How the apparel sector can overcome high interest rates, gain market share

Every apparel business is being impacted by high interest rates and to make matters worse, since these higher rates have followed decades of low ones many fashion brands and companies are finding themselves without a playbook to navigate this ongoing challenge, writes apparel industry expert Roit Kathiala.

Apparel businesses like any other business have loans that are either coming due, need to be taken or have existing loans that need to be serviced with interest payments all at the current extremely onerous interest rate environment, a challenge that could come as a “cold shock” after decades of record low interest rates. So the golden path is to respond to this challenge and still retain a laser focus on revenues, brand relevance and crucial capital investments and hopefully without losing much talent.

These rates and profitability challenges due to interest rates may sound daunting for apparel businesses however, I believe that every adversity, every challenge, every obstacle comes with a hidden opportunity of a great opportunity and all it takes is a little shift of perspective and to see that opportunity amid the fog of the problem and we find sooner or later and quoting Ryan Haliday: “what stands in the way, becomes the way.”

Let’s explore this together and see if there really can be an underlying opportunity in the apparel industry’s seemingly tight high interest rate environment.

Apparel industry playbook for tackling interest rates

The long-standing apparel industry playbook in situations of high interest rates has relied heavily on cost cutting which leans excessively on a few areas which are comparatively easy to execute but may or may not always be optimal choices. The cuts usually focus on marketing spend, capital investments, talent and headcount cuts which are usually easy to execute, however can have some long-term consequences.

So let’s look closely at these areas: Marketing spend pull backs usually take away from maintaining brand relevance and growth in an increasingly competitive industry at a crucial time with both technology and increase of celebrity-owned brands have shifted their priority to have their own fashion and lifestyle business versus endorse and promote other businesses so it is crucial to maintain marketing relevance even during these times.

Capital investment reductions take away from building key capabilities needed to be efficient and build crucial capabilities and last but not least is talent.

Any manager who has been hiring recently knows replacing good talent is indeed a herculean task especially in the current competitive landscape amid shifting priorities and a general ageing workforce in most of the developed world.

Is there a better way? If so, what can it be? It is something that helps companies navigate the high interest rates environment and still keeps the engines going for long term growth.

The solution lies in a more proactive and strategic approach and looks closer at other less prioritised opportunity areas.

Fresh opportunities for tackling high rates

Supply chain optimisation:

Cost of goods together with shipping, transportation, warehousing, and distribution together account by far for the largest cost on any retailer’s balance sheet. However, in times when cost reduction is needed most apparel companies rarely attempt or are completely successful in making a meaningful reduction here.

Diversify revenue streams:

Diversifying the mix of revenue streams between stores, ecommerce, wholesale, and licensing can release cash flow to the business. For example in most scenarios costs for an online sale has a higher variable percentage as compared to one on a brick-and-mortar store which means the cost is incurred only if there is a corresponding revenue being booked.

Strengthen your financial position:

A lean balance sheet can sometimes be a double-edged sword. While it may minimise debt exposure, it can also limit financial flexibility. Apparel companies should focus on strengthening their financial position by building up some cash reserves.

Debt versus equity – use equity:

As more and more fashion companies go public or bring in equity investors, equity has become a powerful tool to bring in some cash to pay down high interest loans and build liquidity. Some successful companies such as ecommerce giant Amazon have gone even further by sharing equity with their employees as a form of compensation and participation in the company’s success and are able to attract and retain top talent without the excess use of cash pay outs of salary or bonuses and get a more “owner’s mindset” in the company that improves morale, retention, and productivity while reducing committed cash payouts.

Optimise inventory management:

Excess inventory ties up valuable capital and incurs carrying costs, which can become burdensome in a high-interest rate environment, plus high interest rates bring uncertainty of demand in play. A robust inventory management process optimises stock levels, minimises excess inventory, improves inventory turnover and helps minimise “style obsolescence” as purchase decisions are made closer to the customer purchase time. This will free up cash flow and reduce the need for financing at unfavourable interest rates.

Negotiate favourable financing terms:

Companies can mitigate need for debt by renegotiating terms with lenders or exploring alternative financing options such as asset-based lending, invoice factoring, or peer-to-peer lending platforms. By shopping around and leveraging relationships with financial institutions, companies can potentially secure lower interest rates or more favourable repayment terms.

Adapt to changing consumer behaviour:

Consumer behaviour undergoes significant shifts during periods of economic uncertainty and high-interest rates. Companies should closely monitor these changes and adapt their strategies accordingly. This may involve re-evaluating product offerings, adjusting pricing strategies or assortment mix.

Stay agile and responsive:

In a volatile economic environment, agility and responsiveness are key to survival. Companies that are flexible and adaptive, ready to pivot their strategies in response to changing market conditions are best positioned to succeed through a high interest rate environment. It is almost always possible to predict the future trends and shift but being first “off the blocks” to respond is the key to success.

Don’t lose focus on long-term growth:

While high-interest rates may present immediate challenges, companies must not lose sight of their long-term growth objectives. Investing in innovation, research and development, and brand-building initiatives and preserving key growth drivers through cost cutting and optimisation can ensure companies don’t compromise the long term for the short term.

While navigating an environment with high-interest rates does poses significant challenges, approaching this by side-stepping cookie cutter industry playbooks, careful fiscal planning, long term-oriented decision-making, and a welcome splash of new ideas and innovation, these challenges can be overcome and companies have a pathway to emerge out of this stronger, more flexible and with a healthier balance sheet to tackle growth strategies and gain market share.

By Just Style