Why Fashion Brands Need to Reduce Inventory to Survive the Impending Recession

The last two years have been a roller coaster for fashion brands. The supply chain disruptions of 2021 led to many merchants struggling to get their hands on enough inventory, and then overbuying to compensate.

Now, with an economic downturn looming and the threat of reduced spending increasing, retailers that overstocked during the pandemic are stuck hoarding mountains of goods in their warehouses that they can’t move.

In fact, according to a recent survey by Inventory Planner, 44 percent of fashion retailers have surplus goods they're desperate to offload — accounting for almost 20 percent of their entire stock holding.

It’s no surprise then that nearly 8 percent of surplus stock globally will ultimately end up as waste, according to a report by Bloomberg, with about $163 billion of inventory tossed annually.

The Inventory Planner poll also found that globally one in five retailers wrote off excess stock as a loss last year, including a large majority of apparel and homeware retailers.

Outside the environmental cost, the danger of sitting on inventory too long is clear. Target saw its shares tumble after it slashed prices to clear out unsold inventory in early June. Last quarter, Walmart’s inventory was up 33 percent.

Mountains of excess stock is a particular challenge for fashion retailers because products start to decrease in value after a while and the seasonal effect can see items quickly go out of fashion and become redundant. Excess stock also means businesses have less room to fill their warehouses with new stock — as well as less cash to buy new items and jump on new trends.

How Are Brands Planning to Deal With Inventory Issues?

As demand slackens, American retailers are sitting on so much inventory that brands — particularly for apparel — have resorted to offering major discounts. Most fashion brands we spoke to are slashing the prices of products, offering freebies with other purchases, bundling products together, and even giving away unwanted items. However, these tactics hurt the bottom line, with more than half of retailers admitting it will be difficult to absorb the loss of marking down prices, liquidation or writing off excess stock.

According to Taylor Shupe, who co-founded the sock brand Stance and now runs the clothing manufacturing company FutureStitch, companies are starting to look at different measurements of success: “It used to be that gross margin was the most important measurement, but recently there’s been the feeling that the measurement that truly matters is inventory,” said Shupe.

Shupe added that contribution margin, or the measure of profitability of each product held in inventory, is becoming vital. As the economic crisis worsens, cutting inventory is a crucial strategic move for all brands.

However, not all brands are simply decreasing order volume. While depressed spending may mean that less inventory is better, the conflicting problems of tight supply chains and delayed shipments mean that brands need other solutions to ensure they can continue to optimize cash flow.

Danielle Malconian, CEO of plus-size apparel brand Vikki V, said the "fear" of overbuying was a  key factor behind her own inventory planning overhaul of the business three years ago.

“To scale online you have to sell more of the same thing to more people, and go deeper and deeper into your inventory levels — and that’s risky,” said Malconian. “It’s frightening as a retailer to overbuy — these days you could go out of business. Cash flow is everything.

“If dollars are caught up in inventory that you’re not able to sell, you can either go out and find more money somehow or you’re in a situation where you have to discount to survive.”

Malconian has been instilling in her team the ideas of protecting the top-selling products and placing less emphasis on the lower-selling items, essentially adhering to the 80/20 rule where 80 percent of your sales are coming from 20 percent of your products.

Using inventory planning technology, Malconian's team receives detailed inventory insights so they can easily identify their best-sellers and accurately replenish their collection of plus-size garments right down to color, style, size and other variants, to create a more optimized inventory assortment with maximum selling potential that also reduces risk.

In a bull market, expanding into new categories and expanding the breadth of your range are good ideas to capitalize on higher demand. But a recessionary environment calls for a different strategy.

All merchants — especially those in apparel — need to identify what’s working and contributing to profit and take a granular approach to analyzing data on a daily and weekly basis. When we speak to retailers we tell them they must get serious about clearing out what’s not working and making sure that every dollar they have in inventory is performing.

The threat of sitting on so much inventory is very real. Apparel retailers need solutions that allow them to quickly see where they do and don't have demand so they can easily identify what needs to be cleared out to free up cash. Make no mistake: cash is king, and right now it's more critical to a retailer’s survival than ever before.

Mark Hook is vice president, global brand, PR and communications, Inventory Planner by Sage, an inventory forecasting and planning software.