Fashion companies: No time like the present to boost profitability
INSIGHT ARTICLE |
Over the past few years, the fashion industry has learned more and more about consumer behavior and how best to engage their customers. By now, we know that a possible increase in retail prices of 15 percent to offset the impact of the proposed border adjustment tax (BAT) is certainly not the way to win over the consumer’s heart.
Let’s go back a few years, to the Great Recession, to a time when friends and family programs started; when TJ Maxx and other discount, off-price retailers grew in popularity; and when retailers, in essence, trained consumers that they never have to pay full price. Now, the young, value-conscious millennial consumer has come of age and is interested in price, quality and fashion more so than brand allegiance.
During the struggles of the recession, smart fashion executives used the poor economy as an opportunity to challenge their teams to cut costs and change the way their businesses operated. Those efforts have, in many cases, been diluted over the past six to eight years as the economy slowly improved. We have now entered another period of uncertainty.
As if weakened European economies, Chinese currency issues and retail store closings were not enough, the fashion industry is now faced with what could be one of its biggest challenges: the BAT. We have received limited and varied information on the proposal. If passed as introduced, the BAT could limit the deduction of cost sales to those products manufactured in the United States. Since over 90 percent of all apparel and accessories is manufactured outside of the United States, this would mean the vast majority of fashion companies that import their products could be spending more on income taxes than their net income.
Whether or not the BAT becomes law, this is the perfect time for many fashion companies to take a close look at their businesses: it’s time to cut costs, increase efficiency and improve the overall health of their organizations. Smart fashion executives should consider the following changes to not only prepare for BAT, but also to increase profitability during this time of uncertainty:
1. Cut back on the number of samples and sample fabrics, consolidate designers and sample rooms for several divisions
2. Investigate shifting production to lower-cost countries or factories to decrease labor costs
3. Review logistics—shipping full containers, less shipments, boat vs air, using first cost to determine duty rates, compare common carrier charges, etc.
4. Tweak your product in areas that won’t be noticeable to consumers – less or lower priced trim, change source of fabric, offer fewer colors and sizes
5. Spend the time and resources to collect those chargebacks which were not agreed to
6. Cut back on print advertising, and invest that money in a digital strategy which will engage the consumer
7. Big data—use information available on your products and customers to make smart, effective decisions
8. Update your enterprise resource planning (ERP) system to more quickly and fully understand your financial status, including profitability by product and division, slow moving inventory, dashboards, as well as vendor and customer status
9. Review costs and locations of third party logistics (3PLs)—determine if you are being charged too much, and if you are in the right location to most effectively and efficiently ship to your customers
10. Close or sell underperforming subsidiaries or divisions—these are a drag on your profitability and a time-sucker, and probably not aligned with your growth strategy
11. Renegotiate your lease, or move to lower-priced facilities—consider moving all non-sales personnel out of the showroom space to a nearby location at lower rental rates, with a possibility of obtaining valuable credits and incentives
12. Offer incentives to your sales people to sell older, slow-moving inventory
13. Engage all departments in cost-cutting initiatives—hold them accountable and reward them for positive outcomes
14. Consider a more robust direct-to-consumer strategy—selling directly or through Amazon or another reseller can double your profit margin, even after shipping costs
15. Review the states for which you have income tax and sales tax nexus—the last thing you want is a costly, time-consuming tax exam
Focusing on just one or two of the above areas can help you prepare for the increased taxes proposed by the BAT. And, if the BAT does not become law, what is the worst thing that happens? You saved your company money and got back on track to grow the business.
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