One thread at a time, the fashion industry seems to be unravelling like a snagged sweater that can’t free itself from the source of its damage.
The bankruptcies come weekly, as do the store closures. Once sought-after real estate on New York City’s 5th Avenue is falling out of favor. Consumers are shopping, but they only want what they want—and most of what they want isn’t sitting in drab retail stores that were struggling for attention before they had a pandemic to blame. Inventory has piled up and not even 70 percent off deals or flash sales will be enough to clear it all.
By many accounts, it would seem the fashion industry is facing some of its darkest ever days.
And there’s still little in the way of immediate positives for the sector.
“Overall, 2020 is a disaster year and ‘21 will not be a full recovery of 2020,” McKinsey & Company senior partner Achim Berg, said.
In April, McKinsey had pegged revenues for the apparel and footwear sector to contract between 27 percent and 30 percent year over year. For luxury, the projection was an even more dismal 35 percent to 39 percent contraction. These estimates came before the industry had really felt the effects of three months of shuttered stores and, according to Berg, fashion hasn’t seen the worst of it yet. McKinsey has revised forecasts for the industry’s fate on deck for September.
“I think the big shakeout is still to come,” he said. “Let autumn come and the 20 to 30 percent we had expected as a shakeout along the whole value chain will really come. I think that we’ll see many more Chapter 11s.”
From bad to worse?
Fashion’s reckoning will bring with it a wave of consolidation that may be years in the making.
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But as Phyllis Shapiro, founder and president of Innovative Consulting Solutions and assistant professor at Parsons, points out: “Fashion has been in a slump for 10 years. Certainly, in my opinion, there’s nothing new and exciting to go out there and buy.”
Brands and retailers alike have been struggling for relevance in recent years, and chasing cheap and measuring margins has squeezed design creativity out of the conversation and often rendered product uninteresting. Or at least not compelling enough to convince consumers to pay full price. Fashion’s present problems are hardly wholly owed to the pandemic.
“The handwriting was already on the wall. We had a lot of issues, we were overstored, we had stores that invested nothing into their omnichannels and they’re paying the price right now,” Shapiro said. “We were due for this. We were due for what they call it on the stock market, a contraction. We had too much of everything and it was unsustainable.”
The count for shuttered stores, or those set to walk the plank in 2020, has already stretched beyond 13,000.
And the store closures will continue. Profitability is down and companies are currently crippled by a lack of cash—which has reverberated throughout the supply chain, drying up funds at the factory level, too.
“Everything, to me, comes down to retail, because if retail isn’t working, then wholesale’s not working. If wholesale’s not working, supply chains aren’t working. If supply chains aren’t working, Third World countries are suffering,” Shapiro said. “So, if retail isn’t fixed and right, then it sort of has this effect globally and down the whole supply chain.”
For now, at least, retail isn’t right and the bankruptcies are lurking. Which means there’ll be consolidation further upstream, too.
“I do expect further bankruptcies, I do expect more companies to go out of business,” said Walter Loeb, former retail executive and now consultant.
Already, whether COVID-19 can be considered the sole culprit or not, the list of filings is long: Brooks Brothers, J.C. Penney, J. Crew, Stein Mart, Stage Stores, Debenhams, Tailored Brands, Lord & Taylor, Victoria’s Secret UK, Chico’s Canada, Ann Taylor parent Ascena Retail Group, Zac Posen owner Centric Brands, Lucky Brand, G-Star Raw—and there are more yet unlisted and more yet unfiled.
The culling, however painful, may be critical to fashion’s more sustainable future.
“We see the consolidation happening, and even if you believe we’re then going to have recessionary effects in ’21 and ’22, we’re still going to have market share redistribution,” Berg explained. “If you take out 20 percent of the players in the market in terms of value and volume, and even if the market is still 5, 10 percent below 2019, you still have another 10 percent that needs to be reduced.”
Retailers are wading through the muddiest of waters, between bailing on staff, suppliers and stores, trying not to be the other 10 percent that needs to be reduced.
“I think some companies are looking at their stores and reviewing what’s going to be viable and what will not be profitable for them in the future,” Loeb said. The lack of demand coupled with an oversupply of unsold stock has made matters untenable for many. And, the reality is, he said, “Most customers are still staying away.”
Offering Dillard’s—which reported its second quarter earnings last week—as evidence of that reality, Loeb pointed to the retailer’s note that sales performance since it reopened stores was just 72 percent of what it was last year. It may seem somewhat positive, all things considered, but the level of loss is palpable.
“That’s not a good number because that means roughly 30 percent of their business just disappeared,” Loeb said.
As earnings reports roll out in the coming weeks, it’s a saga that will play out similarly for most in the industry: loss of sales, loss of stores—another loss for the sector.
In one of McKinsey’s scenarios for fashion’s potentially new reality, Berg says the tunnel with the light at the end of it may stretch to 2023.
“In ‘23 we will reach 2019 levels again and that’s the new reality,” he said. “The new reality is there is no top line growth, we used to have it between 2005 and 15—we had 5.5 percent growth every year that’s gone. It was gone since 2015 already and we will see lots of negative growth in ’20. I think we’re going to see some positive growth from a much lower base in ‘21 and ’22, but it may take until ‘23 to reach 2019 levels, and I think that’s where we are.”
Breaking (down) bad
As with any shakeout, there’ll be winners and losers. There will be categories that succeed while others struggle and cities that rebound while others dribble.
The winners, Berg said, will be “strong brands with a strong balance sheet” and luxury, as McKinsey’s early predictions suggested, may see a slower bounce back.
“While online will do very well, the luxury players have a much tougher time,” Berg said.
China, where a large portion of luxury purchasing happens, may be doing OK, but with tourists grounded, airport business deserted and occasions for luxury wear largely cancelled, the markets in Europe and North America may not fare as well. In July, LVMH reported revenue for its first half down 28 percent. Kering’s fell 30 percent in the same period.
“Online cannot cover for all of that, the sentiment is also not there to support it,” Berg said. “We’ve seen a bit of revenge purchases in Asia, but we cannot see too much of that happening in Europe these days, and I think you can’t even dream of it in North America.”
While the economic recovery in China may be V-shaped, meaning conditions bounce back quickly from their lowest point, Berg likened Europe’s recovery curve to a “Nike swoosh.” In the U.S., there may still be too much ongoing uncertainty to determine just which letter of the alphabet a stateside recovery might resemble.
Luxury aside, it’s fashion’s middle market that may finally meet its maker. But this shouldn’t come as news to the industry.
“The middle tier, which is what we’re seeing fall apart right now first at the retail level, was in trouble already,” Shapiro said. “We were already losing in the middle, we already had J.Crews with problems and things like that. So that’s where we’re seeing the downfall now…and we’re also seeing it with stores that were over leveraged and had big debt. They can’t survive these few months.”
Fashion, may be among the laggards in the recovery as consumers dedicate their dollars to new bedding and bread makers or road trips to dodge lockdown. Digging further into fashion’s categories, Loeb says men’s wear may be the last place demand bounces back.
“One of the hardest hit [categories] is men’s wear, which is the most postpone-able spending category in a family’s budget…children, wife, dog, cat and then men,” he said. “Most people will postpone men’s purchases, and right now we’re seeing that in all the reports that we’ve seen.”
Men’s wear, and business attire in particular will continue to suffer as work from home becomes more prevalent.
“A lot of retail that focused on business attire, they’re not coming back,” Shapiro said. “What’s the future for Brooks Brothers? It’s as sad as can be but that product is going to be limited in its desire probably forever.”
From worse to better?
Doom and gloom has set the tone for 2020 and the present realities for fashion are bleak, but there are glimmers of hope for those that can stomach the blows. And things will get worse before they get better.
“There are some brands that will get out of this stronger because they were strong before the crisis. They are really close to their consumer groups, they use social media to stay in touch, they use this to strengthen their direct to consumer business, they use this to reorganize and get leaner, they use this to cut off some of the old stuff they wanted to cut off anyway,” Berg said. “Those who can should not try to muddle through, but they should try to rethink what the industry will look like, how the consumer will behave and how they want to position themselves.
Regardless, COVID-19 hasn’t ushered in the end of fashion, but it is reshaping it.
“Once they get some stability and less uncertainty, I’m pretty sure people will also express themselves through fashion and they will also purchase fashion again, but it will be different,” Berg said. “It will be a different online-offline play, it will be a different consumer demand, it will be a different way how we develop and source product, and the industry, on average, will be less profitable. We will clearly have a growth issue not only for 2020, but definitely for ’21 and ’22.”