Loss of profit margin in the fashion industry
A major challenge for fashion retailers is the situation where certain stores have surpluses of products that aren’t selling, while in other locations, demand for the same items has exceeded expectations — leaving customers unable to buy the products they came for during the season.
A mismatch between a store’s inventory and the actual sales potential of a specific product in a specific location leads to various consequences. One of the most significant – aside from lost sales – is the inability to sell the product at full price, resulting in margin erosion. How can this be prevented?
Interstore and store-to-warehouse transfers
Overstocking in some stores and understocking in others is most often the result of suboptimal product allocation at the beginning of the season. This issue is typically addressed through interstore transfers and store-to-warehouse movements. The goal of such actions is to relocate products to another store or sales channel (e.g., an online store) where the likelihood of selling them is higher. However, this scenario comes with several negative implications.
Kamil Folkert PhD, Chief Executive Officer at Occubee S.A.
First, transfers are time-consuming. Packing, shipping, and unpacking goods typically takes 2 to 4 days – or even longer if any part of the process falls on a weekend. During this time, the product is unavailable to customers, increasing the risk of lost sales.
Second, store employees are directly involved in executing these transfers, which reduces the time they can dedicate to customer service. Over the long term, when such situations occur frequently, this may lead to a deterioration in customer experience and a weakening of brand loyalty – which is already difficult to build in today’s competitive market.
Third, transfers generate significant costs, particularly operational logistics costs. Even if deliveries are outsourced and vendors offer competitive rates, each transfer eats into the product’s profit margin.
It’s also worth noting that interstore transfers are often used to compensate for out-of-stocks at the warehouse level. This is especially true for the most popular products, where demand exceeds supply and items quickly disappear from shelves. Due to long lead times, these products often cannot be reordered mid-season. To replenish inventory and maintain in-store presentation, transfers are made based on sales performance across individual locations.
Expert dilemmas
Experts responsible for interstore transfers face a real conundrum. On one hand, transfers seem essential, as they increase the chance of selling the product. On the other hand, they carry risk. What if the observed demand shifts, and the product also fails to sell in the new location? As a result, it’s not uncommon for products to circulate between stores, losing margin and generating additional costs – ultimately reducing business profitability.
To make matters worse, analyzing transfers – that is, answering the question “which product, from which store, should be redirected to which other store or sales channel?” – is time-consuming and must often be performed repeatedly, sometimes several times a week. This consumes valuable time from experts who could otherwise focus on managing exceptions or complex cases that require their specialized skills and experience.
Sales and outlets
Overstock in stores and warehouses becomes even more concerning as the end of the season approaches. The risk of being left with a large inventory of products for which there will soon be no demand – and which will already be out of fashion by the same season next year – can keep replenishment managers up at night.
Traditionally, retailers respond to this situation by putting products on sale. Price reductions can reach up to 70%, which inevitably leads to a significant loss of margin. In other cases, surplus products are sent to outlet stores – where discounts can reach 80–90%. Each of these scenarios represents a financial loss for the business.
Advanced data analytics and margin protection
At Occubee, we strive to increase full-price sell-through. We support retailers in reducing overstock and in minimizing – while improving the efficiency of – interstore transfers.
Kamil Folkert PhD, Chief Executive Officer at Occubee S.A.
Both in the case of overstock and interstore transfers, the saying “prevention is better than cure” holds true. Allocation and replenishment are key. In the fashion industry, these two processes follow a different logic, which we can reflect in our system. Both can be optimized using advanced data analytics and artificial intelligence.
The starting point is sales forecasts generated by Occubee with a high level of detail – for a specific product in a specific store. For retailers with dozens of stores and thousands of SKUs, this task is impossible to complete manually.
Next, based on the forecasts and additional information (e.g., store inventory, products in transit, and product assortment), the system creates store demands and then generates picking orders (sometimes also called warehouse orders), which help distribute products to stores according to their individual sales potential. As a result, the stock in each store is aligned with local market demand. This reduces overstock without sacrificing sales.
Better initial store replenishment planning and subsequent restocking limits the need for costly interstore transfers. While this doesn’t eliminate them entirely, it certainly reduces their scale. Additionally, we aim to increase the efficiency of transfers. To achieve this, we use recommendation algorithms, and the results are presented in automatically generated reports. These reports contain suggestions for products to transfer, including which products, from which store, and to which store should be redirected. Thanks to these, experts in the fashion retail network save time on analysis and only need to verify, approve, or modify the suggestions generated by Occubee.
This article was published on the Dlahandlu.pl portal.
