Great merchandising, like great value, never goes out of fashion. In a dynamic and increasingly digital apparel, fashion, and luxury market, companies that get merchandising right tend to outperform their peers. One reason is that the umbrella term “merchandising” describes many of the skills associated with excellent retailing. These include expertise on products, quantities, consumer behaviors, channels, timing, pricing, promotions, and replenishment: elements that are key drivers of value creation and vital tools to create competitive advantage.
Merchandising is notoriously difficult to optimize across its many facets—particularly in the current environment. About 97 percent of fashion executives expect their cost of goods sold as well as selling, general, and administrative expenses to rise in 2023, spurring appetite across the industry to simplify assortments and manage costs.1 For many executives, the trend echoes their longer-term thinking. In one prepandemic McKinsey survey, 98 percent of fashion executives said it was their priority to improve go-to-market and merchandising processes.2 The postpandemic environment has done nothing to undermine these perspectives. In short, best-in-class merchandising capabilities are closely associated with business advantage in the minds of the industry’s leaders.
Given the current economic environment and unprecedented uncertainty companies are facing, the need to get merchandising right is even more urgent than usual. For that reason, many companies are seeking out new approaches to creating efficiencies, and many are adding cutting-edge digital tools to their armories. In 2021, 58 percent of fashion executives said that assortment planning is a key area for their expanded use of data and analytics.3
Definitions and skill sets
Despite merchandising sitting at the center of the commercial process, it remains subject to a variety of interpretations. For the purposes of this analysis, we define merchandising as the process of planning, selecting, distributing, and measuring the success of a product that is delivered to the end consumer. These “stepping stones” include the vital elements of category strategy, delivering on value proposition, and shepherding cross-functional partners to maximize performance.
The specific role of merchandising varies depending on individual business models and balance of global and local teams. However, some common rules apply. From preseason to in season, the end-to-end merchandising timeline starts with the development of the category vision and creation of an assortment plan. Then comes product development, buying and allocation of assortments, and finally, in-season management and analysis of performance at the point of sale (exhibit). Our experience working with some of the world’s leading retailers and brands suggests that companies that can move seamlessly through this workflow, and address the six shifts in the industry’s merchandising model, tend to create more consumer-centric assortments and more robust financial results.
Across the industry, we see six shifts in the industry’s merchandising model that are presenting decision makers with a significant opportunity (see sidebar, “Definitions and skill sets”). If they can optimize their merchandising activities to react to these shifts, they are likely to create a playbook that can help them navigate a tough economic environment and set up their businesses for growth.
Shifts in the industry’s merchandising model
Less is more during economic uncertainty. With inflation running at a 40-year high in many markets, the cost of running a fashion business is rising fast. In periods of economic uncertainty, there is an urgent need for brands to embrace leaner business models so that each dollar earned, and saved, goes further.
Consumers demand newness and storytelling. Over recent sales cycles, product life spans have contracted, putting a premium on newness. Consumers want companies to convey clear brand stories and have a positive impact on society. To react, brands need to ensure close and early cross-functional alignment in their go-to-market plans.
Sustainability is climbing the agenda. Shifting consumer attitudes are driving change and regulatory intent is hardening, requiring the industry to clean up its act. In response, companies need to reduce waste, prioritize sustainable materials, design for circularity, and ensure a sustainable, responsive supply chain.
Channel dynamics are continuing to evolve. E-commerce saw unprecedented growth during the pandemic and many brands moved to direct-to-consumer (DTC) models. However, a new reality is now settling in. To grow, brands will likely need to diversify their channel mix, including wholesale and third-party marketplaces, alongside DTC.
Data and insights have become a necessity. Digital is a surefire driver of performance, but not working in silos is key. Integrated digital solutions enable faster time to market, more full-price sell through, and lower manufacturing costs. They support pricing and promotions strategy and inform range planning and optimization.
Talent crunch puts pressure on the operating model. The war for talent makes a well-oiled merchandising operating model a priority. From defining the merchant role as the exciting and business critical role it can be to finding the right balance between core merchandising skills and horizontal excellence functions, the need to act is clear.
Less is more during economic uncertainty
With inflation running at a 40-year high in many markets, the cost of running a fashion business is rising fast amid soaring labor and input costs and sticky advertising prices—particularly online. Affiliate marketing spending in the United States alone reached $9.1 billion in 2021, a 45 percent jump from 2018. With consumer confidence falling, there is rising pressure on margins, while persistent operational challenges are hobbling activities such as inventory management. As of August 2022, stock levels of publicly traded US fashion retailers were up by 28 percent year on year.4 Brands are often responding to these pressures by raising prices. In the United States, clothes prices in September 2022 were 5.5 percent higher than they were in late 2021, according to US Bureau of Labor statistics. For 2023, nearly 75 percent of executives stated that they plan to increase the prices of their products in the year to come, and 10 percent foresee price hikes of more than 10 percent.5
In a period of economic uncertainty, there is an urgent need for brands to embrace leaner business models so that each dollar earned—and saved—goes further. Some brands are focusing on core products and jettisoning the rest: two-thirds of fashion executives are planning to revise their assortment structures in 2023,6 consistent with a 2021 survey in which 61 percent said they were planning to reduce SKUs.7 In addition, some plan to cut the number of annual collections, while others are focusing on creating streamlined brand narratives, imposing demanding efficiencies, and introducing tighter cost discipline. In all cases, identifying whether a product is a statement piece, a margin driver, or something else, and baking these perspectives into the planning process, is key.
Looking ahead, brands can reduce margin pressure by rethinking discounting and promotions. In recent months, Victoria’s Secret, PVH, and American Eagle, among others, announced pullbacks on promotional pricing. In addition, style by style, many brands are examining how to better align prices with value perception and are taking an analytical lens to price elasticity and margin dynamics. Meanwhile, brands including Michael Kors and Ralph Lauren have raised prices to drive more elevated consumer perceptions,8 for which they have seen positive results.
Beyond pricing, merchants can transition to leaner inventories and refine assortments to more cross-season products, extending shelf life to maximize sell through and minimize markdowns.
Consumers demand newness and storytelling
Despite the trend toward simplification, company leaders need to be wary of making sweeping changes that fail to reflect the impacts of shifting consumer demand. Even in a period of income pressure, or perhaps even more so, consumers want companies to convey clear brand stories and have a positive impact on society.9 One critical element of this proposition is the ability to create and build stories around hero products. Well-known examples include Calvin Klein’s boxer briefs, Burberry’s iconic trench coat, and Nike’s Air Force 1 basketball shoes. The most successful brands are adept at using these products to define what they stand for. While in the past creating a hero product was sufficient, today brands need to be able to tell exciting stories around these products to attract consumers and command a price premium, especially when considering the increasing speed of the industry.
Over recent sales cycles, product life spans have contracted, putting a premium on newness. The trend is also playing out among brands. For example, ultrafast fashion retailer Shein has grown 100 percent year on year for the past eight years. It is the second most popular shopping website among America’s Gen Z (after Amazon) and number one in the world for web traffic. One reason is that Shein is about seven days faster than leading fast-fashion players in moving products from concept to customers.10 This agility is pushing many brands to offer similar propositions: sporting goods players including Nike, adidas, and New Balance drop new sneaker releases on a weekly basis.
Another driver of accelerated cycles is digital engagement, which enables brands to feed consumer appetite for newness. However, a parallel effect is increased demand volatility amid influencer-fueled hype that can lead to a product selling out in days. Over a short period in 2021, for example, Seasum leggings racked up nearly 800 million views, leading to sellouts on platforms including Amazon.
In response to these dynamics, businesses need to ensure closer alignment among product, channel, and marketing functions when developing go-to-market plans for “who to sell to,” “where to sell,” and “how to activate” their products. In addition, brands are moving to more in-season flexibility, including adding fast-tracked products, more nearshoring, and preferred vendor partnerships,11 as key enablers for faster time to market.
Sustainability is climbing the agenda
Fashion is among the most unsustainable industries on the planet, responsible for around 4 percent of global emissions.12 Oil-based polyester accounts for about 50 percent of fiber production, while cotton accounts for another 25 percent, amid significant emissions and reliance on large volumes of water, land, fertilizers, and pesticides.13
Still, shifting consumer attitudes are driving change. About 75 percent of millennials say that they will “definitively or probably” adapt purchase/consumption habits to reduce their impact on the environment.14 Moreover, regulatory intent is hardening, with legislation such as the European Union’s Green Deal requiring the industry to clean up its act, reject greenwashing, and embrace more circular business models.15 Billions of dollars of capital are earmarked for sustainable causes, suggesting even the most hard-headed decision makers will soon need to consider the environmental, social, and governance agenda. In response, many brands are reacting and seeing positive impacts on brand equity and performance.
In promoting the sustainability agenda, merchandisers have a key role to play. They can reduce waste (by tightening collections and focusing on efficiencies), prioritize sustainable materials, design for circularity, and ensure a sustainable, responsive supply chain. They also need to unlock different ways of working, and forge closer collaboration between merchants and their design and supply counterparts through the product development cycle. There should be earlier cross-functional alignment on seasonal business needs, while guardrails should prevent overdevelopment in the design concepting phase. Furthermore, merchandisers can help supply teams better understand assortment needs, helping them accelerate raw-material development, optimize capacity, and reduce waste.
Channel dynamics are continuing to evolve
When a new generation of DTC labels arrived online over the past decade, the fashion industry was ripe for innovation. The DTC model was validated when the pandemic hit and most physical retailers were forced to shut, either temporarily or permanently. During that period, e-commerce saw unprecedented growth rates and increasing numbers of brands moved to DTC distribution models, enabling them to take control of data, pricing, and curation, with sporting goods and luxury brands taking the lead.16
However, after online purchases surged 30 percent year on year in 2020 in the United States and Europe, a new reality is now settling in. Between 2022 and 2025, e-commerce is expected to grow at a compound annual rate of 10 to 11 percent in the United States and Europe—much closer to the prepandemic levels seen between 2016 and 2019.17
At the same time, physical retail is seeing a resurgence. In 2022, US store openings outpaced closures for the first time in at least three years, and although retail foot traffic remains 10 to 20 percent lower than in 2019, the productivity of stores has risen: in the United States, sales per square foot increased 13 percent year on year in 2021.18
Regardless of the extent to which fashion brands have built their businesses around selling direct to consumers online, the deceleration of e-commerce growth and mounting digital marketing costs require a careful recalibration of channel strategies. To grow, brands will likely need to diversify their channel mix, including wholesale and third-party marketplaces alongside DTC, and adopt processes that enable earlier visibility and transparency of cross-channel strategies. Critical to this is having a clear distribution segmentation, allocating wholesalers and DTC to distinct value tiers and setting the guardrails on multiple dimensions, including the assortment that is offered and the level of investment that accounts receive. This enables brands to develop cohesive assortments that can work across their distribution networks.
Data and insights have become a necessity
Data and analytics continues to be a key focus area for merchandising: 61 percent of fashion executives believe end-to-end process management will be among the most important investments between 2021 and 2025.19 One challenge in operationalizing digital business models is to ensure they do not become siloed, which would limit the potential for cross-functional improvements. In addition, structural puzzles must be solved: there are very few off-the-shelf solutions that are designed to integrate the fashion value chain from end to end, meaning companies will need to build custom solutions or prioritize pain points.20
Digital is a surefire driver of performance. Based on our research, we estimate that applying integrated digital solutions to merchandising could lead to up to 50 percent faster time to market, an 8 percent rise in full-price sell through, and a 20 percent decline in manufacturing costs.21 It could support in-season pricing and promotions strategy, as well as feed data-driven range planning and optimization. In addition, through new and more granulated customer insights, companies can bring sharpness to their planning and design processes. Shein has achieved its “TikTok for e-commerce” status by investing in AI technology to predict consumer demand patterns, all of which has helped it accelerate its time to market.22 Nike, meanwhile, has acquired several data and analytics companies, including analytics and demand forecasting firm Celect in 2019.23
Talent crunch puts pressure on the operating model
Amid all-time high vacancy rates, businesses are struggling to attract and retain talent—particularly in digital, creative, and commercial roles. One reason is that near-full employment in many markets means employees have more choice about where, when, and how to work. To complicate matters, people are thinking differently about job satisfaction; there is more focus on work—life balance. As a result of these challenges, there will continue to be a shortage of interested, qualified workers.24
The war for talent means a well-oiled merchandising operating model is more important than ever. From organizational structure and decision rights to KPIs, culture, and talent management, companies need to make sure they are set up to deliver on their strategies and retain key employees. This starts by defining the merchandising role as the exciting and business critical role it can be, and then creating a culture that provides opportunities to grow beyond traditional silos and acquire cross-functional expertise.
Cross-functional expertise is especially critical as the role of the merchant becomes increasingly more complex. Brands need to find the right balance between core merchandising skills and horizontal excellence functions, like sourcing and supply chain, and create clear roles and responsibilities for them in order for vertical and horizontal teams to collaborate most effectively.
One way for fashion brands to compete for talent is by prioritizing technology, since top talent often want to make an impact on innovation. Nike, for example, has recently restructured its organization so that its data and analytics teams sit alongside creative teams.25 This has encouraged data integration in product design and attracted more talent into strategic technology areas.
Taking action
With uncertainty baked in over the short to mid term, and pressure on revenues and margins continuing to rise, decision makers face an imperative, and an opportunity, to streamline their merchandising and go-to-market models. Effectively implemented, this will boost customer engagement and create more efficient and effective operations. Here we gather nine actions that reflect the priorities of some of the industry’s leading companies as they look to capitalize on the six shifts we have highlighted.
- Segment go-to-market calendar: implement multilane calendars to create distinct processes for newness and continuity, increasing your speed to market and derisking your collections where possible
- Adjust sourcing model: define a fit-for-purpose sourcing strategy and model that balances speed, cost, quality, and sustainability to match and enable your merchandising choices
- Focus on net margin: review your KPIs and incentive schemes to ensure product and commercial teams focus on delivering net margin, and thus help tackle declining full-price sell through and increased dependency on promotions
- Scale up test and repeat: build a discrete approach and the required data and analytics capabilities for test and repeat to better react to shifting demand and rapidly double down on best-selling lines
- Manage open to buy: increase the share of your open to buy to derisk seasonal stock through more short-term, demand-focused assortment decisions
- Reduce range complexity: simplify your range architecture and reduce the long tail of SKUs to increase efficiency, reduce excess stock, and derisk supply chain bottlenecks
- Define clearance strategy: create a long-term path to clearing stock, taking an omnichannel lens and considering the role of outlets to not dilute the strength of your brand
- Create organizational clarity: train, upskill, and empower your merchants to make business decisions, and build the necessary cross-functional network around them to drive excellence
- Walk the talk on sustainability: embed sustainability as a core business KPI for merchants to have clear targets on how much of a collection should be made up of sustainable items
Companies that are able to embed these strategic priorities to fit their unique circumstances are likely to make the most progress on adapting their business models to the challenges of the current environment. Moreover, the most successful will leverage these approaches to embed a more agile merchandising capability that creates flexibility, not only to manage through the downturn but also to respond effectively to the future return of growth.
