- After having all of their stores closed for months, some of the biggest
apparel brands are trying out a pack-and-hold strategy. - Basically, they are packing away unsold
clothing with the goal to try selling them again at the same time next year. - The strategy could lead to an interesting shift in how clothing brands think about trends and newness. Plus, it helps them avoid having to put everything on sale.
Faced with a glut of inventory from stores shuttered during the coronavirus pandemic, retailers are now facing a choice: Do they put everything on sale? Or, can they afford to pack it all up and try again next year?
Some of the biggest apparel brands are choosing the latter.
Gap said it decided this would be better than trying to clear through that unsold clothing by putting everything on sale.
"While there is a cost to storing this product, the economics are more advantaged than flowing the goods into what is likely to be a highly promotional environment," Katrina O'Connell, executive vice president and chief financial officer at Gap Inc., said during the earnings call.
Manny Chirico, the CEO of PVH, which owns Tommy Hilfiger and Calvin Klein, said during an earnings call on April 2 that the company would consider a similar solution.
It makes sense that these companies would want to avoid discounting their products. Discounts can be damaging to brands; once customers get used to seeing a lower price, it's hard to get them to go back.
But in order for the pack-and-hold strategy to work, retailers have to be working with inventory that is basic enough to still be in style the following year. Apparel brands typically rely on the idea that they're offering the freshest styles in order to appeal to shoppers.
"Is that essentially an internal admission that that newness — that the need for newness — is a fabrication of the brands?" Simeon Siegel, managing director at BMO Capital Markets, said to Business Insider.
Siegel pointed out that it is the largest brands leading the charge on pack-and-hold, as they may be the only ones who can afford to try it. Also, Gap Inc. said in April that it had nixed orders for the next two seasons, meaning it wouldn't have as much inventory to work through as would be expected.
Plus, as they aim to appeal to the masses, their products are more likely to be basics than a more niche brand would offer.
"There are plenty of smaller, less well-capitalized brands and retailers that don't have the luxury of taking product they've already paid for and saying, 'We're going to wait a year to see [if we can get] anything from it,'" he said.
Some analysts expressed concerns that the strategy will work for Gap.
"We are cautious about whether this season's products will resonate with consumers next year, given rapidly changing consumer preferences," Oliver Chen, senior equity research analyst with Cowen, wrote in a note last week. "We also view there is a risk associated with the possibility of not having enough of on-trend items for the fourth quarter of 2020, which is the most important quarter for Gap."
If larger vendors start to implement pack-and-hold on their own, it could make for an interesting shift in the fashion ecosystem. Off-price retailers like Ross Stores and TJ Maxx often make use of pack-and-hold with the inventory they purchase from vendors — and that supply could dry up if their upstream suppliers aren't offloading unsold goods.
Still, Siegel said off-price retailers will still have an important role to play in the fashion ecosystem, in part because they allow brands to sell their products at a discount without shoppers realizing.
"The idea of the treasure hunt, by definition, means the treasure is hidden," he said. "And if it's hidden, it's less brand dilutive."