During the height of the pandemic, H&M had almost $5 billion worth of excess inventory on hand, and it was not alone. With stores temporarily shuttered due to government mandates and a striking slump in sales as consumers shifted their shopping priorities in the midst of a global health pandemic, brands accumulated mounting piles of garments and accessories with nowhere to go – and in many cases, the options were largely unattractive. Companies could either store the less-season-specific goods in hopes of selling them at full price at a later date (and amassing storage costs in the process) or they could mark the items way down to move them – cutting into margins and potentially, potentially incur a black mark in the eyes of consumers (depending on the brand).
While the pandemic has brought an array of the fashion industry’s blistering issues to the surface, the problem of excess merchandise is not a new one for mass market entities like H&M – which reported that it had $4.3 billion worth of excess merch on hand in 2018 – or for high fashion brands either, as companies across the board have long struggled to get a handle on production volumes.
The problem gets its roots, in part, from the fact that “for both fast fashion and high fashion clothing production, it is cheaper to double volumes with a factory and deal with excess later,” according to Fortune’s Sophie Mellor, who noted that “prior to the pandemic, many retailers tended to over-order on seasonal buys, selling half at full price while the rest is discounted in end-of-season sales to attract a lower-price customer.”
The result of this ongoing predicament for no shortage of brands is a question of whether to discount or discard unsold goods – or to potentially, look the other way when unsold goods make their way into the gray market. All three of those options appears to be losing steam, at least when it comes to luxury goods.
Down with Discounts and Out with Destruction
Consistent promotions and steep discounts are touted as the antithesis of luxury and as “contradict[ory] of the industry’s main sales pitch: that luxury goods command higher prices because they are inherently more valuable,” as the Wall Street Journal put it back in 2018. Accordingly, sales tags have been relegated by many luxury brands, including the likes of Burberry and Prada, which are in the midst of campaigns to move more up-market.
(It is worth noting that discounting is still proving to be a solution to offloading excess merch for certain brands. Tod’s, Dolce & Gabbana, Brunello Cucinelli, Givenchy, and Michael Kors, for instance are among the brands that have scored poorly on the recent versions of Bernstein’s Price Discipline index, a monthly ranking that considers the number of products that brands are offering up for sale – either on their own or probably more likely, on third-party retailers’ sites.)
An alternative to discounting is destruction, which is, of course, rife with issues from a consumer perspective. Burberry, Louis Vuitton, and brands that fall under the umbrella of Swiss group Richemont, for example, have made headlines in recent years for allegedly destroying products in an attempt to avoid selling off their goods at a markdown, while also benefitting from the “drawback” or the return of certain duties, internal and revenue taxes and certain fees collected in connection with products they export beyond their home markets in the European Union.
As recently as this week, Coach was revealed to be damaging unsold or returned handbags before discarding them in an apparent move to (1) prevent others from using/reselling them; (2) avoid selling them at a markdown amid an enduring overhaul to reposition the brand; and/or (3) benefit from the same “tax loophole as if [the products] were accidentally destroyed,” according to Newsweek. (A rep for Coach denied the latter, saying, “The company is not claiming any tax benefits for in-store returns that are unsalable and not able to be donated that were destroyed in store.”)
As the Coach debacle and the backlash that Burberry before that seems to indicate, the potential PR fallout that comes with the destruction of unsold wares might outweigh the benefits. Like Burberry, which came under fire in 2018 after reporting that it destroyed nearly $75 million worth of goods over a two-year period, Coach has since vowed to immediately “cease destroying in-store returns of damaged and unsalable goods.” Aside from brands (somewhat) voluntarily walking back from product destruction practices, in certain jurisdictions, destruction may run afoul of the law, thereby taking it off the table as an option save for any loopholes that luxury goods brands’ lawyers can find; France, for example, introduced a new law that prohibits the destruction of unsold wares.
Finally, brands have long – but quietly – banked on the sales of their goods in the gray market (namely, by retailers outside of their authorized distribution chain) in order to recoup revenues that might otherwise be lost on unsold products. That is starting to change, as well. “Acutely aware of the gradual thinning of the veneer of exclusivity that they have worked hard to establish and that has already been partly diluted by the heavy discounting of off-season stock by department stores and outlets,” the New York Times’ Elizabeth Paton wrote this summer that many brands are proving to only be less willing to turn a blind eye to such unauthorized sales, but they are working to develop “new ways to combat the gray market,” including harmonizing prices across the globe.
So, What Now?
With the industry’s longstanding pattern of destroying unsold products continuing to result in headline-making PR disasters and in light of many brands’ attempts to pull back on – or continue to stay away from – discounts, and to increasingly shy from the gray market, how are brands supposed to off-load the consistent excess that they are left with each season (aside from scaling back production)?
Two avenues seem like obvious options – and neither one of them necessarily forces brands to overtly chip away at their (hard-earned and marketing-heavy) luxury positioning. First up: Brands might be wise to utilize the resale market in a more strategic way in order to move excess merch. In addition to providing brands with an additional point of access to entry-level luxury spenders in much the same way as more accessible, lower-priced products do, and the ability to more closely control the products that are being offered up and the conditions of those sales, in-house resale efforts and/or partnerships with established resale players could enable brands to somewhat discretely get rid of unsold stock without having to slap slashed price tags on their wares.
As I noted in an article recently, should brands aim to make bigger moves to own the resale space, they could sell off unsold goods alongside products that they buy-back from retailers (at the end of the season to avoid deep discounts there) and/or from consumers in something of the same way as resale platforms do. Not exactly novel territory, the melding together of pre-owned goods and close-out pieces already appears to be happening in the secondary market. As TFL reported back in 2018 that in addition to catering to consumers who wanted to consignment pre-owned products, The RealReal was working with brands and retailers to off-load unsold apparel and accessories, hence, all of the “new with tags” merch.
Seemingly doubling down on this B2B element of its business, a rep for The RealReal told TFL last year that the resale giant had seen “a 30 percent increase in supply from brands in the six weeks to April 14, 2020 compared with the same period a year earlier.”
Another option for brands comes in the form of branded subscriptions boxes, a venture that commerce-focused site PTMNTS touched on recently, noting that in an attempt to “innovate around the issue of deadstock discounting, a growing number of subscription firms are combining the inherent appeal of subscription commerce with the thrill of unboxing to turn unsold goods into a surprise hit.” The subscription box trend ramped up in 2020, per PYMNTS, starting in the streetwear space before eventually “crossing into luxury goods, as brands from Balenciaga to Palm Angels and more get curated and sent to subscribers who do not know exactly what [they are getting].”
Ultimately, if brands want to avoid these types of issues, a reexamination of their production is likely the only way forward; unsurprisingly, there has been no major push among the industry’s largest brands – at either end of the spectrum – thus far towards making less.