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The global fashion business journal

Jul 18, 20247:46am

Fashion is sick (and giants have fever)

The international fashion business shows symptoms of an illness: a halted global evolution, sales’ fall in mature markets and a downgraded position in consumer priorities. The giants are reinventing themselves to attract a consumer who has fallen out of love with clothes.

May 17, 2018 — 10:10am
P. Riaño / L. Molina

The Fashion Map 2018: fashion is sick (and giants have fever)



Fashion is sick. Like someone who starts coughing before vacation and knows that fever will inevitably come soon, the global fashion business shows symptoms of a disease that has been revealed as chronic. The scenario has changed and international business giants are doing acrobatics to make the consumer fall in love with them again.


Clothing, footwear and accessories’ retailers were, with the permission of banking and real estate sectors, the first to notice the impact of the financial crisis started in 2007. Tiffany, for example, felt soon the consumers’ fear in its financial results, but at the same time it was one of the first to feel their joy again.


During the financial crisis’ years, fashion retailers blamed the economic situation of its drift: closures, layoffs, margin falls and management changes were justified by consumption reduction. As of 2014, when the whole world waved goodbye to red macroeconomic indicators, fashion began to get excited again.


In Spain, one of the most complicated markets in the world for fashion business, textiles and footwear consumption initiated a recovery at the end of 2013 and sector sales grew again in 2014, after seven years in a row of decreasing revenues across the industry. The joy remained in 2015, but in 2016 (with employment, business creation and GDP still going upwards) came the blow: fashion sales fell again in the country.


Truth was that fashion went through two crises simultaneously: a financial one (from which almost nobody escaped) and another linked to a business that was intrinsically transforming. That is to say, once the current crisis has been overcome, the sector is facing a turmoil that makes fashion sick.





First symptom: a global market slowing down

Global fashion sales continue to grow, but its pace has slowed down significantly in recent years. In 2017, the global fashion business amounted to 1.7 trillion dollars, which represented an increase of 4% over the previous year. It must be taken into account, however, that the industry grew by 3.8% in 2016, its lowest increase since 2008, in the midst of the international financial crisis, according to data released by Euromonitor.


2016 was complicated and fashion payed the bill. Several phenomena impacted the global economy: Brexit, Donald Trump’s arrival to the White House, an escalating terrorist threat in Europe or China’s economy slowdown, increasing the sense of global uncertainty.

“The era of robust growth following the recession could be over as we enter a period of continued uncertainty,” Euromonitor said at the end of 2016. In 2017, the world expected to face consequences due to the previous year changes, but neither Brexit has had an immediate impact nor has Trump fulfilled his worst threats in his first year in office.


Thus, 2017 was a year of transition in which fashion was saved from uncertainty. In any case, although growth in 2017 is higher than in the year before, it’s below the figure registered in 2015, for example, when overall fashion sales rose by 4.5%. Euromonitor expects the global fashion business to grow only 2% year-on-year until 2022.




Second symptom: mature markets don’t buy fashion

Global growth of the fashion industry should be directly attributed to the rise of emerging markets, as in mature ones consumption is falling or is frozen. In the United States, fashion and footwear sales slowed down in 2017 both in terms of volume and value, according to Euromonitor, while in Germany the market “stagnated despite favourable economic conditions.” In France, on the other hand, clothing and footwear sales decreased again in value, and forecasts anticipate that the downward trend in the market will stay in coming years. In Italy, the business remained “static” in volume but decreased in value.


While forecasts for the upcoming years in key world markets for fashion businesses are going down, a few regions are saved. The Middle- and Far East markets, which have grown strongly in recent years, will also face a slowdown until the end of the decade, according to forecasts by Datamonitor and EAE Business School. China is still installed in growth, but its evolution is not the same as a decade ago. In Saudi Arabia and the Middle East, growth continues to be prominent, but potential civil and political issues do worry and could become a risk in the near future.


Latin America is currently the market with the best forecasts worldwide, although uncertainty also reigns in the territory with several elections taking place soon in key countries for fashion in the region such as Colombia or Mexico.


According to data by BMI consultancy, Latin America is the fastest growing market in the fashion industry worldwide, with a business of 160,000 million dollars in 2016, a size much smaller than that of Asia, but much larger than the Middle East. Fashion industry forecast to grow by 7.2% per year in Latin America until 2021, when it will exceed 220,000 million dollars.


But in the United States and Europe, while GPD and consumption recover, fashion loses relevance in the shopping cart and clothing or footwear purchases stop being a priority. The evolution of consumer confidence and retail consumption in relation to fashion sales in countries such as Spain demonstrate this.





In the Spanish market, consumer’s confidence recovery hasn’t benefited fashion sales. In 2016, a year marked by political instability in the country, consumer confidence rose by 1.6 points and retail consumption by 3%. Fashion sales, however, fell by 2.2%. In 2017 the same dynamic repeated: confidence rose by 2.7 points, retail consumption by 2.4% and fashion grew only by 0.1%.


Smartphones and restaurants have been ahead of fashion in Spain and in some of the industry’s main countries in the world. “While more consumers prefer to spend their disposable income on experiences, they are reassessing their priorities,” Euromonitor notes in reference to the United States. “In a context of abundant low-cost offerings and discounts, consumers have grown tired and are beginning to adopt more practical shopping behaviours, reducing compulsive buying,” he says of France.


Another sign of this trend is the fall in margins. International fashion giants have been facing a reduction of their margins for several quarters. Since 2011, Inditex has shrunk its gross margin year-on-year: while it stood at 59.3% in 2011, it decreased to 58.3% three years later and in 2015 stood at 57.8%. In 2017, gross margin weakened again, standing at 56.3%, compared to 57% a year earlier. In the case of H&M, the gross margin has gone from 60.1% in 2011 to 54% in 2017. On the other hand, Gap, who went through a restructuring to cut operating costs, has raised its margin from 36.2 % in 2011 to 38.26% in 2017.


Today consumers seem more willing to spend 150 euros on a tasting menu in a Michelin-star restaurant rather than in any pullover. But if all the prestigious chefs start offering the same menus and, besides, step into a discount war, clients won’t be paying as much any longer and the fact of enjoying a luxury dinner will become a commodity. Fashion has went through a similar process.



Third symptom: fewer stores and new uses

The emergence of the Internet (which in 2017 accounted for 16% of global fashion sales, according to Euromonitor) across the business has revealed a clear symptom of the disease of fashion: the industry has an overcapacity installed in physical stores. If the liberalization of world trade brought to light as of January 1, 2006 (years before and years after) that Europe had too many factories, the same happens now with brick. Internet plays the same disruptive role China did in the past decade and it is also transforming the business.


Retail apocalypse has become the utmost expression in the global fashion business, but truth is that brick-and-mortar influence loss by the digital rise was another of the structural symptoms hidden behind the economic conjunctures. If the first store closures were directly attributed to the consumption drop, those of 2017 and 2018 are justified by ecommerce growth and omnichannel startegies. The reasons for the retail apocalypse go far beyond ecommerce, including macroeconomic factors (such as price and debt maturity) and consumers’ budget shift towards other product categories.


The most damaged actors were those who based their strategy precisely on a country’s penetration by brick-and-mortar retail, especially department stores. But not only them: H&M, for example, has launched a plan to reduce its global store network to adapt to the new fashion consumption situation, while Inditex confessed last March that it has been carrying out this process for the last five years.


The streamlining of physical stores does not only mean closures (and staff layoffs), but also impacts logistics or margins as online distribution gains share in companies’ sales worldwide. The channel that gives more visibility and still represents the biggest share of sales for fashion is in full transformation.


Consumers change their buying behaviour by shifting spending towards ecommerce, but not only that. Ruling categories in fashion are also changing. If women had traditionally boosted industry sales, the fastest growing category is now sportswear, which has become the brightest star, followed by childrenswear. In 2017, menswear sales rose by 3.7%, exceeding the growth of women's fashion, which increased by 3.3%.


The change of priorities in fashion shopping has a direct impact on the sales volume. The dominance of casual fashion (which is demonstrated by the rise of sportswear brands) derives in that the consumer needs and has less variety of clothes in his closet and, therefore, buys less. If the work environment has accepted sneakers, why buying shoes and suits?



The effects: companies doing acrobatics

The disease effects that fashion suffers deliver companies doing acrobatics and all kinds of tricks to make consumers fall in love with them again. Experiments at the point of sale (leaving behind the expression flagship to adopt the brandship, for example) are nothing more than brands seeking formulas to get the customer to bet again on them.


A frantic activity in M&A follows the same pattern: companies seeking the perfect formula to capture today’s client and cure their illness. Or the hiring and dismissals of executives and the new profiles recruited by companies, which reveal groups looking for a magician who manages to have a match with clients.


Or companies more concerned than ever for efficiency, streamlining their distribution, but also logistics and production processes by measuring every step they take.

In short, industry giants that transform the fashion map. Amazon steals market share in the United States to prior fashion leaders such as Macy’s, while also affecting other department stores such as Marks&Spencer or El Corte Inglés.


Inditex leads comfortably the mass market, but its online shift is increasingly evident and, with H&M weakened and Gap in an almost perpetual restructuring, Fast Retailing could take advantage of the situation to gain positions.


The luxury industry lives in its own bubble, but Kering moves towards specialization and experience, abandoning its link to sport (where Nike reigns, even though it’s also in the midst of a transformation that includes closures and dismissals), while Richemont eventually embraces the idea that digital is the future and takes full control of YNAP. As for now, LVMH continues at the top of the luxury chart.


Low growth rates, spending shift, margin pressure or distribution networks’ restructuring are symptoms and consequences of a disease that could well be called lovesickness: fashion isn’t on trend and has lost its charm before the consumer of the second decade of the 21st century.

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