This month Kojima Fashion Marketing presented members with their annual inventory management survey results. However unsexy “inventory productivity” may sound, the most important factor to watch after the development of compelling product is its productive deployment. As noted elsewhere in this journal, inventory productivity meant the difference between success for Wal-Mart and bankruptcy for K-Mart, and it directly impacts the success of new market entrants even more so.
Not surprisingly, Kojima Sensei’s findings demonstrated that more than any particular markdown strategy, intra-store transfer policy or other practice, the primary determinant of high inventory turn and hence high Gross Margin Return On Investment was each brand’s sourcing strategy. While gross margin is the other determinant of GMROI, similar inventory costs across the 42 survey participants — which included most of Japan’s leading apparel companies — meant that the principal GMROI driver was product lead times and pre-planned inventory turns.
For manufacturers, GMROI ranged from 230 yen returned for every 100 yen invested to 1200 yen returned, with the average running 800 yen. For retailers, GMROI ranged from 180 yen returned for every 100 yen invested to 700 yen, with the average being 430 yen.
Against this performance for product developed by the Japanese survey participants — whether sourced in Japan or, alternately, Korea or China — import brands fared much worse. GMROI on imported product ran roughly half that of their own sourced product, with an average 350 yen for manufacturers also serving as import agents, and an average of 360 yen for retailers operating retail shops on behalf of import brands.
Relative to the US specialty retail average GMROI of approximately 300 yen per 100 yen invested, these are still attractive numbers, but for a specialty retail business in Japan, which must use its GMROI proceeds to pay for some of the most expensive real estate and labor in the world, the lower productivity on import product offers the most frequently approached Japanese partner candidates some pause. If you are faced with the opportunity to invest capital in existing operations generating 600 to 800 yen per 100 yen invested, and an opportunity to invest capital in an operation that will yield approximately half that (not to mention that the venture may abandon the market — examples too numerous to mention — or, alternately, may succeed and be bought out earlier than expected — e.g. Zara) where would you put your money?
These concerns not withstanding, selective distribution or working with a partner is still an excellent way to get started in a new market and in my next note I’ll suggest some things a brand owner can do to make their business a more attractive import alternative and overcome these hurdles.