Mothballing: Pandemic Shutdowns Put The Unthinkable Retail Inventory Practice On The Table

In all of retail, there are only two ways to make money: on the margin you get from the goods you sell, or on how many times a year you can capture margin from turning goods into cash. Grocery operates at a very thin margin but turns over very, very quickly. Luxury turns over very slowly, but at very high margins.

In grocery, mothballing is not possible. Even shelf-stable goods have an expiration date, and even if it’s a long time out, savvy consumers will ignore boxes marked with dates that are nearing their expiry.

In fashion, mothballing is possible, but has long been considered unthinkable. About the closest you get is luxury retailers that sit on raw materials year-over-year, like buttons or zippers. There are two reasons why. One, sitting on inventory is the equivalent to stuffing cash in a mattress. Yes, you technically “have” the cash, but it’s not doing any work for you. And it’s unprotected – boxes of clothes in a warehouse could literally go up in flames.

The other reason why it’s unthinkable is because it’s very risky. Fashion tastes change. The flowy boho florals of one season can look completely off the mark the next. If you’ve got low-rise skinny jeans when everyone wants high-rise boot cut, you’re going to lose – you’ll lose mind share, market share, and margin. For luxury, it’s more about creating a sense of urgency – be the one to get this season’s look before it’s gone. Because even if there ends up being a lot left over, luxury retailers will literally set it on fire or take it apart to reuse components before they would ever consider flooding the market with markdowns.

Spring 2020: The Lost Season

Mothballing in fashion is risky when you’re one of a few facing that kind of decision. That’s not the current situation at all.

At best, fashion retailers had sold through the early part of their Spring 2020 seasons. They’ll have a large portion of the late half of the season locked in their supply chain, and they will have already cancelled as much as they can of the rest of spring/summer.

This inventory position means that most of what’s in stores is most likely spring to summer transitional, oriented towards Easter, and some early summer/vacation inventory. And most of what’s in the supply chain hasn’t been seen by consumers yet. Some of that inventory are basics or carryovers that can be extended into summer and fall with little risk. Some inventory stands no chance of working as part of a fall assortment.

Historically the holding costs of packing up inventory have been too high to ever consider mothballing, but now the equation has changed drastically. Holding costs look high when 10-20% of your inventory needs to be sold at markdown prices (which is typically built into the margin plan in the first place). They start looking reasonable when you’re facing 70-80% of your inventory having to be marked down to below cost just to get it out of stores, as looks to be the case once retail can reopen.

While some inventory can theoretically be extended into fall, it still means far fewer overall turns for the retailer – which means less cash that can be put towards the critical holiday season at the end of the year. But that’s still more margin than you’d get if you just pack it all up to try again next year – assuming fashion tastes don’t change dramatically over the next year.

This leaves retailers with a dilemma. It might actually make sense to pack up some inventory and hold it until next year, if only to spread the inventory out so that you don’t have to mark it all down all at once. It does lock up cash, but it also makes room for other inventory that has a better chance to sell. But which inventory do you pack up? The really seasonal stuff that is already irrelevant, but at high risk of being even more irrelevant next year? Or the basics that you know you have a chance to sell next year – but also might be your best bet for stretching into late summer and fall this year?

The retailers who are choosing to pack up the highly seasonal inventory are focusing on the inventory that consumers haven’t seen yet. 2020 was such a pause on fashion purchases that they’re banking on tastes not changing that much (except maybe wanting the matching face mask to go with that dress). They want to keep the basics in stores with the idea that they can stretch those into summer and fall, without having to take deep markdowns, and can supplement in fall with more on-trend pieces to help those basics look new again in the next season.

Some retailers are choosing the opposite: they’re packing up the perennials. The thought is, they’ll be able to sell them next spring no problem. Yes, they’ll have to mark down the highly seasonal stuff that is in stores and the supply chain right now, but then they’ll be able to bring in all new items for fall – new basics, new trend. Spring 2021 will be a do-over on basics, but with little risk that the inventory will be irrelevant because of some unforeseen taste trend.

Pay Now Or Pay Later

The difference in the two approaches comes down to two things: how desperately a retailer needs cash, and how confident they are in being a taste maker vs. a trend follower. The retailers who are packing up the basics are worried about being a trend follower. They’d rather take the margin hit now on the hard-to-sell seasonal stuff and be ready for whatever fashion trends hit for next spring. They also must have a lot of confidence in their ability to fund their holiday purchases, because they’ll be bringing in more inventory to make up for both what is packed up and what is marked down, while also sitting on inventory that had a better chance of selling at a better margin than what they’re leaving on shelves.

The retailers who are packing up the high-trend stuff are more confident they can sell it again next spring, or at least are willing to take that risk and have to mark it down next spring to clear it out, rather than jumping into the margin abyss that already awaits retailers once stores reopen. They’re looking to get their cash machine cycling again as soon as possible by stretching their basics – selling what can sell at a decent margin in the short term – and putting that cash against fall trend bets and holiday.

As with all things impacted by the pandemic, there are no easy answers and certainly no obviously “right” answers. This is uncharted territory. We’ll be living through many such real-time business school case studies for some time to come.