Fashion brands are strategizing to avoid a discount ‘bloodbath’

No matter the season or year, excess inventory is a problem for fashion brands and retailers, but this problem will be especially pronounced during late 2022. Rising inflation has put a damper on the spending habits of many American consumers. , while late inventory from previous seasons means brands have a surplus to work with.

Brands are responding to these inventory challenges in a number of ways. The first, most obvious route is heavy discounting. URBN CEO Richard Hayne predicted that many brands across the industry, including his own, will have to rely on deep discounting to sell through their inventory.

“We don’t know exactly what our competitors are going to do, but we think there’s a lot of inventory across the board,” Hayne said on an August earnings call. “I hesitate to call it a bloodbath, but it’s going to be ugly, in terms of the amount of discounts and valuations.”

Brands like Gap and Abercrombie & Fitch have been deeply discounting their wares all summer, but this approach is far from ideal. Excessive discounting trains customers to wait for sales and buy only at reduced prices. It can also have a significant impact on profits. Gap’s gross margins decreased by 820 basis points in the first half of the year, with 220 basis points resulting primarily from higher discounting. American Eagle managed to sell all of its spring-summer inventory through the discounter, according to the brand’s latest earnings report, but it took a $30 million hit to profits in the second quarter of the year.

Discounting alone will not solve inventory issues for brands. Thus, fashion companies are getting creative with other alternatives, such as implementing packaging and handling internships and working with liquidators without awards.

Both Gap and Kohl’s are using pack and hold, where unsold inventory is not liquidated but instead placed in storage and put back on the shelves at full price the following year. Gap, for example, is saving unsold seasonal clothes like T-shirts, shorts and T-shirts to sell again next summer.

“We are confident that we will be able to integrate our packaged and carried inventory with future assortments,” Gap CFO Katrina O’Connell said on an earnings call last month.

Pack and hold also has downsides—namely, that inventory isn’t workable capital for the year. There is also the risk that that inventory will sit in storage and not work in later seasons. That unsold inventory then becomes one year out of date.

Increasingly, new platforms are emerging to help alleviate the stress of offloading unsold inventory. Ghost, a B2B marketplace that connects brands with off-price liquidators like TJ Maxx and Burlington Coat Factory, launched in October 2021 and secured $20 million in funding last month. In the past two months, Ghost has grown its transactions by 375% as more big brands look for ways to get rid of inventory.

Ghost co-founder Josh Kaplan declined to name any of the brands the company is working with — part of Ghost’s offering to those brands is discretion; even some Ghost employees don’t know who all their customers are. But, he said, it includes some of the biggest fashion and clothing companies in the world.

“When we started building this business, we all assumed it would be the smaller DTC brands that needed the most help building relationships and offloading inventory,” Kaplan said. “But the truth is that even the biggest brands in the world often only deal with one or two off-price vendors.”

Kaplan said, given the data he’s collected through Ghost, there will be an increase in discounted and off-price inventory throughout the end of the year. In particular, this includes brands that have never been sold through a retailer like TJ Maxx or Ross before.

“We’re seeing a lot more interest from brands and luxury brands that are typically more defensive about where their inventory ends up,” Kaplan said. “One of the things they appreciate about us is that they can set parameters around where their inventory is sold. They might say they only want to sell outside the US, for example. This is a particularly popular option for beauty brands.”

Dan Leahy, co-founder of MakerSights, which helps brands plan ahead to avoid overproduction and subsequent excess inventory, said brands need to start planning more intelligently around excess inventory.

“Brands that make tough short-term decisions to increase their distribution find themselves much less exposed to the brand-damaging discounts presented by growing inventories at many big box stores,” he said. “And brands that invest in a deep understanding of their consumer and to ensure that their assortments meet the needs and wants of their consumers can reduce churn from unwanted inventory and actually increase average unit retail sales in a time when rivals struggle with rampant discounts.”

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