Fashion brands are strategizing to avoid the ‘bloodbath’ of price cuts

“We don’t know exactly what our competitors are doing, but we think there’s a lot of upside across the board,” Hein said on an earnings call in August. “I hesitate to call it a bloodbath, but it’s going to be ugly given the size of the discount and the discount.”

Brands like Gap and Abercrombie & Fitch cut their merchandise deeply this summer, but this approach is not ideal. Excessive discounts train customers to wait for sales and only buy at discounted prices. It can also have a significant impact on profits. Net gross margins decreased by 820 basis points in the half year, with 220 basis points mainly attributable to higher discounts. American Eagle managed to sell all of its spring-summer items at a discount, according to the brand’s latest earnings report, but it hit a $30 million profit in the second quarter of the year.

Discounting alone does not solve product issues for brands. Therefore, fashion companies are getting creative with other options such as wrapping and packaging Practices and working with non-value-added liquids.

Both Gap and Kohl’s are using pack and hold, where unsold items don’t perish, but instead, put in storage and return to shelves next year at full price. Gap, for example, is hoarding unsold seasonal clothing like T-shirts, shorts and tank tops to resell next winter.

“We’re confident that we’ll be able to integrate our pack-and-go inventory with a variety of products in the future,” Gap CFO Katrina O’Connell said on last month’s earnings call.

Packing and holding also has a negative side – that is, that inventory is not working capital for the year. There is a risk that that stock will sit in storage and become unworkable in future seasons. That unsold stock will be one year old.

From time to time, new platforms emerge to ease the stresses of offloading unsold inventory. Ghost, a B2B marketplace that connects to off-price retailers like TJ Maxx and Burlington Coat Factory, soft-launched in October 2021 and received $20 million in funding last month. Ghost has increased its sales by 375% in the past two months as many big brands look for ways to get rid of inventory.

Ghost co-founder Josh Kaplan declined to name any of the brands the company operates. Even some Ghost employees don’t know who all their customers are. But it does include some of the biggest fashion and apparel companies in the world, he said.

“When we started building this business, we all thought it would be small DTC brands that needed a lot of help building relationships and unloading inventory,” Kaplan said. But the truth is that even the biggest brands in the world are often associated with one or two off-price sellers.

By the end of the year, Kaplan will be adding discounts and non-prices, taking into account the data it collects through Ghost. In particular, it includes brands not previously sold through retailers such as TJ Maxx or Ross.

“We’re seeing a lot more demand from luxury brands and brands that are protecting where their inventory ends up,” Kaplan said. “One of the things that gives us value about us is that they can set parameters on where their products are sold. They can only say sell for a price outside of the US. That’s a very popular option, especially for beauty brands.”

Dan Leahy, co-founder of MakerSights, which helps brands plan ahead to avoid overproduction and subsequent excess inventory, says brands need to plan wisely when it comes to excess inventory.

“Brands that make tough short-term decisions to maximize their distribution are vulnerable to brand-destroying discounts offered by high-productivity factories in many department stores,” he said. “And brands that invest in deeply understanding their consumers and ensuring that their specialties satisfy their customers’ needs and wants can reduce unwanted inventory and increase average retail sales at a time when competitors are offering deep discounts.”