Merchandise Planning 101 is Fashion Industry Rule #1

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.