Apparel prices rose 0.8% in June compared to May, and 5.2% YoY, according to the Bureau of Labor Statistics’ Consumer price index. Overall, the inflation gauge, which includes everyday items such as food and gas, rose higher-than-expected (9.1% than the previous year).
Industry leaders see increased operational expenses impacting margins as inflation continues to rise. In addition to having to deal with growing expenses for other commodities - from fuel to payroll and manufacturing supplies to freight, businesses also face a faltering economy and declining consumer confidence.
A survey by Mckinsey found that US consumers reported switched brands and retailers in 2022 primarily for lower prices. Among those who switched, slightly more than one-third opted to buy private-label products.
Shoppers are still paying more as they refresh their closets, even though excess inventory has racked up in several retailers’ warehouses and stores.
However, the apparel industry is showing some signs of a pullback. As apparel sales rise by dollars, units have fallen about 8% versus the same year-ago time period, according to NPD — something that could drag down sales over time.
Walmart saw a split in its apparel category. It aggressively marked down some of its clothing in the fiscal first quarter, as shoppers pulled back on discretionary merchandise.
Abercrombie & Fitch and American Eagle Outfitters both reported a steep jump in inventory levels, up 45% and 46%, respectively, from a year ago from a mix of items not selling and supply chain delays easing.
However, an exclusive article by McKinsey explains how to cope with inflationary pressure in the apparel industry.
ADAPTing to inflation in apparel
The ADAPT model by Mckinsey offers a five-component approach to reset margin structures with bold, deliberate actions that could yield competitive advantages in a persistent inflationary environment.
According to McKinsey there are five components to the ADAPT model: Adjust, Develop, Accelerate, Plan, and Track.
- Adjust discounting & promotions
- Retailers may avoid margin problems soon by pulling back on promotions.
- Companies including Victoria’s Secret, PVH, and American Eagle Outfitters declared that they would reduce promotional pricing in recent months.
- There are strategies that merchants can use to combat inflationary pressures without increasing product prices. For instance, to retain the margin for small baskets without increasing product pricing, they could raise the minimum basket requirement for free shipping from $50 to $75.
- To cut costs even further, companies and retailers should provide other omnichannel fulfillment options, such as buy online- pick up in-store (BOPIS). Of course, they should test consumer reactions, to make such moves in advance.
- Develop the art & science of price change
- Apparel merchants should adopt a more granular strategy to better align prices with consumers’ perceptions of value rather than adopting an average price increase across their whole product mix.
- The best option might be to raise the price across assortments, while relying on tailored promotions and customer loyalty strategies, especially for the most crucial and highly exposed to inflation products.
- Retailers may decide whether to hold prices to protect brand value and market share and where to raise them to protect their aggregate margins by understanding which categories are most susceptible to inflationary pressures and are the most valuable to customers.
- Men’s suits, for instance, have seen four times as much price inflation as women’s suits in recent years. With the help of these findings, short-term pricing strategies can be revised, which can buy time to test long-term margin-protection approaches.
- Accelerate the decision-making tenfold
- For apparel retailers, it is the ideal time to eliminate bottlenecks and streamline operations with suppliers, supply teams, design, or physical store and online operations. In terms of strategy, this might entail increasing insight into their cost structure.
- To enable quicker planogram modifications and pricing updates, for instance, garment merchants might expedite in-store pricing execution. This would shorten the time between the decision to make price adjustments and their actual implementation in stores.
- European fast-fashion retailers H&M and Zara have taken this approach, expanding their online channels to complement their physical stores, generate growth, and offset inflationary costs.
- Plan options beyond pricing to reduce costs
- When manufacturers use true design-to-value (DTV) thinking, their cost base can be adjusted. Alternative textiles and less expensive design strategies help support margins in areas where cost constraints are high.
- For instance, Zalando, the largest online clothing retailer in Europe, has seen midmarket buyers switch to less expensive goods over the past year and is updating its inventory to reflect this trend.
- By incorporating more private-label products into their inventory instead of brand-name goods, apparel retailers may also increase their profit margins. Either way, an agile approach to product design can be a winning strategy, although it can take time to benefit the bottom line.
- Track execution relentlessly
- The current inflationary environment evolves daily. Accordingly, apparel businesses need to define leading KPIs that can both track changing customer behaviors and measure the effectiveness of their actions in the market.
- For instance, by carefully monitoring categories for declining volumes and basket size, they can spot early signs that customers may be shifting their behavior due to price sensitivity.
- Tracking execution includes keeping tabs on rivals’ activities as well. When setting initial prices and passing on additional expenses at premium product levels, retailers need to be aware of how competitors are adjusting their prices.
- Acting quickly and decisively to manage price increases – guides the company’s short-term strategy for countering the effects of inflation.
Inflation is a problem for apparel players, but it also offers a chance for those who react quickly to take advantage of it. Companies with a strong incentive to act swiftly on pricing across the value chain are those who recognize that inflation is likely to remain, at least in the short and medium term.
Read the full article here.
Also read: Ralph Lauren Reveals Three-Year Revenue Growth Strategy: Eyeing Key Cities & New Customers
