Zara and Burberry's Digital Strategies Show How to Recapture Gross Margin in a Discount-Driven World

For many apparel retailers, the traditional ways of buying and selling are not aligned with consumer behavior in our ever-changing digital world. And the speed of innovation is causing this gap to widen. Retailers that rely on discounts to spur demand and move stock at the end of a season are feeling the pains of this short-sighted approach, given the increased competition driven by consumers' anytime-anywhere access via digital channels.

Leading retailers are leveraging digital strategies to enable smarter supply chain and inventory management, and in turn, minimizing the need to discount without inhibiting inventory turnover. Understanding customer preferences through engagement is key; with a supply chain that is agile and responsive to customer signals across channels, retailers can reduce the excess or unwanted inventory that leads to markdowns and discounting.

Mastering digital
Research from Leading Digital: Turning Technology into Business Transformation — a book by Didier Bonnet, senior vice president of Capgemini Consulting, and MIT research scientists George Westerman and Andrew McAfee — highlights how large global companies are using digital technologies to gain a strategic advantage, and outlines the impact of certain digital initiatives on financial performance. Digital maturity is classified through the following categories:

The research reveals that "Digital Masters" are committed to investing in technology-enabled initiatives and creating digital transformation leadership capabilities. Further, the research demonstrates that Digital Masters generate 9 percent more revenue and 26 percent higher profits than their industry peers.

For apparel, digital mastery reveals itself in endless ways. Some retailers are using technology to optimize their existing processes; others are providing a new platform to engage their customers in the end-to-end product lifecycle to have greater impact and relevance. Apparel retailers can more closely tailor their actions toward customer needs and significantly improve performance through digital engagement. By focusing on the supply chain — in terms of speed, inventory management policies and a cross-channel digital strategy — retailers can consider value-add alternatives to promotional discounting and markdowns to clear residual inventory and protect margins. 

Creating value with supply chain agility
Radical shifts in consumer demands are driving the traditional six- to nine-month apparel supply chain to become obsolete. To stay ahead, it's critical for apparel retailers to operate more like a multi-lane freeway to be agile (and fast) when needed. While there will always be some amount of traditional product development in the "slow lane," the future lies in the middle and fast lanes. Retailers can adapt to a "middle lane" by making raw materials that can be transformed quickly and made readily available in response to trends and consumer feedback. The path to the "fast lane" for retailers begins with a digital strategy that enables the consumer and retailer to be engaged in a constantly iterative feedback loop of product design, supported by an integrated and agile supply chain that respond to these constant shifts.

Zara is a great example of a company operating successfully through a multi-pronged approach. The apparel retailer reserves a majority of production capacity for in-season adjustments, while also designing and producing about half of its products in-season. Unlike traditional retailers, Zara does not order the vast majority of merchandise for the season in that initial order, but instead, orders a relatively small amount of merchandise. Once the season's merchandise hits the stores, Zara begins to collect insights on product performance through analytics – perhaps the most critical component of this method.

As analytics grow more contextual in nature, merchandising teams are able to pull insights from the data and act upon the findings. For example, if a pant fit sells better without pockets or a specific color is trending more than expected, merchandising teams can guide their replenishment orders accordingly, which will lead to better overall business outcomes. From here, Zara can use findings from in-store analytics but also can incorporate learnings from social media, feedback via ratings or reviews on their website and can implement additional crowdsourcing capabilities to further optimize their already flexible supply chain.

Another differentiating characteristic of Zara's supply chain is the speed at which it gets product from factory to store. Unlike most apparel retailers that source in Asia and transport via shipping to achieve lower average-unit costs through longer lead times, Zara sends goods via air from its facilities in Spain to its stores around the world weekly. This practice is unique and compelling, and Zara has proven that the cost of transporting via air directly from the factory pays dividends in the form of increased sales and higher average-unit retails to be first on newness. Traditional department stores are increasingly taking cues from Zara; Lord & Taylor has implemented a process to more quickly reorder items that are selling fast and J.C. Penney has reduced production times for its private brands by placing smaller initial orders with Bangladesh factories.

Optimizing inventory management flow
The traditional "push" model of determining allocation of style, color and size per store six to nine months in advance of the product hitting the shelves is outdated and costly, and fails to incorporate customer feedback. Apparel retailers stand to gain with smarter inventory management practices to have trend-right product. By incorporating a "pull" allocation model, retailers are able to position inventory more as "right place, right time," and will rely less on discounting to move product.

While discounts improve financial performance by increasing turnover, discounts also decrease margin per item. It's critical for business to be able to find a balance when it comes to discounting in order to maximize both turnover and margin.

Some retailers have benefited greatly by shifting their flow policy and strategy to hold more initial flows at distribution centers instead of pushing completely to store stockrooms, making store stockrooms less cluttered and more efficient to navigate. Companies can then fill stores from distribution centers based on sales as opposed to having to predict replenish quantities. In this model, employees spend less time looking for inventory in the stockroom, and instead can process replenishment shipments on the floor as they are received and assist customers in parallel.

It is critical for retailers to incorporate customer feedback and sales into initial allocation decisions. Retailers can capitalize on direct-to-consumer sales in addition to traditional brick-and-mortar with the implementation of strong synchronization across channels. Companies can gather consumer data through digital sales and interactions and use that data to more accurately predict product stocks in retail locations. Retailers can reduce lost sales, increase average unit retail and improve profits by using analytics that have a continuous improvement capability and can position inventory proactively while accounting for trends in real-time.

Competing with an edge of end-to-end inventory visibility
The agility that comes from having complete inventory visibility is a competitive advantage that early adopters are starting to leverage and the rest of the industry must adopt to remain relevant. RFID technology, for example, allows real-time tracking of products and automated re-ordering to minimize both storage space needed and the amount of out-of-stock products. By implementing RFID, retailers can have increased confidence in the accuracy of their data, incorporate more locations into e-commerce fulfillment equations, and create larger pools of inventory with better opportunities to reduce discounting.

Retailers who leverage distributed order management solutions combined with RFID identify the best point-of-fulfillment and manage inventory more effectively than those using a more siloed approach to channel inventory. Department stores like Zara, Macy's and Marks & Spencer have rapidly initiated programs that tag merchandise in order to more effectively orchestrate profitable sales and fulfillment.

Capitalizing on social media engagement
Social media is a powerful tool that retailers can leverage to create brand evangelists who will pay a premium for products, ultimately reducing the need to offer discounts. Burberry has successfully used social media to interact with customers and build its brand, and now is capitalizing on this engagement for real-time sales.

Before products debuted at a "see now, buy now" event during London Fashion Week last September, Burberry initiated a marketing campaign to tease consumers. Those related digital initiatives were almost like a traditional trunk show, in that they created interest and demand by directly engaging with consumers – only now through digital means. By capitalizing on its social media influence, the high-end brand was able to convert fashion show buzz into orders instantly. From a supply chain execution standpoint, Burberry leveraged feedback from fans during this marketing campaign to alter production accordingly. Once the Fashion Week event started, Burberry also enacted a live stream on Facebook and live customer service on Facebook messenger.

Going digital to sidestep discounting
The common theme of many of the aforementioned solutions is digital transformation. And while retailers may feel overwhelmed in keeping up with the onslaught of emerging technologies, it is important to remember that you do not need to try everything all at once to see what works. 

Retailers try many different approaches, often in an uncoordinated way, and as such, typically do not get the maximum benefits they seek. As a first step, it's critical to identify the digital capabilities – from   product assortment, all-channel access, personalized offers to improved service and the like – that are the most important to consumers, and then implement these capabilities through an integrated, test-and-learn, continuous improvement approach. Only then will retailers be on the road to digitally transform their customer experience and realize a reduction in discounting tactics and improved profitability that goes along with it.

Bill Lewis is a senior vice president in the Consumer Package Goods, Retail and Distribution practice at Capgemini Consulting, the global strategy and transformation consulting organization of the Capgemini Group. Solomon Kane is a senior consultant at Capgemini Consulting.

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