A mountain of unsold inventory is a multifaceted issue facing high-end luxury retailers this holiday season. Retailers and brands alike grapple with the issue of unsold inventory, balancing financial considerations with brand reputation and environmental impact. The critical problem stems from the deceleration of consumer spending after the initial surge in spending during the pandemic recovery phase — leaving brands grappling with excess stock as discretionary income and consumer demand stabilized.
According to Barclays' newest U.S. credit card data report, spending on luxury goods in November decreased by 15% year-on-year, following a 14% decline in October. Citi's credit card data echoes this sentiment, showing a 9.6% drop in luxury fashion purchases in November year-on-year. This downturn is significant, considering that November and December typically account for 25% of annual luxury sales.
The consecutive monthly drops signal a potential shift in consumer priorities or a response to broader economic pressures. These statistics are particularly noteworthy as they emerge from a sector known for its resilience and appeal to affluent consumers.
"A sustained dip in luxury spending could ripple through the entire industry, affecting everything from retail strategies to stock valuations of high-end brands," said Jeanel Alvarado, retail expert. "Share prices of major luxury players such as LVMH, Kering, and Burberry have seen significant declines since early August 2023, indicating investor concerns.
Luxury Brands Brace for Less Than Lucrative Christmas
As the festive season of 2023 approaches, luxury retailers and brands are bracing for a less-than-lucrative Christmas. Despite the allure of exclusivity and rarity luxury brands cultivate, recent data paints a challenging picture.
"It’s not going to be a holly jolly Christmas for luxury brands this year," said Alvarado.
The luxury market, which saw a composite sales surge to US$347 billion in FY2022, is now facing headwinds. The personal luxury goods market is projected to grow by only 4% in 2023, reaching approximately $394 billion by year-end, as per the 22nd Bain-Altagamma Luxury Goods Worldwide Market Study. This growth is modest compared to the previous year's performance.
The overstock situation is compounded by geopolitical uncertainties and inflationary pressures, leading U.S. and European consumers to tighten their purse strings. Despite the gloomy outlook, luxury brands are reportedly better equipped than during the 2008-2009 crisis, having implemented artificial intelligence to predict sales volumes and adjust production.
Do fashion brands typically allow retailers to return inventory if it's not sold?
The answer, however, is more complex.
"Yes and No," says Jeanel Alvarado, retail expert.
The traditional practice within the industry has been for brands to discourage or outright disallow returns of unsold merchandise by retailers. This stance is rooted in maintaining brand exclusivity and avoiding the logistical and financial burdens of managing excess stock.
Some retailers may have special agreements with manufacturers that permit the return of unsold goods, but these arrangements are not the norm. More often than not, retailers must find alternative ways to deal with inventory that fails to sell at full price.
For example, "Mass retailers like Bergdorf Goodman nearly always set a "sell-through" percentage as part of their agreements with manufacturers, which is typically around 85% but can be subject to negotiation. Suppose sales do not reach the agreed-upon percentage. In that case, the retailer is often entitled to return unsold items to the manufacturer for credit, which usually involves a discount on the invoice, reflecting the delayed payment terms that are common in such transactions." said Alvarado.
"Depending on the luxury brand, they may have specific dates were a discount on the items are allowed, up to a certain % or maybe collaborating on an in-store promotion with the retailer, such as Holiday Season discounts."
However, "Department stores, retail outlets and independent retailers are generally expected to handle unsold items through their own strategies, including markdowns, discounts, or clearance sales. While effective in moving products, these methods can erode profit margins and potentially damage the brand's perceived value."
"This is because brands will often offload excess inventory to these off-price retailers to sell off unsold inventory. For example, TJMAXX has a section on their website called “Runway,” which has items from former luxury goods on sale with steep discounts."
The Rise of Direct-to-Consumer, Resale and E-commerce
Bain & Company's report revealed direct-to-consumer (D2C) sales have surged from 40% of the personal luxury goods market in 2019 to an impressive 52% by 2023. This substantial increase underscores a broader transformation within the industry, as luxury brands increasingly bypass traditional intermediaries to engage directly with consumers.
This pivot towards D2C channels is a response to changing consumer preferences and a strategic move by luxury labels to exert greater control over brand image, customer experience, and profit margins. With nearly 80% of luxury purchases being digitally influenced, according to industry insights, luxury brands have recognized the need to enhance their online presence.
"One newer strategy has been for these third-party sellers to use online resell marketplaces, auctions, and other e-commerce sites to offload smaller quantities of excess merchandise, targeting buyers interested in reselling the items in different venues."
"Resale, consignment and auction marketplaces such as Fashionphile, Sothebys, The RealReal, Rebag, Vestiaire Collective are now seen as a strategy allowing brands to maintain their image while allowing to sell excess merchandise to online shoppers who may not be able to shop at traditional luxury stores."
Luxury brands, in particular, have financial incentives to destroy unused items to avoid paying inventory tax on unsold goods at the end of the year. However, this approach is increasingly untenable in a world where sustainability is becoming a priority for consumers and regulators alike.
The European Union, for example, has proposed policies to ban the destruction of unsold textiles, pushing brands to find more responsible ways to manage their inventory.
Luxury brands like Louis Vuitton, Coach, Michael Kors have been known for resorted to destroying unsold products to maintain their brand value and sense of scarcity, however, this approach has been highly scrutinized by customers for its wasteful and environmental impact. For example, Burberry, a major company in the sector, has publicly ended the practice of destroying unwanted products and now commits to reuse, repair, donate, or recycle all unsaleable products.
"Excess inventory requires both sustainable practices and creative solutions. One strategy has retailers and brands embracing the resale market, despite initial reluctance from luxury brands to engage due to fears of cannibalizing full-price sales and diluting brand exclusivity. There's been a noticeable shift in attitude moving into 2024." said Alvarado.
"This has led brands such as Gucci, Alexander McQueen, Chloé, and Balenciaga have since establish various partnerships with reseller sites to offer authenticated, pre-owned products directly to consumers or through trusted third-party platforms — to ensure only real products are not being sold."
AI, Technological & Manufacturing Advancement
Technology's "decisive role" in avoiding overstock issues encompasses AI and machine learning for demand forecasting, smart inventory management systems, personalized retail experiences, sustainable material innovations, and on-demand manufacturing
Luxury brands are harnessing the power of AI to analyze vast amounts of data, including macro indicators, historical sales, and social media trends. This deep analysis allows for more accurate demand forecasting, ensuring that production aligns closely with consumer appetite. As a result, the risk of overproducing garments, which could lead to a surplus of unsold stock, is significantly reduced.
"H&M was one of the first fashion retailers to adopt AI to scrutinize store receipts and returns, fine-tuning the quantities of each garment distributed to their stores, thereby reducing the likelihood of excess inventory," said Alvarado.
While it is not typical for fashion brands to allow retailers to return unsold inventory, the industry is evolving. The luxury sector may need to brace itself for a potentially austere holiday season and consider strategic adjustments to navigate the apparent waning interest from its customer base. Brands and retailers must navigate a complex landscape of financial pressures, brand integrity, and environmental responsibility.
