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Fashion as a Sunk Cost

Summary:
Marketplace has a recent story on excess retail inventory. Due to the pandemic,  people are not shopping for the latest apparel in nearly the expected numbers. This inventory represents a fixed and sunk cost with low opportunity cost. Options include: Holding onto it until next season since this season. Usually, the value of fashion items depreciates quickly but who knows this year as no one has been able to "be seen."Sell it off to a deep discounter. You may get less than you paid for it, but that is more than nothing. Do not commit the sunk cost fallacyBurn it. That is what Burberry did, though it faced a backlash because of it. It may be profitable to destroy it even if its value is positive because doing so maintains the exclusivity of the brand.Because manufacturers have more

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Marketplace has a recent story on excess retail inventory. Due to the pandemic,  people are not shopping for the latest apparel in nearly the expected numbers. This inventory represents a fixed and sunk cost with low opportunity cost. Options include: 

  1. Holding onto it until next season since this season. Usually, the value of fashion items depreciates quickly but who knows this year as no one has been able to "be seen."
  2. Sell it off to a deep discounter. You may get less than you paid for it, but that is more than nothing. Do not commit the sunk cost fallacy
  3. Burn it. That is what Burberry did, though it faced a backlash because of it. It may be profitable to destroy it even if its value is positive because doing so maintains the exclusivity of the brand.

Because manufacturers have more information about the viability of their products than do retailers, retailers may be susceptible to hold-up. One way they protect themselves is to write contracts that keep them off the hook.

Lauren Beitelspacher, who teaches marketing at Babson College, said department stores, for instance, will often negotiate terms about excess inventory in their contracts with suppliers. These contracts mandate that you will give me advertising money, you will allow me to discount it or you’ll take the inventory back, she said.

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