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Report: Traditional Apparel Battles for Consumer Dollars, Athletic Brands Will Win

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American consumers might be spending more, but many apparel brands and retailers are seeing gross margin trend lower.

In its latest Industry Update, financial services firm Cowen and Company said traditional apparel is getting crowded out by bigger ticket items, fast fashion and off-price, Amazon’s rise and spending on wearables in the battle for consumer cash.

Apparel consumer price index (CPI), which looks at the average change in prices over time for a predetermined basket of consumer goods, fell 2.3% in July, a rate of deflation not seen in 10 years.

The reason for this pressure? Cowen pointed to three contributing trends:

1) Amazon will be the largest U.S. apparel retailer by 2017 (its apparel business is expected to grow to $52 billion in gross margin volume by 2020), which will be a boon for strong brands but a blight on traditional retail;

2) Major off-price retailers will expand stores in the U.S. by 2,500 by 2020, while major retailers will expand by roughly 875;

3) Spending on fitness-related wearables will pull spending from traditional retail as consumers are expected to spend $15.8 billion on the category by 2020.

And with consumers’ willingness to spend on fitness wearables comes their demand for athletic apparel and footwear to match.

“Price perception data for Nike and Under Armour from the Cowen Consumer Tracker Survey updated through July, further indicates the consumer’s willingness to pay for innovation, performance and newness,” the report noted. Price satisfaction scores for Nike and Under Armour are up an average 3 percent over the last year.

Though the macroeconomic trends are looking more positive, Cowen said each of the disruptive trends, plus the pervasiveness of high-turn, low cost fast fashion is “impacting apparel business models through a combination of deflationary pricing pressure and increased speed to market and end user which may impact future revenue growth and operating margin expansion.”

Amazon’s projected growth in apparel, for one, will pull share from traditional brick-and-mortar retailers, and brands will have to closely monitor their relationship with the e-commerce giant.

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“Global brands that can effectively segment product between their own stores/website, the traditional wholesale partners and Amazon have an opportunity to expand distribution,” the report noted.

Some brands, like Nike, Under Armour, VF Corporation and the North Face, will likely continue to limit the products they sell through Amazon, Cowen explained.

“We think that the goods sold on AMZN will be more commoditized products, popular items that consumers can purchase from multiple companies stores and/or websites.”

For new or exclusive products, like the current season’s clothing or a signature shoe release, will still be sold through the brand’s own website so they can control the product display and requisite marketing.

When it comes to the off-price disruptors, the discount category is experiencing “tremendous” growth in revenue and store expansion and that growth is only expected to continue.

Macy’s and Kohl’s recently entered the off-price race this year, joining the ranks of other department stores like Nordstrom and Saks, and the sector’s rise will put added pressure on apparel pricing as the lower-cost formats fight the full-price stores for share of consumer apparel spending.

Fast fashion has been the driving force behind the new way of retail and the quick-to-market category has continued to siphon share from traditional apparel retailers, and expansion isn’t expected to slow anytime soon.

The five key fast fashion players, Zara, H&M, Uniqlo, Primark and Forever 21 brought in a combined $68 billion in global sales last year, or 6 percent of the global apparel market, the report noted.

“We think the opportunity for fast fashion retailers remains significant in the U.S., Cowen said. “Updated for recent figures, we estimate fast fashion has roughly a 2.6% share of the 2014 U.S. apparel market with an opportunity to grow that share to just under 4 percent by 2020.”

Fast fashion, off-price and Amazon combined, with their promotional or discounted prices, according to Cowen, will “chip away at traditional methods of apparel distribution and exert deflationary pressure on AURs [average unit retail] as all concepts compete for share of customers’ wallets.”