Samuli Pehkonen

Excess inventory is a built-in characteristic of fashion's dominant business model, designed to maximize production efficiency and sales prospects in a trend-driven industry where accurately aligning supply and demand has been a persistent challenge. However, how brands handle the growing glut is an increasingly complicated question. The ninth annual State of Fashion report by The Business of Fashion Insights and McKinsey & Company also sheds light on this ever-present issue in the industry. Here are my takeaways from the report.

The current magnitude of excess inventory challenges

Despite overall industry inventory levels remaining broadly flat in 2024, 33% of brands continue to struggle with inventory positions.

In 2024, brands produced between an estimated 2.5 billion and 5 billion items of excess stock, worth between $70 billion and $140 billion in sales. Luxury powerhouses LVMH and Kering Kering recorded excess inventory of almost €5 billion combined in 2023, with impaired inventory accounting for about 4 to 8% of total sales –– the cost of impaired inventory held by the two biggest luxury groups more than doubled between 2014 and 2023.

The average share of fashion brands' assortments on discount increased 5 percentage points in the first half of 2024 compared to the year prior –for example, Nike says markdowns affected around 44% of assortment in 2024, compared to just 19% in 2022.

Root causes of excess inventory in fashion

While inventory challenges are complex for most retail industries, fashion will never have zero leftovers and faces distinct issues.

Rapid trend cycles

The number of micro-trends has boomed, and trending styles fluctuate more than ever before.

Unpredictable seasonality

Climate change is making it harder to predict weather conditions and correlate demand.

Lengthy supply chains

The complex routing of fashion goods across retailers, brands, and manufacturers results in long lead times with limited flexibility.

Product and channel complexity

Consumers are increasingly purchasing fashion items across various channels, making it difficult for brands to provide multiple options for size and color across a growing number of touch points.

Higher volumes also mean better economies of scale in manufacturing, and overproducing is perceived as cheaper than missing a sale due to stockout, further embedding excess in the fashion system.

What's in store for the 2025

In 2025, brands will increasingly prioritize profitability amid flat sales volumes and increased markdowns. Given the strong correlation between inventory turnover and profitability, managing inventory will be a key lever to pull. Meanwhile, higher warehousing costs created by limited capacity and high interest rates also push brands to shift unsold inventory.

Recent regulation changes, such as the EU's Ecodesign for Sustainable Products Regulation, are putting pressure on brands to find sustainable ways to manage excess inventories. Approved in July 2024, the regulation will require fashion companies in the EU to report on unsold textiles starting in 2025. It will also make it illegal to destroy unsold products in early 2026, a practice often related to protecting pricing power and brand equity.

However, sustainability might take a backseat on the industry executives' agenda: In the past two years, sustainability was identified as the top opportunity for the industry in the State of Fashion report, while priorities such as differentiating brands positioning and capturing market share with new designs are anticipated to take priority for next year.

The number 1 risk cited by fashion executives in 2025? Consumer confidence and appetite as macroeconomic pressures and rising prices have driven fashion shoppers to adopt cost-conscious behavior, turning to options with a strong value-for-money perception.

70% of consumers plan to purchase from outlets or off-price retailers in the next 12 months, even if their discretionary budget increased. This shift in consumer behavior promises continued strong growth for off-price retailers that grew revenues 1.8x vs the broader market in 2023. While traditional off-price retailers like The TJX Companies, Inc. , Burlington Stores, Inc. , and Ross Stores, Inc. dominate the segment with treasure hunt brick-mortar experiences, the growth of online off-price retail is even stronger, led by players like BESTSECRET and Zalando Lounge.

Other trade-down behaviors include resale powered by the likes of Vestiaire Collective , Vinted , and Depop , as well as newer trend "dupes" – duplicates of more expensive products, a rebrand of what used to be taboo of counterfeits now popularised by Gen Z.

How brands plan to tackle excess inventory challenges

In search of a healthy bottom line and more sustainable business practices, brands recognize the importance of both proactive and reactive tactics to inventory optimization.

75% of executives plan to invest in data-driven planning and forecasting tools, and more than 33% to increase their open-to-buy budgets. With the advent of generative AI, 33% of fashion executives perceive back-end supply chain and logistics as the top use cases for this technological paradigm shift and new startups such as autone are emerging to help brands to make better inventory decisions.

When it comes to reactive tactics, 35% of executives plan to increase private sales, and 21% look to partner with off-price players, both tactics that we at Troves can help brands with. 30% plan to increase volumes to outlets, and 21% plan to offer more promotions. While discounting in any channel is inherently profit-diluting, this indicates that brands outside luxury are willing to lean on it.

Recycling excess inventory is an option on the agenda of 26% of executives, but manually dismantling each product so that its parts can be reprocessed into new materials is costly, time-consuming — and currently limited in scale.

My company, Troves , is building B2B solutions for inventory redistribution in the fashion industry. If you're one of the entrepreneurs and executives navigating these challenges in what looks to be a particularly tumultuous and uncertain 2025 or a retailer looking to source overproduced, or excess, branded goods at a lower price and supercharge your buyers with new technologies, I'm always happy to chat samuli@troves.co .

Samuli Pehkonen

Helsinki, Uusimaa, Finland 3 t. seuraajat 500+ yhteyttä

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Troves

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Muut nimetyt Samuli Pehkonen

Samuli Pehkonen

Helsinki, Uusimaa, Finland
3 t. seuraajat 500+ yhteyttä