When inflation was at a 40-year high, most brands had little choice but to raise prices. Today’s less-overheated economy requires a more nuanced approach.
Last week, the US Department of Labour reported that consumer prices rose 3.4 percent in 2023 – higher than economists would like, but down sharply from the previous year’s 6.5 percent jump. The data for fashion is more of a mixed bag: prices for footwear have fallen 5 percent this month compared to a year earlier, but bottoms on average cost 10 percent more, according to the retail analytics firm Edited.
Still, cooling prices are a mostly welcome trend in the fashion industry, signalling that the pandemic’s supply chain snarls are mostly untangled, and that central banks will soon start lowering interest rates, lowering borrowing costs for consumers and investors alike.
But the return to normal is also forcing brands to make some tough decisions: while their expenses aren’t rising as quickly as they were, they aren’t coming down either. It’s also getting harder to pass higher costs along to consumers, who are growing impatient for the cycle of spiraling prices to end.
This year, fashion and retail firms will have to get creative. That means finding ways to pass costs along without inducing sticker shock in consumers, and offering strategic discounts to inflation-weary shoppers without destroying margins. Brands are jettisoning products that have become too expensive to produce, and are switching to more cost-effective marketing.
In the end, gauging customers’ mood will matter just as much as interpreting the headline economic data.
“[Brands] can’t expect that the macroeconomy is going to be their saviour,” said Sucharita Kodali, vice president and principal analyst at Forrester. “This is, for all intents and purposes, as soft of a landing as anyone can expect.”
Managing Price Hikes
After two years of price hikes, brands are largely taking a wait-and-see approach before settling on a pricing strategy in 2024. Still, it’s likely that many will maintain a customer-centric method to markups as they chase further growth.
Beauty brand Kopari, for example, evaluated how competing brands increased the prices of similar products and then calculated its own price hike based on an industry average for those items. The brand then consulted with 100 of their most loyal customers on Slack to gauge what costs they were most comfortable with. The company capped its price increase on its most popular items — such as its best seller the Lip Glossy — by $2.
This method prevented both a consumer backlash and a sales drop off. The company’s sales rose more than 40 percent in 2023, in line with its previous year’s increase, said Susan Kim, Kopari’s chief executive.
“I’m a big believer in setting pricing based on what consumers are willing to pay,” said Susan Kim, Kopari’s chief executive. “We definitely thought that we had permission to [raise prices] below 10 percent, but certainly not into double digit increases.”
Other brands are avoiding raising the price of their goods altogether, instead placing a premium on certain services. Sustainable apparel brand Ministry of Supply began charging $7 for expedited shipping last July, a service it had previously offered for free. (Simultaneously, it introduced a free 7-10 days shipping option.)
“We will do everything in our power not to raise prices,” said Aman Advani, Ministry of Supply’s co-founder and chief executive. “We’re absorbing that and finding ways to work around it that don’t have to be a direct consequence to the customer.”
Subverting Discountmania
As inflation-weary consumers look for discounts, brands will have to find a way to give them what they want without destroying their margins.
Filson, an apparel brand known for its outdoor-oriented clothing and accessories, typically holds bi-annual markdowns, and began offering Black Friday discounts in 2022. In December, it added a 12-day sale where it offered a 24-hour discount on a new product category each day.
The additional promotions, along with more brand awareness-oriented marketing, helped Filson grow sales by just under 10 percent in 2023, an improvement from 2022. But this year, Filson wants to return to its cadence of a bi-annual clearance sale and Black Friday promotion, and hopes other initiatives like new store openings will replace additional discounts as a sales growth driver, said Neil Morgan, Filson’s head of strategy.
Other brands are identifying fresh ways to introduce new discounts this year for consumers still seeking deals.
Ministry of Supply, for one, uses ChatGPT to parse headlines every two weeks to see the types of promotions competitors are offering and determine what its own customers are in the mood for. In January, the brand launched a four-day promotion where customers could receive a free pair of briefs when they spend at least $100 on full-price items, after the brand observed other companies offering post-holiday deals, Advani said.
How to Train Your Operating Costs
In 2023, many brands introduced cost reduction tactics to grow profits that they are sure to carry into 2024. Likewise, the ones that didn’t will probably be forced to this year, as some inflation will persist.
That means redirecting marketing spend to channels with a higher return on investment, and cutting other costs where feasible. In 2023, for instance, luxury resale site Fashionphile spent less on paid ads on Meta and Google and ramped up investment in influencer-created short-form videos on Instagram and TikTok and in-person events at its New York and Los Angeles showrooms.
The company also cut spending on e-commerce software. The result was an increase of just under 10 percent in its profits on the basis of earnings before interest, taxes, depreciation and amortisation, said Ben Hemminger, Fashionphile’s co-founder and chief executive.
Last year, Kopari similarly made cuts where it could, such as simplifying its packaging design to reduce costs by just under 5 percent. This year, the brand expects costs at some of its manufacturing partners to jump 4 percent, but is confident it can circumvent those hikes by routinely streamlining its inventory, offering a smaller assortment but producing more units of each to get better rates.
“If you have 10 SKUs [stock keeping units], and you’re doing 1000 units of each, you’re paying different pricing for that,” Kim said. “You’re probably not recognising the efficiencies of scale versus if you have one SKU and you’re doing 10,000 units of that.”
For the companies that made operational adjustments last year, there’s reason to be optimistic about 2024′s growth potential.
Fashionphile, which generated flat year-over-year sales in 2023, is aiming for a sales increase of up to 15 percent in 2024 as it looks to open permanent brick-and-mortar stores following the success of the two pop-up shops it opened in Orange County, Calif. and San Diego last December.
“Some growth [expectation] is coming from the anticipated increase in available cash for luxury goods on the web,” Hemminger said. “But we’re also taking real steps into retail, and some of our growth will come through a more omnichannel approach in 2024.”
