NEW YORK, United States — For Nanushka, the cool-girl label from Budapest, returning to the way things were before the pandemic is not part of the plan. The brand’s six-month-old Manhattan store, the first outside its home country, is still closed, as are many of the department stores that sell its cinched vegan leather jackets and understated slinky dresses.
The brand is preparing for a tough stretch by focusing on core offerings and planning to produce 20 percent fewer styles for upcoming collections. Growth will likely be stagnant for the foreseeable future after sales doubled in 2019.
Nothing will really be “normal” again, said Peter Baldaszti, Nanushka’s chief executive and co-owner.
“I’m not envisioning the end of capitalism, but the level of growth and the size of the market will definitely be smaller,” he said.
The world economy may be starting to thaw, but recovery will not happen overnight. Many economists predict it will take years to undo the damage from the lockdowns, with frequent setbacks if the coronavirus flares up again before a vaccine is developed. Consumers are expected to cut spending on apparel and footwear by up to 30 percent this year, according to BoF and McKinsey.
Retailers like Abercrombie & Fitch and Capri Holdings have expressed optimism about the level of traffic in stores that have reopened in recent weeks. But brands can’t count on an unexpectedly swift recovery; they need to prepare for a long struggle.
I’m not envisioning the end of capitalism, but the level of growth and the size of the market will definitely be smaller.
First and foremost, that means coming up with a strategy to manage inventory and cut costs. Preserving cash is key, as outside support from the government or industry groups is unlikely to be enough to keep companies afloat if “normal” is still a few years off.
There are also opportunities to make changes that were necessary even before the pandemic, from cutting off underperforming wholesale accounts to building an in-house e-commerce operation and revamping parts of the supply chain.
Below, BoF outlines the steps that retailers and labels need to take now that they have survived the pandemic’s initial shock and are looking ahead to the long recovery.
Plan on at Least 18 Months of Downturn
When the economy first shut down in March, many businesses modeled out future sales based on best-case and worst-case scenarios, as well as a middle road based on current trends. Nearly three months later, brands should revisit those estimates and plot out new forecasts over a longer time horizon.
Prepare for multiple realities at the same time.
Building financial models allow companies to make contingency plans. The rosy outlook on sales requires high inventories and less money spent on marketing. But if sales fall short, then the retailer is stuck with mounting inventory. A grim outlook comes with its own liabilities, such as not being able to meet demand if sales exceed expectations.
The key is to be flexible between each scenario, and prepare for multiple realities at the same time. Planning for a worst-case scenario, in which sales drop 50 percent further from the sluggish demand today, could mean being prepared to offload extra inventory to outlet channels or third-party distributors, and cutting more expenses. If the worst-case scenario becomes reality, the retailer will know exactly who to call about the excess and which arms of the business to eliminate. Planning for an upside, when demand might suddenly rise, means being able to tap into a nimble replenishment process for sold-out goods so as to not lose your customers.
“What’s challenging today is having confidence about the business but still being careful of not being overly optimistic,” said Jill Layfield, chief executive of shoe label Tamara Mellon. “When you overestimate demand, sales will suffer because of discounting. But we also can’t be too pessimistic, and give up and say 2020 is done. It isn’t.”
Brands, for the most part, are planning for slow sales through the end of next year, or even later.
Noura Sakkijha, the founder of direct-to-consumer jewellery brand Mejuri, told BoF the rate of growth her brand experienced as a start-up won’t be possible for another year or two, but that she anticipates some positive signs in the third or fourth quarter of this year.
Matthew Tingler, an investment banker at Baird, recommends a forecasting strategy that leaves room for the market to stabilise for the next six to 24 months, or for it to experience a significant downturn this fall if infection cases come back up. A third scenario involves a spike in demand at any time.
Cut Down on Inventory
Many retailers’ most urgent task is to deal with the excess inventory of spring products that consumers did not buy, as well as the summer dresses and sandals that consumers probably won’t want.
A summer of deep discounting will be tough to avoid. But brands should be thinking of less-harmful ways to reduce inventory.
“Retailers have to think about this without just racing through markdowns,” said Sarah Willersdorf, partner and managing director at Boston Consulting Group. “Maybe they could consider a three-season plan, taking the excess inventory and reserve some of it for multiple seasons.”
Gap plans to pack the bulk of its inventory into storage to save for next year. It’s a move that would save the company on margins as well as on manufacturing costs.
Wholesale brands experiencing cancelled or delayed orders should try to sell them online instead.
In the long run, brands should plan to order fewer SKUs, in smaller quantities. Tamara Mellon reduced SKUs by 30 percent and cut upcoming order volumes in half.
The premium shoe label is also ordering partially made shoes. By doing so, if a style sells well, inventory can be replenished in two weeks instead of six. Multiple styles can also be made out of a single part.
“We want to design in a way that allows us to chase replenishment faster with a group of styles that share more attributes,” said Layfield. “We’re potentially discovering a new way of selling finished goods.”
Keep Costs Low
Companies should continue to strictly manage expenses, even as sales rebound.
For smaller companies, the biggest cost tends to be payroll.
It’s not like somebody’s going to turn the lights on and everything will be back to normal.
Deirdre Quinn, chief executive of womenswear label Lafayette 148, said she furloughed about half of her staff and the positions will return in stages. But not every role will be recovered.
“It’s not like somebody’s going to turn the lights on and everything will be back to normal,” she said. “Some jobs will come back and there will be some that won’t because you have no other choice.”
Retailers should also renegotiate their rent, Tingler said, as landlords are facing a glut of vacant space and have extra incentive to hold onto tenants.
“When we think about how we can control overhead, I’m asking myself, do we need our headquarter, do we need the square footage we currently have?” said Layfield.
Richer Poorer, a loungewear and intimates brand, is seeing its best year yet. Focusing on e-commerce has significantly saved cash, said co-founder Iva Pawling.
“We’re not going to do big catalogue shoots for our wholesale partners, and we’re not travelling to retailers’ trade shows. We’re saving upwards of $200,000 from these costs,” she said.
Know Your Customer
Consumers are experiencing financial hardship too, and many are also planning to tighten their budgets for the coming months. Luxury brands can expect their clientele to rebound quickly; Chanel and Dior have even raised prices during the pandemic.
Everyone else needs to consider that many of their customers will be poorer and nervous about the future. Mejuri is introducing more entry-level items such as its $50 gold vermeil earrings, to sell alongside its more-expensive products, which include a $700 diamond necklace.
Baldaszti of Nanushka is expecting that its customers will purchase less, but more selectively. Instead of changing the prices on its $600 jackets and $400 sweaters, the brand plans to design new products with this consumer mentality in mind, offering garments that will last longer.
‘Declutter’ the Business Model
Brands operating with a reduced financial cushion need to cut anything that isn’t contributing to the bottom line.
This could mean shedding unprofitable wholesale accounts, as Richer Poorer is doing. It could also be cutting down on marketing channels without clear returns or exiting arms of the business that aren’t lucrative. Moda Operandi, for instance, shut down its men’s division in April as a result of hurt sales from the pandemic.
Some brands aim to produce fewer collections on their own pace, rather than racing to keep up with the fashion calendar.
Tamara Mellon is counting its blessings today because it never operated on a traditional calendar model. It introduces monthly “drops” of new styles — a cadence that it plans on continuing in the future.
“This is a big chance to say, what do we really want our business to look like?” said Michael Flanagan, a financial advisor to fashion labels.
Take Calculated Risks
When a business has scaled to a certain level, every decision may feel like a risk. One positive about the global recession is that the playing field feels so rigged against everyone that now may be a chance to go for something that you’ve long deferred.
Nanushka, for instance, was planning on changing its sourcing supply to use a fabric with a lower carbon footprint than its current materials but at a 30 percent higher cost. So the company dragged its feet, Baldaszti said. But in the wake of the pandemic, as the company reexamined its priorities and values, it finally took the leap.
When there’s a crisis, you have to set your priorities.
“It might sound strange that we increased the cost of a fabric in this situation but … we decided we don’t want to push more and [cheaper] products on the market for the sake of growth,” Baldaszti said.
Willersdorf points to potential investments in artificial intelligence in demand planning or personalisation, where brands can test out private promotions instead of public ones that would have a positive impact on margins. These investments to boost margins can post valuable returns at a time when profitability is easier to control than revenue.
“If we were in a situation where the pandemic didn’t hit, we would’ve procrastinated,” said Baldaszti. “But when there’s a crisis, you have to set your priorities.”