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Here’s What the Data Says About Recessions, Unemployment and Apparel Sales

Doom and gloom are not the key words fashion vendors should live by in a post-COVID-19 world.

While disruption from the impact of the coronavirus, or COVID-19, pandemic will undoubtedly be unparalleled across all sectors, that doesn’t mean it’s time to become pessimistic. Disruption has a tendency to create new brands, business models and methodologies. For apparel and footwear vendors, COVID-19 has resulted in near-term hits such as delayed payments, cancelation of orders and lower-order volume for future seasons. Yet, the future for the two fashion sectors is actually fairly positive, provided companies start now to rethink their distribution strategies.

“We see a future where there will be successful post-pandemic brands, many of whom emerged as leaders during the [COVID-19-led] recession. Their success will almost certainly be attributable to constructive actions taken during the disruption period,” concluded a report from PreciseTarget.

Founded by Robert McGovern, the company uses a machine learning system to profile the buying tastes of consumers based on their prior purchases. And it analyzes key metrics to help formulate a predictive conclusion about the future. The PreciseTarget Outlook for the Apparel Industry Post-COVID-19 report determined that rethinking these distribution channel will help apparel and footwear sales, particularly since it appears that the categories tend to see a quicker recovery than what’s seen in other consumer sectors.

Rethinking the department store distribution channel

While there’s been much talk about supply chains in retail, vendors have another network they should pay close attention to and that’s their distribution chain. This is one that has already been disrupted at retail as multi-branded retailers such as Neiman Marcus Group, J.C. Penney & Co. Inc. and, most recently, Stein Mart, have all filed Chapter 11 petitions seeking bankruptcy court protection. The department store group is particularly hard hit, already distressed before COVID-19 and now expected to suffer the greatest impact. Credit ratings firm Moody’s Investors Service is projecting a five percent decline in operating income for the sector, but the longer-term outlook is worse. And PreciseTarget’s data suggests a 30 percent to 50 percent reduction in department store doors, with a 20 percent to 40 percent reduction in revenue for the sector.

“By necessity, the wholesale brands must pivot to a much higher mix of direct-to-consumer,” the PreciseTarget report concluded. That does not mean going all-in on the e-commerce front. “It would be a 9.9 on the difficulty scale to suddenly build an online audience sufficiently large to grow your sales  from 10 percent e-commerce to 100 percent,” the report said.

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With stores over-stocked and malls empty because consumers are afraid to shop in a physical store, the data profiling firm predicts wholesalers that survive COVID-19 will be 30 percent direct-to-consumer, and within two years will kick that up to 40 percent. The current average pre-COVID is about just five-to-nine percent of revenues from the direct-to-consumer channel.

Keeping in mind the expectation of extensive store closures and massive discounting to clear overstocked inventory and the fact that data becomes more important as companies rely on predictive analysis, PreciseTarget said tomorrow’s retail world will have more data scientists than merchandisers.

But the analytical firm also cautioned that Amazon should not be viewed as a retail partner to cure all ills.

“Over the past 36 months Amazon has created over 175 knock-off apparel and footwear brands that compete directly with the mainstream brands, at dramatically lower prices. The current is flowing the other direction; Nike, IKEA, Birkenstock, Vans, Ralph Lauren, Patagonia, and The North Face are among the brands no longer selling directly on Amazon. Expect this trend to continue as Amazon likely becomes one of your major competitors,” PreciseTarget concluded.

No correlation between loss of consumer wealth and fashion purchases

So why is PreciseTarget so optimistic about fashion’s ability to survive COVID-19 even if it switches its distribution chain mix, given the current U.S. recession—which an economic watchdog said started this part February— and high rate of unemployment?

The analytical firm has concluded that data shows neither the loss of shareholder wealth nor unemployment significantly impacts apparel spending as much as one might think. That doesn’t mean there’s no impact, but that the impact is felt more in other consumer spending categories where recovery can take over twice as long as the 29-month average for the apparel and footwear group.

The report takes a look at two prior recessions, one starting with the DotCom bubble burst and the Great Recession in 2008. In the former, data indicated no correlation between loss of shareholder wealth and consumer purchases of apparel and footwear products. “In fact, apparel sales showed a steady upward growth trend as the markets continued to fall lower,” the report found.

In the Great Recession, there was a slight correlation between the two, with apparel sales down 11.7 percent and taking 29 months to recover to pre-recession sales levels. In contrast, the Wilshire index was down 48 percent and took 55 months to recover, while the Nasdaq was down 46 percent and took 42 months to recover.

But with recent high levels of unemployment, the study also looked at whether there’s a correlation between job losses and apparel sales. In checking on monthly apparel sales between 2000 and 2020 and monthly unemployment rates for the same period, the data indicated no correlation between the two.

Apparel sales continued on a slow and steady growth path, irrespective of the ebbs and flows of the unemployment rate as the economy churned through its cycles. Apparel sales grew during periods of highest unemployment,
and no noticeable growth acceleration occurred when the unemployment rate fell,” the report noted.

PreciseTarget also overlaid data from monthly apparel sales to other consumer categories to see how consumer spending performed during and after the Great Recession to help predict what to expect from the current recession. Only one category did better than apparel’s 29-month recovery period, which was luxury hotel spending at 28 months. The closest after apparel’s 29-month recovery period was cosmetics at seven months. Next was restaurant spending, which took 31 months to recover. That was followed by automobile purchases at a 75-month recovery period, electronics and appliances at 84 months, furniture and home goods at 101 months and home improvement at 115 months.

“We are projecting that the apparel recovery will be similar to what we experienced in the Great Recession. We anticipate consumer spending will recover in a matter of a few quarters, with a much higher, and likely permanent, shift to online buying,” PreciseTarget predicted.

Of course, consumers were already shifting their apparel purchases to online even before COVID-19. In a post-COVID-19 world, consumers who weren’t big online shoppers before and who have since become more comfortable with e-commerce platforms are expected to continue with their new shopping behaviors. “We anticipate that this progressive migration will shift to a step-change, where online becomes 30 to 40 percent of retail in the 2021/2022 period,” PreciseTarget said.