Is more supply chain collaboration needed as a multibrand fashion retailer? Based on perspectives and practical experiences, seeking an answer to the question of how much supply chain collaboration can contribute to the profitability of players in the fashion market (clothing, shoes, and sports, etc.). With a focus on brand owners and multibrand fashion retailers.
Multibrand fashion retailers are facing additional challenges due to the COVID-19 crisis. Their position in the fashion market was already weakened before the crisis. I foresee the end for multibrand fashion retailers that do not invest in EDI with the goal of implementing Vendor Managed Inventory (VMI). Without VMI, the business model of the multibrand fashion retailer is no longer sustainable. This crisis will painfully highlight that. And yes, as with any rule, there will be exceptions, but those exceptions must be exceptionally well-founded.
In last month's blog, the importance of VMI as a strategic choice for the collaboration between retailers and brand owners in the fashion industry is discussed. EDI is a prerequisite for this. It is not too late yet, but without EDI and VMI, the future of multibrand fashion retailers looks bleak even after the crisis, and the viability of many of them will prove unsustainable.
Due to the crisis, fashion stores have been closed for an extended period. While online sales compensate to some extent, there are reports of revenue declines ranging from 50-90% over several months. This happened just as stores closed when the spring collection had just been delivered and had to be paid for. Consequence: low cash flow, high prefinancing costs, and high inventories.
Fashionable collection outdated and the multibrand retailers
As sales continue to be delayed and the season progresses, the fashion collection becomes outdated, and the value of the goods drastically decreases. Once sales pick up, everyone will want to get rid of their excessive inventory, which can only be achieved through significant markdowns, resulting in further margin loss. Meanwhile, purchases for the upcoming seasons need to be made amid uncertainty about the future. When delivering the new season, the retailer must pay for the goods to the brand owner. This is where liquidity issues become critical. Many bankruptcies in the fashion industry are expected to follow, with peaks anticipated in the months of September and March.
“A one-month closure quickly costs €4 billion in turnover, with thin margins for most players,” said Dirk Mulder in the article by ING (Impact of corona on non-food retail) with conclusions including:
- The gap between the winners and losers in retail will widen sharply.
- Supply chains will be organized differently: risk spreading will become more important.
- Existing business models are being closely scrutinized.
Many rely on a legal ban on clearance sales; However, the effect of such a ban is highly uncertain, as evidenced by it article by ABN AMRO d.d. 18 april (Ban on sale not effective). In this context, it is stated: "The proposal for a temporary ban on sales seems sympathetic, but it is far from certain that it will be effective. Circumvention of the ban, whether or not from abroad, and the inability to adjust prices to the current economic downturn, seem better to simply allow sales with the aim of quickly liquidating stocks, rather than trying to maintain margins on stocks that ultimately do not sell."
Fashion chain
The links in the fashion chain are closely interconnected, including the financing models in the successive links of that chain and the risks associated with inventories. It is a system of gears that have found a delicate balance over the past decades. Due to the global disruption caused by the corona crisis, sand is thrown into multiple gears at the same time, causing the entire system to come to a standstill. The need for change in the fashion chain was already evident (fair trade and sustainability), but the corona crisis is making the problems painfully visible. Ultimately, a chain can only function healthily if the various links in the chain collaborate with each other in a respectful manner. That is the current challenge!
VMI as business model
VMI as a business model means that the retailer chooses a limited group of brand owners. In times of crisis, you learn who the right ones are to commit to each season. To whom you delegate control of the collection for that season; pre-priced and shop floor ready. Based on structured, daily data via EDI, you can expect the brand owner to deliver the right product at the right time and at the right price to the shop floor. Additionally, they should retrieve 'dead stock' from the shop floor. Brand suppliers who cannot adapt well to the VMI model will see their retail partners switch to brands that already support the VMI model or disappear entirely due to bankruptcies resulting from liquidity shortages at those retailers. Brand owners were already dealing with a challenging financing model. Their suppliers mostly want to be paid upfront (at the dock). On average, their multibrand customers take about 50 to 60 days to pay their invoices. So, there was already a gap of 3 months, and this is only getting worse due to the corona crisis.
Furthermore, due to corona, retailers are also canceling or scaling down orders with brand owners. Overall, there are enough challenges for brand owners and their multibrand retailers regarding their common interest. Not surprisingly, successful brands like YAYA, PME, Profuomo, OPUS, and Tommy Hilfiger have designated the VMI model as strategic. It represents a successful collaboration with multibrand retail partners. A prerequisite for both brand owners and multibrand fashion retailers for this form of collaboration, with more diversified risk and greater flexibility in the chain, is daily, structured, and therefore automated data exchange, machine-to-machine, in both directions (hence, EDI).