Back to school: ten tests for the fashion business

Fashion swims in deep waters. As one of the most globalized industries thoughout its entire supply chain, from sourcing to distribution, fashion starts a new period marked by macroeconomic challenges.

At the same time, fashion business will face its own challenges the next couple of months, from the model crisis the sector is going though to the changes in consumption. With ten key elements on the table, fashion has become the bad student of the class.

Consumption, shaking

Fashion consumption stopped increasing, at least at the pace it used to. In 2018, the global fashion business reached a revenue of 1.8 billion dollars, according to Euromonitor. One year earlier, in 2017, it grew to 1.7 billion dollars, an increase of 4% compared to the previous year. Last projections of Euromonitor assure that the sector will reach a global business of 2 billion dollars in 2023.  

During the last couple of years, global consumption has destabilized because of macroeconomic and political issues, and fashion was one of the most affected sectors. Besides, the fact that the most important product category for the industry, womenswear, has stopped growing in the developed economies (Europe and United States) this has affected the global revenue.

What will happen in the next couple of months? With more political uncertainties than ever (Like the Brexit or the trade war), Chinese economy slow down, a consumer that has changed its way of buying and the threat of a new crisis, fashion consumption stated shaking. And companies see it coming.

Fashion is no longer welcomed  

There was a time when investors and financial entities saw fashion companies as its star clients. Even though that time is not that far, it's long gone, and has fashion stopped being welcomed in banks and the portfolios of the biggest investment groups of the world.

The risk is high. Fashion is a system that depends on consumption. That said, when the economy started its recovery from the economical global crisis of 2007, the sector was one of the first that benefit. Now, with consumption dropping, the risk associated with fashion is high.

A big number of European and American companies just finished or are in the middle of refinancing process, from Spanish El Ganso, to American Forever21. How will this affect the sector is yet to be see.

Fashion stopped being welcomed in banks and in the worlds biggest investment groups

A less global fashion? In the brick and mortar, yes

It´s the moment to withdraw and re-center in safer and more profitable markets on short term. At least that that is what some companies of the sector have strated to think, they are starting to close their international stores after years on the rise overseas. 

After the retreat of fashion groups from Russia, Brazil or China, the turn has arrived for markets like United Kingdom and The Netherlands. El Ganso and Scalpers are two examples, the Spanish brands decided to withdraw its physical presence and focus in the online channel.

After a direct impact in the countries with an over dimensioned structured, the retail apocalypse arrives now at markets with weaker presence and the brick and mortar leaves the online bet to make its move.

The challenge of the margin online 

What if the cheap delivery open bar finishes for the package companies? This possibility, that has been placed on the table by the logistics giants, becomes a threat for the already weakened margins of the fashion delivery groups.

Logistics companies have started to raise its prices because of the impact of ecommerce in its results. In the last couple of months, companies like DHL have warned over the necessity of restructuring its operations due to lowest results than expected, same as FedEx, UPS or Royal Mail.

Fashion distribution hasn’t take long trying to avoid the impact in its margins. H&M, for example, announces in April a minimum range for free deliveries in its ecommerce platform. Asos and Zalando are using similar measures. The British company updated its returns politics to avoid massive returns and Zalando added minimum order price in Italy.

What if fashion is no longer purchased?

 Second-hand (with operators that modernize the segment like Wallapop or Vinted) opens the door for new business models. Rental and subscription become stronger in the sector and these new players are making its way up the fashion rankings. What impact will this have in the fast pace of the sector? In need of volume and repetition so the model works?

Bridal rental services moved in 2017 around 1 billion dollars and its estimated that by 2023 the number will arrive at 1.8 billion dollars. The main booster of this segment is North America that represents 40% of the business according to the Online Clothing Rental Market: Global Opportunity Analysis and Industry Forecast, 2017-2023 report, elaborated by Allied Market Research.

In August, the rental and subscription business had a busy month. The giant Hudson’s Bay, for example, sold Lord&Taylor to Le Tote (specialized in providing its users with monthly boxes of items that can be returned after used) for 100 million euros. Nike, on the other hand, introduced its sale by subscription in its children footwear and Gap launched the Style Passport program, that will offer the rental of three garments a month for a fixed price of 85 dollars per month.

The temptation of promotions

If there has been a constant in the fashion business since the economic crisis is the promotions. Ahead of the reduction in the consumers purchasing power and the development of low-cost players like Primark, the sector reacted with 2X1 or 50% off sales.

While markets like the United States were used to a permanent sales season, other countries have fallen deep into the last decade of promotions, while campaigns like Black Friday keep popping up.  

In countries where competition is particularly high, (like Spain, where Inditex is king), sale season and promotions have been strong. This has caused a reduction in the price per unit of the garments. But, with the recovery of fashion consumption, and the average price started to rise, but instability in consumption and the threat of a new crisis make the temptation too big. Will companies fall back into sales season and promotions, or will they stay away from this loved and hated policy?

Courts around the corner

Chapter 11, bankruptcies, dismissals and refinancing are again the center of the fashion headlines. The high retail prices in distribution companies and the drop of sales are some of the elements that may lead the sector into a new wave of crisis.

One of the last companies to join this tread is Forever21. The American retailer is about to file for Chapter 11 to restructure its debt. If the company doesn’t achieve this, it will enter the courts.

“Fashion companies are not implementing sustainable solutions fast enough to counterbalance the negative environmental and social impacts of the rapidly growing fashion industry,” stated the BCG

Lose the focus on sustainably  

 Even if sustainability is the latest word in the fashion vocabulary, and it's present in all the speeches about the future of the sector, some of the opinion leaders started to forecast a light softening in the sustainable bets of the companies. 

“Fashion companies are not implementing sustainable solutions fast enough to counterbalance the negative environmental and social impacts of the rapidly growing fashion industry,” stated the Global Fashion Agenda Report created by the Sustainable Apparel Coalition (SAC) and The Boston Consulting Group.  “If the industry does not implement changes at a faster rate, it will not be able to achieve the United Nations Sustainable Development Goals or meet the Paris Agreement”, added.

New balance in stock

The trade war between United States and China has caught up with raw materials, textiles, fabrics and confection garments, rising alarms in the American fashion companies, that continue to focus the Asian giant as a big part of its stock supply. Companies like PVH, Abercrombie&Fitch or Nike, already stated that they will rethink its supply strategies.

The cheap production cost in Asia reached its limits. Investments made by the industry in Bangladesh in terms of security and sustainability leave a shot margin to continue pushing the low. On the other hand, minimum wages in these countries and in the ones around it continue to increase.

Ethiopia and Myanmar, projected for years as the next sites for low cost, are not arriving at the point the companies desire. The lack of infrastructure in the territories puts a brake in this while the political instability of the region also makes its harder to invest.

Finally, uncertainty generated by the trade war between the two economic giants and the increase of protectionism is taking its turn in emerging markets. The Chinese yuan is being one of the most penalized, with its worse number in more than 25 years.

Put fashion back in trend  

But, at the end, all challenges end up in bigger one: to put fashion back in trend. During the last couple of years, fashion has lost its sparkle in the eyes of the consumers all around the world, specially in developed economies.

Categories like restorations, travel and communications have earned more and more range in the home expenses, at the same time fashion has decreased.  Consumers are looking more and more for experiences, and fashion stopped being one.

Facing the threat of a new economy brake and a consumer that is every time more aware of what its expenses, fashion is running against the clock to go back in trend. Otherwise, how much more will sales drop and how many more companies will be left behind?