The Inflationary Wardrobe
Rising inflation rates are set to dampen consumer behaviour and hit shoppers’ wardrobes. These three supply chain opportunities can help fashion retailers overcome these challenges.
Recent global shocks such as the pandemic and Ukraine conflict have caused rippling effects across global supply chains. Consequently, shifts in consumer behaviour and fashion trends have accelerated, requiring retailers to quickly adapt and review their supply chains.
The what, why and relevancy of inflation
With inflation rates materially rising above the 2% target, the price of food, clothing, train tickets, and petrol are some of the everyday goods and services we’re seeing rise in price in the UK. The Office for National Statistics reports the UK’s current inflation rate is at 9.1% — an increase of 7% since this time last year and the highest the UK has seen in the last 20 years.
The Bank of England expects inflation in the UK to reach 11% by October 2022 when the cap on domestic energy bills is lifted and projects a return to the 2% target rate by 2024.
Increases in inflation are reflective of both recent global shocks and domestic factors. Disruptions to global supply chains are a consequence of post-pandemic economic recovery and the Ukrainian war exacerbating rises in global energy prices.
For consumers and businesses, high inflation rates lead to unpredictable pricing, making it tricky to plan how much to spend, save, and invest. As a result, fashion retailers will be faced with increased product and manufacturing costs, and an inability to absorb these costs could result in customers paying higher prices.
Consumer confidence has already been damaged by the pandemic and has only just started to return to pre-pandemic levels. It may be shattered again if customers discover that their fashion favourites suddenly cost more to purchase.
Impact of inflationary pressures on fashion retailers
As consumers have started returning to stores and purchasing more apparel both in-person and online, sales have begun to stabilize. Margins, however, are getting tighter.
Rising raw material costs and global supply chain disruptions have caused bottlenecks and increased the cost of all clothing and footwear. According to data from the ONS, womenswear prices have increased by 37% over the last five years with menswear rising by 25%.
As the availability of post-pandemic stimulus packages reduces and inflationary pressures reach consumer pockets, lower-income households will be hit the hardest. Discretionary spending on apparel will no longer be a priority and many consumers will be forced to cut back on such purchases or choose cheaper alternatives. With lower levels of consumer spending expected, retailers could see a fall in sales.
Global Data conducted a consumer survey in April 2022 to measure the impact of rising inflation on the retail industry. It reported that 32% of UK consumers will buy fewer clothing and footwear items and 13.1% will stop purchasing them altogether.
Customers are also becoming increasingly aware of the environmental impacts of deliveries and returns. According to market research company Mintel, there’s been a significant shift in consumer behaviour over the last 18 months — shoppers are showing an increased interest in re-wearing, recycling, and renting clothes, owing to the circular economy revolution.
The rise of rental companies offering flexible alternatives is also impacting consumer retention for fashion retailers where low-income shoppers are more price sensitive. Demand could be diverted to rental marketplaces as consumers look for more cost-effective ways to maintain their wardrobes on a constrained budget.
Three ways retailers can navigate inflationary pressures
As inflation causes supply chain disruptions to persist, retailers can convert these challenges into opportunities to drive profitable growth and retain consumers. Whilst there may not be a single answer, retailers can take a number of actions to respond to increasing inflation rates.
Below are three focus areas retailers should consider.
1. Optimise demand forecasting and inventory management
Retailers need to ensure their decision-making processes and purchases are well aligned and well informed. By using Integrated Business Planning (IBP) tools such as Anaplan, retailers can leverage data to inform inventory planning and improve purchasing decisions.
IBP tools can help retailers digitize supply chains by working across numerous functions and ingesting data from multiple sources. This helps increase efficiencies, drive automation, and deliver enhanced forecasting accuracy and insight to optimize inventory holding levels.
Unpredictable consumer demand will force retailers to rethink demand planning strategies and inventory holding. Retailers must avoid high volumes of inventory to reduce the risk of excess stock resulting from weaker consumer demand. The success and effectiveness of this is underpinned by strong cross-collaboration between merchandising teams, suppliers, and supply chain functions.
2. Counteract the inevitability of returns
As rising and widespread inflation makes it difficult for retailers to control external costs, there will be a greater need to ensure internal processes are optimised for cost effectiveness. Retailers have more room to engineer procedures internally — this greater control and decision-making power over operations will need to be extensively exercised to overcome the challenge of costs associated with returns.
When it comes to online retailers, return rates typically reach 30 to 40% as consumers exploit the ability to purchase items in various sizes and colours with the intention of trying it on at home and making a return. The handling of returns for certain products can often end up costing more than the price of goods sold, impacting the bottom line. Additionally, shipping costs for returns are often absorbed by retailers as part of their competitive customer propositions.
Retailers can reduce the propensity to return by empowering consumers with comprehensive information relating to their products, ensuring that the customer is confident with their purchase. Retailers can also leverage data and analytics to pinpoint the root causes of high return rates on specific product lines, helping them prevent similar situations down the road.
Although controversial, charging the consumer for returns to offset processing costs could quickly replace the norm of free returns. A number of key players in the market have already adopted this approach with others likely to follow suit.
3. Adapt the business operating model
With increasing costs, price will continue to be the primary driver for purchase decisions amongst consumers. To sustain customer loyalty, retailers may be forced to adapt their business models to become more competitive across low-cost segments.
Fast fashion retailers typically have a vast array of product lines with a quick turnover influenced by seasonal trends, giving customers an abundance of options to choose from. Retailers may need to minimise the range of product lines available and instead drive demand by emphasising value through less-differentiated offerings to compete with low-price retailers.
Largely due to COVID-19, supply chain issues are still prevalent and will likely continue throughout the rest of 2022. Market dominance of major companies has resulted in price increases across key trading routes — predominantly Far East Westbound (FEWB) movements. To further control internal costs, retailers could also benefit from re-routing shipments for a slower turnaround of new product lines.
The impact of inflation doesn’t fall equally on everyone. Retailers will need to review their pricing strategies by offering a wider range of affordable clothing and targeting groups who are still wanting to spend on fashion.
Closing remarks
The success of the above measures requires end-to-end supply chain visibility. Increased transparency reinforces the effectiveness of these measures to enable retailers to navigate through sustained high inflationary periods and remain profitable.
At Slalom, we’re helping people and organizations mitigate the impact of rising inflation by focusing on supply chain optimization and leveraging technology to drive results. Download the full whitepaper here.
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