After expanding in 2021, fast fashion could be squeezed again

AUS CONSUMERS feel good. On February 15, the Commerce Department reported that shoppers nationwide spent 3.8% more in January than they did in December, unfazed by soaring inflation and the uncertainty related to covid. This is the fastest monthly increase in almost a year. Some of this madness is happening on new rags. Elsewhere too, clothing sellers are booming. In Britain, fashion was the only segment to see online sales increase last month, year-on-year, according to Capgemini, a consultancy. As catwalks and cocktail parties scramble from New York, which has just hosted its Fashion Week, to London, where another is kicking off, the vibe in the apparel sector is as bright as the pastel-colored dresses that are all the rage this season. .

High-end brands like Christian Dior (belonging to LVMH, a colossus of luxury) or Gucci (belonging to Kering, another French group) are relatively sheltered from economic turbulence. People who can afford their dresses can take a hit during a recession, but rarely end up going shirtless. The same cannot be said for less luxurious fashion houses. But they too have had a good run lately.

Ralph Lauren, a relatively upscale American brand, opened 40 new stores in the third quarter of last year alone, including a flagship store in Milan, as well as stores in Atlanta, Chicago, Detroit and Miami, often in the most chic shopping streets of these cities. Her boss, Patrice Louvet, thinks that consumers will continue to replenish their wardrobes and says that his company “is back on the offensive”. In mass distribution, sales at Hennes & Mauritz (H&M), a fast fashion giant, are back to pre-pandemic levels and profitability is better than it has been in years. Helena Helmersson, who took over as chief executive in January 2020 just before covid-19 hit Europe, has proclaimed she wants to double the Swedish group’s sales by 2030 and achieve an operating margin above 10% within three years, compared to less than 2% in 2020 and 7.7% in 2021.

Ms. Helmersson and Mr. Louvet reflect optimism in the industry as it emerges from the disruption caused by the pandemic. But they should take it easy with the champagne during the next Fashion Weeks. Apparel companies, especially those that cater more to the masses, face an assortment of challenges. Some of them, such as digitization and sustainability, predate covid-19. The pandemic has only piled up more, from supply chain bottlenecks and exorbitant shipping costs to worker shortages. On top of that, the whims of the world’s most populous autocracy mean that one misstep can cost businesses a fortune. H&M sales in China tumbled last year after the company raised concerns over allegations of forced labor in the Xinjiang region.

The success of fashion retailers last year was driven by unusual circumstances that won’t last. The pent-up demand sparked a wave of “revenge shopping” as stores finally reopened, particularly for “second-hand clothes” (the lingo for big-ticket items). The pockets of buyers were filled with infusions of government money. And the pandemic has been the final nail in the coffin of some weaker companies, reducing competition in the crowded market; Topshop, Laura Ashley and MT Lewin went bankrupt in Britain, and Ann Taylor, Brooks Brothers and J. Crew in America.

Now that consumers are no longer receiving government checks, and have already revamped their wardrobes anyway, they risk becoming more parsimonious. Unlike well-heeled customers of luxury brands, who might barely notice that a handbag that cost $5,000 in 2019 now costs $8,000 (as became the case in November with Chanel’s Classic Flap) , those from mainstream brands may balk at higher prices. Necessary investments in digitalization and sustainability – Ms Helmersson has launched a vegan collection and invested in Sellpy, a digital second-hand clothing exchange platform – will eat into the profitability of fast-fashion houses.

Younger models

When it comes to competition, some outdated brands may be gone, but a few new faces look far more threatening to the market share of the mass-market giants. Companies like Shein, a Chinese super-discounter, Britain’s Asos or Germany’s Zalando make more digital sense than most offline H&M and Inditex, its big Spanish rival and owner of brands such as Zara. They are also finding ways to appeal to young fashionistas. All of this may explain why analysts expect a more modest increase in H&M sales than Mrs. Helmersson, of about 50% by 2030, and less comfortable margins. Its share price, like that of Inditex, is below what it was before the pandemic.

In its annual report on the state of the apparel industry, McKinsey, a consultancy, predicts that discount and luxury fashion will continue to impress investors this year. Mid-market retailers can enjoy another season or two of revenge shopping. After that, their prospects seem more threadbare.

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This article appeared in the Business section of the print edition under the title “The Mid-Market Corset”

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