Designing a promotional strategy that works for apparel retailers Francesco Fiorese Kristen St. Martin-Lipton Michelle Verwest June 2014 www.simon-kucher.com
Consumers purchase behavior for fashion and apparel goods has evolved in the post-recession period. Although global apparel sales pushed ahead in 2012/2013, growing by 6% to reach US$1.7 billion 1, consumers have become more conservative due to the fragile macroeconomic climate and continue to place importance on promotions when it comes to their apparel purchase decisions. 2 For retailers around the globe, this behavior has meant intense competition for a decreasing share of wallet and has translated to a steady increase in promotional activity. A recent statement in a Women s Wear Daily (WWD) article reflects the strategy of many retailers these days: 85% of adults identify promotions as an important factor in their purchase decisions 2. To capitalize on the available traffic, Express extended the duration and depth of discounts and was satisfied with its effort to clear inventories 3 But inundating customers with consistently broader and deeper promotions is not necessarily the answer and excessive promotions have been proven to hurt retailers bottom lines (see Figure 1). Gone are the days where deeper and broader is sufficient to draw in loyal customers and achieve desired sales and margin targets. Retailers must instead respond to this change in consumer behavior with promotional strategies that guide targeted customer segments through a migration path, linking the strategy to the objective for each customer segment to increase customer loyalty, and, therefore, the overall health of the business. 1 Euromonitor International 2 NRF Monthly Consumer Survey, January 2014 - May 2014 3 Arnold J. Karr, Lululemon Joins Fray with Cut to Forecast, WWD, January 13, 2014 2
Impact of promotions on apparel retailer bottom lines: Q4 2013 Financial Reports The Gap Q4 2013 results Gross Margin dollars down 280 basis points Driving factors Unusually promotional holiday season¹ Marks & Spencer Falling clothing sales for 10 th quarter in a row Heavy discounting that took place before Christmas with prices slashed by as much as 50%² Levi Strauss & Co. Gross margin dollars down 180 basis points (US $12M) Increase in price promotion and mark-down activity due to a slower holiday season J. Crew Gross margin rate down 160 basis points Promotional environment and actions taken to move through the inventory to make sure we ended the quarter with current inventory and that we weren t carrying a lot of inventory³ 1 Gap Inc. Earnings Call, February 27, 2014 2 Bloomberg, January 9, 2014 3 David Moin, Headwinds Persist as J. Crew Enters Spring, WWD, March 25, 2014 Figure 1 Simon-Kucher has identified four promotional strategy foundation steps that retailers should consider when designing promotion plans: 1. Define promotion strategy and principles given objectives and targets 2. Support promotion principles with analytics 3. Educate the organization and draft a promotion plan 4. Track promotion success 1. Define promotion strategy and principles given objectives and targets Promotions can successfully drive desired behaviors and meet varying objectives for each target customer segment. For example, the objective of promotions may be to drive value and volume for one customer segment but penetration and purchase frequency for another (see Figure 2). Before planning any promotion activity, a retailer should first define how objectives vary by customer segment, keeping in mind product category (shirts, pants, etc.), channel (i.e. Factory, Retail, Web) and time of season (e.g. opening, mid-season, sale). At the end of the day, the type of promotion used to increase basket size of infrequent customers will look very different from the promotion used to minimize cannibalization risk but maintain the brand image for loyal customers. 3
Mapping promotion strategic objectives to customer segments Penetration Increasing the number of shoppers who purchase the product at least once in a given period P Customer segment Purchase frequency Purchase volume Purchase value Increasing the number of times the shopper purchases the product within a given period Increasing the volume bought by the shopper at any time Increasing the shopper s spend per unit of volume Product category A B C D 1 Value Volume Volume Frequency 2 Value Value Frequency Penetration 3 Frequency Frequency Penetration Penetration 4 Volume Volume Penetration Penetration Figure 2: Defining promotion objectives by segment - example Once objectives are defined, promotion principles should be established to guide the design of a promotion plan. The principles should document goals and decision factors, including: Illustrative Seasonal goals Channel goals Depth factors Frequency factors Vehicle factors Drive purchase volume in the middle of the season; drive turnover at the end of the season Promote turnover in factory stores with deeper discounts Maximum discount allowed is 40% - going deeper does not lead to incremental unit lift Limit number of promotions to 2 per season to prevent shoppers from adjusting their purchase habits to wait for future discounts Implement a minimum purchase requirement on all promotions within retail stores to drive basket sizes Figure 3: Defining promotion principles - example 2. Support promotion principles with analytics The best promotion principles are supported by analytics. Analytics not only ensure a retailer is using the most effective promotion type, but also help with change management and building internal buy-in of the promotion objectives across the organization. Common sources of analytics include: Historical data analysis Management level or store associate surveys Customer research In-store market tests +78% 4
How does a retailer know which source will work best for their given situation? There is a tradeoff between the level of sophistication and resource requirements behind each source. However, a best-in-class approach will utilize historical data analysis and incorporate in-store market tests. For historical data analysis to be worthwhile, a retailer must first ensure that all promotions are tracked systematically and that unit sales and price points can be tied back to specific promotions. Once a systematic tracking process is in place, historical data analysis can provide insight into the right depth, frequency and vehicle to use, building a foundation to support promotion principles. Simon-Kucher project example Simon-Kucher recently used historical data analysis to help an apparel retailer, whose goal was increasing inventory turn within one of their main categories (Category 1 in Figure 4), realize that deep discounts actually cannibalized sales and that the category required fewer discounts than other categories. As displayed in the following chart, Simon-Kucher helped the retailer discover that the demand for Category 1 was almost twice as elastic as all other categories, meaning less deep discounts could achieve a similar inventory turn as that achieved for all other categories. Post promotion analysis: Average weekly performance 300% 250% 200% 150% Revenue Lift Volume Lift Category 1 demand was almost twice as elastic as all other categories, meaning that less deep discounts in category 1 could achieve similar inventory turn 100% 50% 0% Promotion discount Category 1 25% All other categories 30% Figure 4: Historical data analysis - example 5
Keep in mind, though, that analytics should not be the final decision factor in setting a promotion plan. Expert judgment and historical experience should always be combined with the results of any promotion analysis or in-store test. Clearance pricing strategies at Zara 4 Zara is a Spanish-based fast-fashion retailer belonging to the Inditex group, selling its products through 1800+ stores in more than 80 countries worldwide. In FY2013 net sales amounted to 10.8 billion. Clearance periods. Zara has winter and summer clearance periods, which require a large amount of stock withdrawn from its stores during regular season periods to be redistributed to its network. This happens over several weeks before the beginning of each clearance period. Throughout the clearance period, prices need to be adjusted to minimize the inventory left for liquidation at the end of the period, when it will have to be sold to wholesale buyers targeting low-price channels, mostly in developing countries. The pricing strategy aggregates products into homogenous clusters, characterized by the same product type and retail price. Clusters within a given price range are aggregated into categories, which are assigned a clearance sales price, which is to be updated on a weekly basis throughout the clearance period. A data-driven pricing strategy. In 2009 they carried out a pilot study in Europe to test a statistical model to optimize markdowns across different product ranges in womens apparel. This model acted as a decision support tool to recommend target prices for test groups in Ireland and Belgium, and was closely adhered to by the involved country managers. Product groups priced according to the model performed better than control groups, yielding an estimated increase in clearance revenues just shy of 6%. The model was fed historical data from regular season periods and clearance sales from previous year, and performed a regression analysis to forecast the expected demand for each product, and fix prices accordingly. After the successful pilot study the model was implemented by Zara s IT department, and made available to country managers worldwide as the standard markdown pricing tool for pricing recommendations, sales predictions, and revenue projections. Takeaways. This success story points out the importance of data-driven decisions when it comes to choosing the right price for promotional items. Even if at the end of the day choices lie with the management, adequate decision support tools are key to boosting performance. 4 OPERATIONS RESEARCH Vol. 60, No. 6, November December 2012 6
3. Educate the organization and draft a promotion plan Once the principles and analytics are in place, a retailer should institutionalize smart pricing and promotional planning through internal education and a comprehensive plan. The most effective promotions for each target segment and product category should be communicated across the organization. By combining the strategy, principles and analytics, retailers can build a proper pricing and promotion plan, outlining the promotion tactics (i.e. the type of promotion, depth, frequency and time of season) and communication methods for each category and channel by customer segment. Frequent checkins (e.g. weekly meetings) between the owners of different marketing and promotion initiatives can avoid too frequent price communication with customers and prevent promotion fatigue. Promotion plan by week Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Category A Retail stores Category B Category C E- commerce Category D Category A Category B Category C Category D Outlet to promote excess retail store inventory from prior season Promotion tactic and communication methods No promo Multi-buy email campaign 25%-40% off in-store & >40% sale section on-line coupon code Clearance section 15%-24% off in-store & on-line coupon code Figure 5: Promotion plan - example 4. Track promotion success Retailers should establish procedures for tracking effectiveness of the promotion plan and have contingency plans in place as needed. Commonly tracked KPIs include week-over-week unit sales comparisons, incremental revenue, margins, store traffic, etc. However, a best-in-class measure of promotion effectiveness will also consider the impact of the promotion on other product categories (both unrelated and complementary) not directly included in the promotion. By looking at the effect a promotion had on an overall portfolio, a retailer can ensure that a promotion is successfully achieving objectives and use the learnings to influence future promotion plans. 7
By applying these four promotion steps, retailers can effectively design their promotional strategies to attract customers in today s challenging competitive environment while maintaining long-run profitability. An effective promotion strategy is especially important for retailers today, considering the importance customers place on promotions and affordable prices when making apparel purchase decisions. By understanding their customer segments and providing a clear structure and communication for promotions, retailers can rise above the clutter and strengthen their business with healthier, more sustainable margins. About the Authors Francesco Fiorese Director at Simon-Kucher s Milan office Francesco has extensive experience in strategy and pricing for consumer and manufacturing companies. email: francesco.fiorese@simon-kucher.com Kristen St. Martin-Lipton Senior Consultant at Simon-Kucher s New York office Kristen has vast experience designing pricing and promotion strategies for global consumer and retail companies. email: kristen.stmartin@simon-kucher.com Michelle Verwest Senior Consultant at Simon-Kucher s San Francisco office Michelle has nine years experience on the ground in the apparel retail industry: working in strategy, merchandising, and planning for multiple apparel retailers. email: michelle.verwest@simon-kucher.com About Simon-Kucher & Partners Simon-Kucher & Partners is a global consulting firm with 700 professionals in 27 offices worldwide focusing on Smart Profit Growth SM. Founded in 1985, the company has almost 30 years of experience providing strategy and marketing consulting and is regarded as the world s leading pricing advisor. www.simon-kucher.com 8
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