In his second guest post for WhichPLM, David Courtier-Dutton, CEO of SoundOut, discusses the rise of online-only retailers, and how they are hindering traditional bricks and mortar businesses. Using Zara’s successful business model, he explores how a modern day fashion retailer can get the edge using PLM.
Diesel, Payless, Sears, Charlotte Russe, David’s Bridal, Rockport, Nine West, Claire’s …the list of retailer casualties is becoming relentless. Every brand has its own particular challenges but a combination of sluggish consumer spending and the persistent march of the online-only retailers have led to a seismic shift for the bricks and mortar sector. Even stalwarts like Gap and Victoria’s Secret are aggressively rationalizing their store estate – and more to come. UBS recently predicted that, as a result of increasing e-commerce penetration, 75,000 more stores would need to close over the next 7 years.
The internet has given consumers unprecedented choice and price transparency. Competition is intense, net margins are on the floor and, in particular, traditional retailers are particularly ill equipped to cease the march of the internet-only players whose business model gives them a significant commercial advantage. Traditional retailers are burdened with expensive fixed cost store estates and, while online competitors have different costs such as shipping and returns, these are variable costs i.e. if they don’t make a sale they don’t incur the associated costs. Both models deliver around 5% net margin but in a downturn, due to lower fixed costs, the online retailer has the edge.
This was less of a concern when 95% of consumers favored traditional retailers, but online sales of fashion will account for over 20% of total US apparel spend this year and are continuing to grow at almost 15% year on year. We are at a tipping point, and the trend is most definitely the friend of online pureplay retailers.
As a result traditional retailers are walking a tightrope, evolving gradually to omnichannel while doing all they can to maintain the viability of, and focus on, their store estate. But the additional investment required to stave off irrelevance places even more stress on typically stretched cash resources. For traditional retailers this is their Kodak moment, and many won’t make it.
The Elephant in the Changing Room
While most retailers are obsessed by shaving costs and incremental efficiency gains, there is a huge ‘cost’ that cripples margins for almost every retailer – both on and offline – and that’s discounting. The average discount across all stock for fast fashion retailers is typically around 30%. Put another way, poor ranging and buying savages net margin – driving it from around 35% to 5%.
That is one huge elephant.
While it is right to be addressing automation, allocation, omnichannel, personalization, CRM, social shopping etc, until now comparatively little attention has been given to poor Dumbo in the corner. Buying right has two components: optimization of creative design and accurate design driven demand predictions – both of which have historically been seen as creative ‘dark arts’. In fast fashion, buyers and merchandisers are predominantly hired on their financial track record rather than a review of their last season design picks. For senior management the success or failure of new collections are largely uncontrollable except to the extent hiring and firing in the buying/merchandising department can move the needle.
Why is it that Zara’s average discount across all stock is sub 20% while for a typical competitor the number is around 30%? This gives Zara an extra 10% net margin to play with, to invest in high speed local sourcing, technology, state of the art logistics and still deliver a bottom line that is the envy of retailers worldwide.
For all the cost cutting, smart sourcing and supply chain optimization there is a simple truth that sets good retailers apart from bad: whatever the reason, they buy more accurately. If you stock the right products at the right price in the right quantity you have more shelf space, more cash working profitably and less discounting – all of which drops directly to the bottom line. Put another way, a retailer with a 5% net margin who can reduce their average discount across the business from 30% to 25% will double profits – and valuation.
So why does Zara discount so little? Because the accuracy of their buying (i.e. predicting appeal and actual demand for each item) is far more accurate than others on the high street. How does it do this? It is largely due to a highly effective feedback loop from store to design. All frontline employees send continuous feedback comprising their analysis of what is selling well and why; this is fed in near real-time to the design teams who adjust and adapt designs to maximize appeal and sell through. It is critical to note that this feedback is observational based on consumer behavior, i.e. it is reporting on what consumers think and act on, rather than the personal opinions of the Zara employees.
So how does the modern day fashion retailer replicate this? How do they bring the consumer into the design process? How do they out-Zara Zara?
While siloed consumer insight offerings have been available to retailers for some time, it is the increasing acceleration of PLM platform adoption that will take the consumer to the heart of a retailer’s workflow in a truly frictionless way. A PLM platform is uniquely positioned in the heart of the design process. This will enable scalable, rich and quantitative consumer insight to be delivered precisely where it is needed in the PLM workflow to help designers optimize designs in real time and, with machine learning, help power demand predictions for merchandisers. The fashion focused technology platforms that deliver these granular consumer predictions already exist and will soon be embedded in your PLM platform.
Today few would book a holiday, watch a movie, hire a contractor or choose a restaurant without first seeking consumer guidance through reviews and ratings – why would you risk the future of your company, your reputation and your job, by not doing the same with your designs, ranging and demand predictions?