Why is clothing a necessity

Clothing and fashion - risky business or investment with style?

How we dress changes all the time. Weather and fashion trends mean that we always need different clothing. No wonder the fashion industry is a global giant. But what does this colossus look like from a holistic point of view? And what opportunities and risks does it bring for investors? A little tip in advance: if you read this text (or any other source on the subject), pay attention to the details. The clothing industry is often divided into production and sales. Depending on which of the two subsectors are included or excluded, the provisions of the market volume differed to a large extent. In addition, different terms each cover different fields and areas of the market.

The clothing industry - an overview

Market value and growth

Sheng Lu, professor in the Department of Fashion & Apparel Studies at the University of Delaware, estimated at the end of 2018 that the global fashion trade will experience an annual growth rate of 5.3% from 2017 to 2022. The industry should therefore reach a total value of around 1.38 trillion US dollars in 2019. (Trillion = thousand billion)

McKinsey estimated that the global fashion industry totaled 2.4 trillion in 2016. In a more recent industry report, they calculated the growth rate of the fashion industry to be 4-5% in 2018 and 3.5-4.5% in 2019.

According to a 2018 estimate by the fashion industry network Common Objective ten countries dominate the fashion trade (excluding shoe and jewelery trade). These account for 69% of all related expenses. China and the USA are at the forefront: both markets together represent 42% of all clothing spending. Common Objective attributes this to the high purchasing power (USA) and the high number of buyers (China). The ten dominant countries also include five European markets (in descending order according to the size of the purchase volume): Germany, Great Britain, Russia, France and Italy.

Functional innovations are rare in the clothing industry. Growth forecasts should therefore always be viewed in the following context: the fashion market currently has little or no opportunity to expand with new, groundbreaking products. This limits growth opportunities: Euromonitor predicts that global fashion sales will only increase by 2% by 2022, but there are chances that technological innovations such as big data, blockchain, AL or 3D printing will change the industrial process, of which both retail and trade Production could benefit. However, the technologies listed are still in the early stages of development and their long-term impact on the industry is therefore still difficult to assess.

Modern business models: fast and digital

With fast fashion, a trend is emerging that has great potential to change the clothing industry in the coming years. As Sanford Stein describes in an article in Forbes magazine, gigantic fast fashion companies like H&M and Zara are having great success bringing new products to market at low prices at a fast pace.

However, this business model is also facing major challenges: ecological consequences and poor working conditions have caused widespread criticism, companies have increasingly relied on online presence and thus unbalanced the market. At the same time, there is a trend among consumers to opt for less and therefore high-quality clothing.

In the spring of 2018, retail giant H&M amassed an inventory of unsold clothing totaling $ 4.3 billion, forcing the company to make clearance sales. This makes it clear that key players in the industry are not invulnerable either.

Another business model that threatens traditional retail is online retail. In 2018, online clothing sales in the US grew 18.5% from the previous year, while total clothing retail growth was only 5.3%. This means that 34.4% of all clothing traded in the US is sold online. In the UK, e-commerce accounts for around 24% of total clothing retail in the same year.

Risks

Industry expectations and perspectives

When industry executives were asked what they saw as the biggest challenge facing the industry in 2019, the uncertain state of the global economy was the dominant answer: 15% of respondents saw this as the biggest challenge facing the industry, followed by online and omnichannel competition with 13%. They saw the third largest risk on the one hand in the rapid pace at which consumer preferences are changing and in the need to operate transparently and sustainably (7% each).

Within the apparel industry, expectations vary enormously depending on the industry segment, field of activity and geographic location. This is also evident from the McKinsey Industry Report, which asked executives for their assessment of the development of the industry in 2019.

  • Strong trust in the premium segment, doubts about medium-sized companies: 56% of the respondents expect an improvement in the conditions for luxury fashion, 42% for the middle class and only 27% for the low price segment. On the other hand, 58% expected conditions to deteriorate for medium-sized businesses, 54% for the low-price segment and only 32% for the luxury segment.

Optimism in the West, pessimism in Asia: Only 30% of respondents believed 2019 would improve conditions for the industry in Asia, while 51% expected it to worsen. Opinions were also divided in Europe. There, 44% of managers believed that conditions would improve, 47% feared a negative development. North America was more optimistic. Only 30% expected it to get worse, while 64% believed that the next year would be better.

Fast fashion vs sustainability

The total amount of clothing produced more than doubled between 2000 and 2014, and sales rose rapidly, especially in emerging countries. However, according to the McKinsey report, the industry failed to raise its environmental and social standards. In factories there are sometimes problematic working conditions and it is estimated that the production of one kilogram of product produces 23 kilograms of greenhouse gases.

Another serious problem is water consumption. Parts of the clothing production process require a large amount of water and it is estimated that over a tenth of all industrial water requirements are used in the fashion industry.

These aspects constitute both ethical problems and potential business risks. However, there are signs that the sector is moving in a more sustainable direction. Second-hand platforms and fashion rentals, designer brands with a sustainable agenda and water-saving dye works are coming onto the market, and ecological production practices are increasingly being used.

Companies are coming under increasing pressure to deal more conscientiously with the ecological consequences of their production. For example, the French fashion brand Kering Urged by President Emmanuel Macron to initiate an eco-push. At the same time, the company recognized that sustainability is a central concern, especially among consumers of the younger generations.

Sustainability issues are therefore a major challenge for industry. While consumers' need for sustainable clothing is growing and companies are becoming more interested in meeting this need, the industry has not yet managed to implement largely sustainable production. The fragmentation of supply chains complicates this even more. For more sustainable production, all areas involved in the industrial process would have to be changed.

Invest in the apparel industry

In the clothing and fashion market, there are a few things that investors should be aware of. Like the investment and research company Value Line notes, the sector is characterized by strong competition: large dealers, niche businesses and companies that want to conquer new market regions. The fashion market is dynamic and changing quickly. So companies have to be adaptable.

How Value Line notes, the sector is sensitive to the broader economic development: Consumers buy clothes when things are otherwise going well and are accordingly cautious in times of crisis.

In 2018, a total of US $ 2.06 billion in venture capital was invested in American startups in the fashion and beauty sector: This is 30% more than was the case in 2016. Industry experts and investors have listed some factors that speak for an investment. This includes, for example, competent strategies in the online and offline areas, or the offering of core products with classic elements that are independent of seasonal fashion. Factors that cause discomfort between companies and investors are the low growth rates compared, for example, with the tech industry.

In a survey by Deloitte The interest of private investors in the clothing sector is higher than in other segments despite lower growth forecasts up to 2021. There can be several reasons for this: higher profit expectations or interest in growing market share. However, the expressed interest is not always followed by a real investment.

In the EU, investments in the clothing industry leveled off at a constant level during the 2010s: After the total amount invested fell from 1.8 billion in 2009 and 2009 to 1.4 billion in 2011, it has remained roughly at this level every year since then Height (until 2018).