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22 Jul

Liquidation Retail 🤝🏾 Fast Fashion

I’ve discussed my dressing sense, or lack thereof, several times on LinkedIn and Twitter.

Thankfully, I don’t have to worry much when I want to invest in a pair of bottoms. The good thing is that jeans or linen pant styles don’t change drastically, at least for men. And if you shop frequently, I am sure you know how expensive a good pair of jeans or linen pants can be. So, I prefer buying them at sale prices.

But if you are a bargain-hunter like I am, it would be useful to understand how stores like Brand Factory (BF) operate.

Wait, is that like an online thrift store?

Well, not quite. But you could consider it the offline predecessor to online fashion aggregation stores like Myntra or Ajio. But unlike Myntra or Ajio, which aggregate brands online, Brand Factory was launched (2006) with the aim of housing multiple factory outlets under one roof.

In case you’re unaware, a factory outlet usually sells branded goods at heavily discounted prices for reasons ranging from defective products to out-of-season goods and everything in between.

You might have noticed factory outlet stores of major brands, usually located in close proximity to each other. Naturally, bargain hunters seeking quality products will likely shop from factory outlets, a fact highlighted by Suresh Sadhwani (Business Head – Brand Factory):

“Around 2006, end-of-season sale (EOSS) was not a big phenomenon. People would have only factory outlets, where they could go to seek discounts on branded wear. However, these were small outlets with limited options. Brand Factory as a concept is a large store where we can bring together ‘multiple factory outlets’ under one roof.”

So, unlike a thrift store that sells used or second-hand products, a factory outlet sells fresh products at lower prices.

Also, you will notice some key features that differentiate Brand Factory from other retail stores:

  1. The discount range is between 20 to 70% all year round.
  2. The products are original and not imitated first or second-copy quality.  
  3. Products like luggage, shoes, and cosmetics are sold at Brand Factory in addition to clothes.

Essentially, it is like a mall in itself, with a shop-in-shop arrangement, where every brand partner of BF is allotted the required space to put out their merchandise and manage the inventory. It is not too different from a Shopper’s Stop or Lifestyle in the case of store design, but wildly different in terms of the target audience and the prices at which goods are sold.

And what enables BF to offer branded products at seriously discounted rates is a concept called Liquidation Retail.

Liquidation Retail is a phenomenon arising from speedy trend cycles in the fashion industry.

Have you noticed how, every three to four months, fashion trends change? Brands keep adding newer clothing styles even when the four-month-old inventory isn’t sold.

A brand may offer the four-month-old inventory at discounted prices but still fail to sell the stock completely, increasing the volume of unsold inventory at its store.

In fact, it turns out brands like H&M are sitting on unsellable goods worth $4.3 billion!

And H&M uses new fashion styles to draw in customers who visit to check the new products and keeps the unsold inventory on sale at the store, nudging the customer to buy the old stock at lower prices.

But most other fashion brands cannot part with their unsold inventory and end up liquidating (selling) these products to Brand Factory. This unsold inventory is called liquidation stock, and its commercial value is included in every brand’s Profit and Loss (P&L) statement.

Here’s how it works:

  • A brand will sell its unsold inventory at a cost price (say 40% of MRP) to Brand Factory.
  • Brand Factory will add a 10-15% margin to the price it bought from the brand and finally sell it to the customer at a 50% discount on MRP.

For example, any premium apparel brand usually works on a multiple of 4. That means the Louis Phillipe trouser you bought for ₹3000 cost less than ₹750.

A few seasons after launch, Louis Phillipe will be happy to sell it for ₹400 to any bulk buyer because they already have the latest season merchandise to put in-store sale. Brand Factory sells this trouser to you at ₹899 at 70% off, making more than a 50% margin.

In this way, a brand liquidates its stock to a discount retailer like Brand Factory, which sells the branded, good-quality stock at lower prices than a brand outlet creating a win-win for all stakeholders.

A brand wins by offloading unsold inventory and breaking even on goods not sold. Brand Factory wins by consistently offering heavy discounts on quality products, thereby earning customer trust.

Customers who are price sensitive but also want to buy good quality, branded products don’t mind shopping from Brand Factory. A customer doesn’t have to wait for a sale either. Brand Factory triangulates such an arrangement by putting its mouth where the money is instead of playing within the limits of brand perception.

Put differently, Brand Factory democratizes aspiration by making branded goods affordable to more customers.

Here are BF's revenue growth figures between 2015-2021:

In fact, in 2018, BF outlets contributed almost 30% to Future Group’s (then parent company) overall revenues.S. Sadhwani (Business Head – Brand Factory) explained the reason for the consistent growth:

“We ensure profitability by scale. The business operates on a low margin–high volume matrix. We also keep our overheads and costs low. We select locations where Brand Factory is a stand-alone and largely destination store. This helps us get better rentals and we can pass on the benefit to customers. We manage operating costs through less manpower as compared to full-price stores.”

Lower operating costs owing to high awareness of the market it caters to have sustained BF since 2006 despite growing competition from e-commerce fashion retailers and D2C fashion brands. Customers also look favorably to BF because they have a certain level of awareness about what quality of products to expect at the store.

For instance, look at the response to this question on Quora:

Is it good to buy clothes from a brand factory?

“I think yes you can, but the challenge is to find the right piece from the flooded selves where all unsold stuff are kept. You need to be aware about few things before buying from brand factory

1. Brand factory is good place to shop for basics clothes so you should not expect anything trendy.
2. Know your size and purpose for shopping.
3. Be Aware of current trends in terms of “what collar size, pocket size or placket and cuff are in trends and try and find things looking similar to it.
4. Buy your whites and blacks from the store. Also can think about your formal shoes.”

Brand Factory, as a business case study, highlights retail's complexity in India.

Based on a brand's product, price, placement, and promotion differences, myriad kinds of retail business models can operate in the country.

The moment you think of discounts and discounted products you are quick to assume there is some flaw hidden in the product. If you’re a brand loyalist, you might complain that the discounted product is of a cheaper quality and extend that judgment to the person who prefers shopping at lower prices. You might also judge that person’s aspiration as being fake or inauthentic because they don’t buy directly from the brand or at a certain price point.

But the success of Brand Factory lies in defying all that and correctly identifying that the Indian consumer — first and foremost — is value-conscious, not as much as price- or brand-conscious. Based on this simple but strong insight, the company successfully repackaged the perception of cheap, creating value for a huge segment of customers.

After all, shouldn't creating value ideally be the focus of any business?

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