Production is no longer the apparel and footwear sector’s dirty little secret. Consumers have a wealth of insights at their fingertips, exposing the true planetary cost of manufacturing clothing and shoes—not to mention the harm to people. But what does this all mean for the future of fast fashion?
UBS analysts investigated the outlook for the throwaway fashion sector and what a potential decline in sales volume would mean for an industry valued at $2.5 trillion as of 2017 that drives 3 percent of the world’s gross domestic product.
How fast fashion might adapt
Fast fashion’s quick-turn model designs obsolescence right in. The relentless parade of new product means today’s trend is tomorrow’s markdown, creating ample fodder for landfills and incinerators.
The UBS team, including Victoria Kalb, analyst and head of EMEA ESG, and U.S. retail and softlines analyst Jay Sole, analyzed what growing consumer awareness of ESG, or environmental, social and corporate governance, means for the broader retail sector.
The investment bank’s research shows that fashion needs a complete circular overhaul instead of half-hearted attempts to swap in “more sustainable” options for their planet-polluting predecessors. From H&M and Zara to Asos and Gap, retailers are accelerating their uptake of recycled product, ditching conventionally grown cotton for organic, and slashing chemical usage in fabric treatments. And while many now offer garment-collection schemes aimed at boosting textile recycling, few, analysts said, have yet to meaningfully curtail their collections—an action that would significantly curb their impact.
Making garments with sustainable components “becomes largely insignificant when set against the sheer quantity of items produced and discarded,” the report said.
The sprawling, highly fragmented textile and apparel industry will struggle to broadly adopt solutions to these challenges, analysts said, putting the onus on fast-fashion firms to holistically redesign their businesses. The end result could drive a “10 to 30 percent decline in high-volume/low-value apparel unit sales” over five to 10 years, UBS said.
All eyes on ESG
Companies could face public censure over a lack of environmental responsibility and social savvy.
A UBS survey of 3,000 consumers from March prior to the coronavirus outbreak last year showed that 55 percent said they knew people who cited environmental and sustainability reasons for pivoting their shopping behaviors. Nine percent would cut back on apparel purchases if informed of the sector’s negative environmental impact, including carbon emissions, toxic chemicals and water use, while 18 percent would seek out sustainably made brands. However, the majority, at 58 percent, claimed ignorance of fast fashion’s deleterious effects on ecosystems, like contributing more to climate change than international aviation or shipping combined, UBS said. Or consuming up to 150 liters of water per kilogram used in dyeing, with 20 percent of industrial water pollution globally attributable to dyeing and treating textiles.
The pandemic evolved the project’s scope to focus on worker welfare as well, with brands like Boohoo facing intense scrutiny for sweatshop-like conditions at Leicester garment factories.
UBS found that fashion retailers would fare better with fewer customer orders than shrinking basket sizes. A 20 to 30 percent plunge in the volume of fast-fashion sales would pry 3 percent from the average multichannel merchant’s EBIT (earnings before interest and taxes) for every 1 percent decline in sales, it added.
Fashion’s likely to counter sagging sales with cost cutting and store closures. Raising prices is an unlikely option in a highly competitive sector that would require acting in unison.
Across the world
In Europe’s fast-fast section sector, marquee names face varying outlooks. UBS described H&M as “favorably exposed,” given its efforts in pursuing sustainable inputs and creating conscious collections. Zara parent Inditex, however, “could improve consumer perceptions of garment manufacturing conditions and emissions,” it said. Zalando’s premium brands and higher price points reduce its fast-fashion exposure, UBS found, while Primark’s place in the value-priced segment doesn’t augur well for the Associated British Foods-owned chain, inviting “more questions as to how its items are sold so cheaply.” Asos is at “greater risk” as it over-indexes on “going out” garb and stocks several low-cost brands.
In the U.S., fast fashion accounts for nearly 25 percent of total softlines sales, UBS said, or 20 percent of department store revenues, 35 percent in specialty retail and 25 percent in off-price. The sector could see its EBIT CAGR (compound annual growth rate) fall between 0.2 percent and 1.6 percent if the volume of fast fashion shrinks by 20 to 30 percent, the report said.
That range presumes that retailers “recover 50 percent of the lost fast fashion volumes in other apparel categories, including higher sales from ESG-conscious brands,” though growth would “come below our 2 percent industry forecast,” analysts said.
The UBS team says ESG-focused brands should outperform peers, given consumers’ growing emphasis on sustainability. Names like Nike and Deckers, with little to no fast-fashion exposure, are expected to excel, given their investor-friendly financial footings and cash-flow generation.
However, department store retailers like Macy’s and Nordstrom are likely to struggle in a lower-volume scenario. “This channel, in our view, is a share donor to other channels with a better value proposition, including pureplay online, off-price, specialty retailers, and brands’ own stores or websites,” analysts said.
In Japan, Uniqlo parent Fast Retailing “differentiates itself from fast fashion retailers by offering basic casual clothing with a typically more universal appeal based on product quality and functionality,” analysts said, noting a 3 percent annual dip in national apparel consumption from 2015 to 2019. Heightened consumer awareness of ESG issues could inflate the decline to 20 percent over four years, 22 percent over five years and possibly as high as a 30 percent decrease over seven years, UBS said. Asia’s emerging middle classes and Uniqlo’s high-quality basics Lifewear concept power future growth.
UBS noted that fast-fashion brands have been exiting China since 2018, with Topshop and NewLook leaving, followed by Forever 21 in 2019 and Old Navy, Esprit and Superdry last year. The China sportswear sector has limited exposure to fast-fashion products since merchandise bears higher average selling prices. A decline in fast fashion volumes is expected to have a corresponding shift to apparel categories including athleisure. Anta and Li Ning could benefit, along with Topsports, an international sportswear retailer.
What happens to manufacturers?
Changes in fast fashion have ramifications for manufacturers, too. Taiwanese, Chinese, Vietnamese and Indonesian garment producers focused on mid- to high-end apparel could gain new orders if they make for the top, ESG-focused fashion companies tracked by UBS, which noted the unfavorably exposed mass-market production of Myanmar and Bengal factories.
Fast fashion’s decline could drive consolidation among small and mid-sized manufacturers, UBS found. Taiwan’s Eclat, a maker for Patagonia; vertically integrated knitwear manufacturer Shenzhou; and Makalot, which cuts and sews for Walmart, Gap Inc. and H&M, are seen as beneficiaries of this potential shift, given their ESG-compliant operations.