Digital Transformation in Fashion (4) – part 1/2
Following with Fashion business strategy and operations insights from Fashion Goes Tech, my latest book on how technology is empowering retail businesses. Today, we move forward across the value chain phases within the business of fashion: Planning.
Charles Higgins Kepner said that successful merchandising incorporates the 5Bs: “the right product, in the right place, at the right time, at the right price, in the right quantity”. In fashion, the right product means color and size too. Designers think what the best “ingredients” are for the fashion collection, the planners decide what the correct mix is based on the 5Bs. Therefore, merchandising skills and requirements include strong analytical and numerical abilities to work out budgets and understand sales figures (eg. analyze like-for-like sales, stock turn, success rate, forecasts).
Fashion is a unique industry because new product introduction takes place on a frequent basis and consumers see new items released into stores every 2 or 4 weeks in some cases. B2B players, also from other industries, are implementing the “fashion business model” to get closer to their customers. The consumer electronics industry, for example, has transitioned from a slow product development strategy to one that emulates fashion (Apple, Samsung or Xiaomi are some examples of companies going B2B to B2B2C while opening owned stores) and releases new products every season or year. New product presentations are the “fashion shows” equivalent.
The business of fashion includes different production planning strategies such as made-to-order, make-to-stock, customizations or limited editions. So complexity goes beyond guessing the assortment but aligning product strategy, to sourcing, supply chaing and finance strategy. In other words, understanding the probability a product (color/choice level) has to be sold in a certain place during a period of time taking into account lead time, payment terms and stock-turn, amongst other factors.
According to Gartner, Demand Planning (or merchandising) is the development of a consensus-driven demand plan that optimizes the balance between market opportunity and supply network capability. Demand planning enables organizations to make more accurate demand forecasts for a product or service, increasing their efficiency in producing and delivering the product to the customer’s satisfaction.
To develop this consensus-driven demand plan, buyers/planners/merchandisers (the operational or mathematical side of the product development phase) review all relevant data (analysing sales turnover, stock levels, markdowns, etc). Fashion tech startups, like Heuritech are enhancing this process thanks to AI that supports leaders making better decisions. Artificial Intelligence is used in this case to improve trend forecasting and sales forecasting.
A merchandise plan requires a deep understanding of the business, including customer segments, channel choice, consumer behavior or needs. Those insights are not so volatile but can change every certain period of time due to the fashion business characteristics:
An example of luxury brand’s target market is Moschino’s psychographic segmentation: Moschino’s target market is both male and female from the ages of 18-45, and mid to upper-class. The Moschino’s consumer can be described as someone who is loud and bold and has the desire to stand out in a crowd and make a statement (Marangoni, 2017). This is part of the input merchandisers will use to define the assortment, its colors, sizes, price points, amount of customer choices, etc.
Retailers face the challenge of balancing understocks and overstocks to control margins and cash flows. Overstocking means putting on hold cash flow while losing margins progressively. While, understocking means lost sales and disappointing customer experience (except luxury or fast-fashion that play with the scarcity bias). Both are usually a consequence of bad planning/demang forecasting, incorrect allocation or shipping delays, amongst other issues.
Merchandising is, in my opinion, the orchestrator of design and operations, the one who understands key business performance metrics and aligns purchasing, distribution (at channel but also at store level) and planning/ supply chain (defining first-allocations, replenishment and store transfers rules) taking into account financial and logistics restrictions.
In Fashion Retail Outlook: Expert Call with Alfonso Segura x RBC Capital Markets, I commented that Inditex was the retailer best positioned to face the macroenomic undertainty. Inditex merchandising process has no competitor. Pablo Isla, Inditex former president, was a visionary implementing RFID and integrating physical and online channels within the fast-fashion business model.
Today Inditex SINT (Integrated Stock Management System) is allowing e-commerce channel to take profit from stores inventory, enhancing omnichannel model and improving last mile logistics efficiencies. Sharing inventory is a best-in-class capability today, but you need excellent operations and processes to control loss-sales and over-stocking or improve customer experience. Another key success factor is nearshoring, which reduces order-to-delivery lead time to stores. Inditex nearshoring production represents around 60%, meaning its risk of securing inventories are lower compared to competitors like H&M or brands like Nike.
In relation to Inditex latest results (Q1), I recommend RBC insights from last september. This are the key points outlined by RBC Equity Research team:
1) The US market remains very strong for Inditex , driven by a strong footfall and store recovery, as in other markets. This has become Inditex’s second biggest market after Spain.
2) Inditex’s main format Zara continues to perform very well, and it also called out strong performances from Stradivarius, Pull & Bear and Bershka.
3) ITX has committed to buying 30% of the future production volume of Infinna , a textile fibre created entirely from recycled clothes, for a total of more than EUR100mn over a three-year period, starting in 2024. We expect Inditex to announce further tech related investments in this area later this year.
4) Inventory – this rose +27% yoy in Q1 , reflecting some pull forward of orders to ensure strong product flow. However, Inditex states that it is of very high quality and is being matched by a strong sales development.
5) Russia EUR216mn provision – this is currently all non cash and reflects all expenses up to the end of this year. We expect Inditex to review its position in Russia further later this year.
6) We believe Zara’s new policy of charging for product returns should not impact sales materially , and should help to make the industry more efficient and sustainable, by encouraging customers to return more product to stores.