Why 2023 will set new benchmarks for retail

The extraordinary era is over.

After three tumultuous years of surprising highs and devastating lows, all signs point to 2023 becoming more or less a regular year for the fashion industry.

What does normal look like? On the one hand, supply chain disruptions have largely been resolved, meaning most shipments will arrive on time. The cost of shipping clothes from factories in Asia is almost back to pre-pandemic levels, and energy prices are close to where they were before Russia invaded Ukraine.

E-commerce continues to grow as a share of overall sales, but at a more relaxed pace than in the 2010s. This creates new opportunities for face-to-face shopping and multi-brand retailing. Brands thinking about a digital future in 2020 are re-balancing brick-and-mortar retail, online and wholesale.

Crucially, fashion businesses are hoping for the first time in three years that their success will no longer depend on the contingencies that have repeatedly upended the industry since 2020 — including the pandemic and Russia’s invasion of Ukraine.

To be sure, running a business is never entirely predictable. While the worst of the pandemic may have passed, economists are predicting recessions — if not outright recessions — in the U.S. and Europe this year.

Still, retailers are approaching a fresh start in 2023. Even at the end of 2022, many companies are still comparing their performance to 2019 – suggesting they are still in recovery mode. There is still work to be done to address the disruptions of the pandemic, such as excess inventory. But the industry finally appears to be at the start of a new cycle.

“The past three years have been a ping-pong of external shocks,” said Simeon Siegel, retail analyst at BMO Capital Markets. “Now, people’s successes will be their own and their mistakes will be their own.”

the Hangover

For retailers, establishing a sense of post-pandemic normalcy means correcting the mistakes of the past year.

In response to a surge in demand for everything from leggings to cocktail dresses in the second half of 2021, many are placing big orders for new merchandise. Consumers continued to spend last year, but not to the same extent as they depleted their pandemic savings. Retailers from Nike to Nordstrom are stuck with excess inventory.

Rebecca Duval, an analyst at Bluefin Research, said discounting would be a painful but necessary tool to eliminate the oversupply.

For example, Nike reported in its Dec. 12 earnings report that its inventory levels were 43% higher than last year. 20 — which has surpassed the previous quarter’s peak after the activewear giant embarked on an aggressive discounting strategy leading up to and during the holidays. Investors were happy despite the hit to margins.

Duval said she expects most retailers to reach healthy inventory levels by the second quarter of 2023.

“Retailers will have to keep a close eye on inventory and sales ratios and gain insight into their supply chains,” she said. “They’re going to have to chase sales and [liquidate] Nothing. “

Investors will wait and see.

“The burden of proof is back on companies to forecast their business,” Siegel said. “Supply chain issues have been the biggest external shock to the retail ecosystem. If that subsides, retailers can go back to their usual inventory Herculean task of planning.”

Economists predict that consumer confidence will remain tepid through 2023. For example, Coresight Research predicts that the U.S. apparel and footwear market will decline 2 percent this year. So the safest bet for retailers is to plan conservatively and choose to cut back on full-price sales, rather than resume the discounting cycle many were stuck in before the pandemic.

The New Supply Chain Reality

The good news is that the task of inventory planning is easier today than it was two years ago, because the turmoil in the supply chain has largely subsided. Without a large backlog, logistics companies are now better able to deliver products on time. High shipping costs have also come down. Online return rates have plateaued and prices for shipping containers from Shanghai to Los Angeles have plummeted from a peak of just over $12,000 in September 2021 to just under $10,000 in September 2021, according to a report from the National Retail Federation last month. Below $2,000 for December, according to a Cowen report released Tuesday.

While that’s still 48% higher than the 2019 rate, it’s a far more palatable operating expense than what retailers were forced to incur last year. At the very least, wild swings caused by the pandemic appear to be a thing of the past.

“The new baseline for the supply chain is that costs are still much higher than in previous years,” said Amit Sharma, chief executive of Narvar, a service that enables online brands to offer shipment tracking to their customers. Sharma added that before the pandemic, the typical retailer spent 15% of its total spend on shipping, today shipping can eat up a quarter of its budget.

To reduce these costs, brands can ship online orders from stores if they have a retail footprint, or delegate shipping to suppliers, Sharma said. Factory dropshipping has become a popular strategy in the wake of the pandemic, with big box retailers like Target now fulfilling most of their online orders from their local stores.

Ultimately, controlling costs and increasing supply chain flexibility will be the “recipe for growth in 2023,” said Coresight Research analyst Sunny Zheng. “We expect the market to fully normalize in 2024.”

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