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Can the Supply Chain Drive Out the Promotional Cycle?

The good news about consumers is that, to some extent, they can be molded. The bad news is that once certain molds stick, it can be challenging to move on from there.

The scenario is one the apparel industry has been facing with the promotional cycle that have buried many players as their shoppers have grown accustomed to getting things at a deal or discount.

For many, the question has been whether retailers can remove themselves from the markdown mania and if they can retrain their consumers to pay full price for product.

It’s a problem the industry will have to learn to solve, because if you ask AlixPartners managing director Murali Gokki, the constant markdowns don’t appear to be meeting their end.

“The promotional environment you’re seeing in the United States is not going to go away,” Gokki said at the Sourcing Journal Summit in Hong Kong last month. “The consumer has been trained to shop a certain way and it really isn’t going to change. At least for the foreseeable future.”

What can be changed, however, Gokki continued, is the nature of the promotions and markdowns.

“I have a feeling that’s not being optimized in the industry at all,” Gokki said. “The industry tends to overestimate the sales gain from a promotion and underestimate the profit loss from a markdown.”

And that predicament is one that could separate successful retailers from those lining up in bankruptcy court.

“Unless they pay attention to that and change that equation, it’s going to be hard to be profitable from the brand/retailer perspective,” Gokki said. “From the supply chain/sourcing perspective, the realization that the industry needs to come to is how they develop product.”

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When a company produces a garment valued at $45, slaps a markup on it and tickets it for $100, Gokki explained, that does not mean it’s designing and making a $100 garment.

“You’re making a $45 garment, and therefore your product development cadence, your sourcing cadence, everything needs to tie back to a $45 garment, not a $100 garment,” he said. “Speed is not just about everybody driving to a six-week or a 12-week solution.”

Rather, speed is about a brand understanding its customers’ expectations and aligning their speed equation accordingly.

“They need to adapt multiple speed models and align the multiple speed models to the needs of the consumer so they’re delivering the right value at the right time,” Gokki said.

If companies can get that equation right—as Inditex has managed to do with its Zara model—plus find relevant product they can create a sense of scarcity around, they might be able to get consumers on board with paying full price.

Though, as PwC Strategy& Principal Dr. Axel Nitschke, pointed out, “There are segments that will not change, have not changed and are very price sensitive.” Adding to that, he said, “But I think it’s also on us, the industry, to understand and identify customers’ new needs.”

Part of getting to that understanding, Nitschke explained, will be using both big and small data collected across the digitized supply chain to better connect to the consumer and offer more meaningful product.

“Meaningful can be sustainability, meaningful can be focused on design, but the overarching theme is to build the supply chain in a smarter way if you could focus on the customer and on the product instead of the Excel sheets and PDF files,” he said.