Smart Retail Markdown During COVID-19

Fashion retailers riddled with excess inventory due to the Covid-19 crisis are forced to markdown to clear piling stocks. In this report, discover the markdown strategies deployed by retailers like Farfetch, Net-a-Porter, Everlane and more.

Written by Ashley LooiMay 16, 2020

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Introduction

Key Insights

  • Disruption to Markdown Timing: Farfetch vendors carried out more markdowns in April this year to clear off excess inventory brought on by Covid-19.
  • Product SKU-level Performance Tracking: Monitoring product movement at a granular level enables tactical markdown executions while protecting profit margin.
  • Curated Promotions: A disciplined and personalised approach helps to offload inventory while keeping customers engaged.

Discount Driving Forces

The US economy is largely driven by consumer spending, which accounts for 70% of its GDP. As the coronavirus shows no clear signs of slowing down in the US, jobs are no longer secure with consumer spending severely impacted. Approximately 20.5 million jobs were lost in April, putting the US unemployment rate at 14.7% – the highest since the Great Depression.

Business closures and layoffs have caused the steepest monthly drop in US consumer spending ever recorded at 7.5% – 3.6 times higher than the previous record of 2.1%.

A Glut in Inventory

Physical store closures and supply chain disruptions are causing a surplus in inventory. Being confined to solely digital channels, retailers are unable to drive out as much inventory compared to pre-crisis conditions.

Moreover, some retailers have adjusted their Spring/Summer collections, prioritising stock that will sell now to accommodate customer buy-now-wear-now preferences, while delaying launch timings for products that can be introduced at a later date.

Shifts in Consumer Spending and Behaviour

32% of US citizens have experienced negative impact towards their income due to Covid-19 and expect to decrease spending on apparel by 51% in the coming weeks. Cash-strapped consumers are now shifting towards a new discount mindset as retailers delve into deep discounting to overcome a glut in inventory.

With the current climate, how can retailers markdown effectively and still protect profit margins?

This report aims to identify key lessons at leading brands and share how to execute smart markdown without hurting profit deeply and eroding brand equity.

More than 1,330,000 womenswear data points were screened from March 2019 to May 2020 across the US market full-price and off-price channels in the luxury and premium segments – including Farfetch, Net-a-Porter, Yoox and The Outnet. Direct-to-consumer (DTC) brand, Everlane, was also analysed to uncover how smaller players markdown differently from the bigger brands.

 

All data used in this report comes from products retailing online as tracked by Omnilytics, unless otherwise mentioned.

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Markdown Mania

Change in Timing

Covid-19 has caused a disruption in Farfetch’s markdown timing bringing reductions forward to April, as a consequence of the surge in number of Covid-19 cases in the US. The retailer launched 7,108 first discounts in April, three times higher than the year before.

Everlane was not exempt from disruptions to the markdown calendar. Prior to this, the brand had not launched any first discounts on its Spring/Summer collection. 209 first discounts have been executed since March this year, higher than 2019 and increased in frequency.

Covid-19 has brought on a disruption to markdown timing in brands. Introduction of first discounts has not just been brought forward, it has also increased in magnitude compared to last year.

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Markdown Mania (cont’d)

Increasing Discounted Products

The retailer previously offered discounts for only 81,878 items in March to May last year, which increased to 137,285 items this year. The large amount of markdowns garnered an uplift in sell-out rate to 30% against last year’s 21%. The bulk of discounts were offered in April, when up to 82,000 items were discounted weekly.

Industry Leaders

Prada and Fendi have seen great success throughout this crisis. Both brands managed to secure sell-out at 80% and 84% respectively, despite having discounts on less than 15% of their entire assortment.

The two industry leaders achieved sell-out rates on par with, and beyond other brands retailing on Farfetch – where an average 58% of items were discounted.

Brands should not wait to execute markdowns. Identify which products fulfil the ‘buy-now-wear-now’ preference of consumers and execute markdowns immediately to overcome overstocking issues. Brands should also look to industry leaders like Prada and Fendi to observe their markdown strategies.

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Discounted Assortment

Most Discounted Categories

The categories with the most discounts were Tops, Outerwear and Dresses in apparel, followed by Shoes, Bags and Accessories in non-apparel. A deeper dive into the categories in apparel and non-apparel revealed that luxury and premium retailers are focusing markdowns on Spring/Summer collections.

Farfetch and Net-a-Porter drove discounts on the Blouses subcategory, consisting of ruffles and floral patterns. Sandals & Flip Flops were frequently seen in the non-apparel discount assortment, where 55% of the items had open toes.

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Discounted Assortment (cont’d)

Targeted Discounting

Unlike large retailers, Everlane practiced targeted discounting – where different discount strategies are applied to each category. Smaller brands like Everlane have the ability to practice targeted discounting because they have more control over pricing and have more agility. This provides DTC brands with better capacity to adapt to the market than larger brands.

A deep dive analysis shows that Everlane is focusing on moving stock for Dresses. The category had the highest percentage of discounted products at 60%, twice as high compared to Tops, Pants & Leggings and Jeans.

Brands should take a deeper dive into monitoring performance, not just at category level, but all the way down to SKU-level performance tracking.

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The Right Channel

Compared to the same period last year for March to May, 878 new brands have offloaded their markdown inventory on the off-price channels Yoox and The Outnet. The 13% uplift in brand portfolio with 45% more SKUs, signals the need for luxury and premium brands to execute markdowns amidst the crisis.

Apart from the expanded brand portfolio, the discount assortment on the two off-price channels has grown by 56% as brands struggle to clear the glut in inventory.

Wide discounting on full-price channels like Farfetch and Net-a-Porter can erode brand equity. Hence, it is important to identify off-price channels like Yoox and The Outnet, where the customer base is different. Luxury and premium brands should consider moving markdown inventory to off-price channels to safeguard brand image and move inventory at a faster rate.

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Curated Promotions

Retailers have launched promotions through creative masking of discounting to entice cash-strapped customers.

Product-Driven Offers

Net-a-Porter attracted customers by offering 15% off on selected new arrivals for a style refresh. Yoox offered 20% discount on denim, T-shirts and sneakers to entice customers to spend on seasonless product. This offer tapped into the opportunity of consumers wanting core product.

Following Covid-19 cases picking up in the US during mid-March, Everlane launched promotions featuring a different product each week. Featured products included its jeans, performance leggings and day glove. The weekly promotions were meant to generate buzz and interest leading up to Everlane’s first site wide sale at 25% off.

PR Messaging

Farfetch utilised the angle of protecting smaller brands by launching the #SupportBoutiques campaign. The retailer showed its support to boutique brands by offering up to 25% discount to encourage customers to purchase products from said boutiques.

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Conclusion

Main Findings

Disruption to Markdown Timing: Luxury and premium brands have made adjustments to their markdown calendars, with increased first discounts in April.

Meanwhile, Everlane launched markdowns during the Spring/Summer season for the first time. The number of first discounts in March to May increased tremendously compared to the same period last year.

Targeted Discounting: Smaller brands are more agile and have the ability to pivot discounting strategies compared to larger brands with more complex decision making hierarchies.

Everlane executed different percentages of discounted items for each category. Dresses had the highest discounting at 60%, significantly higher than other categories.

Curated Promotions: As consumers become cash-strapped, discounting will become commonplace – leading to markdown mania. Retailers have to step it up to be more creative in their promotions to foster the enthusiasm of customers.

Farfetch launched a campaign spotlighting smaller boutiques that are worse hit by Covid-19 than bigger brands. Everlane’s weekly promotions on featured items garnered high interest through to its first site-wide sale at 25% off.

Next Steps for Brands

Monitor Consumer Demand: Blouses and Sandals & Flip Flops took the lead in discounting, aligned with the current buy-now-wear-now consumer preference around Spring/Summer styles. Brands should offer shallow discounts on styles which are already driving demand.

Brands need to conduct in-depth analysis on the performance of styles to optimise stock levels. Opportunities can be seized by implementing deeper markdowns on downtrending styles and holding off on or offering shallow markdowns for those which are uptrending.

Tactical Markdown Strategies: In this crisis climate, a high-level performance analysis is insufficient – performance must be scrutinised down to SKU-level.

The data and insights gained from monitoring performance should guide brands into launching tactical markdown strategies such as first discounts, priority by seasonality and SKU-targeted discounting. Next, layer the markdown mechanism with smart and personalised messaging.

Moving Stock to Off-Price Channels: Brand equity is not easily established and can be jeopardised by over-discounting on full-price channels. Brands need to consider moving markdown inventory to off-price channels to protect brand image.

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Meet the Author

Ashley Looi

Ashley Looi combines her major in econometrics with her interest in fashion to help brands and retailers uncover actionable insights. She currently produces in-depth reports on the fashion industry and its changing retail scene across the United States, United Kingdom, Australia and Southeast Asia.

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