“Pausing fashion”: a COVID-19 catwalk prisoner’s dilemma

29. April 2020
by Bob Chermin and Robert van Rooij

German outdoor specialist Salewa has decided to push 75% of its 2020 collection into 2021. A bold COVID-19 inspired move, which the company is actively signalling in the hope that it will inspire other companies to do the same. Whether or not to follow suit is as much of a traditional prisoner’s dilemma as there has ever been one. A trade-off between short and mid-term risk that companies - even during challenging times - should make consciously.

What is happening? 

The impact of the COVID-19 crisis on the fashion industry at large has been major. There is, for now, a fall-out of demand for fashion of which most will likely not be recovered. Brick-and-mortar shops experience major effects from the lockdown. Unlike other categories, demand is not shifting towards the online channel. In addition, the stay-at-home measures have triggered demand for much more informal clothing. As a consequence, retailers and fashion brands are not able to sell major parts of their stocked spring '20 collections. As these are fashion items, they will lose a major part of their value after the spring season - read lockdown - is over.

What makes the current situation worse, is that the oversupply in the market makes traditional options to monetize on leftover stock less attractive. Clearance discounts will be heavily contended creating price pressure. Traders and outlets are showing some willingness to buy, yet only at dump prices and with limited restrictions on sales scope (restrictions that are normally in place to prevent competition with one’s own merchandise). Furthermore, destroying stock is unprecedented at this scale and rings serious environmental alarm bells.

One option that remains is to carry over items to next year’s collection, which is what Salewa seems to have decided. Under regular circumstances, carrying over items is used for the functional (e.g. sports) and basic (e.g. underwear) parts of the assortment. It appears Salewa has opted to carry over fashionable items as well. In other words, they have opted to “pause fashion”.

A prisoner's dilemma for our fashion CxO

Whether or not similar action is wise for your collection will depend on what your competitors do. As such, it is a traditional prisoner's dilemma. Let me clarify by describing each possible scenario:

1. You "pause fashion", relevant competitors follow suit

If competitors follow suit and "pause" their collections, there will be less pressure on the end-of-season sales, resulting in higher prices and better performance this year. In addition, postponing today’s trend to spring ‘21 will ensure that all collections in the market keep their value at the cost of some additional handling and inventory expenses. In this scenario, both you and your competitors maximize value. 

2. You "pause fashion", relevant competitors do not follow suit: 

If competitors do not follow suit, more volume will reach the end-of-season sale, increasing price pressure this year. In addition, today’s trends will not be postponed to next year. Your spring ‘20 collection, which you have spent a year’s worth of inventory and handling cost to keep, will be less competitive and consequently will have to be discounted to sell in spring ‘21. This scenario hits you hardest, yet is best for your competitor. 

3. Relevant competitors "pause fashion", you do not follow suit: 

The same logic applies as with (2), however now you are the one who can sell at reduced discount this year and reap the commercial benefit next year. The optimal scenario for you, on top of having the benefit of much needed short-term cash. 

4. Nobody “pauses fashion”:  

If nobody decides to “pause fashion”, there will be a rat race to realize some sales this year. Consequently, the hit that the industry has to take will become even larger, potentially endangering major players in the industry. The worst case scenario for the industry as a whole.

The degree to which the prisoner’s dilemma is true and relevant for your business and market depends on a number of factors. For example, a higher share of online sales, a large fixed customer base, a shorter supply chain, a lower inventory, or a product mix skewed towards basic and functional items can all reduce your risk exposure. Also, your current financial position may provide you with more room for strategic plays or demand immediate action. 

Making the choice

It might very well be wise to differentiate the approach for different parts of your business, as aforementioned factors are likely not the same for different channels, markets, fascias, or products. Knowing what to do where requires doing the math for some different scenarios, if only at the back of an envelope during times of crisis.

While making the choice, the questions below should help you make the right considerations and do the math.     

  1. What are the expected moves of relevant competitors?   What is the likelihood of different moves for each of your relevant competitors? Are you competing with groups who are impacted less by the current crisis (e.g. Inditex, online companies) or for whom pausing is not an option (e.g. cash constrained companies)?
  2. What is the exposure of your business?   What is the definition and importance of "newness" of your collection from your customers' perspective (this is important, customers' perspective not designers' perspective)? What would be the impact and associated risk of “pausing fashion” on different parts of your collection?
  3. What is the financial attractiveness of your short-term sales channels?   Is there a reasonable opportunity to sell at a (substantial) discount today? To what extent are you facilitating forward-buying or creating your own competitor? What would be the additional price pressure in different competitive scenarios?
  4. What would be added costs / benefits of a “pause”?   What are additional handling and inventory costs? Are there any costs or cash savings to be made from creating fewer items next year? What are opportunity costs next year in different competitive scenarios?
  5. What is the current risk appetite?  What kind of financial risk are you able and willing to bear? Are there easy opportunities to control risk in the different competitive scenarios?
  6. Consequently, what is the optimal risk/reward decision today given different scenarios of competitive response?

As always, we are here to help and we are happy to provide a sounding board free of charge. Just reach out.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms

Der Bergsport-Spezialist Salewa hat beschlossen, sich bei der Textil-Kollektion für Sommer 21 massiv zu konzentrieren. 75% der aktuellen Sommerkollektion werden ins kommende Jahr übertragen. Wir sprachen mit Salewa-Chef Stefan Rainer über Nachhaltigkeit, Lagerabwertung und echte Innovation.