Managing stock has always been a tricky part of any business. But it becomes even more so when demand evaporates overnight as occurred with the outbreak of the Covid-19 pandemic and the subsequent lockdowns worldwide, prompting manufacturers and retailers to be nimble and explore various different solutions.
Many retailers were already under pressure before the pandemic due to the competition of internet, higher costs and changes in consumer patterns, which was leading to a gradual weeding out of the weakest. Now, UBS estimates that the current health crisis could led to some 100,000 stores of all type closing in the U.S. over the next five years, more than triple the number that shut during the 2007-09 recession.
Fighting for their survival early in the pandemic, some distributors redirected stock to retailers in countries where sales points had been allowed to remain open. But, as the virus spread, many decided to cancel orders from suppliers instead, pushing the problem upstream.
That caused an inventory backlog, with Indian factories, which reported an 84 percent drop in sales during May over the same period last year, according to The Economic Times, left to manage mountains of stock. In April, India’s Council for Leather Exports urgently called for foreign buyers to protect workers by fulfilling purchase contracts. Meanwhile, cancelled orders from H&M forced the Srirangapatna factory – a production unit in Karnataka, India which delivers 70-80 percent of its output to the clothing retail giant – to announce 1,300 overnight layoffs on June 6, sparking protests from workers.
Due to the lockdowns in its various markets, Primark’s stores were closed over a 12-day period from March 11. To retain cash and cut costs the retailer implemented various measures. These included the cancellation of orders for any products for which the handover date from the supplier was after April 17. At the start of the re-opening of its stores, Primark had £1.5 billion (€1.7bn-$1.9bn) worth of inventories on hand, and had also made commitments with suppliers for a further £0.4 billion (€0.4bn-$0.5bn). This compares with a typical stockholding of £0.9 billion (€1.0 bn-$1.1bn).
Destruction of stock off limits, e-commerce to the rescue
The destruction of excess stock has been a favourite technique of fashion companies, but it is becoming less viable due to public outcry and political pressure. Burberry made an industry-leading commitment in 2018 to stop the wasteful practice. Last year, the French government announced plans to outlaw by the end of 2021 the destruction of non-food goods that already have a recycling network and by the end of 2023 for other products. The fashion industry is especially targeted by the new legislation because it has to renew its product lines more frequently than other industries and often has unsold inventories. In a panel put together by the American Apparel and Footwear Association last month, Amina Razvi, executive director of the sustainable apparel coalition, said “[companies] must look at ways to find responsible solutions for their deadstock”.
Instead of destroying stock, Caroline Rush, chief executive of the British Fashion Council, urged designers in an interview for Euronews to recycle excess inventory, “so that the product we have is re-used, shredded, goes back into new yarns and created for the future”. Indian experts have suggested domestic textile producers use stock to create reusable personal protective equipment (PPE). Worldwide, many companies have re-engineered part of their manufacturing facilities to produce PPE, often using semi-finished goods or components in stock and normally used for their ordinary trade.
E-commerce has been a lifeline for many companies. Inditex, the owner of Zara and other brands, recorded a first-quarter drop in sales of 44 percent but online sales surged by 95 percent in April and inventory fell by 10 percent. The company is therefore increasing internet commerce, and announced in June it would wind down up to 1,200 smaller stores concentrated in Europe and invest €900 million for the next three years in centralised stores and its online platform.
Well-structured retailers have often registered explosive online growth, albeit not fully compensating the loss of sales in physical stores. The U.S. footwear group Shoe Carnival disclosed that in the beginning of its fiscal second quarter, comparable e-commerce sales were up by 470 percent. Meanwhile, its peer Caleres indicated that e-commerce represented about 28 percent of the business of its Famous Footwear chain in the first quarter ended on May 2, compared with about 10 percent in the full year ended on Feb. 1.
Meanwhile, Zalando has been developing its Connected Retail program that enables individual stores to sell online, by extending its offer to waive commissions on the service to Poland, Sweden and Spain. The initiative, which was originally aimed at supporting brick-and-mortar stores during the coronavirus crisis, was introduced in Germany and the Netherlands on April 1.
The offer will run until the end of 2020, also covering Germany and the Netherlands where it was initially scheduled to end on May 31. On top of waiving commissions, the package includes offers of weekly payments by the e-tailer to the members of the program.
To alleviate the impact of the Covid-19 pandemic and help Italian shoe manufacturers, which are mainly small or medium-sized companies, to sell online, Assocalzaturifici launched BDroppy, a multichannel platform to help its members sell online all over the world by reaching thousands of dropshippers. The project is a ”strategic partnership” between the Italian footwear manufacturers association and Branddistribution. BDroppy will enable the companies to sell their products online to over 450,000 retailers and digital vendors worldwide.
The emergence of online resale marketplaces has provided alternatives for stock clearance. Luxury Soho, launched by Alibaba, allows fashion labels to target specific groups such as Millennials and Generation Z. The designer Philip Lim struck a deal with luxury marketplace The RealReal to shift unsold 3.1 Phillip Lim items in June.
But some companies have continued to shun online sales. Before the pandemic, TJMaxx-owner’s TJX Cos made only 2 percent of sales online, and stopped taking online orders entirely during the lockdowns. After most of its stores were open in the second half of June, it limited e-commerce to preserve the “treasure hunt” experience that is integral to its sales strategy. Primark, which relies entirely on its physical stores, confirmed that it will continue to shun e-commerce. The company did try e-commerce in 2013 through the U.K e-tailer Asos but reckoned that the channel was not adapted to its model of a fast turnover and low costs, and that home delivery would inevitably impact.
Interestingly, with the reopening of its stores, TJMaxx, which generally sells at lower prices than its competitors, enjoyed strong turnouts, while there were reports on social media and in the press of enormous queues outside Primark stores when it reopened its stores in England on June 15.
Varying discounting strategies
A common approach to reduce stock has been to adopt aggressive pricing strategies. Gap and Victoria Secret offered unprecedented flash sales online of 75 percent and 60 percent off respectively in April, and the number of discounts across the U.S. were up by 18 percent by April, according to the analytics firm Edited. As brick-and-mortar stores have reopened discounting has continued, with Saks offering 70 percent off hen it reopened its flagship New York store at the end of June. But discounting risks accustoming consumers to lower prices as well as harming brands’ image – especially in the luxury sector – experts warn. Muji, John Lewis, Uniqlo and Primark have all therefore eschewed markdowns, while Gap scaled back on its previous lofty price cuts in June.
Edited pointed out that each region has implemented different discounting strategies. Germany is currently the most aggressive, raising the average level of reduction and the proportion of products marked down above last year’s levels, matching proportions in the U.S., while Italy is offering the lowest discounts among the markets analyzed, it said.
Adidas, Next and Gap are favoring pack-and-hold strategies till next spring, a strategy that works best with non-season specific stock. NeroGiardini, the Italian footwear brand that so far has doggedly steered clear of internet sales to end users, has used its 12,000 square meter of storage space to mothball 150,000 pairs of shoes. It will sell the stock in spring 2021, alongside a small number of new models.
Alessandro Bracalente, a manager of B.A.G., the company that owns NeroGiardini, said that first-half losses are limited to around 20 percent. This has been achieved by focusing on markets in which brick-and-mortar shops rebounded from lockdowns quickest, for example in Germany, Austria and Switzerland.
Geox also indicated that it plans to manage this year’s excess stock from 2020 in a profitable way over an 18-24 month period, by including new and ongoing models in future collections and selling the remainder through the network of outlets and promotional channels.
Other companies have opted for markdowns but funnelled sales through alternative channels, so as to distribute discounted products discreetly. In May, Harrods, the iconic Knightsbridge luxury department store, announced it would open its first outlet store in London’s Westfield shopping centre for the sale of this season’s inventory. Its flagship location, which reopened in June, has been reserved for new collections.
Across the Atlantic, Dick’s Sporting Goods launched two new clearance concepts in June, taking the number of its clearance centers to 11 from three. The chain’s “OVERTIME” locations, which are offering 75 percent off brands including Nike, Adidas, and Under Armour, will be open for the foreseeable future, while “Dick’s Sporting Goods Warehouse” stores will offer discounts of up to 90 percent on top brands and will be open for the next six months only.
Governments to the rescue
Ultimately, government intervention may be key to help manage stock accumulated during the crisis. France pushed back its clearance season from June 24 to July 15, to provide an extended window for the sale of spring/summer collections at full prices, so upholding margins for retailers. Germany led the way in Europe for cuts in value-added tax, which it slashed from 19 to 16 percent on non-food products and to 7 percent on restaurants. It hopes that the measure will stimulate consumer demand, but the move has also fuelled fears in neighboring markets that the initiative will lure away consumers putting further pressure on local retailers.
One cannot rule out stronger government measures to help mop up excess stock, including hindering imports. The Indian government has sought to support domestic manufacturers by blocking imports. In the wake of the bloody border stand-off between India and China in the Ladakh Himalayan region from May, India has tightened customs scrutiny, banned some Chinese apps and banned the import of all Chinese power equipment. Last month, Ram Vilas Paswan, the food and consumer affairs minister, called for Indians to boycott imports, describing China as “ a hostile neighbor” and “India’s number 1 enemy”.
A desire to shift stock is one reason for the measures. Indian paper mills, which are facing severe demand compression at a time China and Indonesia are pushing excess inventory into the domestic markets at cheap prices, have asked the government to raise tariff walls on paper imports from China from the current 10 percent to the 25 percent, Financial Express reports. There is speculation that India is considering raising import duties on other products, including chemical and leather goods, for which tariffs could rise from 8 percent to 35 percent.