McKinsey recently released the latest iteration of its Global Fashion Index. And if you think store-wide inventory accuracy matters, you’ll be happy with it.
In its periodic study of more than 350 publicly traded companies, the ranking is dominated by those who were among the first to prioritize store-wide inventory accuracy and embrace the technology (called RFID) needed to achieve it. . The president of Zara’s parent company (Inditex) has spoken publicly about the strategic importance of RFID since 2014.
By 2019, the connection between accuracy and profitability was clearly discernible. And in 2020 it was brought to the attention of some of the leading authors of the State of Fashion annual report. The fact that their reports continue to fail to mention store-wide inventory accuracy doesn’t make the topic – or the discovery of this connection – any less significant.
In addition to Inditex, others such as Nike, Adidas, Lululemon and Uniqlo (Fast Retailing) have been among the first to provide these advanced features to their businesses. Victoria’s Secret, PINK and the Chinese powerhouse Anta Sports were quick followers.
The same pattern has been repeated in the Luxury segment, where inventory accuracy at the store level is currently more of a “nice to have” rather than a “need to have” capability. Gucci (Kering) and LVMH each use RFID in many of their stores and have been quicker to do so than many of their peers.
For those unfamiliar with the McKinsey Global Fashion Index, it tracks a broad set of activities, covering all regions, product categories, and value segments. McKinsey ranks each of these companies according to the degree of economic profit they create. Companies that generate negative economic profit are called Value Destroyers and those that create economic profit are called Value Creators. The cream of the crop are the top 20 artists, crowned as Super Winners.
Economic profit measures the creation of value by taking into account the amount of money a company invests to generate its performance. It is calculated by deducting adjusted taxes and the cost of capital from a company’s operating income.
Most companies are now value destroyers
It might come as a surprise, but nearly 70% of the companies studied by McKinsey’s team are generating negative economic profit. They are destroyers of value.
While it might be tempting to blame the COVID pandemic, a closer look at the data reveals that it is simply a continuation of a long-standing decline. In fact, in 2015 the number of Value Creators and Value Destroyers was essentially the same.
The average 60% disappeared years ago
In the past five years, and possibly more, there hasn’t been a single year in which the average 60% of companies as a group they have generated Economic Profit.
For simplicity, let’s assume McKinsey studied exactly 350 companies. [In reality they indexed a slightly larger group.] At 350 companies, each quintile represents 70 companies. If only 31% of companies in 2020 were Value Creators, as already discussed, then only about 110 companies created value and 240 companies destroyed value. And whatever value was created by the 40 companies occupying seats 71-110 on the list was offset by the value destroyed by the 170 companies occupying seats 111-280.
The bottom line
As noted by McKinsey, the Apparel / Footwear / Fashion industry has evolved into a winner-takes-all competition. And the world’s most profitable brands have quietly proven it’s hard to win without store-level inventory accuracy.