Fashion industry: the Emperor’s New Clothes

The fashion world, including the clothing industry, is undergoing profound changes, and the crisis will only deepen the previously observed negative trends. The entire value chain is being rebuilt due to the expected changes in consumer behaviour and the new reality.
Fashion industry: the Emperor's New Clothes

(Smarty9108, CC BY-SA 3.0)

The fashion industry is one of the largest branches of the global economy. It employs more than 70 million people, while the global value of its revenues was estimated at over USD2.5 trillion in 2019, with exports accounting for half of that amount. In total, fashion generates more than 2 per cent of global GDP. The largest segments of this market include women’s fashion, men’s fashion, and the luxury goods market. However, according to estimates presented by McKinsey, this year revenues could drop by up to 30 per cent in the clothing segment, and by 40 per cent in the luxury goods market. In the Q1’20, the stock valuations of clothing suppliers declined by 40 per cent, that is, even more than the main stock market indices. As many as 75 per cent of the largest retail chains have shut down their showrooms and stores (for example, Zara closed almost 4 thousand stores), laying off or furloughing their staff. Over the coming months, many companies could face bankruptcy, especially considering that their financial situation was not very good even before the pandemic — in 2018 the earnings of more than half of the entities in the industry were lower than their cost of capital.

Bankruptcies in the US, Europe and Asia

We have already seen the first victims of the pandemic — several American store chains including Neiman Marcus, J. Crew, JCPenny and Lord & Taylor, the American oldest department store, have initiated bankruptcy proceedings, while the British retailer Laura Ashley has announced insolvency. Unfortunately, online sales have not been able to make up for the these losses. Since the beginning of the pandemic, the value of online sales has fallen by up to 20 per cent in some European countries, by more than 30 per cent in the United States, and by more than 15 per cent in China. This is also due to the fact that many eCommerce entities who were subjected to lockdowns were not able to execute customer orders, while others introduced very big, previously unseen price cuts and discounts. As many as 56 per cent of the surveyed consumers indicated that this was the only reason why they had decided to make purchases. But for most retailers shifting to a greater extent to eCommerce is not a good option, because it results in a narrowing of margins, and this could lead to the loss of profitability.

The consequences of the pandemic have been most acute for the direct manufacturers of clothing products in countries such as Bangladesh, India, Cambodia, and Ethiopia, as well as their employees, for whom the loss of job could result in hunger and poverty. It’s not just that production was halted. Many well-known global clothing brands have cancelled previously signed contracts, refusing to collect the manufactured products, or even to reimburse the cost of fabrics and materials necessary for their manufacture.

Demand will not increase quickly after the pandemic ends, because clothes are not among the most necessary expenditure. More than two thirds of consumers in Europe and the United States declare that they will reduce purchases of clothing products by up to 70 per cent, which is significantly higher than in the case of other consumer discretionary products.

The recovery will be even slower in the luxury goods market, which is heavily dependent on foreign tourists. The latter will probably not come back quickly, and they have so far accounted for approximately 30 per cent of the sector’s revenues. LVMH, which is the largest player in the market and the second largest European company in terms of value — it owns brand such as Louis Vuitton, has already announced a 20 per cent drop in revenues in the Q1’20. Better consumer sentiment may only return in two years, based on analogies with the previous crises, such as the 2008 financial crisis. Back then, 300 American companies in the fashion industry went bankrupt.

Changes in the production

Because of the present situation, the big brands and companies have to plan their production and supply more carefully in order to reduce unnecessary losses. This means much shorter production runs, better adaptation to the consumers’ expectations and values, and, consequently, more flexible supplies of the retail chains based on production located closer to the markets (so-called nearshoring). The ideal in this regard is so-called “made-to-order” production, especially in the case of the more expensive products. So far, the return rates of purchased products reached 25 per cent in the case of traditional sales and as high as 50 per cent in the case of e-commerce (e.g. Zalando). In the case of made-to-order goods, the return rate drops to 5-7 per cent. Forecasts indicate that in five years, up to one quarter of all clothing sales could take place in made-to-order format. This also ties into the trend of increased emphasis on sustainability in the fashion industry, which is mainly driven by young consumers. The pandemic will only strengthen these tendencies.

Environmental issues

The latest studies conducted in the US and Europe show that 15 per cent of clothing buyers are guided by ecological motivations. Meanwhile, the fashion industry is one of the biggest polluters in the world, alongside the oil industry and the meat industry, accounting for 10 per cent of all carbon dioxide emissions. This is mainly due to the production of synthetic fibres, which are petroleum-based. The industry also generates enormous water consumption, especially in the cotton production process. Therefore, fashion brands must take consumers’ values into account when preparing their products. This includes a commitment to the recycling of clothes — some brands, such as H&M, have already started collecting used clothing. The design of clothes is also planned in a way that enables the reworking or supplementation of unsold products. In this way they could return to the stores in the next season. This means more versatile clothes, which retain their attractiveness for the customers for longer than just a single season. The pandemic has shown that seasonal collections will have to be discarded. This is a departure from the “fast fashion” trend, where clothes become useless after one season. Studies carried out in the United Kingdom indicate that so far up to a third of all female consumers considered clothing items to be “old” after they were worn two or three times.

The extension of the life cycle of clothing could mean that the manufacturers will limit or end the practice of burning millions of pieces of unsold clothing articles each year instead of offering them at a reduced price. Until recently such practices were pursued by companies such as H&M and Burberry. Ecological requirements and new consumer values have forced many brands to make their activity more transparent. The Fashion Transparency Index monitors the entire process of clothing production and distribution. It is supposed to serve the development of social responsibility within the clothing industry. More than 200 clothing companies operate within the B-Corp initiative, which brings together entities applying the principles of sustainable development. One of them is Patagonia, the manufacturer of outdoor clothing, which was the first company to use polyester fleece lining made from recycled plastic bottles. This is increasingly important, because even prior to the pandemic more than 60 per cent of surveyed consumers in the world declared that they would be ready to stop buying or even to boycott products from brands responsible for unethical practices.

eCommerce and digitization

The pandemic has also accelerated the digitization of the fashion industry, both for technical and efficiency-related reasons. The isolation of the economies rendered impossible the previous contacts between the designers, brands, and the clothing manufacturers. One reaction to that was the virtual collections, catwalks, and showrooms. The Paris Fashion Week (organized at the turn of February and March) was available to Chinese consumers in the form of live coverage streamed online. It attracted twice as many customers as the actual event held in 2019. Ultimately, however, we will see the complete digitalization of the entire supply chain. There are already some designers who specialize exclusively in digital design. The Dutch fashion house, The Fabricant not only prepares 3D collection designs, which enables faster orders, but also intends to share digital collections in social media. A dedicated application will allow customers to virtually “try on” clothes, for example, on Instagram. This could also have an ecological aspect, because every seventh young woman using this medium has so far considered wearing the same outfit for the second time as a fashion faux pas. Three-dimensional presentations of the clothing collections (a so-called virtual lookbook) could soon become a standard in online stores. Holograms using virtual reality technology also provide new opportunities for the presentation of fashion products. The Japanese company Asics has recently promoted its new shoe collections in this way, both in the media and among industry professionals.

Supply chain management is being facilitated by specialized digital platforms operating in the cloud, such as Unmade, which connect various industry players — from designers, to manufacturers, transport operators, and global brands. This enables faster decision-making regarding the design and commissioning of production, which is further aided by artificial intelligence tools. The designs and digital samples are made available in 3D format, which means that it is possible to order the production of even small batches of clothing by renting a single machine in factories in Bangladesh or Vietnam. Additionally, it is now possible to monitor the implementation of orders in real time and to almost instantly transfer production from one country to another, if for some reason the execution of orders is at risk. These management practices based on the “lean” philosophy are ultimately leading to an even greater strengthening of the bargaining power that the distribution channels have in relation to the manufacturers.

In the area of promotion and sales of fashion products we can expect a rapid increase in the importance of social media, at least in some markets. This is indicated by the developments in China. In the first two months of 2020, that is, during the peak of the pandemic, WeChat became a key sales platform, noting an increase in the value of transactions by as much as 159 per cent. This (mainly financial) platform, which originally grew out of an online messaging app, enables contact between in-store sales personnel and customers, which increases the conversion rate (the number of transactions in relation to the number of users opening the app). Chains offering luxury items are now selling their products based on livestreaming technology, which enables virtual visits to the sales outlets (the Yizhibo platform). This form of in-store visits is supported by “influencers”, who provide virtual consulting both to the customers and to the distributors.

Video chats are very well received by the leading Chinese brands, which have greatly increased the use of this channel of contact with the customers and the contractors — in the case of the world’s largest eCommerce entity, the Taobao portal belonging to AliBaba, the increase was seven-fold. Western consumers are also increasingly interested in buying clothes online. The McKinsey survey conducted in April indicates that one quarter of all customers from the United States and Europe intend to increase their online purchases, while 13 per cent of customer bought clothing online for the first time. However, many chains are not prepared for online sales. From the point of view of the customers’ financial situation, the outlook for the e-commerce industry is not optimistic, because 44 per cent expect to reduce the value of their purchases in the coming months also in this sales channel.

The end of shopping malls is coming

Traditional brick-and-mortar shops will also be vying for customers’ attention. At the same time, some companies — also in Poland (LPP, 4F) — have announced a reduction in the number of stores operating in shopping malls — characterized by high rent costs — in favour of stores located on shopping streets. However, even these entities will have to change, adapting to the new reality of the contactless economy. This may include the application of already existing technologies, such as beacons (sensors), which identify the customer inside the store or even in front of the store, and inform them via an app whether the products they are looking at are available in their size, as well as offer them tempting discounts. Such a solution could eliminate the need to try on clothes. A similar function is fulfilled by so-called virtual mirrors which allow customers to digitally try on the products brought to the dressing room by displaying their image in various outfits. This is safer and more convenient than traditional dressing rooms. There are also many other similarly useful technologies in the area of the Internet of Things.

However, in the coming months the main challenge for the companies and brands in the fashion market will be to stave off potential bankruptcies. One solution to this problem could be to join forces and consolidate in order to reduce fixed costs. This could be achieved by combining specialized fashion categories which have been dispersed so far, such as outdoor, sportswear and shoes, or wholesale suppliers. A greater scale of operations will translate into greater economic benefits from the implementation of technological innovation, provided that it does not compromise the relationship with the customers, who are even more valuable today.

(Smarty9108, CC BY-SA 3.0)

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