“The increase in permanent markdowns in fashion retail continues to expand. Driven by the perception that this offers a solution to difficulties such as overstocking and slow sales growth, managers are betting on this marketing tactic. However, the experiences in the USA should serve as a warning about the results of applying this strategy, saturation and cannibalization of sales. But this is not happening; Asia and Europe are headed towards the same destination, guided by the myth of the ‘panacea’ of promotions and discounts. The fashion industry is entering a cycle of serious risk of margin erosion unless retailers and brands thoroughly reconsider their business strategies”.
In this first paragraph, you can clearly see what McKinsey confirms in his comprehensive report The State Of Fashion 2018. In the framework of this comprehensive industry report, which you can download for free here, we will analyze this business tactic which has an obvious impact on fashion brands and direct effects on sourcing. In this last area, sourcing and provisioning, this practice forcefully makes us protagonists of a vertiginous race to continue reducing costs – purchase price – while shortening the development and production times of the product to increase the speed to market and maintaining or improving its quality.
Discounts to eliminate excess stock.
Whether in stores, shopping centers or even in e-commerce, promotions with reduced prices have become a constant in the fashion retail landscape and this strategy will continue to grow in the near future. Today’s customers demand lower prices and want a satisfying shopping experience when it comes to finding that unique item at an unbeatable price.
At the same time, discounts offer brands and retailers an alternative to quickly eliminate overstock. This is a point that has become critical due to the difficulty that brands currently have in accurately predicting the changing desires of the new generation of digital consumers.
Excess stock has been increasing season after season due to increased e-commerce sales, where return rates average more than 20% compared to physical store sales. But we must say that discounts are only a temporary solution to a problem that must be solved with the establishment of permanent and organic measures.
Saturation and cannibalization in the US.
The United States adopted strategies of continuous discounts, to the displeasure of traditional retailers; during 2016 two thirds of North American consumers bought items in a discount retail store. Reduced price chain stores were for a long time the winners in the market and even some of them continue to show significant sales growth today. Conventional retail responded to this commercial onslaught by launching its own reduced-price promotions. To this situation we must add the multiple openings of outlets, online sales platforms also joining the strategy of discount and the increase in the number of options available – styles – for each of the fashion seasons through a new concept of production and supply, the Ultra-Fast Fashion.
After a long cycle of aggressive price increases, a slowdown in sales in these discount stores progressively appeared and with it, the first signs of strong competition between the concepts of reduced prices and even with the full-priced items within the same brand. This showed that the US market was approaching saturation and cannibalization.
Right now, the signs are very clear and we all know that the US low price market has passed a tipping point and is a less viable source of growth for the future, which is why fashion players in the US should be cautious when looking at their business planning for the coming years.
In Asia and Europe, outlets and discounts.
Meanwhile, other global markets have discovered the potential of discounts. Between 2003 and 2017, the number of reduced-price stores in Europe has doubled and during 2018 this trend has remained constant. As in the US, the current European market is dominated by outlets, reduced-price chain stores and the growing role of discount players in the online channel.
Asia has been experiencing an early expansion of this business model in its retail market: the total number of retail stores in Korea has grown by around 5% in the last year; the market for premium sales has grown more, by around 12%. In the Chinese market, estimates indicate that outlets will have a value of $12.2 billion in 2018.
If, as forecasts indicate, the market for reduced prices increases during the coming year, mainly in Asia and Europe, fashion and retail companies should analyze the possible difficulties concerning the application of this strategy and analyze other new alternatives for organic and more genuine growth for their brands.
With the American experience as a background, it is very easy to deduce that some brands that took advantage of discount stores to quickly increase their sales volumes saw how they gradually lost their “brand image” and how their margins suffered, when the discounted price options began to cannibalize the sales of their own high-end and full price items.
The fashion industry and retail deserve organic and sound growth. To achieve this, the sector has launched a series of initiatives that we will analyze in future articles: neorelocalization or nearshoring of production hand in hand with automation, sustainable production and customization of fashion. Through these reports you will be able to understand why these strategies will generate sustainable development. We must find the way to make it possible and realize that value!