Rising operational costs – manufacturing, fuel, freight, payroll, etc. – and increasingly skittish consumers are squeezing margins in the apparel industry. With persistent inflation sweeping over much of the West, a new article from McKinsey and Co. recommends a five-point plan, under the acronym ADAPT, to struggling apparel producers and retailers.
As the article points out, the U.S. saw inflation ascend to 9.1 percent in July, after its highest 12-month climb in more than 40 years – that is, since the so-called “malaise” of the Jimmy Carter presidency. McKinsey notes as well that “price realization in the apparel industry has lagged well behind inflation rates and household income growth.”
Meanwhile, the consultancy’s latest Consumer Pulse survey found that the percentage of optimists among consumers fell from 44 percent in October to 38 percent in May. The result is that consumers are out for bargains, and willing to switch brands or retailers to find them. At the same time, upstart brands are gaining ground with Gen Z and “masstige” (mass-produced goods marketed as luxe) consumers.
Enter McKinsey’s model: ADAPT, short for Adjust, Develop, Accelerate, Plan and Track.
The elements to “adjust” are discounts and promotions. One tactic is the “broad pullback,” which can “preserve customer perceptions of value” while sustaining margins. Other tactics are to limit clearance pricing and cut back on inventory – although it is true, the report concedes, that inventories were up year-on-year for many retailers in June.
Retailers are to “develop” the “art and science of price change,” preferring granular changes to average reductions across the product mix. This calls for repeated “segmenting,” by trial and error and on the basis of “price elasticity and margin dynamics.” Another option is “raising the price across the assortment while leaning on personalized promotions and loyalty tactics,” especially for “products that are highly exposed to inflation and most important to customers.”
Retailers are to “accelerate” decision-making, by removing bottlenecks in their relations with vendors, suppliers, the design department, stores or e-commerce operations. To accomplish this they could sharpen their view of these entities’ cost structures or take advantage of digitalization to speed up price changes and interlink e-commerce with physical stores (click-and-find, click-and-collect, etc.).
The “plan,” meanwhile, should go “beyond pricing to reduce costs,” especially if retailers turn around and squeeze suppliers, which have their own rising costs to deal with. McKinsey’s solution is cost management through “design and category architecture.” Manufacturers can switch to “alternative fabrics and lower-cost design,” while retailers can switch from brand-name to private-label products or else personalize their promotions.
The final step is to “track” execution, through such share-of-wallet KPIs as “consumer basket size, average unit retail, units per transaction, and customer transaction-frequency.” McKinsey reminds us that inflation in nondiscretionary categories (food, shelter, energy) can affect discretionary spending – and that tracking should extend also to the competition.
