BURN BABY BURN

Burberry, that iconic UK fashion retailer – made famous by its hallmark trench coats, was in the international retail news in July 2018.

It captured the attention of the mainstream UK newspapers when they discovered that it had destroyed over £29 million worth of last season’s inventory. It did so because it wanted to essentially protect its brand equity and heritage and because it was fearful of such inventory falling into the hands of grey channels. The latter are unauthorised channels, not sanctioned by a retailer to sell stock. They provide a threat because they sell stock at seriously discounted prices. It can be argued that this ultimately damages the credibility of a brand – particularly one that is positioned at the premium end of the market. In the case of Burberry around £10 million of the inventory came from its cosmetic supplier – Cody. This supplier was introducing a new range of stock and Burberry clearly had no need for the excess stock from the previous season.

We should note that Burberry experienced brand damage back in the early noughties when it became the “butt” of jokes because all sorts of unsavoury characters – referred to as “chavs”, were to be seen strutting around in the hallmark check scarves. Its loyal customers and opinion formers were not impressed with the apparent thrashing of the brand.

The popular newspapers expressed outrage that a company such as Burberry could adopt such as wasteful approach to dealing with inventory. Surely, they argued, this is symptomatic of greedy companies who refuse to allow merchandise to be sold to people willing to pay for it?

Environmentalists also levelled accusations against Burberry, arguing that the incineration process was a sure-fire way of damaging the environment. A spokesperson for Burberry was quick to assure sceptics that they implemented an environmentally approach by working closely with incineration specialists in order to harness the energy from the process of destroying the merchandise.

Further investigation by the newspapers revealed that this is not an isolated practice. Many fashion label retailers such as H&M also adopt similar practices. In the latter case over 15 tons of H&M inventory was burned in 2017.

Richemont; the luxury branding conglomerate destroyed over £421 million worth of watches from brands such as Cartier, Jaeger and LeCoultre, across its European and Asian markets.

Nike deliberately slashed thousands of its trainers in order to ensure that they could not be re-sold on the grey markets.

Operators such as Kering (which owns Gucci and Bielenciaga), along with H&M arguably adopted more proactive strategies in the context of sustainability. They entered into a scheme called “Worn Again”, where raw material can be converted into yarn to make fabrics and garments. Other retailers also sell off unwanted stock to internal staff.

These examples are good illustrations of what commentators refer to as the “circular economy” – where there is a proactive attempt on the part of companies to re-use stocks.

The journalistic view is that by burning last year’s unsold inventory, Burberry can stop their iconic brand falling into the hands of the “wrong people” via unauthorised channels. These grey channels arguably cannot be eliminated – much like scalpers who re-sell tickets for sports events and concerts.

With better technology, such as RFID it is possible to trace the movement of inventory across the supply chain and beyond. Arguably retailers should be in a stronger position to identify unauthorised channels and their sources – thereby reducing the threat to some extent.

At first glance, burning items would appear to be a drastic way of dealing with a particular problem. Wearing our “marketing hats” however we perhaps need to take a more rounded view of such an approach.

From our analysis of building brands indicates that companies invest large amounts of money in terms of building brand awareness, attracting customers and retaining them. Put simply, strong brands do not emerge as if by magic. They are carefully crafted and marketing to defined market segment. It takes time and money to develop brand equity, to the point where customers are willing to pay a premium for the right to use or wear the particular item. This is particularly the case with luxury, “high end” brands. Anything that potentially threatens this status is likely to damage the brand; in some cases irrevocably.

Building on this line of argument, marketers have a responsibility to protect the brand and have to make decisions that potentially have side-effects, such as deliberately destroying inventory in the process. What are the alternatives? Any suggested initiatives are likely to still damage the brand at best or run the risk of excess items being sold at heavily discounted prices. This destroys the essence of what luxury brands are all about: aspiration, exclusivity and being a member of an elite community. These are potential benefits that some shoppers are willing to pay a high premium in order to bask in the reflected glory of such products.

If luxury brands are consistently available at “knock-down” prices is it not unreasonable to expect a decline in their benefits? It has to be said that the preponderance of online channels does not help. It is more than likely that individuals can track down luxury items far more readily than a decade or so ago.

The onus of course is on the branders to police such activities and take appropriate legal action against offenders.

My concern about the issue of burning inventory is more about managing the manufacturing process and the supply chain than it is about branding issues per se.

To my mind, excessive inventory is a strong indicator that forecasting processes are inefficient, leading to a build-up that inevitably leads to wastage. Many retailers respond to this by using “mark-downs”. This involves selling items at discounted prices in order to shift inventory and generate cash for the business. At the “high end” of fashion retailing however, this is difficult to justify as a strategy. As noted earlier, brand equity erosion is likely to result. It also conditions shoppers to refrain from purchasing immediately and to wait until the expected time when the retailer lowers price.

Luxury brands are all about creating exclusivity and scarcity: not about widespread access or availability.

The real criticism of Burberry lies in their apparent inefficiencies with respect to supply chain management in my view.

Retailers such as Zara have perfected the art of managing the supply and demand equation. They do not release large piles of inventory into the supply chain – instead focusing on small amounts of individual items. Their systems and procedures revolve around quick response. If some items are moving quickly off the shelves, then individual store managers can generate more inventory very quickly. Nothing is produced until firm orders or demand patterns are identified. This does not eliminate the need to carry stock. However it dramatically reduces the need to build up buffer stock.

To me, burning excess stock is a firm indication that the supply chain procedures are too lax and loose. More focus in needed on managing the forecasting process and aligning demand with supply.

What do you think?

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