Fashion players navigate a new world with contemporary attitudes

Contemporary & Accessible Fashion Market Trends

Although it might be too early to quantify COVID-19’s overall impact on the fashion industry, the pandemic has shaken the foundations of most businesses. Some of these changes might persist, even after the dust settles. In this article, we talk about the coronavirus emergency’s short- and long-term impact and its implications on fashion companies’ and investors’ M&A decisions.

E-commerce

While consumer engagement with apparel and fashion brands may have increased during and after the lockdown — with more consumers at home, idly scrolling through social media — increased traffic is not translating to conversion. Even retailers with higher online penetration, such as direct-to-consumer specialty apparel players, face challenges as consumers pull back on discretionary spending. The good news is that the lockdown has brought a new cohort of customers online who had never previously considered e-shopping. Even though such shoppers were more likely to buy groceries or home decor items, in the long run, seeing the benefits of Internet purchasing might make them stick to e-commerce in fashion, too. There are several actions fashion companies can undertake to translate high e-commerce traffic into sales:

  • Allocate a larger share of investment to the digital channel
  • Experiment with new ways of collaborating with established e-tailers
  • Make digital marketing more personalized
In the post-COVID-19 years, investors will have to reconsider their existing KPIs, looking beyond financial data. Such indicators might include the company’s ability to move to digital and to communicate strategically, and its flexibility to adapt. FEDERICO GIAMMARUSTO, CONTEMPORARY & ACCESSIBLE FASHION SPECIALIST, OAKLINS

Wholesale

Wholesale was not experiencing its best moment, even before the pandemic: small, family-owned boutiques in Europe and some of the large North American luxury department stores were already struggling for two major reasons. Firstly, because many brands have been trying to reduce their dependence on the wholesale channel and create their unique retail experience through vertical integration over the past 20 years. Secondly, e-commerce has also been eating up wholesale’s market share. This pandemic might push some of the multibrand stores out of business. Neiman Marcus and Barneys have already filed their Chapter 11 bankruptcies. This scenario will hurt the brands that still depend on the wholesale channel and young brands that need department stores to reach new customers and finance the development of their full collections. To survive, wholesalers are likely to adopt aggressive commercial and discount policies, which at least in the medium term, could damage the price positioning of brands that don’t have a concession model.

Geographical exposure

The recovery trajectories of the fashion brands might differ drastically, depending on their geographical mixes. Those with more exposure in Asia might observe consumer confidence returning to pre-coronavirus levels earlier in the game. European store openings in May yielded more promising results than predicted. In North America, recovery might take more time as COVID-19’s devastating impact on the economy overlaps with uncertainties from rising social tensions and the presidential elections in November 2020.

New opportunities for growth

McKinsey & Company, the strategic management consultancy, recommends that fashion brands consider growth through a reshaped ecosystem. Crises can create new avenues for growth. Companies should ask themselves questions such as: “Are there companies we could potentially partner with, both to keep them in business and to allow us to expand into adjacent markets or product categories? Are there moves along the value chain (such as vertical integration) that have become more attractive? What partnerships or acquisitions — perhaps in the technology arena — could we pursue now that were less viable before? What brands could we acquire to complement our portfolio or initiate our journey towards becoming a larger luxury group?” As companies seek to form partnerships or make acquisitions, it will be important to consider not just economic rationales, but social rationales as well. For example, could an M&A deal help a supplier in distress, save jobs in a struggling community or strengthen the luxury sector for the longer term?

New investment KPIs

There isn’t a single fashion company that thrived during the three-month store closure and the lack of reasons to dress up, and 75% of publicly listed apparel and fashion companies in North America find themselves with negative EBITDA or untenable net debt-to-EBITDA ratios. With this morale, established KPIs, such as revenues and EBITDA margins, aren’t useful indicators. Instead, there are a couple of other things investors might be looking at:

  1. E-commerce dynamic. Companies that managed to ramp up their e-commerce sales throughout 2020 and succeeded in building up their omnichannel capacities were able to create more value in the short and long run, compared with those whose e-commerce sales stalled.
  2. Resilience & flexibility. A team’s ability to get the best out of the given circumstances and act quickly has always been a great asset for any investor. Some companies emerged from the lockdown with stronger teams and a clearer strategic vision, which makes them more attractive from the standpoint of a potential investor.
  3. Strategic communications. The first half of 2020 brought many opportunities for companies to express their social and environmental stances, and their care for their employees, customers and business partners. Some of them switched to mask and sanitizer production, others donated to hospitals, while some provided facilities to house coronavirus patients. The companies that seized these opportunities to establish a better market positioning will obtain a higher investor appraisal.

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Federico giammarusto
Federico Giammarusto Milan, Italy
Partner
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Marc van de put 0
Marc van de Put Amsterdam, the Netherlands
Partner
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