Michael Kors, Gap, and Ralph Lauren are trying a new strategy to survive the retail apocalypse - and customers are going to hate it
- American consumers became addicted to discounts after the recession.
- But heavy discounting eats into profit margins and can be detrimental to a brand's image.
- Ralph Lauren, Michael Kors, and Gap are scaling back on discounts after years of declining sales and profits.
American consumers are addicted to discounts - and some major brands are now scaling back.
Heavy discounting has been the flavor of the past decade as retailers try to appeal to price-conscious consumers scarred by the recession. But while 40% signs might be a way to entice customers through the door, discounts can hurt profit margins and brand status.
Now, some of the most heavily discounted brands are looking to scale back.
Who's doing it?
Fashion brand Michael Kors has seen a steady decline in its same-store sales growth since 2014. This is partly because of endless promotions in its stores and at wholesalers, such as department stores, which make the brand seem less exclusive to consumers.
The chain is now trying to reposition itself a high-end retailer by reducing the number of promotions and pulling back from department stores to make the brand less available to the mass market.
"We think that this is critical for us to really do three things; number one, to protect our brand image," CEO John D. Idol said on a conference call with investors in 2016. "As you know, that channel has become very promotional and, in fact, is causing us difficulties in our own retail channel, which is why you see our gross margins declining because we're really trying to meet certain pricing that's happening to be competitive. And we don't think that's the right thing to do for our brand going forward."
In the company's most recent earnings call in November 2017, Idol said that they had reduced the number of promotional days by 40% during the quarter, and according to a Morgan Stanley note to investors, this strategy is proving effective: average prices in women's wholesale accessories, footwear, and ready-to-wear, which suggests that customers are prepared to pay full price.
Coach and Ralph Lauren are also victims of heavy discounting at department stores.
In 2016, Coach said it would be shuttering 25% of its 1,000-plus wholesale locations along with a "reduction in markdown allowances" to preserve the brand's status after being deemed too ubiquitous and promotional.
Similarly, Ralph Lauren CEO Patrice Louvet pulled stock from 20% to 25% of department stores in August 2017. He claimed that discounting was damaging to the brand and that shoppers only spend money on "exciting" apparel.
"Exciting isn't selling a generic product with more and more discounting," Louvet said during an earnings call in August 2017.
To avoid having excess stock left over, which is most vulnerable to markdowns, Ralph Lauren has also tightened inventory levels. In its most recent quarterly results, it reported a 26% decrease in inventory compared to the year before.
Gap Inc CEO Art Peck, who oversees brands such as Gap, Banana Republic, and Old Navy likened sales to a "game of chicken," when they tried to reduce the number of promotions at Banana Republic.
But the retailer is now committed to reducing promotions at its three stores - these hit six-year highs in October, according to a Morgan Stanley analyst note, but were flat in November and December versus the year before.
Gap is working on reducing sales by speeding up the supply chain so it can react more quickly to changing trends and keep up with fast-fashion brands such as Zara and H&M.
In an earnings call at the start of 2017, group CEO Art Peck said that he had cut the time it takes for certain products to go from the design board to its stores from 10 months to 10 weeks.
This means inventory levels and styles will be better matched to demand. Gap then has the ability to respond quickly to what customers want and don't want, which means less leftover stock which finds its way into the discount racks.