GUEST COMMENT Surplus stock: Why are retailers getting their sums wrong?

I was struck by a recent BBC documentary on fast fashion and the ecological havoc that over production and consumption is wreaking on the planet.

The subsequent ongoing government investigation into the industry, plus the increasing focus on surplus stock – Burberry and H&M have come under fire for destroying unsold products to balance books and protect brand reputation – begs the question: why are retailers getting their sums wrong?

There must be a better way

Let’s go back to basics and examine what retail is: producing goods to sell. You will have identified a need, found suppliers to make the items and then marketed them to as many potential customers as you can find. It’s been this way for thousands of years, but one major challenge today is the geographical distance between where an item is made and where it’s sold. This process creates a delay, incurs expenses such as customs duties and means many modern retailers don’t have agile production methods.

If the new utopia says that every product can be bought, sourced and shipped from everywhere a retailer is present, this lack of agility prevents them from quickly shifting goods from one place to another. It’s clear many are struggling to meet the new customer demand. Omnichannel, it would seem, is a hard task.

The problem at the beginning of the season is many retailers have to buy large quantities of stock, otherwise, it’s not economically viable. The cost of producing a garment in the Far East is low, so they prefer to produce too much than risk not making enough. Buyers do their best to make predictions on what will sell throughout the season, but they don’t really know what the most popular items will be. This has a bad ecological impact, and retailers are forced to walk down the well-trodden path of knocking 70% or more off prices at the end of the season, which ultimately damages the brand.

What if we eradicate the surplus stock problem by not creating it in the first place?

Shortening the supply chain and producing clothes at the point of sale is one way of selling more and being effective in reaching customers. The retailer can shift stock quickly if the customer needs change and they can also buy a smaller quantity, so the risk of a surplus stock is lower. This is a win for the environment and the retailer – stock is produced in one month rather than three, and capital is not immobilised by over-buying.

If manufacturing in the Far East is a must, consider how efficiently you are selling your stock. You want to make sure you sell as much as possible at full price early on in the season, and whatever channel a customer uses to shop, you have to be able to supply the item.

Unifying stock allows you to ship from store or online – anywhere the product is located – and gives the customer a holistic view of your inventory. Online shoppers don’t see the inner workings, that the item they want is located in the retailer’s Aberdeen store, they are simply told it’s in stock and can place an order. Essentially, you can turn your store network into mini warehouses.

But change takes time. Retailers are currently doing their best, and they have still that surplus stock to sell.

The consumer culture shift requires better retail agility

Recent research released by Deloitte revealed that UK shoppers saw record levels of pre-Christmas discounting in 2018 – and found a contributing factor in the uplift was an over-supply of unwanted stock, caused partly by the mild winter weather. It analysed 800,000 products and found retail discounts averaging 44%.

Although customers have come to expect heavy discounting in the run up to Christmas, the culture around retail evolves and people do adapt to new patterns. Some international retailers sell old season products in Australia because the country is, meteorologically speaking, a few months behind. It’s a straightforward way of continuing to sell your stock at the full price at the end of the season in the UK.

Using a cascading set of redistributors such as TK Maxx, vente-privee or marketplaces to sell excess stock, or even department stores which sell last or end of season products within concessions, are good ways to clear surplus inventory. However, it’s less efficient than the brand selling it directly as they pay commission to those third parties.

Some donate the stock to charity, or, they destroy the products. This surely must be a last resort in the life of the product.

The industry can mature. Retailers can have a model where every product meets its customer – where there are no orphans, no discarding or dumping of merchandise. It just needs fresh tactics to maximise profit margins each season and minimise excess stock.

How much of your stock is sitting there not reaching the customer?

Author: Romulus Grigoras, chief executive officer of OneStock