Fashion retailers face unprecedented challenges as they grapple with an evolving economic, social, and regulatory landscape. Pressure on profit margins is intensifying, with higher costs of raw materials, labor, and energy. And while inflation has stabilized, suppliers are not passing cost reductions onto brands, squeezing margins even further.
The changing dynamics of fashion retail
The textile industry has been under ongoing strain, affecting not only mass-market and fast-fashion brands but also luxury and affordable luxury sectors. Most fashion brands have recently announced disappointing first-half operating profits, and need to regain cost control by actively forecasting and monitoring their cost structures.
Pressures are evident at all levels. Fashion retailers are faced with rising costs and shifting consumer preferences towards fewer purchases and more sustainable options. Declining consumer spending has forced brands to lower prices, triggering profit warnings and causing a $4.8 trillion drop in global equities across several sectors. In addition, the ever-evolving regulatory landscape is pushing companies to source materials more sustainably, often at higher costs.In this challenging environment, overcapacity in China presents an opportunity for brands to negotiate more favorable pricing from manufacturers.
But regaining control of margins is no easy task for fashion brands. They face multiple challenges, including limited visibility into manufacturing data, low leverage with suppliers—often worsened by high employee turnover and inadequate training—and the time-consuming process of retrieving and analyzing product information. Additionally, brands with highly seasonal products (i.e., low carry-over products) struggle with cost tracking, adding another layer of complexity and uncertainty to margin management.
In this complex environment, fashion retailers need innovative solutions to maintain profitability and competitiveness—and this is where AI can have a significant impact.
How AI can transform cost management
- Enhanced data visibility: AI can help fashion retailers gain visibility of their cost structures by consolidating and analyzing large volumes of data. AI-based solutions can process historical pricing data, image comparison, benchmarks, and other internal information to create reliable cost models.
- Greater negotiation power: AI-powered tools can rapidly analyze historical data, providing fashion brands with structured arguments for negotiating with suppliers.
- Time efficiency: AI can significantly reduce the time required to develop, structure and update cost models. With AI, retailers can generate should-cost models quickly and at scale.
Real-world applications
AlixPartners has developed a proprietary, innovative AI-driven approach that demonstrates the practical benefits of AI in cost management. The model leverages machine learning, GenAI and AI-powered visual recognition to build detailed should-cost models, monitor price fluctuations, create what-if scenarios and compare similar products. Using simulation and testing models, our approach provides:
- Tailored should-cost models: AI leverages current company data such as product order information or even raw stylist sketches to create customized models for each product. It considers value-added elements such as assembly type or elaborated trims (e.g., number of buttons, embroidery, tubular collar), enabling precise cost predictions and comparisons.
- Visual similarity detection: AI identifies specific visual similarities based on cut, fabric texture, and overall style between products, facilitating product and supplier comparisons, and enabling retailers to negotiate more effectively using specific examples.
- Scenario analysis: AI helps retailers quickly analyze various scenarios to understand the impact of different sourcing decisions on unit prices. This enables more efficient analysis and navigation of what-if scenarios, which is particularly useful for modeling changes in purchase price when transitioning to more sustainable materials or relocating manufacturing to closer countries.
Are you ready to transform cost management?
In the highly seasonal and competitive world of fashion, it is vital for retailers to manage margins tightly and understand price differentials. By enhancing data visibility, improving negotiation power, and increasing time efficiency, AI offers a crucial tool for fashion retailers to regain control of their cost structures.
By understanding the true potential of AI in fashion retail, and adopting AI-driven cost management strategies, retailers can achieve significant competitive advantage, ensuring their long-term profitability and sustainability in a rapidly changing market.
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