Despite the prevailing gloss and optimism, the recession has hit fashion retailers hard. With some boutique companies struggling to pay their suppliers, the first six months of 2008 witnessed a 28% rise in calls from the receivers within the UK, with over forty fashion and cosmetics businesses falling into administration. As Darwin reliably foresaw, when times get tough the fit & lean survive and those carrying excessive baggage fail & fall. Every recession inevitably produces winners and losers, as lean, hungry and competitive outfits appeal to the cost conscious with fresh fare and sophisticated styles, while those who continue to indulge themselves with hyperbolic price tags and outmoded ideas will be driven to the wall. However it would appear that fashion is a safer market than housing, as consumers stopped buying houses long before they reduced their expenditure on clothing... Winter came early for fashion retailers in the West, especially in the UK where sales of clothing fell 2.3% from August to September. Young fashion brands were hit particularly hard, with Henleys forced to trim its account base by 25%. Rising rents and reduced credit insurance have forced many retailers to withhold payments to their suppliers, precipitating a cash flow crisis within the industry which has given dozens of retailers a financial seizure. Some stores are even using revenues from the sale of their best selling brands to pay other suppliers, thereby preventing them from restocking their most profitable merchandise. Although this is the fourth recession of the past twenty years (1980-2, 1990-1 & 2001-3), it threatens to become by far the longest and deepest as its roots stem from a collapse in the financial sector rather than a downturn in consumer demand. In spite of all the forewarnings and preconditions for government borrowing, the banks are showing small businesses little mercy as their standing overdraft facilities are removed, forcing independent retailers into liquidation by arresting their cash flow. Above all other economic factors that have contributed to this perfect economic storm, it is the restriction of insurance cover which has triggered spiraling costs and the collapse in cash flow. Worse is yet to come as the global $5 trillion sub-prime melt down will inevitably be followed by a rise in credit card defaults and a collapse in factory supply. The failure of many garment manufacturers will have an unfavourable impact upon the balance of supply and demand, leading to increased cost prices for many retailers. |
So who then will ultimately rise from the eye of the hurricane to become the new conquerors, and who will be lost after the flood waters of recession finally recede? Which fashion retailers will emerge bold and beautiful from their chrysalis after a long, cold winter of discontent? Perhaps most pertinently, which business models will survive the test of weak credit, insolvencies, and changing patterns of consumer behavior?
The Gucci Group and Puma (PPR) achieved a marginal 1.7% increase in their 3rd quarter sales (£3.67bn), despite the credit crisis, putting their sales for the first three quarters up 8% (£11.6bn). This positive performance was fuelled by strong sales across their Gucci, Yves Saint Laurent, Bottega Veneta and Puma brands, most notably Yves Saint Laurent which saw an increase in total 3rd quarter sales of 27.4%. Burberry, another luxury retailer, also enjoyed a 13% increase in sales to £539 million during the first half of the year, growth that was driven by more efficient supply channels, iconic outerwear and a strong demand for accessories. Hermès, a chain specializing in high end accessories, reported a 13.4% increase in sales for first quarter of 2008, with silks and leather goods (including their famous 'It' bags) all top sellers. Top end retailer Austin Reed saw UK revenues rise 2% to £110m, with their ‘Signature’ clothing range now representing more than 10% of sales. Thus it would appear that the luxury retail sector remains in rude health, while purveyors of more modest fare have suffered the worst of the downturn.
Tommy Hilfiger, outfitters of urbane city wear, reported a 30.5% increase in sales to £582.5m for the six months to October, a strong performance which was largely driven by sales in Japan and Europe. Tommy Hilfiger's European sales were up 25.9% to £300.9m, while across North America sales rose 16.7% to £204.8m. The company has been pursuing an aggressive expansion plan, opening no fewer than fifty new outlets over this same period, increasing its global presence to 850 stores.
In 2008 Inditex, the Spanish company behind the Zara clothing chain, superseded Gap as the world's largest clothing retailer, reporting a 9% rise in first quarter sales to £1.79bn. Maintaining a tight rein on costs, Inditex offsets its higher local labour rates with a greater flexibility in production and design, resulting in shorter lead times and reduced transportation costs. Such smart trading has allowed Inditex to rise to become a global player with over 3,900 stores across 70 nations.
However, in the world of fashion, big is not always beautiful. UK’s Supergroup, creators of Superdry and Cult Clothing, recorded a 100% increase in sales through the five months to November, representing a 250% increase in profits. Despite the downturn, Supergroup’s sales for October and November rose 7% owing to their successful occupation of a largely untapped niche market. Flying into the face of the recession, Supergroup have either opened or expanded stores in five major cities, with eight more planned for 2009.
As the fashion bulls continue to expand their territories, across much of the rest of the commercial landscape belts are being tightened. Marks & Spencer (M&S), the UK’s leading clothing retailer, is actively considering cutting its advertising spend on celebrity models in an effort to pare its operating costs by as much as 20%. M&S saw its pre-tax profits crash 34% to just below £300 million for the six months to September. Although its UK sales fell by only 1.1% over the same period, its total sales increased marginally to £4.2bn supported by a 23.9% increase in international sales. M&S believes that it will survive the recession due to its tight regulation of costs, capital expenditure, cash flow and stock. With substantial underlying property assets and secure funding, the company certainly has enough fat to survive the coming winter.
For many established brands like Gap, the past year has presented mixed fortunes. The ailing retail giant’s net sales were down 6% to £800m, with its Gap, Banana Republic (-4%) and Old Navy (-24%) brands all recording significant falls. Although Next declared a 6.5% increase in profits to £478m, like-for-like sales were down over 6%, with forecasts of a further 4 to 7% decline in 2009. Profits from Next's store chain fell 3.7% to £317m, although this fall was more than compensated by booming Internet and directory sales which climbed 13% to £775m, generating profits of £144m (up 48%). However, the Next Group’s year end net debt will be in the region of £670m, despite an overall 0.9% increase in sales.
The Arcadia Group, which owns a number of chain stores including Top Shop, suffered a 2.8% decline in annual like-for-like sales to September 2008. Topshop, Topman and Miss Selfridge were the best performers from Sir Philip Green’s diverse empire, which reported an overall 5.1% decline in pre-tax profits to £189m, triggered by increased costs and a 0.6% fall in annual sales to £1.85bn. Nordstrom was also hard hit, reporting annual sales down 5.8% to £444m, with ‘same store’ sales falling 9.6%.
Despite natural skepticism over the public’s willingness to buy such personalized items as clothes on the Internet, the online fashion retail sector has thrived through the past five years. Last year the market was valued at close to £2.4 billion, with optimists forecasting a further 26.3% increase to £3 billion in 2008. As a consequence, most major fashion retailers have established online divisions that offer vast virtual catalogues, with only the players from the very highest and lowest ends of the market resisting the relentless rise of the Internet.
In fact, online sales are expected to account for over 6% of all clothing and footwear expenditure in 2008, and this sector will probably be one of the few to grow through the retail recession. Indeed, such growth can only be further fuelled by the expansion of Internet access, the advent of broadband TV, and the increasing availability of online catalogues. Online fashion retail has found a natural home among the Internet generation, while professionals who are pressed for time seem to believe that online retail is faster, cheaper and affords more privacy.
It is difficult to divine the fortunes of such retail giants as Gap, M&S, and Arcadia, as these corporations have vast assets and equally extensive access to capital. Such resources enable them to linger on indefinitely, even if the winds of fashion should prevail against them. However, many smaller and more innovative fashion houses which trade just below the eye line of high society, but above the budget of the average Joe or Joanne, appear to be heading for liquidation. Successful brands such as Burberry and Gucci, which extolled the virtues of high profile advertising and dominated the mediascape, are succeeding as more reticent retailers perish. These high profile and prestigious fashion brands embody all that the fashion conscious aspire to be: confident, sublime & stylish.
The fashion industry does much more than just clothe & inspire; it communicates social class, generation, and sexual availability, defining & distinguishing individuals within otherwise formless masses. At the more youthful end of the social spectrum, retailers such as Tommy Hilfiger & Superdry, which have pitched affordable and urbane styles at a fashion conscious and cash-starved youth, will remain lean and fit enough to survive the harsh times ahead. Meanwhile, for all but the most personalized of fashion boutiques, online retail will prove an essential string to the commercial bow, maintaining reach across the generations and beyond the city limits. The immediate future of fashion however lies in the hands of those who direct it. Prevailing icons of style and beauty such as Kate Moss, Victoria Beckham, and Paris Hilton attract the eyes of millions as they parade the magic of what it is to seem and to be. The glitterati hang upon their every move, and they in turn sense and scent changes in the prevailing mood of fashion, always careful to stay one step ahead of the latest trend. Their wealth, desirability and pervading influence drives changes in popular style as they serve as walking wardrobes for the latest creations from fashion's elite designers. The styles they favor will pervade popular magazines and TV channels, dictating high street demand. For these individuals, the illuminati of fashion, the economic winter will be just become another fleeting avenue of style.