Overstocking is an enigmatic problem in SCMluxe. With rapidly changing trends and fashions, luxe companies will always end up with over stocks irrespective of how carefully they plan their inventories. Though this problem is symptomatic of the retail industry as a whole, the luxury goods sector faces certain challenges in dealing with obsolete or overstocks since it cannot use the traditional channels of in-store sales/discounts or unloading the overstocks through discount chains or selling in non-core geographies/regions. Using any of these channels would adversely impact brand value and image. The disposal of overstock has to be discrete and tastefully handled. Typically luxury goods companies use a variety of methods to go about disposing overstocks:
· Destroy Overstocks: True luxury companies would follow a strategy of simply using the landfill as a method of disposing overstock. It’s expensive but safeguards the brands positioning as the ultimate luxury
· Recycle: Products where the components can be effectively dismembered and re-used would follow this strategy – a prime example being haute jewelry where precious stones can be re-set and metals melted and re-fashioned
· Outlet Stores – these stores owned by the firm and normally situated in brand factory outlet malls outside suburban city limits carefully control the price and quality of overstocks being disposed off in an appropriate setting to the product and brand policies
· Flash sales on speciality e-commerce sites – These internet based sites are not run of the mill discounting sites but are specialised to the luxury goods industry and sell products under strict guidelines which reflect their luxe ethos and excess inventory is sold only for a limited period of time with deep discounts. Some examples are Rue La La, Gilt Group, Ideeli in the US and Brand Retail and Vente-privee in Europe.
In this post, let’s look at some of the features of these speciality flash sales channels. Some of their distinguishing features from traditional discounting sites are:
· Carefully controlled product list to incorporate and maintain itself as a purveyor of luxury products
· Membership based sales with membership controlled to ensure the right audience (membership is regulated using online databases like Amex members for their platinum service etc)
· Focus is not just on fast delivery and service quality but also on perfect packaging, creativity and marketing flair. Most of these channels will have in-house video, photo and recording studios to provide the most cutting edge online catalogues
· Close association with the manufacturer and owner of the brand of the product being sold. In most cases an agreement is made out strictly covering all aspects of how the product will be marketed and sold on the online channel between the owner of the brand and the online site
· Typically online sites such as Vente-privee will buy merchandise from manufacturers only after a customer has placed an order (and paid for it) on their site. This means a positive cash flow with absolutely no requirement for working capital
The obvious advantages of the online flash sale model have some draw backs:
· Upstream issues of getting buy ins from manufacturers – brands typically require just two or three partners for liquidating overstock and competition from online partners is fierce. Also brands have their own outlet stores to liquidate stock making online sales only the last resort for un-sold stock
· Low margins – since very little value is added by the online retailer, the margins are wafer thin in the US with Europe being slightly better at 6%-7% net profits. Also in the US competition forces online sites to buy merchandise in advance from manufacturers and stock them before a online sale is made – this means high working capital requirements, restricted cash flow and higher overheads in maintaining stocks
However the current economic climate is proving a boon for online flash sale business with the US market itself expected to grow from the current $1.75 billion to $ 7 billion in 2017. That’s a whole lot of luxury goods being sold online and at discounted prices….something manufacturers and luxe brands will need to watch out for.
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