The US economy is largely driven by consumer spending, which accounts for 70% of its GDP. As the coronavirus shows no clear signs of slowing down in the US, jobs are no longer secure with consumer spending severely impacted. Approximately 20.5 million jobs were lost in April, putting the US unemployment rate at 14.7% – the highest since the Great Depression.
Business closures and layoffs have caused the steepest monthly drop in US consumer spending ever recorded at 7.5% – 3.6 times higher than the previous record of 2.1%.
Physical store closures and supply chain disruptions are causing a surplus in inventory. Being confined to solely digital channels, retailers are unable to drive out as much inventory compared to pre-crisis conditions.
Moreover, some retailers have adjusted their Spring/Summer collections, prioritising stock that will sell now to accommodate customer buy-now-wear-now preferences, while delaying launch timings for products that can be introduced at a later date.
32% of US citizens have experienced negative impact towards their income due to Covid-19 and expect to decrease spending on apparel by 51% in the coming weeks. Cash-strapped consumers are now shifting towards a new discount mindset as retailers delve into deep discounting to overcome a glut in inventory.
With the current climate, how can retailers markdown effectively and still protect profit margins?
This report aims to identify key lessons at leading brands and share how to execute smart markdown without hurting profit deeply and eroding brand equity.
More than 1,330,000 womenswear data points were screened from March 2019 to May 2020 across the US market full-price and off-price channels in the luxury and premium segments – including Farfetch, Net-a-Porter, Yoox and The Outnet. Direct-to-consumer (DTC) brand, Everlane, was also analysed to uncover how smaller players markdown differently from the bigger brands.
All data used in this report comes from products retailing online as tracked by Omnilytics, unless otherwise mentioned.
Covid-19 has caused a disruption in Farfetch’s markdown timing bringing reductions forward to April, as a consequence of the surge in number of Covid-19 cases in the US. The retailer launched 7,108 first discounts in April, three times higher than the year before.
Everlane was not exempt from disruptions to the markdown calendar. Prior to this, the brand had not launched any first discounts on its Spring/Summer collection. 209 first discounts have been executed since March this year, higher than 2019 and increased in frequency.
Covid-19 has brought on a disruption to markdown timing in brands. Introduction of first discounts has not just been brought forward, it has also increased in magnitude compared to last year.
The retailer previously offered discounts for only 81,878 items in March to May last year, which increased to 137,285 items this year. The large amount of markdowns garnered an uplift in sell-out rate to 30% against last year’s 21%. The bulk of discounts were offered in April, when up to 82,000 items were discounted weekly.
Prada and Fendi have seen great success throughout this crisis. Both brands managed to secure sell-out at 80% and 84% respectively, despite having discounts on less than 15% of their entire assortment.
The two industry leaders achieved sell-out rates on par with, and beyond other brands retailing on Farfetch – where an average 58% of items were discounted.
Brands should not wait to execute markdowns. Identify which products fulfil the ‘buy-now-wear-now’ preference of consumers and execute markdowns immediately to overcome overstocking issues. Brands should also look to industry leaders like Prada and Fendi to observe their markdown strategies.
Most Discounted Categories
The categories with the most discounts were Tops, Outerwear and Dresses in apparel, followed by Shoes, Bags and Accessories in non-apparel. A deeper dive into the categories in apparel and non-apparel revealed that luxury and premium retailers are focusing markdowns on Spring/Summer collections.
Farfetch and Net-a-Porter drove discounts on the Blouses subcategory, consisting of ruffles and floral patterns. Sandals & Flip Flops were frequently seen in the non-apparel discount assortment, where 55% of the items had open toes.
Unlike large retailers, Everlane practiced targeted discounting – where different discount strategies are applied to each category. Smaller brands like Everlane have the ability to practice targeted discounting because they have more control over pricing and have more agility. This provides DTC brands with better capacity to adapt to the market than larger brands.
A deep dive analysis shows that Everlane is focusing on moving stock for Dresses. The category had the highest percentage of discounted products at 60%, twice as high compared to Tops, Pants & Leggings and Jeans.
Brands should take a deeper dive into monitoring performance, not just at category level, but all the way down to SKU-level performance tracking.
