Dealing with Disruption Helping Fashion Retailers and Manufacturers to Face an Increasingly Fragmented Future

SAP White Paper Retail Fashion & Manufacturing

Dealing with Disruption Helping fashion retailers and manufacturers to face an increasingly fragmented future

3 Overview • Imagination and innovation hold the key to combatting the COVID-19 outbreak 5 Pinpointing patterns • Understanding the past is critical to creating a brighter future 7 Weathering the economic storm • Factors in Hong Kong’s favor • Deﬁning Retail 3.0 • Taking the next step 9 Creating new capabilities • Mixing online & oﬄine • Merging inventory • Drop shipping • Increasing collaboration between retailers and manufacturers 11 How can SAP help?

Overview

IMAGINATION AND INNOVATION HOLD Whether the fears are real or imagined, the THE KEY TO COMBATTING THE COVID-19 outlook for the global retail industry appears OUTBREAK likely to mirror Hong Kong’s, as people take precautions to limit their contacts and reduce Hong Kong’s retail economy has been hit hard, the risk of contagion by avoiding large malls suffering the double blow of anti-government and popular stores. That is unwelcome news protests in the second half of 2019 and the for any retailer, but it poses a particularly acute COVID-19 novel coronavirus outbreak in 2020. problem for the fashion and apparel sector, These twin crises are keeping customers out of where so much of consumer demand is driven stores, restaurants and shopping malls, and by desire rather than a pressing and immediate border controls have cut the flow of tourists need for an item of clothing. from Mainland China and around the world. As a result, retail Sales figures, which plunged This has left fashion outlets and garment and 60% in Q4 2019, could be heading lower in Q1 apparel manufacturers facing a number of 2020. strategic questions, including: • What can I do? In the original epicenter of the outbreak – • How can I swing my current focus away from Mainland China – many manufacturers have empty physical stores towards expanding been forced to shut down production lines to online opportunities. protect staff from the risk of infection. • Where do I start the process? Predicting when these factories will restart, let • What will bring the most immediate benefits alone return to full capacity, is impossible. and the biggest long-term returns? • How can I retain flexibility and build more The slowdown in apparel-intensive provinces agility into procurement, sales ordering, and like Zhejiang will have a domino effect inventory allocation to deal with current and throughout the supply chain, creating pressure future market disruptions? on stock and logistics systems, and ultimately affecting retailers’ stocks. At the moment, The answer is that changing times call for a global retailers buy approximately 20% of their combination of new solutions and innovative goods (by value) from China, although when it business models. That means adopting comes to seasonal categories, that percentage imaginative ideas to exploit booming online rises substantially. The impact on larger markets, squeezing maximum value out of all manufacturers who are fortunate enough to available data, and changing the way inventory have multiple production sites in different and production is handled. countries will be lighter than those mainly or only producing in China, but shortages are For example, eCommerce is definitely a key inevitable. focus for retailers. But, building up all of the usual infrastructure can be an expensive and The number of COVID-19 cases outside of time-consuming process. Alternatively, China is increasing steadily. Ironically, in some exploring a relatively new concept like drop places this has led to a minor retail uptick due shipping – where goods purchased online are to the panic buying of essential items, such as shipped directly from the logistic partner (or food, toilet paper and hand-sanitizer. So far, manufacturer)’s warehouse and delivered the biggest beneficiaries of the outbreak straight to customers – can offer tremendous appear to be digital entertainment platforms, advantages, both in good times and bad. which have seen demand explode as people choose to stay at home instead of going to clubs, concerts or the movies.

Implemented eﬀectively, drop shipping enables Much like drop shipping, postponement allows retailers to cut supply chain lead times. In retailers to cater more closely to customer addition to boosting customer satisfaction needs by adding ﬂexibility, shortening lead through faster delivery, it also reduces logistics times and reducing the risk that something and warehousing costs, thus enabling the won’t sell. vendor to reduce prices or improve their margins – or both. Ultimately, recognizing a threat is one thing. The real challenge is deciding what actions Other ideas include strengthening the need to be taken, and determining the correct collaboration with upstream manufacturers to order in which to take them. SAP’s advice is exploit the potential of innovative simple – start at the beginning. arrangements, such as “postponement.”

In practice, postponement can take some of the guesswork out of the retail equation. The retailer makes a commitment to a specific quantity of goods, but delivery is carried out in stages. This enables the retailer to “test the market” with a small quantity of goods. They can see which styles, prints and colors prove the most popular, before finalizing the specifics of the main order.

Pinpointing patterns

UNDERSTANDING THE PAST IS CRITICAL Markets can be resilient, and typically enjoy a TO CREATING A BRIGHTER FUTURE rebound after an incident. During the SARS outbreak in 2003 – which in many ways Hong Kong’s reputation as a shopper’s mirrors the current COVID-19 crisis – China’s paradise has been well earned. Crowded retail market plunged dramatically between streets, malls and markets have put the city March and May. Then it recovered almost as ahead of the world in average sales quickly, and ended the year slightly ahead. per-square-feet and retailers were willing to pay the price of such success in terms of high In March 2011, the panic around Japan’s rents for floorspace. Fukushima nuclear disaster triggered a precipitous drop in retail sales, which plunged In recent years, a seemingly unending series of rapidly in a single month. Yet, by June the disruptions has altered that positive picture. figures had returned to pre-crisis levels, Financial crises, pandemics and protests, although the rest of the year proved to be a coupled with tremendous fluctuations in one of bumpy road for the retail sector. Hong Kong’s retail mainstays – tourism – have reduced both the appetite and ability to pay Most recently, the 2015 MERS outbreak in premium rents. These issues have also Korea took retail sales to rock bottom for four magnified competitive pressures, further long months, before recovering rapidly and reducing margins and threatening the viability surging ahead with the arrival of the peak of many businesses. Mid-Autumn retail season.

Although the statistics demonstrate that At the same time, the border between oﬀ and markets can bounce back from serious online is blurring, as the two domains merge disruptions fairly quickly, that doesn’t and complement each other’s strengths. necessarily mean they remain the same. The reality is that each impact creates an incentive For example, eCommerce feels fast at the point to change, and successful enterprises learn of purchase, but customers sometimes ﬁnd the from each new lesson and evolve strategies wait for delivery frustrating. The introduction of and solutions to take advantage of them. an Omni-Channel business model can eliminate that problem by allowing customers to browse In recent years, one of the biggest changes has and buy products online, and pick them up the been the inexorable rise of eCommerce, which same day at the nearest physical store. has been fueled partly by increasing competitive pressures and as a response to a eCommerce isn’t a parallel universe. The reality steady stream of crises. is that today the online dimension is an increasingly important part of the commercial Looking at the global market situation, landscape. It may even be the key to worldwide ecommerce sales topped US$3.5 overcoming the current COVID-19 crisis, and trillion in 2019, representing an increase of whatever comes next. approximately 18% on the previous year. By 2023, eCommerce is expected to nearly double to top the US$6.5 billion mark.

Weathering the economic storm

Improving margins and boosting topline growth are critical concerns for C-Level executives. That explains why so many are aggressively pushing their businesses to reap the rewards of eCommerce. The results, however, diﬀer dramatically from geography to geography, as well as within markets.

According to the most recent Global Retail ANNUAL GROWTH: In 2017, UNCTAD’s Payments Trends report from worldpay by FIS Business to Consumer index ranked Hong published in June 2019, online sales in the Kong as the 16th most e-commerce-ready United States represent 14.3% of the total country in the world. In 2018, it rose one place, retail market, while in Hong Kong, the average and that trend is expected to continue as the is closer to 4%. growing number of internet and smartphone users simultaneously leads to an increase in That means there is an enormous opportunity online spending. for the city’s retailers to expand online, and many are already doing so. For example, FAVORABLE TAXATION: Businesses that are despite the tough market conditions during based in Hong Kong, but earn their revenue 2019, the biggest and most prominent abroad, are not taxed. This enables businesses ecommerce platform in Hong Kong, HKTV Mall, to outsource goods and services from one managed to achieve double-digit growth. country and sell them anywhere in the world, without incurring a tax penalty. This represents FACTORS IN HONG KONG’S FAVOR an opportunity to make proﬁt from the outset. While Hong Kong consumers are staying home for safety and health reasons, they can still INTERNET PENETRATION: Hong Kong shop online rather than physically in stores. enjoys one of world’s highest rates of Internet Retailers should consider swinging more penetration. Statista puts it as high as 93% in investment into online initiatives, while at the 2020, and predicts that it will reach 95% by same identifying and shutting down stores 2023. That means most potential eCommerce which are making a loss. customers in Hong Kong are already online. In fact, they spend more than 24 hours a week There are good reasons for doing so. Factors in browsing the internet. This, combined with the Hong Kong’s favor include: fact that the number of e-commerce platforms is still relatively small, shows that Hong Kong is still a young and untapped eCommerce market.

DEFINING RETAIL 3.0 TAKING THE NEXT STEP Before considering what to do next, it is worth There has clearly been a major shift in how and ﬁrst reviewing the evolution of retail business where consumers buy their goods. from retail 1.0 to retail 2.0, and into retail 3.0 – the so-called Omni-Channel era at which we Older retail 1.0 retailers must adapt to the new are now arriving. world and use the latest technologies. However, Retail 2.0 internet players also face Retail 1.0 refers to the traditional way of concerns, particularly around the realization running a retail business, based on physical that there is still signiﬁcant value to having a locations as a single sales channel. physical presence.

Retail 2.0 refers to the dot.com era, where Amazon clearly appreciates that a physical online retailers only sell their products on-line. location is an essential ingredient in making a eBay is a classic example. sale, at least for some goods. The online behemoth signaled its commitment to the Retail 3.0 refers to online retailers embracing Retail 3.0 format last year when it purchased the move to a physical presence, in much the Whole Foods. In the last-mile competition to same way that Retail1.0 players have invested deliver goods rapidly, physical stores represent in online platforms. Examples include Amazon, a critical jumping oﬀ point for merchandise which used to sell exclusively online, but has delivery and return. now launched a network of physical stores under the Amazon Go brand name. Closer to Ultimately, whether your business is a Retail home, the HKTV Mall, which began its business 1.0 operation that is moving to Retail 3.0, or a selling groceries and cosmetics online, has now Retail 2.0 player migrating to 3.0, you might extended its reach by launching physical still be missing out on a bigger opportunity. The shops. best players don’t separate online and oﬄine to 2 distinct channels – they build and exploit the synergy between them.

Creating new capabilities

Retailers can innovate their way out of the current COVID-19 crisis and meet other challenges, by implementing Retail 3.0 Omni-Channel strategies aimed at improving customer experiences and driving traﬃc.

With the right technology, the scope for MERGING INVENTORY creating new capabilities is broad. In some Once you have made it possible for customers ways, the only limit is the imagination of the to choose how they shop, it makes little sense individuals involved and their passion for to continue operating separate inventory finding new solutions to perennial problems. systems for the online and offline aspects of the business. In addition to enabling Four new capabilities which fashion organizations to enjoy the advantages of manufacturers and retailers should consider economies of scale, merging everything into include: one single inventory can also dramatically reduce the risk of running into a stockout MIXING ONLINE & OFFLINE situation. Retail used to be an all or nothing proposition, with organizations mainly focusing either on DROP SHIPPING their physical offline presence, or a pure online Margins can be improved still further by eCommerce operation. When offline players adopting drop shipping – an ecommerce added a digital dimension, it was usually run business model that allows a retailer to sell completely separate from the rest of the products from their store without the need to business. invest capital in areas such as inventory, warehouse space and fulfillment. Today, that is changing as retailers recognize the synergy and customer satisfaction that can When the customer makes a purchase from an be unlocked by mixing the potential of both online store, the product ships directly from sides of the business. Offering customers more the vendor, logistic partner or even the factory. choice and allowing them to decide exactly how Drop shipping practically eliminates inventory they want to shop, can make a tremendous bills, making it an attractive proposition for difference. both major players and smaller online entrepreneurs. Examples of that kind of capability in action include: The advantages of drop shipping include: • Relatively easy to get started • Buy Online Ship to Store (B.O.S.S.) • No need to manage, stock or organize • Buy Online Return in Store (B.O.R.I.S.) inventories. • Buy Online Pick up in Store (B.O.P.I.S.) • Expands the product offering • Scales easily up or down • Operating budgets are low • Quickly provides a healthy cash flow, with little or no capital investment

INCREASING COLLABORATION BETWEEN Factory will keep on sewing but leave the RETAILERS AND MANUFACTURERS garment dyeing to last step so that the reorder In the past retailers simply bought product lead-time could be greatly reduced. from vendors or manufacturers, and lived with the resulting limitations which ranged from This provides the factory with the assurance of long-lead times to an almost total lack of a sizeable contract, while also offering the flexibility. With the proliferation of shorter retailer an opportunity to test the market to see fashion cycles and regular (if unpredictable) which color sells best. If red proves most disruptions, such a simple approach is no popular, the rest of the order can easily be longer desirable. switched to red. If it turns out all three colors sell as fast as each other, then the retailer can The answer is for both parties to collaborate split their order accordingly to take advantage much more closely by implementing a of consumer tastes. postponement model. For example, rather than the retailer ordering a 100,000 pieces of Other advantages include: T-Shirts for delivery in six months, they should • Better sell-through instead ask for 10,000 in all colors as a test • Improved stock replenishment lead time order, ready for delivery and sale more or less • Reduced markdown immediately. The balance of 90,000 shirts can • Quicker response to market changes be fulfilled in a series of reorders during subsequent months, with the colors' reorder quantity based on the actual sales profile from market.

How Can SAP Help?

Working through these challenges with clients, SAP is doing more than enabling them to tackle the current crisis. We are also helping these companies to create and maintain more resilient and sustainable businesses. That includes adding new capabilities, such as ﬂexibility in the face of change, and the agility to move in a new direction as quickly as possible. This can be just as important as lowering inventories and controlling costs.

In addition to recommending speciﬁc actions, we also provide a variety of solutions which address diﬀerent retail fashion and manufacturing scenarios. They include:

SAP Commerce Cloud provides a commerce SAP S/4HANA for fashion and vertical platform that covers product content business (FVB) supports key processes management, experience management, order around merchandising, including assortment management, and personalization. It is planning, pricing and promotion management, designed to support B2B, B2C, and B2B2C and merchandising analytics. Importantly, business models, and it includes prebuilt these can now be managed together with integrations with core SAP solutions. Forrester wholesale and manufacturing processes. You has described SAP Commerce Cloud as “a best get an end-to-end view which includes all your fit for companies looking for an products, all your labels, all your inventory and industrial-strength, full-function commerce all your stores. FVB also provides flexibility to platform that is in wide use across several handle postponement between fashion retail- industry verticals.” Commerce Cloud provides ers and garment manufacturers. all you need for an Omni-channels business. SAP Cloud Platform (SCP) provides a rich SAP Customer Activity Repository (CAR) set of services, tools, APIs and applications allows you to collect, clean, and centralize that help you to integrate and extend your multichannel customer and point-of-sale (POS) solutions, optimize your business processes data in real time. CAR prepares that data for and create an engaging digital experience. unified demand forecasting, omnichannel pricing and promotion, product availability and Other insights and solutions which support sourcing, and embedded data science. CAR integrated business planning across the entire can provide single view of inventory for all sales supply chain network can be found in another channels, making it ready for consumption by new SAP whitepaper entitled “Combatting the other applications. Knock-on Effects of the Coronavirus on Global Supply Chains,” which can be downloaded here.

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