Decoding Excess Stock with Market Insights by Giulio Xiloyannis, CCO of The Zalora Group
The Covid-19 pandemic has completely shifted the way we operate in retail. From consumer-facing avenues to back end systems, fashion brands and retailers are facing great instability.
A primary aspect of retail that is particularly at risk is inventory. Without focused strategies to clear inventory and with continued volatile trading seasons, many brands are now sitting on a mountain of excess stock and are facing difficulties in moving it due to declining consumer buying power.
In our latest webinar featuring Giulio Xiloyannis, Chief Commercial Officer of Zalora, he shared the steps brands can take to tactfully deal with excess inventory and how a mega e-commerce platform like Zalora is managing this crisis.
Maintaining Cash Flow
Currently, every impacted fashion brand is struggling to protect its cash position. As stated by Xiloyannis, most brands are now looking at stock liquidation as a means to move inventory, but it poses a tradeoff between cash flow, markdowns, brand equity and inflation risks.
Ultimately, the goal right now is to improve the position of the balance sheet. The easiest way to do it is through discounting until enough liquidity can be achieved to maintain optimal stock holding, sell-through rates and inventory cover.
However, Xiloyannis warns discounting comes with its own set of challenges as it can potentially harm brand value and eventually, the bottom line. He further expands that this is the time to carefully consider the current financial needs of the company and to work with your finance department to understand how much liquidation is required.
Preferably, rolling over most of your inventory to upcoming seasons and reducing future production is a far better option than diving straight into markdowns.
Alternatively, there is also the opportunity to redirect inventory to other markets that can absorb the product. The safest way to do this is by launching through an e-commerce platform that can offer a variety of solutions such as fulfilment services, consignment terms or even stock absorption, although this is dependent on the brand’s ability to pivot its supply chain and logistics as cross-border e-commerce trade has been severely affected by the lockdowns.
In this situation, brands have no choice but to further drill down on localisation and maximise domestic opportunities through omnichannel strategies.
Optimising Product Assortment
An extremely pressing concern for brands in the coming trading season is reduced buying budgets for Q3. Wholesale buyers have started cutting down their buys, in favour of a more conservative plan that focuses on core or evergreen products to avoid deep discounting in the long run.
This makes existing category shifts even more obvious as the demand for functional products increases while occasionwear suffers. Xiloyannis points out that this is a particularly unfortunate time for Eid fashion, a key product segment on Zalora. However, he believes that this is a temporary pitfall for an otherwise strong market as the desire for modest and ethic clothing is on the rise.
Further reading: How Will Coronavirus Impact Eid 2020 Retail?
Brands that are already facing overstocking issues due to problems such as this will need to start forming clearance strategies on all sales channels.
Here, Xiloyannis advises brands to find a balance between markdowns and short-term promotional vouchers. Brands should opt to avoid such deep discounts now to prevent the need to go even deeper in the following months, as this will disrupt the market gravely.
Instead, he suggests developing key strategies for discounting that factor product margin, further targeting and segmentation of your customer base and most importantly, to discount on SKU performance and not categories.
One of the core pricing strategies that Zalora applies is dynamic pricing. Algorithms and data help Zalora’s buyers to determine when products need to be discounted and at what rate.
“The data has shown that doing gradual discounting actually increases sell-through rates and reduces average markdown during a season, compared to doing flat discounts in a mid-season sale or an end-of-season sale,” said Xiloyannis.
Strengthening Back End Processes and Retail Operations
One of the most glaring flaws of the retail industry is how inflexible the retail model is. Xiloyannis says, “the brands that are most at risk are those who have stock locked up in stores with no online access to POS systems or central warehouses that can fulfil both online and offline sales”, emphasising the importance of an omnichannel strategy.
“Data is useful to any industry that deals with matching supply and demand, but it is especially important for fashion as it is one of the most volatile markets.”
Fashion’s constant volatility is one of the reasons why having real-time data is so crucial. In a market that deals with multiple segmentation groups combined with an ever-shifting trend cycle, brands need integrated data systems that allow them to have better visibility into product and inventory performance.
He adds that the brands which will survive this turmoil are those which have a lean store setup, equipped with a just-in-time replenishment system, a fulfilled-by-retailer model or a centralised stock room that is located in a trade free zone for the ease of logistics.
The ‘New Normal’ for Fashion Buying and Wholesale
While so many aspects of retail remain uncertain, what is abundantly clear is that traditional wholesale needs to change.
When asked about the impact of Covid-19 on the buying process, Xiloyannis says “the concept of visiting trade shows and doing buying trips should be the last thing on a buyer’s mind right now.”
He anticipates that there will be two major shifts that will take place in buying. The first, a more digitised process that involves better sample photography and online product packages, as well as a more secure online order placement system. Secondly, giving the brand principle a higher responsibility in SKU selection and renegotiating contract terms to co-share the risk of holding stock.
This means both the buyer and the principle will need to have access to the same data source to come to a better understanding of sales performance, product movement and consumer demographics.
In future, he also predicts that more wholesale retailers could adopt a hybrid business model that incorporates traditional buying with consignment, dropship, outright purchases, fulfilled-by-retailer agreements or a combination of these models.
The main takeaway from our conversation with Xiloyannis is the significance of an omnichannel strategy in tackling excess inventory.
Prior to Covid-19, the shift to e-commerce and online channels was already quickly accelerating, however, this crisis has made the move unavoidable. Brands that did not invest in optimising their back end operations and building integrated data systems are unlikely to survive should another external threat occur.
Undoubtedly, online shopping will take a larger share of the total spend during this period. As social distancing regulations dictate how brick-and-mortar stores will operate for the foreseeable future, brands must focus on building e-commerce resilience, especially in developing markets where online was not previously a priority.
Find out more on the key retail strategies shared by Giulio Xiloyannis here.
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