Inflation takes a toll on businesses of every kind. Retailers and consumer brand companies are no exception. Finding ways to reduce costs while not significantly affecting the quality or availability of products is key to maintaining margins and customer loyalty.
To learn about some of the options retailers and apparel companies have to better navigate these challenging times, we spoke with Eric Fisch, national sector head of retail and consumer brands at HSBC Bank for HSBC Corporate Banking. Here, he discusses how companies can manage costs, how expanding the number of vendors is a good long-term strategy and how passing along price increases to consumers can be done smartly.
- Finding ways to reduce the cost of goods sold—Certain brands are known for specific qualities, whether it’s the weight of the fabric or the embellishments that define the look. But certainly elements less noticeable to consumers could be adjusted to save money. Fisch said some apparel companies he’d spoken with were experimenting with less expensive zipper pulls, for example, or eliminating the extra buttons often included with a shirt or jacket. Some companies also use less expensive fabrics to line garments, which reduce costs but don’t take away from the overall aesthetic.
- Securing lower-cost vendors—Throughout the history of the garment industry, manufacturers have moved from one country to another to source lower-cost labor. Aside from the raw materials that go into making a garment, labor is the biggest cost that apparel companies face. Fisch said that in his conversations with manufacturers, he’d heard that they expanded the number of vendors they worked with as specific regions or countries shut down over COVID-19 concerns. By diversifying the supply chain, companies can not only potentially secure lower-cost vendors, but they can also ramp up production at a different location if one or more regions shuts down or becomes too expensive.
- Ordering in bulk—One of the benefits of placing larger orders (besides not having to worry about adequate inventory) is that you become a more significant customer for a vendor and can, therefore, command a better price for your goods. Fisch said apparel companies would typically order in bulk for core products (a black turtleneck or a short-sleeve white T-shirt, for instance) that they knew would sell through season after season. “The larger the quantity you can commit to, the more important you’re going to be to that vendor,” he said. A larger order can also potentially give a company access to more sophisticated factories with better pricing that might not have been willing to work with a smaller order size.
- Placing orders early—Even the busiest factories have seasonal downtimes. When an apparel company can provide early insight to a factory into how much inventory it will need and when, that factory has a better chance of slotting that production run into its downtime and offering the apparel company a discount. In this current inflationary environment, it stands to reason that the price an apparel company pays today for goods will be lower than what it will pay in six or nine months.
- Passing costs on to customers—The benefit of passing increased costs on to the customer isn’t hard to understand: By charging more, an apparel company or retailer has a better chance of maintaining margins on the goods sold. It can do this without affecting the quality of the goods made or having to store more product for longer periods of time. However, as any business understands, a price increase is not without risk and should not be done without careful consideration and thorough understanding of the customers most affected, Fisch said. In general, the lower the price of an item is in absolute terms, the riskier it is to raise prices because buyers of lower-priced goods are typically more cost-sensitive. “There’s a big difference to a shopper for an item that goes from $8.99 to $10.99 than there is for a shopper who buys a designer sweater that has increased from $415 to $480,” he said. Understanding this dynamic allows a retailer to pass on price increases in a way that helps to maintain margins without alienating the consumer.
In an inflationary climate the likes of which we haven’t seen since the 1980s, apparel companies are likely using all five of these levers to manage costs. “The accumulated effect of the first four means that companies have to do less of the price increases,” Fisch said. That’s good news for consumers, but it means apparel companies and retailers have to keep a sharp eye on managing costs so that customers keep coming back.