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How Focusing on Target IMUs Could Undermine Margins

In a time when apparel brand and retailers are struggling, companies are looking for ways to improve profitability. But one of the surest often gets overlooked. Today, companies are leaving money on the table because they don’t truly understand costing. Even if buyers exceed their initial markup (IMU) targets, they will never be effective negotiators if they don’t accurately cost products before sending them to suppliers.

Too many brands, retailer, importers and wholesalers focus on buying “packages” to achieve a target IMU. They don’t really understand, or care to understand, the actual cost components of the product, opting instead to award business to the lowest bidder. For instance, it’s not very smart to assume that this $49 retail price shirt, where I have a target IMU of 70 percent, has an actual cost of $15.

One reason for this may be that many companies today have buyers or merchants negotiating directly with suppliers, bypassing the traditional sourcing office or agent, in theory to save time and money. However, if the designers, merchants, buyers, and technical teams do not understand costing, they will be at a significant disadvantage when going direct.

When buyers do attempt to estimate cost before negotiating with a supplier, they often fail to understand the choices they have or the alternatives they could pursue to either enhance quality or salability, reduce cost, or both. Understanding fabric weight and construction choices, widths and yields, standard minutes and factory efficiency, logistics, duties, compliance and more will allow buyers to better control their own destiny and profitability.

And the biggest mistake is that time is often not considered a factor when estimating cost; the 8-12 weeks of freight and logistics time it takes to get a finished product from a factory in Asia to a store in the U.S. is costing the buyer valuable margin, as is the back-and-forth, iterative development time on the front end. Most retailers never consider the cost of time when estimating product cost.

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But fast fashion has trained consumers to want newness, making speed to market a top concern. Obvious tactics for reducing time to market are near-shoring strategies or air freight but both have specific costs that could impact margins. The most impactful speed-to-market strategies will start with the front end of the process, using 3-D technologies, virtual product development and good old fashioned decisiveness to cut months out of seasonal calendars. Then, leveraging near-shoring and creative logistics strategies can enhance that speed even further.

If costing is understood and engineered correctly, the time element of getting product from design to the customer is a cost that can be significantly reduced, enhancing both product appeal and salability, and the bottom line.

Having a firm understanding of costing could soon become even more important if proposed changes in the tax code and trade deals come to pass.

First, the tax reform proposal developed by the House Republicans relies on a border adjustment tax (BAT) to offset the revenue lost from cutting the corporate tax rate from 35 percent down to 20 percent. The BAT is not in and of itself a “tax” at the border but it precludes businesses from deducting the cost of imports when calculating their earnings. Essentially, if you can’t deduct the cost of your imports, you will have to pay tax on them. For the apparel and footwear industries, who today import about 98 percent of what they sell in the U.S., their “new” taxes would far exceed their profits. The ripple effects of this would be felt in higher prices, lower earnings, job losses, bankruptcies and less purchasing power for consumers.

Second, the administration is still talking about renegotiating NAFTA and imposing additional tariffs on Mexico and China. The House has a target of completing tax reform by the August recess so we will know soon enough how these high impact proposals will pan out, but apparel and footwear brands and retailers, and consumers, should be very concerned.

By Ed Gribbin, president of Alvanon