COVID-19 has caused consumers to change their behavior and consumption patterns starkly over the last year. The footwear industry has been adversely impacted, halting a healthy growth trend that lasted more than a decade.
Wholesale athletic footwear sales in the U.S. rose steadily between 2008 and 2019, registering growth every single year for a total 40% rise over that timeframe. Imported pairs of shoes per capita increased 6% between 2012 and 2019. As has been well documented, the arrival of COVID-19 changed this trajectory suddenly last year. The second quarter of 2020 was when the majority of the impact was felt. Based on a sample set of the top 13 public footwear companies in the U.S., comparable second-quarter revenues were down 31% while gross margins fell by 710 basis points. However, there was material recovery in the back end of last year—full-year 2020 revenue declines were 4.5%, gross profit fell 9.5%, and gross margin declined 220 basis points.
The outsized impact of reduced brick-and-mortar sales was a major factor in these declines, as footwear relies heavily on the touch-and-feel factor. At the same time, consumers who were spending on footwear transferred a majority of their purchases online. Online shoe sales grew 10% in 2020, with online penetration of sales of fashion shoes rising by 12%. Retailers with established omnichannel infrastructure hurriedly moved operations and inventory online at the outset of the pandemic, committing to new costs that in many cases also included expensive partnerships with delivery and returns providers. This posed additional challenges for retailers, the most impactful of these being the smaller margins that usually accompany ecommerce sales (Figure 1).
While most nonessential retailers saw a similar drop-off in margins last year, the footwear industry has shown to be more susceptible to the EBIT changes brought on by ecommerce growth. Size and fit inconsistencies mean that footwear traditionally sees higher return rates than apparel and other categories. Return rates can be as high as 35% in footwear, three times more than in general ecommerce. This exacerbates the already higher shipping costs of shoes and the resulting differential in rates between cartons and apparel mailing envelopes.
Several other factors can worsen footwear’s margin erosion. Among these are higher storage costs due to boxing requirements and elevated opportunity costs when packing and shipping from the store, given the high-service sales model of selling shoes. There is also higher inventory risk caused by both out-of-stock and obsolescence due to the additional number of product sizes.
With the shift to ecommerce expected to be sticky, footwear retailers that sell directly to consumers must get ready for similar behavior-driven changes to the business. What can they do to prepare?
- Drive for fit consistency to reduce returns: Reducing the potential for returns should be a top priority. Incorporating customer feedback into design decisions and greater collaboration and communication with factories on fit requirements can both drive improvements. A well-established feedback loop through the production process and investments in consistent lasts can also drive incremental improvements.
- Evaluate and improve how returns are handled: Retailers must measure and understand their total cost of returns. This will help in identifying opportunities to increase margins through pricing decisions, expense sharing with suppliers, or improving return reallocation processes to minimize scrapped inventory.
- Plan inventory for omnichannel operations: Footwear companies do have an advantage over apparel in one area, that is, their product is generally packaged the same for brick-and-mortar as it is for ecommerce. This should make it easier for footwear retailers to create a common omnichannel inventory pool to drive efficiencies.
- Leverage stores as points of distribution: Retailers can invest in in-store technologies aimed at enabling better customer relationships and frictionless ecommerce fulfillment. This can include improving order management systems for more efficient buy-online-pick-up-in-store options, for instance. Retailers can also add better product display options as well as adopt better workforce management tools for efficient labor planning that is based on omnichannel requirements.
While demand is likely to bounce back as the world starts to look beyond the pandemic, customer behavior has been changed for good and they are now much more comfortable buying all kinds of product categories online. Footwear is now a true omnichannel business. This challenge presents the perfect opportunity for footwear retailers to make holistic changes in the way they think about omnichannel distribution models, inventory management, and end-to-end product development.