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How to Discount Smartly During Covid-19

It's almost inevitable that brands will need to implement mark downs during this period of uncertainty. However, a creative and disciplined approach can help offload inventory while keeping customers engaged.
Brands are heavily discounting during the Covid-19 pandemic. | Source: Shutterstock
By
  • Chavie Lieber
BoF PROFESSIONAL

NEW YORK, United States — In normal times, Lele Sadoughi can sell her pearl and gem-studded, influencer-endorsed headbands for as much as $200. They almost never go on sale, aside from Black Friday and, of course, National Headband Day in October.

But these are not normal times. Sadoughi said she was caught by surprise a few weeks ago when she learned that Nordstrom, Saks Fifth Avenue and other retailers had slashed prices on some of her headbands, barrettes and earrings.

Many brands and retailers are offering deep discounts, even on luxury items that rarely go on markdown, to try to recoup sales they've lost due to the coronavirus pandemic. Designers face a dilemma: join the discounting frenzy at the risk of damaging their brand. Or sit out the sales and potentially alienate customers who are nervous about spending money in what's shaping up to be a severe recession.

“I’m getting mass emails from wholesalers saying ‘we are taking site-wide markdowns, extending payment terms and that’s just what has to happen,’” said Sadoughi. “I’ve never seen anything like this before.”

Sadoughi is now choosing one item to discount at 50 percent off, an offer she gives to Instagram followers a few times a week via Instagram Live every night from 5 to 8 pm. She hopes a targeted discounting strategy will boost direct sales without hurting her brand’s image.

We are taking site-wide markdowns, extending payment terms and that's just what has to happen.

Not every brand is being so particular. J.Crew recently offered up to 80 percent off some items, while Everlane had its first sitewide sale, at 25 percent off. Vince, Rebecca Minkoff, Rag & Bone and Kate Spade were among the brands recently offering 20 to 30 percent off. Proenza Schouler was offering up to 75 percent off past season's merchandise.

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At department stores, the markdowns are often even steeper. Nordstrom was promoting 40 percent off many items, in addition to price-matching, while Macy’s was offering multiple promotions. Neiman Marcus was offering an extra 30 percent off its sales section, which is already up to 75 percent off.

The current race to the bottom is reminiscent of the aftermath of the 2008 financial crisis, where the worst recession in decades had retailers like Saks Fifth Avenue offering 70 percent discounts, kicking off an industry-wide discount addiction that most retailers never quite managed to shake.

Discounts today aren’t as deep as they were in 2008, though prices for luxury fashion are 14 percent below where they were during the holiday sales season, according to retail price intelligence platform Intelligence Node. Some analysts say it’s likely only a matter of time before sales reach their recession-era depths.

Discounting is a drug and once you start, it's hard to pull back.

“Discounting is a drug and once you start, it's hard to pull back,” said Simeon Siegel, managing director of equity research at BMO Capital Markets.

Then again, no company will be left untouched by Covid-19, and brands must move this season's inventory and generate cash to survive. A strategic approach to discounting, where fire-sale reactions are traded for a disciplined attitude could help brands fare the crisis.

Discounting Is Inevitable

Brands and department stores are resorting to promotions for a simple reason: they need a steady stream of cash to pay expenses like rent, salaries and next season’s collections.

Stores are closed across the US and Europe, and e-commerce so far hasn't filled the gap. Online sales for accessories and apparel were down 23 percent in mid-March, according to Earnest Research. According to The Business of Fashion and McKinsey's State of Fashion coronavirus edition, revenue from the global fashion industry will decline 27 to 30 percent in 2020 while revenue for luxury will shrink 35 to 39 percent.

Most brands have already cut expenses to the bone, often by laying off employees, scaling back on marketing and cancelling orders with suppliers. But they still need some revenue coming in, and, increasingly, markdowns are the only way to draw customers.

"Nobody wants to mark down new merchandise, but we are trying to keep ourselves going," said Rosie Assoulin, a New York-based designer. "The percentage we give away does hurt us, but [the sales] also help us keep going. We have to keep our cash flow and payroll. It's medicine we have to take."

Nobody wants to mark down new merchandise, but we are trying to keep ourselves going.

Assoulin has marked down new merchandise from both her high-end namesake label and the more casual By Any Other Name. Normally, designers like Assoulin would try to sell their collections at full price through August.

M.Gemi, a direct-to-consumer footwear brand, has been running promotions since late March, including a sitewide 20 percent off sale. Chief Executive Ben Fischman said the brand rarely relied on discounts prior to the pandemic, but felt it had to take drastic steps to ensure it hits sales targets.

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“We have 15 partner factories in Italy who’ve been annihilated, and when we ask what we can do they say, ‘make sure there’s work for us when we are back,’” he said. “Obviously we'd rather be full price, but we have to do extraordinary things in extraordinary times. We want to make sure our business can move forward in this crisis, and that our partners have a business to get back to too.”

Even brands that can afford to keep merchandise at full price might be forced to discount if their competitors are doing it.

It's a prisoner's dilemma. If everyone else is discounting, you will look expensive and no one will buy from you.

“It's a prisoner's dilemma,” said Barbara Kahn, a marketing professor at Wharton. “If everyone else is discounting, you will look expensive and no one will buy from you.”

Through Sadoughi’s Instagram Live discounting strategy, the brand has sold six times the amount of inventory from the prior week. It’s also been able to promote lesser-known categories like sunglasses to followers who are likely tuning in for headband deals.

Executing a Smart Discounting Strategy

While discounting can hurt a brand, there are ways to execute sales that might soften the blow.

Mansur Gavriel, the minimalist luxury brand, has been discounting items by offering 20 percent off a specific colour each week, doing Millennial pink one week and red the next.

Kahn of Wharton advised brands stay away from applying discounts across an entire website, as it trains shoppers to expect sales every time they come back. Instead, Khan recommended discounts that incentivise customers to spend money, such as issuing gift cards if they reach high spending levels.

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Sadoughi said a sitewide promotion would hurt her brand in the long run. Her decision to choose one item to discount at a time helps prune her inventory and keep customers coming back to her social media to find new deals.

A few weeks ago, M.Gemi held an online sample sale with even steeper markdowns for old inventory. For those deep discounts, M.Gemi created a separate site and invited customers via social media and email.

“We would never want to sell a shoe for $75 on our site itself because when you start putting things out at that price when other shoes are selling for $300, it just devalues everything else we are selling,” Fischman said.

During Black Friday sales, items marked down by 20 to 30 percent sold out faster than products with steeper promotions.

Brands should steer clear of offering discounts steeper than 20 percent unless they are applied to items from past seasons that must be cleared out, said Emily Bezzant, vice president of research and analysis at retail data company Edited. During Black Friday sales, items marked down by 20 to 30 percent sold out faster than products with steeper promotions, she said.

Instead of leaning heavily on discounts, Kahn also recommended brands market cheaper products to customers, instead of promoting their markdowns. She pointed to “the lipstick effect,” where consumers buy cheaper luxury goods during times of economic uncertainty.

“Giving customers cheaper items will get them to spend money,” Khan said. “Promote on quality, not on discounting.”

We’re tracking the latest on the coronavirus outbreak and its impact on the global fashion business. Visit our live blog for everything you need to know.

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