19 September 2022
Fashion and apparel challenges for DTC brands
Bainbridge Growth breaks down how Allbirds, Lulu's, Warby Parker and Vera Bradley are navigating headwinds.
Bainbridge Growth breaks down how Allbirds, Lulu's, Warby Parker and Vera Bradley are navigating headwinds.
This piece originally appeared on the blog of Bainbridge Growth. It is being republished by The Current with permission.
The end of summer brings investor scrutiny of the apparel and retail industries, and pressure is being felt by department stores, specialty apparel retail, and digitally native brands. The primary headwinds include excess inventory, elevated fuel surcharges, and returns combined with inflation’s impact on consumer spending.
Whether the category is eyewear (Warby Parker), women’s event wear (Lulu’s), footwear (Allbirds), or bags and accessories (Vera Bradley) much of the commentary and proposed solutions are similar. A notable part of this analysis was that all four companies reduced full-year 2022 revenue guidance in recent weeks to reflect softening demand and higher expectations of promotional discounting. This report will dive into recent earnings reports and walk through some of these subjects and how DTC brands can position themselves as they encounter a shifting macro situation.
The Bainbridge Blog already covered inventory issues at big box retailers earlier this year. Excess inventory has predictably now reared its head at smaller DTC brands, and these companies have shared with investors their strategies to deal with the extra product they have on hand.
Lulu’s perspective on this challenge has been a reiteration of their non-seasonal and less fashion-forward catalog. They increase wedding and college-homecoming inventory in line with demand, and actively avoid seasonality that is driven by weather or holiday spending. Even with this approach, Lulu’s management mentioned $5M of their $48.5M in Q2 ending inventory is excess.
Allbirds wrote off a significant chunk of their first generation apparel catalog inventory in Q2, centering their second generation of apparel around evergreen (non seasonal) line up that is not confined to a particular functional use case or weather pattern. On the most recent earnings call, even after the write down Allbirds identified $10M out of their $122M as excess. Vera Bradley wrote off approximately $5M in inventory and finished the most recent quarter with $149M in goods on hand, with most of the write off centered on masks and the exit of their retail start up brand.
Many ecommerce retailers have called out financial pressure from higher shipping costs, add-on fuel surcharges, and elevated returns. As gas prices have tapered off from their June highs, certain transport markets have seen reduced shipping rates and fuel surcharges but most of this favorability will be in the coming quarters.
Lulu’s referred to high fuel surcharges in Q2 and accessorial fees imposed by carrier partners, in addition to a sudden jump in returns they attributed to macro softness. Those two variables hurt gross margins by roughly 300 basis points, accounting for most of the gross margin drop to 45.8% vs 49.6% (Q2 ‘22 vs Q2 ‘21). Recall in our earlier piece this year we covered Lulu’s ongoing transition to useing robotics in their Eastern Pennsylvania distribution center that commenced in Q2 ‘22. The robotics rollout and the expansion of the Northern California distribution center drove a 30 basis point increase in variable labor within SG&A as a percentage of net revenue.
It will be key to monitor the future P&L improvements in gross margin and SG&A as a percent of revenue as Lulu’s reaps the benefit of this fulfillment network investments. Allbirds is investing in supply chain efficiencies that include a dedicated third party returns processor in the US as well as new manufacturing relationships and more automated distribution centers.
Omnichannel DTC brands have also continued to aggressively expand their store footprints over the last 6 months, leading to deleverage in the P&L as sales growth slows. As these brands open stores, they increase SG&A. They are hoping that the new stores increase sales and therefore the increase in sales is greater than the increase in costs. But in many cases, revenue growth for omnichannel brands is converging with or falling below the rate of store count growth. We believe that the next several quarters will see significant divergence in margin performance of digital native brands versus omnichannel strategies.
Omnichannel brands are beginning to see sales growth below store growth. (Chart by Bainbridge Growth)
The reaction from consumers under the $45K to $55K income level has been the most consistent call out by large retailers and Bainbridge DTC Index members. The recent common refrain has been around the sales slowdown that began in mid-June as national gas price averages ticked up above $5 per gallon. Brands like Warby Parker with average household income per customer of over $100K were quick to point out their upmarket positioning. Allbirds also has a relatively upmarket positioning as 65% of their sales was from households with income over $100K.
Even with their large exposure to affluent customers, Allbirds management mentioned that “persistently high inflation has started to take its toll on consumers” and pointed out a sales slowdown beginning in mid-June. The business saw additional pressure on the international segment from foreign exchange rates and Europe’s subdued growth. Allbird’s decided to lay off 8% of staff and slowed new hires after their 15% YoY growth quarter was also marred by a substantial inventory value writedown that drove a gross margin drop from 56.1% down to 36.1% (Q2 ‘21 vs Q2 ‘22).
Allbirds customer mix by income segment. (Courtesy photo)
Warby Parker saw slowness start in the back half of May, with Q2 landing at a growth rate of 13.7% even after a 22% increase in store count from 145 to 178 (Q2 ‘21 vs Q2 ‘22). When accounting for inflation this is quite a concerning growth rate given the increased store count, subsequently Warby took action to layoff 63 people, equating to 15% of their corporate headcount.
Warby Parker revenue and store count. (Source: Warby Parker)
Retailers of all stripes are clearly facing a range of challenges, with the impacts more pronounced for certain business models. Lulu’s continues to show the profitability of monochannel ecommerce combined with a data driven inventory approach. Their focus is on constant improvement of the fulfillment cost structure and maintaining their industry-high inventory turns. From an omnichannel perspective, Allbirds and Warby Parker are having a tougher time navigating the macro slowdown due to their capital plans being focused on store count growth.
It’s hard to quickly pivot a brand's growth story once it is built around expanding store footprint as analysts begin to ask more “path to profitability” questions. If consumer spending quickly reaccelerates, omnichannel players may be better positioned to acquire customers at efficient CACs. For the time being, the brands that have avoided layoffs are ecommerce only brands (LVLU) or omnichannel players with slow or no store growth (VRA). These business models may weather the current macro environment better.
Accurate inventory is now essential for Amazon FBA sellers, writes Emplicit's Evan Sherman.
Amazon used to be a lot more laissez faire about how Fulfilled By Amazon (FBA) sellers used their fulfillment centers. Sellers could send in inventory, and, while the space wasn’t unlimited, if their sales were not as forecasted they would simply pay long-term storage fees. Sure, if a seller’s inventory management was poor enough they would have their inventory storage limits reduced and pay higher storage fees, but this was just an incentive not to let things slide too much.
However, in 2022 Amazon reduced storage limits overall to the point where some FBA sellers had sales and catalog size impacted, and in March 2023 Amazon revised their inventory system. There is now an incentive for FBA sellers to be highly accurate with inventory management because Amazon will reward them with increased storage limits. Precision is a carrot now, rather than a stick.
In this article, we provide five strategic methods that sellers can utilize to optimize inventory management on Amazon.
Achieving successful inventory management on Amazon requires a profound understanding of past demand patterns and the capacity to accurately forecast future demand. Seasonality, market trends, historical sales figures, competitor activity and planned promotions all play a crucial role in determining the trajectory of sales.
At Emplicit, we advocate for the analysis of multiple historical data points, encompassing previous 7, 30, 60, and 90-day sales figures. Our logistics experts factor in internal factors such as stock availability, marketing spend, promotions, and sales and margin targets, and external factors such as seasonality, Amazon trends, new category restrictions and market entrants. A comprehensive review of shipments in working, shipped, or receiving status is also beneficial. Striking a balance between what has been sold, what is available, and what's en route to an Amazon fulfillment center is key to precise forecasting.
Inventory management isn’t a static task; it requires constant vigilance and flexibility. FBA sellers should regularly review and modify their demand forecasts, adjust their replenishment suggestions based on demand shifts, and update their minimum reorder points as required.
Sellers should review sales daily, plan replenishment frequencies to suit their needs, and maintain appropriate inventory levels at Amazon. Weekly replenishments can help keep a seller’s inbound pipeline full, minimize out-of-stock instances, and account for unforeseen supply chain disruptions.
Amazon’s organic and paid algorithms prioritize products with high sell-through rates. This means best selling products end up selling better. Focusing on high-performing items allows FBA sellers to reduce monthly storage costs, avoid aged inventory and the associated fees that Amazon imposes, and curtail the need for costly removal orders. And sales velocity is the quickest way to get Amazon to increase your storage limits. Concentrate on the 20% of items that generate 80% of sales.
At the same time, sellers should prune their catalogs by removing slow-selling items. These items negatively affect Amazon’s Inventory Performance Index (IPI) score, which directly influences the space Amazon allocates to a seller’s inventory in their fulfillment centers.
If sellers are tight on inventory space, as well as the best-selling products, they should prioritize products with higher margins until Amazon provides additional storage, and they should reduce marketing spend accordingly – something which necessitates a close relationship between inventory and marketing.
Ranking products by sales and margins, and calculating the storage space each product takes up will go a long way towards understanding and anticipating demand on Amazon.
Amazon’s capacity management system is a new system for allocating inventory limits to FBA sellers and allowing sellers to gauge their inventory capacity at Amazon’s fulfillment centers. It also enables sellers to bid on increases to their inventory limits.
Previously, Amazon had restock limits which were updated weekly based on the seller’s previous 90-day sales. Restock limits were determined by Inventory Performance Index (IPI) metrics such as sell-through, excess inventory, and stranded inventory. However, because the restock limits were updated weekly, it was challenging to plan accordingly, especially heading into a peak season or if a seller was about to run a promotion.
With Amazon’s Capacity Monitor program, sellers are given a monthly capacity outlook based on the cubic feet of space occupied by their products in Amazon’s fulfillment centers and their IPI metrics. Amazon not only provides a current month outlook on available space; they provide an estimate for the next three months which can aid in the inventory planning process.
To take advantage of the new system, it’s imperative FBA sellers understand their product's physical footprint in relation to the allotted space Amazon provides (Amazon does still provide unit estimates). Knowing a product’s cubic feet and the product tier designation allows for effective planning of inventory replenishment. Exceeding space limits means overage fees from Amazon, however, if a seller knows they have a peak in sales coming up they can bid for additional capacity (in cubic feet). However, selling-through this additional inventory means Amazon waives those fees, so it’s a win-win.
At Emplicit, we have seen the capacity monitor program benefit our clients, with many clients seeing an increase in the amount of inventory they can ship in – likely due to healthy sell-through velocity and other IPI metrics. The program has fundamentally changed the way we approach managing our inventory on Amazon, so everything sellers do regarding inventory planning should be within the context of Amazon’s capacity monitor program.
Smart sellers should already be considering the impact of their product packaging on their FBA fulfillment fees. If the actual product size allows, sellers can generate significant savings by reducing the size of their packaging. Amazon’s Small Standard rates are 15-20% cheaper than Large Standard rates depending on weight, and Amazon’s Small & Light rates are 15-27% cheaper still than Small Standard rates. However, fulfillment cost savings are not the only reason to reduce packaging size, smaller packaging can significantly increase Amazon inventory cost-efficiencies.
With Amazon’s capacity management system providing inventory space based on cubic feet rather than number of units, the space each product takes up is now more important than ever. While larger packaging sizes can sometimes improve sales in brick and mortar retail, sellers should consider developing smaller Amazon-only packaging. This will not only reduce fulfillment costs, but allow more units to be stored in the same inventory space. The combined savings can more than offset the cost of a redesign and second packaging print run.
Additionally, smaller packaging may qualify sellers for Amazon’s Compact By Design badge. This helps brands stand out, and increases click-throughs and conversions. (We suspect there are algorithm tweaks for brands with certain badges too, but it’s difficult to prove.) Amazon-specific packaging can help with Transparency (anti-counterfeiters) and help combat unauthorized resellers.
While it might seem like a significant investment and not something the inventory team typically gets involved with, reducing packaging size is a long-term way for FBA sellers to optimize inventory management.
Amazon Global Logistics (AGL) offers a streamlined solution for sellers whose products are manufactured in China. AGL eliminates the need to use freight forwarders who would usually receive a shipment from China, then split up that shipment and forward on to multiple Amazon fulfillment centers per the standard FBA process. Instead, sellers can book shipments directly with Amazon, complete the necessary export/import documentation, and ship directly to US, UK or European fulfillment centers – sending the entire shipment to a single fulfillment center.
If leveraged properly, AGL can save sellers thousands of dollars in warehouse and 3PL fees and reduce the need for inventory to be processed multiple times before it arrives at Amazon’s fulfillment center, meaning inventory gets where it needs to be quicker.
AGL offers two shipping options – Standard Ocean Freight and Fast Ocean Freight – with the standard option giving sellers the opportunity to either ship via a full container load (FCL) or less than container load (LCL). Shipping partial container loads with Amazon doesn’t slow shipments down versus other carriers because of Amazon’s scale. Amazon’s economies of scale mean that AGL can offer shipping prices from mainland China and Hong Kong that most sellers are unable to match. And Amazon’s expert customs brokers get products cleared through customs quickly because Amazon has a vested interest in shortening the time to market.
This one-step international shipping direct to Amazon was actually something we pioneered before the advent of this service from AGL – working with our client Shapermint and their manufacturers in China and logistics team to ensure packaging and shipments were FBA compliant. However, now AGL offers this service, it’s an even easier solution to a common challenge. We suspect AGL will roll out in other international manufacturing markets, but Amazon is tight-lipped for now.
Amazon inventory management is complex and needs constant attention. Sellers can hire a fractional inventory specialist because this is not something that should be trusted to an Amazon generalist. If sellers get inventory right, it will keep pace with sales. But if they get it wrong, their inventory can become the main thing holding them back.
Evan Sherman is the director of logistics at Emplicit.