The cost of inventory

As compared to the HILOS model

How much do brands spend on getting their products into the hands of their customers? 

 

The answer to that depends on who you ask – design and development teams have target margins for landed FOB from their source factories, merchandisers and supply chain deal with distribution costs, inventory obsolescence, and discounting, marketing and sales deal with demand generation and store costs. And depending on the sales channel - e-commerce, owned retail, and wholesale - margin breakdowns can look very different. 

 

Below is a sample margin breakdown from an omnichannel name brand that can demand high price-value with wholesale partners, better than average sell-through via owned retail, and an efficient distribution network for e-commerce operations. In short, below is the best-case scenario for a well-run mid-market brand. 

While initial margin is higher for a brand’s D2C e-commerce channel, the higher costs of distribution directly to customers erode this benefit. An efficient owned retail footprint can consolidate these distribution costs into fewer collection points but increases SGA costs below the line due to the costs of leasing and maintaining these brand stores. Wholesale has the lowest distribution and SGA costs, with the retailer taking on the distribution and inventory risk from the brand, but also a significantly lower margin due to wholesale pricing and negotiated discounts. 

 

As a design, development, and infinite restock platform for brands to launch fashion and performance footwear lines, HILOS is disrupting the above model of bulk overseas manufacturing tied to higher inventory and distribution costs with a local production and rapid replenishment model. While replenishment models have long been proven revenue generators for apparel, they have been impossible to adopt for footwear due to tooling and production complexity. By 3D printing on-demand, HILOS supports infinite restock, eliminating inventory costs and supply risk. See how the two compare for e-commerce:

E-Commerce

For online channels, HILOS replaces landed FOB and added distribution costs with on-demand local production and restocking at a comparable gross margin. Below the line, brands never miss a sale due to lack of inventory, achieving higher sell-through at less cost. A study by Bidnamic, an algorithmic performance marketing platform, found that increasing product availability online significantly reduces demand generation costs, as much as doubling e-commerce conversion rates. The combined impact of similar gross margins and lower demand generation costs can more than double net profit margins.

Owned Retail

For owned retail, brand stores can see a 30-45% increase in sales from effective replenishment models that allow for higher sell-through, all while mitigating the risk of over-ordering, discounting, and liquidation costs. While owned retail still has higher fixed costs than e-commerce, by accelerating the amount of inventory that moves through each store through rapid restock, brands can boost net profitability by as much as 50%.

Wholesale

For wholesale models, HILOS is only cost competitive when its leaner inventory model allows brands to negotiate wholesale relationships without discounts, since retailers are no longer risking the inventory exposure that would need to be discounted. Under the current constraints of a wholesale relationship, where pricing is built around bulk distribution, overproduction and discounting, the HILOS model isn't as competitive. 

Takeaways

Within an e-commerce channel, an infinite restock and drop-ship model is competitive with gross margins and can more than double net profits by increasing conversion and reducing customer acquisition costs.  

For owned retail, increased sell-through swells top-line sales, delivering more revenue per dollar spent on fixed costs and growing net profitability as much as 50%.

Given a wholesale model, brands and retailers have the same opportunity to increase sales while reducing inventory costs, but this comes at the expense of the discounts retailers are used to negotiating with the brands they carry. 

Across all channels, local production and infinite restock is the ideal model for brands focused on reducing costs, increasing conversion rates, and investing more of their supply chain spend into sustainable, higher quality product. The replenishment model is a proven revenue generator, while going from factory direct to consumer mitigates much of the waste in current supply chains.

If as an industry we can only make what we actually sell, then we have an opportunity to do well by doing right.