Cold winter for Indian apparel retailers

Many Indian apparel retailers are offering discounts ranging from 40% to 60% three weeks ahead of schedule this season (newspaper article). Sales have been impacted by 20-30% due to higher excise duty taxes and higher cotton prices which have led to a 10-15% rise in product prices.

Could this situation have been foreseen by the retailers? Are they too late on the buzzer? One can only say that apparel retailers will do well to use BI and analytics better to track sales shortfalls in real time and adjust pricing before everyone else realizes that a slowdown is on.

From an analytical perspective here's what they could do:
1) Price elasticity studies and market surveys to understand the impact of 10-15% price rise on demand
2) Markdown models that advise the retailer on how much the price should be discounted if a particular sales target is not met in the early weeks/months of the season.

These are especially relevant in the Indian market since the festivals/ holiday periods occur in the middle of the season (e.g., Divali) and dates vary year by year. Retailers need to be very nimble to adjust prices quickly if festival/holiday targets are not met.

Uncertain times in US apparel retail

The last couple of years have been exceptionally uncertain for US apparel retailers. As is seen from the graph below, sales had a significant year-on-year dip in September 2008 with the financial crisis. Each of the subsequent twelve months witnessed year-on-year declines. In September 2009, apparel retail sales started showing signs of stabilization. Since December 2009 retail sales have shown year-on-year increases. As of July 2010, apparel sales have crossed 2007 levels and appear poised for a full recovery.

Figure 1: US Monthly Retail Sales ($ BN) for Apparel Retailers (US Census)

However consumer sentiment remains much subdued. Although the University of Michigan Consumer Sentiment Index (refer Figure 2) has recovered from the lows of late 2008, it is still at/below the levels seen during the slowdown in the early 1980s and the dotcom crash in 2000. The lack of cheer among the consumers has made the outlook highly uncertain for apparel retailers.

Figure 2: University of Michigan Consumer Sentiment Index

Existing home sales, another important indicator of economic wellbeing, had a dramatic decrease in recent months. This has left many wondering how the future will shape up.

Figure 3: Seasonally-adjusted US Existing Home Sales (National Association of Realtors)

This period of uncertainty has left retailers rethinking their allocation plans and inventory management. Inventory turnover ratios dipped significantly between September 2008 and March 2009 (Q3’08 and Q4’09). Retailers adjusted to the new realities of low consumer sentiment, reducing retail sales and credit deleveraging, and adopted a more cautious inventory approach and an aggressive sales (discounting) approach. This led to higher turnover ratios between April 2009 and October 2009. Just as higher retail demand kicked in during Q4’09, the inventory turnover ratios returned close to 2007 levels.

Figure 3: Inventory Turnover for US Apparel Retailers (US Census)

Retailers have been cautious in filling shelves in the first two quarters of 2010. Retailers such as Macy’s have commented about their disciplined approach to inventory management. Inventory turnover ratios across the industry are running at historically high levels reflecting tight inventory management. Of course, one could wonder whether retailers are losing sales because of lesser material on the shelves.

Now, more than ever, apparel retailers will have to pay careful attention to making sure that the right product is in the right places at the right time and the right price. Retailers can use advanced analytics to better decisions in assortment, allocation, forecasting and pricing.

If you are interested in apparel retail best practices in assortment, allocation, forecasting and pricing, please write to me at raj@knowledgefoundry.net