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

Localizing assortment in fashion retail

CNBC reported today that Macy's recent outstanding results can be attributed to its local approach to customizing its assortment and its size mix (click here).

Chief Executive Officer Terry Lundgren attributed the results to better margins, disciplined inventory management and Macy's program to allow stores greater leeway in catering to local tastes. These factors also prepared the company to woo shoppers despite the threat of a new dip in consumer spending.

Although the department store chain has centralized its buying, planning and marketing operations, it also has local managers on the ground who examine sales data and travel to a specific handful of stores to study customer buying at those locations. Based on their work, individual Macy's stores may decide to stock more of a particular dress size in a particular style, for example.

Other store chains make similar inventory moves, but without the granularity of Macy's approach. For example, a store may ship more of a specific size for a whole range of clothing to a store. That may be all it takes to make more apparel sell at a full price rather than linger on the rack and be marked down.

Kudos to Macy's.

Based on our work for several US women's apparel retailers, I can tell you that assortment localization can be achieved through good analytics. Retailers don't need many local managers to observe the shelves to achieve localization.

The key aspects of analytics for assortment localization include:

• Collating the transactional sales data (gross sales ($,units) , net sales ($, units), cost ($)) at a weekly level across stores for the past few quarters -- typically hundreds of millions of rows
• Adjusting the sales data for stock-outs and negative margin sales (to get a true picture of demand for each style at a store level
• Rolling up the sales data to the desired level of product hierarchy (Department/category/class/section/end-use/Color/Size/etc)
  
• Using the rolled-up adjusted sales data across stores to decide assortment and allocation for the future.

Drop me a mail at raj@knowledgefoundry.net if you want more details.