In India, the fashion retail industry is one of the most significant contributors to the country’s economic growth. The industry includes various departments like designing, styling, manufacturing, retailing, supply chain, advertisement, promotion, etc.

Sales Analysis

As the industry is thriving, the competition rate is also very high, especially if there is a similar market to target. The fashion industry works with designing skills and needs a clear perception of business analytics. Sales analysis is an important KPI (key performing indicator) to run a successful fashion enterprise. The other essential KPIs which should be taken care of are regional sales, average order value, sell-through rate, sales growth, revenue etc. Forecasting demand to have a balanced inventory and reducing the deadstock rate is essential. It will result in substantial growth and help spot missed chances and possibilities to expand the business. It will also help in knowing the target customer better and offer products catering to a specific demand.

There are many different ways of sales analysis, with ABC analysis being one of them. ABC analysis is a product assortment management method that helps better manage inventory. It gives a thorough idea of the most and least valued products, which is essential to maintain a balance between sales and inventory. It gives a brief idea of the business’s strengths and problems. The analysis is based on the Pareto method of analysis. In a product-oriented business, it is crucial to recognise the categories of products that generate maximum sales and profits to manage the inventory properly. While doing so, customer satisfaction plays an important role in the development and ultimate growth of the brand. According to studies, if only about one per cent of customers returns from a store unsatisfied, it will give an advantage to the competitor brand. Therefore, it is significant to meet customer demands to have a profitable business without wasting capital in excess inventory.

ABC Analysis

ABC analysis is one of the most used analysis methods, which is based on the Pareto principle founded by the French inventor Vilfredo Pareto. In an article published in 1951, the author discussed how General Electric was the first company to use ABC analysis for inventory optimisation (Dickie, 1951). It is a technique used for business decision-making by analysing historical data. It is based on the 80-20 rule. Pareto analysis is based on the idea that 80 per cent of total revenue can be achieved by doing 20 per cent of the work or 80 per cent of problems can be detected to 20 per cent of the causes (Karuppusami & Gandhinathan).

In this analysis, products are classified into three grades according to demand and sale: grade A, grade B, and grade C.

Grade A: The products mostly in demand fall under this category. In short, they are profit-making products and contribute around 80 per cent of the total retail revenue. Therefore, these products should always be kept as a priority.

Grade B: These products contribute around 15 per cent of the revenue. It is generally the largest inventory that an enterprise keeps. These products are also important to be stocked in the inventory but less than grade A products. The inventory of these products can fluctuate between grade A and grade C items according to demand and sale. 

Grade C: These products contribute significantly less, around 5 per cent of the revenue. These give little to a business and will increase the storage cost in the warehouse. These are also known as slow-moving stock or even deadstock. Strategies should be made to de-stock the grade C products and reduce the storage cost.

Calculating ABC Analysis

The sales contribution of a category is given by the total revenue generated from a single product in a particular period divided by the total revenue in the same period. For instance, if a store sold little black dresses worth ₹1,00,000 in one month, and the total revenue generated by the store during the same period is ₹3,00,000. The contribution by the little black dresses is around 33 per cent of the total revenue generated. The same process can be followed for all the categories to have a fair idea about the grade A inventory and the dead stock.

Advantages of ABC Analysis

As it is the most preferred method, ABC analysis has many advantages, as discussed below:

Optimisation of inventory and demand forecast: The analysis helps identify the most preferred products with significant demand. So, it will help de-stock the dead stock and increase the demand forecast’s efficiency.

Maintain product life cycle: A product has four main phases in the product lifecycle (PLC), which are introduction, growth, maturity and decline. This analysis helps to maintain the proper life cycle of the product and real-time monitoring of the inventory.

Control over high-cost inventory: If the products have a high cost and fall under grade C of the classification, they can be traced out easily with the help of this analysis and can be further pushed for sale or on discount to make space for grade A and B products.

Improve sell-through rate (STR): The sell-through rate is the rate at which items under a category sell. It is calculated with respect to the total inventory received at the beginning of the month. STR of 80 per cent is considered a good value for a retail store. While on an average, it can be considered any number between 40-80 per cent.

Reduce storage costs: Warehouse storage costs are very high, so this analysis gives a clear picture of the slow-moving items or deadstock that can be removed or pushed with the help of discounts and sales that will make more room for the products of grade A and B.

Better product pricing: Best-selling items’ prices can be raised with increased demand for improving profitability.

Better supplier negotiations: The cost of low-selling items may be negotiated better with the supplier. The suppliers of fast-selling items may be negotiated for providing post-purchase services.

Improve stock turnover rate: Inventory control can reduce handling cost, carrying cost and duration of product in the store, thereby improving the stock turnover rate. This, in turn, helps in proper category management and better customer solutions.

Limitations of ABC Analysis

Loss of time and customer dissatisfaction: ABC analysis can only be applied once the stock is sold. At the beginning of a new season, in the absence of demand and sales data, the products are allocated to different categories based on the merchandiser’s experience. This results in a loss of time in re-assessing the situation and may lead to customer dissatisfaction.

Challenges for new products: As ABC analysis is based on historical data, it cannot be applied to new or seasonal products. As new products have no sales history, ABC analysis cannot help to forecast their performance and inventory levels. It cannot be used to make strategic business decisions.

Not suitable for all products: Functional clothing items may have low demand compared to novelty or high fashion items. Thus, ABC analysis will grade them into category C. However, this product may be functionally essential.

Inventory mismanagement: ABC analysis is based on price or sale frequency, not volumes. It may lead to inventory mismanagement and the store may end up being highly deficient in grade B and C products and may have a considerable amount of grade A stock without regular monitoring. It may result in unhappy customers and high-value stock accumulation.

Loss and theft: As ABC analysis focuses more on grade A products, grade B and C products may go unnoticed, leading to damage, product obsolescence, loss, or theft.