Throughout the next week, Glossy is running a series of stories on how the fashion and beauty industries are preparing for a potential recession. We’ll dig into how companies plan to manufacture, fundraise and run a retail fleet when the economy suffers.
The last two years have been a roller coaster for fashion brands.
First, spending dropped at the beginning of the pandemic and retailers canceled orders, leaving many brands sitting on mountains of excess inventory that they couldn’t sell. Then 2021 saw supply chain disruptions leading to the opposite problem: brands couldn’t get enough inventory and were overbuying to compensate.
“There was a dramatic pullback at the beginning of the pandemic where brands weren’t producing new inventory,” said Matt Field, founder of MakerSights, a company that works with companies like Madewell to plan their inventory. “But then there was this rush to purchase, and brands had too little inventory. So there’s a desire to not get caught out again like that.”
But now, with an economic downturn looming and the threat of reduced spending increasing, how are brands planning to deal with inventory issues? And what are factories doing to prepare?
According to Taylor Shupe, who co-founded the sock brand Stance and now runs the clothing manufacturing company FutureStitch, manufacturing volume in apparel has dropped. Last year, due to supply chain delays in receiving products from manufacturers, FutureStitch’s partners like Everlane and Crocs bought excess inventory. But through 2022, he expects to see orders through FutureStitch’s three manufacturing facilities drop by a third.
“One effect that the last two years have had is that companies are looking at different measurements of success,” Shupe said. “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.”
Shupe said that contribution margin, or the measure of profitability of each product held in inventory, is becoming the most important thing his brand partners are looking at. In other words, as the recession looms, cutting inventory is a crucial strategic move for all brands.
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%, something the company is trying to reset, according to its most recent earnings report in early June.
But not all brands are 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 some brands still need to overbuy. This is especially true of brands selling products made with more expensive raw materials.
For example, inflation has pushed the cost of gold up by nearly 20% in the last six months. Sophia Kahn, co-founder of the jewelry brand Aurate, said this was the key factor behind her own inventory planning.
“The way we are preparing for this is partnering very closely with our suppliers and ordering inventory now, before the prices go up too far,” Kahn said. “This way we can continue to serve our customers the best price and quality jewelry.”
The best way to hedge against an unpredictable inventory situation, according to Field, is by adhering to the 80/20 rule.
“Generally, 80% of your sales are coming from 20% of your SKUs,” Field said. “The last five years have seen a lot of push for newness and expanding the breadth of assortment, but recently, the pendulum has swung back considerably.”
Field said he sees his partners moving toward what he called “SKU rationalization,” or paring back the number of different SKUs manufactured and using economies of scale to make up for the fewer options. One-off products that capitalize on a short-lived trend are both more expensive to create – since smaller production runs tend to be more expensive than larger orders – and are more of a liability if they don’t sell right away.
Michelle Cordeiro Grant, founder of intimates brand Lively, said SKU rationalization has been her strategy in anticipation of a recession. Lively’s assortment mirrors the 80/20 rule almost exactly, with 85% of sales coming from just 20% of the assortment. In fact, just five SKUs make up around 50% of Lively’s sales.
Cordeiro Grant said she’s been instilling in her team the ideas of protecting the top-selling products and placing less emphasis on the lower-selling outliers, even if that means possibly missing out on newness.
“We classify our products as platinum, gold and silver, based on how much of our revenue they make up,” she said. “I’ve been telling the team: Protect the platinum.”
One change Lively has recently made that’s in line with this philosophy is distilling its manufacturing process down to ensure that each product only uses two materials. Most of the brand’s assortment is now made of some combination of nylon and spandex.
“We made the hard choice to not go into new materials,” Cordeiro Grant said.
In a bull market, expanding into new categories and new materials, and expanding the breadth of the assortment are good ways to capitalize on high demand. But a recessionary environment calls for a different strategy, she said.
“This is one of those times where you have to be comfortable leaving a little bit on the table.”