May 8, 2017

In Global Retailing, Does The ‘See-Now, Buy-Now’ Model Really Work?

by Jharonne Martis

A year ago, designer Tom Ford announced that the venerable fashion process of showing a collection, then shipping the merchandise to stores weeks later, no longer made sense. Last fall, Ford, Burberry, Tommy Hilfiger and Ralph Lauren experimented with a strategy called “see-now, buy-now” and made their collections immediately available online and/or in stores.

So, does the see-now, buy-now model really work? In a collaboration between Thomson Reuters and StyleSage Co., which tracks and analyzes retailers pricing and assortment movements across the globe, we were able to pull some interesting fashion data on the e-commerce demand for these collections.

The quick verdict on see-now, buy-now collections is that there was very little that sold out immediately. Traditionally in fashion, brand new collections are a novelty and therefore are launched at full price. However, high inventory levels for these collections suggest that the fashion merchandise is not moving out of the stores, and their high price points make them inaccessible to the average shopper.

It’s also possible that the see-now, buy-now model is killing the demand progression. The model might satisfy the consumer’s need for instant gratification, but a good fashionista also wants to know what’s coming up next, thus what to anticipate. And in this instance, the traditional runway show is satisfying that desire, which also helps boost demand.

More interesting, the data shows that some of the see-now, buy-now merchandise did not sell out on partner sites until discounted, which hurts profits. This is definitely a valid reason to stop executing this trend. The data also shows the retailers’ inability to pass on high costs (like special fashion shows) to its elite shoppers.

High-end established luxury brands rarely discount their products, even in today’s promotional environment. No discounts means staying true to brand image, selling the illusion of brand exclusivity. The major European designers understand that offering steep discounts could tarnish their brand image, and refuse to partake in the see-now, buy-now model that could lead them down that road.

So how are the see-now, buy-now pioneers doing?

The Designer: Tom Ford

  • Items sold out, but at major discounts

Ironically, Ford was the first designer to abandon the see-now, buy-now model. He said in an interview with Women’s Wear Daily that his fall collection was delivered in July and August, like most fall collections. However, with the see-now, buy-now model the collection was held under embargo until the show went live in September. He said he “lost a month of selling” time and “had merchandise sitting in stockrooms.”

Thomson Reuters and StyleSage looked at Ford’s fall/winter 2016 collection that launched online at Net-A-Porter, My Theresa, and Mr. Porter. These numbers include apparel, bags, shoes and accessories.

Digging deeper into the data, we saw that 36 fashion items launched on My Theresa and only 11 sold out, of which three were sold at full price (Exhibit 1). His fashion collection was more popular on Net-A-Porter where 23 items sold out, but barely two items sold out at full price, and only one at Mr. Porter.

Exhibit 1. Tom Ford See-Now, Buy-Now Fall/Winter 2016 Collection

Only a handful of items sold out at full price – and the non-full price/sold-out items did so at major discounts of 50%+.  For example, Tom Ford’s velvet feather maxi skirt initially appeared on Net-A-Porter in September 2016 for $6,450, but was sold out in February 2017 at 60% off the original price ($2,580) (Exhibit 2).

Exhibit 2. Tom Ford Maxi Skirt Fall/Winter 2016 Collection – 60% Off

Source: StyleSage Co.

 

The Designer: BURBERRY

  • Unable to pass on high costs to elite shoppers

 On the latest earnings call presentation, Burberry said that the Runway Bridle bag is already its third best-selling style globally following its introduction in the September see now-buy now collection. The bag is very popular among celebrities and fashionistas, and sold out at its full price of $1,295 (Exhibit 3).

Exhibit 3. Burberry Bridle Bag Fall/Winter 2016 Collection – Sold Out

Source: StyleSage Co.

However, of the 99 Fall 2016 fashion items launched on the Burberry site, only 19 items sold out, of which 18 items sold at full price (Exhibit 4). Moreover, this significantly decreased in the spring 2017 season when 95 items were launched, but only one item sold out at full price.

Exhibit 4. Burberry See-Now, Buy-Now Collections

Of the designers implementing the see-now, buy-now model, Burberry is in one of the healthiest financial shapes. Still, inventory levels are higher than the industry mean.

Looking at the September interim balance sheet, you’ll find that inventory levels have risen 9.8% from the same period in 2015 (Exhibit 5). Similarly, after the spring/summer 2017 fashion show, Thomson Reuters I/B/E/S estimates suggest inventory levels will rise again 7.6% from a year ago, suggesting that the fashion merchandise is not moving much out of the store.

Exhibit 5. Burberry Earnings Quality Components

 

Source: Thomson Reuters Eikon

The company’s gross margin for the trailing half year period (represented by the red line in the chart below) remained consistent above its industry mean at 75% for the period ending September 2016. However, operating and net margins — the two most commonly used measures of a company’s margins — fell to 9% and 6% respectively, both below the industry median (Exhibit 6). This reflects the company’s inability to pass on high-quality leather material and labor costs (like its see-now, buy-now fashion show) to its elite shoppers rather than swallowing them.

The see-now, buy-now model is meant to give customers access to the latest items as they come down the runway. However, this might be coming at the expense of the company’s profits. The operating margin results are particularly significant as an indicator of operating efficiency. The decrease in operating margin suggests that Burberry is earning less per dollar of sales, perhaps a sign that this concept is eating profits.

Exhibit 6. Burberry Gross, Operating and Net Margins

Source: Thomson Reuters Eikon

Burberry’s return on its net operating assets (RNOA) tells a similar tale: although it is still stronger than its industry average, it has dropped to a six-year low of 37.2%, having fallen steadily over the last five periods to a point where it is now approaching the industry median of 20.7% (Exhibit 7). Thus, despite having sold out 23% of its first see-now, buy-now collection, Burberry saw RNOA fall further in its fifth straight period, instead of boosting profits.

Exhibit 7. Burberry Return on Net Operating Assets

Source: Thomson Reuters Eikon

The Designer: Ralph Lauren

  • See-now buy-now hasn’t helped the bottom line

Ralph Lauren has said that this model is doing well. However, the numbers tell a different story. Last year, 70 fashion items launched on the Ralph Lauren site of which 11 sold out at full price. This spring, the number dropped considerably when 77 items were launched, but only one item sold out at full price.

Exhibit 8. Ralph Lauren See-Now, Buy-Now Fashion Collections

Recently, Ralph Lauren announced the closure of its Fifth Avenue flagship store in New York, which will significantly reduce costs. One of its biggest problems has been the fact that its merchandise has been everywhere from department stores to outlet malls across the country. Last June, Ralph Lauren announced its Way Forward plan, which has resulted in improvements in inventory and margins.

Despite these improvements, earnings growth has now fallen for nine straight quarters, and is expected to continue to be negative for the next four quarters. The same can be said for revenue. Analysts continue to be bearish on the stock, with most lowering earnings estimates. Accordingly, the stock has moved significantly to a “Sell” recommendation since the end of January.

Exhibit 9. Ralph Lauren Stock Recommendations

Source: Thomson Reuters Eikon

Despite improvements led by the Way Forward plan, the see-now, buy-now model hasn’t made any notable improvements to the bottom line. Furthermore, analysts polled by Thomson Reuters don’t forecast any significant financial improvements in the next four quarters.

The Designer: Tommy Hilfiger

  • An ambitious collection with a 3% sold out rate

Tommy Hilfiger is owned by parent company PVH. Although we don’t have data on its first see-now, buy-now fall 2016 show, it is evident from PVH Q4 2016 financial results that sales growth at Tommy Hilfiger remained stagnant around $402 million in North America. However, international sales did see a significant spike, suggesting that the brand is resonating better abroad. Thomson Reuters expects similar financial estimates for the current quarter.

Still, Tommy Hilfiger’s see-now, buy-now spring 2017 fashion show was not only lavish in execution, but he also launched a significant amount of items — 147 on the Tommy Hilfiger site. However, only four items sold out at full price (Exhibit 10).

Exhibit 10. Tommy Hilfiger See-Now, Buy-Now Spring/Summer 2017 Collection

A good number of fashion designers have criticized the see-now, buy-now model, mainly for the cost and time scheduling inefficiency. This makes this model less likely to take off in the fashion industry.

François-Henri Pinault, CEO of Kering (parent company for Gucci, Saint Laurent) went as far as saying that the time difference between a fashion show and product launch is critical in creating demand for the fashion pieces. The StyleSage Co. data shows that an anemic quantity of items sold out at full price at both Ralph Lauren and Tommy Hilfiger. This suggests that there wasn’t much hype for the collections to begin with. Moreover, it supports Pinault’s theory that the model kills the demand process.

 It looks like the traditional timing of runway fashion collections is here to stay, for now.

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