PARIS, France — How do you measure success in a pandemic? Six months after the coronavirus went global, fashion companies are still reeling in a market that’s more unpredictable than ever.
Fundamentally, brands still aim to sell more products at greater profit, but it’s hard to set targets and hold teams accountable when revenue and profitability are subject to wild swings due to new waves of coronavirus cases, shifting travel restrictions and the ebb and flow of government support.
And yet, managers need clear data to help drive decision-making. Even as many brands fight for survival, executives are starting to ask which metrics will prove the right ones to motivate teams, craft a narrative for investors and assess the success of initiatives going forward.
A "balanced scorecard" — which covers performance metrics across four perspectives: internal learning and growth, business processes, customer feedback and financial data — has long been a key tool for a company’s managers to measure success at turning their strategies into action. Choosing the right data points is essential to restoring normalcy in operations and people management — and at the chief executive level, it can also help maintain the crucial support of boards and investors.
Looking ahead to 2021, companies need to put some sort of structure in place.
"Stakeholders can accept that this was an unusual year. But looking ahead to 2021, companies need to put some sort of structure in place," said Anne Raphaël, a Paris-based governance expert and luxury headhunter for consultancy Boyden.
What are some of the key metrics a balanced scorecard should include in today’s fashion market?
Cash is king
As Covid-19 shuttered stores and shook consumer confidence, this year's targets on profitability, revenue growth, share price and return on invested capital were quickly out of reach at most brands, not to mention goals like sales per square meter and percentage of full-price sell-through. Those metrics took a back seat to the most fundamental measure of a business's health: cash.
"Since the crisis, managers have been obsessed with cash — both acquiring it and holding on to it," said Bruno Roland-Bernard, a Paris-based consultant and financial communications professor at the Institut Français de la Mode. After racing to freeze investments, limit operational spending, and ramp up online sales, they’ve been watching closely to see if their brands still generate enough revenue to meet their (newly reduced) obligations.
As the market recovers, operating cash flow and free cash flow remain a focus. Brands who generated enough cash through the crisis will be in a better position to invest in relaunching their businesses, creating and marketing new products or adapting their distribution models to a post-Covid world. In a July call with investors, Gucci-owner Kering repeatedly highlighted strong cash generation to reassure investors about the strength of its brands even as sales fell 44 percent.
Brands whose cash flow turns negative for too long could end up having to sell assets or "call mom and dad" — that's to say, seek emergency loans from the bank or additional investment from parent companies, Roland-Bernard said.
With sales declining sharply across the fashion market, companies are putting an emphasis on market share. When a brand’s sales suffer less than competitors, that means its relative size in the market is improving. That might not mean more profit for investors immediately — increasing share often requires hefty investments — but boosting relative importance can lead to faster growth and greater negotiating power once demand improves.
During LVMH’s most recent investor call in July, the luxury conglomerate mentioned market share six times — touting increases to market share for its Christian Dior unit and saying that for its watch and jewellery brands like Bulgari and Tag Heuer, market share gains were the “foremost objective” for the next six months.
Highlighting market share gains can help maintain investor support during a crisis: taking a bigger piece of the market shows that a brand is outperforming competitors (even if business is down overall) as well as providing a case for moving ahead with expensive projects like store expansions or hiring new designers.
Sales growth in Asia has also become a hotly watched metric. Mainland China and South Korea were among the geographies where shopping recovered most quickly from the coronavirus. Executives say this makes Asia the best region for benchmarking versus rivals and for getting a sense of the underlying demand for products, which has been obscured in other regions by store closures and a higher degree of wariness for shopping during the pandemic.
“It’s important to look at how you’re doing in the places where the traffic is doing well again, to gauge desirability for your brand,” Isabel Marant Chief Executive Anouck Duranteau-Loeper said.
One caveat: benchmarking brands in Asia isn’t always straightforward, as the ones who had previously relied most on selling to Chinese customers abroad are seeing a particularly rapid shift to domestic spending.
Not just sales, ‘sell-out’
Unsold inventory is a key risk for fashion companies, whether they're in a brand's own stores or shipped out to wholesale partners.
That's why in addition to monitoring stocks and sell-through in their own stores, tracking sell-out (that is, when wholesale partners sell products to end clients) is a priority now, Duranteau-Loeper said. It’s important to react quickly when stocks start to pile up at department stores and multi-brand boutiques.
“We can respond by shifting marketing investment to a region or city, to give sales a boost,” Duraneau-Loeper said. It’s also important to know as soon as possible which products are performing well so they can move quickly to reorder, she added.
With e-commerce exploding since the onset of coronavirus, and with customers getting more and more used to discovering products through digital platforms, it's no surprise that fashion leaders are tracking their online performance more closely than ever. The number of followers on social media, engagement with posts, conversion rates in e-commerce, number of units per transaction (UPT) and sales growth via third-party e-tailers have only grown in importance.
Brands are measuring their own progress on these metrics, as well as benchmarking versus competitors using aggregate scores, like the ones provided by consultancy L2, according to Paco Rabanne's fashion Chief Executive Bastien Daguzan. "Your digital footprint is definitely key. The goal is to create an online ecosystem where you can try things and learn," Daguzan said.
Fashion companies have raced to renegotiate rents in various shopping malls, high streets, and airports that were deserted or shuttered earlier this year. As traffic rebounds unevenly across geographies and store formats, and with long-haul tourism yet to make a comeback, rent as a percentage of sales remains a critical metric for judging which locations a brand can afford to hold onto — and for how long.
"A number of brands have to plan to reduce their cost base in light of lower turnover," said Pierre Mallevays, founding partner at luxury M&A advisory firm Savigny. "The first thing to be right-sized will be the retail network."
In recent years, brands have increasingly relied on data to understand how much their marketing initiatives like campaigns, fashion shows and product launches translate to visibility on social networks and in the press. With budgets under severe pressure since the coronavirus brands are more interested than ever in tracking how good their return on marketing investment really is.
They’re looking at how their marketing investments add up to a share of voice in each region, Michael Jais, chief executive of brand data consultancy Launchmetrics said. Benchmarking marketing with competitors doesn't just help brands identify places where they need to boost awareness; it can also help them see where they may have over-invested and can afford to pull back, fuelling a more targeted approach.
“They want to make the right investment for the right audience in the right place,” Jais said.
‘The Client Angle’
With retail drivers like tourism and store traffic still largely at the mercy of coronavirus, brands should be closely monitoring metrics and fixing targets at the client level, according to luxury consultant Olivier Abtan, senior managing director at Publicis Sapient.
Luxury fashion brands depend on two main types of clients to drive the vast majority of sales: the 3-5 percent of top-spending clients who can account for more than a third of revenues, and the 70 percent of new or unidentified clients whom brands need to recruit each year.
Brand's should be focusing on average spend by top clients to make sure they're still engaging their most loyal, well-off shoppers, as well as on the number of new clients being acquired online and in stores. Most of those new clients may disappear, but others will grow into a brand's best customers over time.
“If the number of new clients is way down, that isn’t just a problem for this year but for the years to come," Abtan said. By contrast, if the number of new clients is suffering less than overall revenues, that can lay a foundation for future growth. “When the usual drivers of sales are down, the client angle is the right one."