Lauren were strong performers in menswear. Alice and Olivia, Chloe, and newcomer Two Eggs were top performers in womens wear.

What do you think? Could we be moving away from yogawear? If so, where might we be headed? Join the dialogue at PreeLine.

View the entire report here PreeLine August Report