MARKET INTELLIGENCE
SHORT READ
PART 1
2023 APRIL ISSUE
Written by : Andrew Sia
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From the Desk of the Publisher
Under this title, we have tried to report about the retail business, about the market place and how the brands are doing. We found that these short-reads can be quite informative.
The main feature here is the last article, where we raised the question for the future of fashion sourcing. Formerly it was all about the cost and for the last four decades China ruled this arena, from manufacturing to supply chain management and it has built their dominance successfully.
But we have found that the behavior of the consumers have changed this time and they have become more fickle. It will take time until everything can be normalized from this darn Covid pandemic and a new life pattern can be developed. Right now we have to keep ourselves alert and ready for any changes.
Contents:
Vivienne Westwood Died at the Age of 81
London Designer Outlet in Wembley Park, London
Bed Bath & Beyond and Its Trouble
Luxury Companies Are Welcoming China to Open Their Borders
LVMH is the First Luxury Brand Recorded €20 Billion in Annual Sales
Uniqlo Follows Prime Minister Kishida’s Call to Increase Employee Wages
Latest Performances of Burberry and Richemont
Retail is Slowing Down Leads to Layoffs
American Dream is Missing Another Loan Payment
Are We Heading For A Global Recession
Consumers’ Confidence Rose in January
Introducing Extended-Producer Responsibility Program (EPR)
The Future of Fashion Sourcing
Vivienne Westwood, Died at the Age of 81 – WSJ, December 30, 2022
Vivienne Westwood, known for the creator of punk fashion, died on December 29 in London.
She started as a primary school teacher before she became known as a fashion designer. Her designer career kicked off in the 1960s after she met with Malcolm McLaren, who also became her professional and romantic partner. Together they defined the aesthetic of London’s burgeoning punk rock scene with Malcolm McLaren who put the band, Sex Pistols together.
She was made a dame in 2006 for her services to fashion.
London Designer Outlet in Wembley Park, London – The Industry.Fashion, January 9, 2023
The shopping center was opened in 2013 and has recorded its best December sales totaling £10,464,749 since its opening.
Despite the rail strikes hampering travel, Boxing Day 2022 sales were up 89% on 2021 and it was even up for 2.9% on the pre-pandemic 2019, making it the second-best Boxing Day in the outlet’s history. The average transaction value (ATV) was up 17% in December versus pre-pandemic 2019.
The most recognizable brands—Levi’s, Puma, New Balance, Kurt Geiger—experienced record trading days on Boxing Day.
Overall December 2022 sales saw a 2.6% increase from same month in 2019, and +32% on 2021. Trading in between Christmas and the New Year was particularly strong, as shoppers took advantage of additional discounts with sales increasing by 49.5% compared to 2021, and by 3.6% compared to pre-pandemic 2019.
Designer outlet presents the appeal as the cost-of-living crisis has taken over the shoppers to look for ways to save money on discretionary purchases. And London Designer Outlet can offer year-round saving of up to 70% off recommended retail price and even up to 85% off during seasonal sale period including the Boxing Day sales.
Bed Bath & Beyond and Its Trouble – FT, January 6, 2023
The company with 1,000 stores, is the largest U.S. home good chain, is struggling to continue its business as a going concern. Its shares were down 18% at $1.98 in pre-market trading. Its market capitalization was $17 billion a decade ago, has fallen below $200 million now.
Bed Bath & Beyond has been stretched for quite some time and it reduced credit to allow it to buy the stock for the holiday season. Because of the reduced inventory has lowered customer traffic and reported sales for the quarter to November 26 from $1.88 billion to $1.26 billion.
The group has more than $1.7 billion in long-term debt at the end of August.
Most U.S. retailers entered the holiday season with a healthy level of inventory, unlike the past two years when the supply chain was disrupted. But the struggle of Bed Bath & Beyond has been more than the rest of them as vendors have been nervous about its ability to pay its bills.
Luxury Companies Are Welcoming China to Open Their Borders – WSJ, December 28, 2022
Share prices in Europe for the luxury retailers surged after the news from China was announced. LVMH Moët Hennessy Louis Vuitton advanced by 2.5%, Kering SA, owner of the Gucci and Saint Laurent rose as much as 2.2%, Hermès International gained more than 2%.
Over there in Italy, Moncler SpA, Tod’s SpA and Salvatore Ferragamo SpA also rose.
Luxury brands been relying on Chinese tourists on their spending before the pandemic. In these three years they have been depending on wealthy western consumers but the interest rate and inflation have gained their traction on their spending.
The Chinese tourists have been the important drive for the luxury market for the last twenty years and they preferred to do their purchases overseas as the prices are lower than at home.
Their spending was accounted for one-third of global spending on luxury brands in 2018 as reported by Bain & Co.
And during the pandemic, American consumers helped to make up some of the shortfalls in part by the strong dollar and the savings accumulated during the period.
Bain & Co. even predicted more optimistic by saying that by 2030 sales to the Chinese consumers would account for 40% of the personal luxury-goods market which would be equivalent to $585 billion by then.
I have my reserve as China has its own problems to solve as after the three years of lockdown and situation in China has changed. It has many challenges that it would need to solve. Also the world has changed and started to have a different attitude with China as the country.
Bain & Co. and the luxury companies are too much over their expectations and hope with their wishful thinking.
LVMH is the First Luxury Brand Recorded €20 Billion in Annual Sales – BOF, January 22, 2023
LVMH controls the world’s largest luxury brands and its shares hit a record high. It is the first luxury brand to have this record, although the financial institutes have previously estimated 2022 sales crossed that threshold. The company has proved to be very resilient during the looming recession,
Uniqlo Follows Prime Minister Kishida’s Call to Increase Employee Wages – FT, January 12, 2023
Fast Retailing, Asia’s largest clothing retailer and owner of Uniqlo, said that it would increase its employee wages in Japan by 40% as inflation in the country rises at its fastest pace in decades. This follows the call from the Japanese prime minister Fumio Kishida for Japanese businesses to raise wages. Fast Retailing is saying that this will take place in March.
In Japan, the monthly pay for the university graduates will increase to ¥300,000 ($3,270) from ¥255,000 and new store manager will increase to ¥390,000 from ¥290,000.
Fast Retailing is bearing a high personnel costs despite of depreciation of Yen, a higher material costs and a Covid-19 outbreak in China. The group has already increased its prices at Uniqlo’s stores in Japan last year. It had already raised the wages at an average of 20% for most of the part-tome employees in September.
This increase will happen in many other companies.
Latest Performances of Burberry and Richemont – FT, January 19, 2023
Luxury groups, Burberry and Richemont reported weaker than expected quarterly sales over the Christmas shopping season following the eruption brought by the Covid in China that pushed back the customer’s demand.
Sales for both the British and Swiss luxury groups fell by a quarter in the last three months of 2022. Strong demand from Japan and the return of tourists in Europe were not enough to offset China’s surge in infections. Burberry recorded revenues of £756 million, an increase of 1% based on the same period in 2021. Before the pandemic, 40% of the group’s sales were for Chinese customers, it is now down to 25%.
Outside China, Burberry’s sales grew 11%. Which was led by the return of those high-spending tourists to Europe. The group remain optimistic for high-single-digit growth and the currency movements would give it a £160 million benefit.
At Richemont, owner of Cartier and watchmaker, Jaeger-LeCoultre, whose revenues rose 5% to €5.4 billion. Analysts said that the trading is underperforming especially in jewelry and watch sales. It shares have risen 12% in this month but sector leaders like LVMH gained 15% and Hermès at 13%. Burberry’s share price was up 2.8% and Richemont rose 1%.
Retail is Slowing Down Leads to Layoffs – New York Times, January 27, 2023
Retailers came out from sky-high demand from shoppers during the early part of the pandemic on furniture and clothing, together with e-commerce, the demand has faded as well. Consumers are now more worried with the prices of the daily necessities, such as food. Today, retailers are ready for a slump.
We have already seen Saks Off 5th, the off-price retailer owned by Hudson Bay, started to lay off employees. Saks.com is laying off 100 employees, or 3.5% of its workers. Amazon.cm started to layoff 18.000 workers and most from the retail division. Bed Bath & Beyond cut its workforce and prepare for a possible bankruptcy filing.
We can see that this time the layoffs are more structural changes as the industry has to recalibrate itself after the rapid growth from the market reaction caused by the pandemic. There is also the worry about the U.S. economy and layoffs by prominent tech companies.
Sales for the holiday shopping was weaker than in past years. Although December retail sales increased 6% but it was offset with the inflation of 6.5%.
At Nordstrom, sales in the last nine months of 2022 decreased 3.5% from the year earlier. Macy’s also reported its holiday sales had been on the lower end.
But Walmart took a different approach this time. It announced that it was raising minimum wages for its store employees in a bid to attract and retain workers in a tight labor market.
Retailers are accessing the e-commerce they need as during the pandemic online sales was the only thing that took off. At that time many stores were gasping with Covid lockdown and restriction that resulted the closures of the stores. Now they have to deal with a new reality.
The new few months will be tough for retailers as profit margin will shrink and revenue growth will be slow.
American Dream is Missing Another Loan Payment – Retail Dive, February 6, 2023
American Dream is owned by Canadian mall developer, Triple Five Group, missed another $8.8 billion debt payment. Last year in August, it initially missed a deadline due to insufficient funds. Bondholders also received a notice last year of default on interest payments.
American Dream brought in the entertainment into the mall, including an indoor ski-slope but the project was many years behind schedule. During the pandemic, it was shut down, not long after it finally opened. There was a fire which kept the slope out of service for weeks. In 2021, the mall lost $60 million.
Also that year, after a default on debt tied to American Dream, a group of lenders, included J.P. Morgan, seized a stake in Triple Five’s Mall of America in Minnesota, which was collateral on American Dream’s debt.
Are We Are Heading For A Global Recession – FT, January 23, 2023
Although retail sales have been falling, and the stock market wad down 20% last year, but spending on luxury goods have grown by roughly the same amount in 2022. We came to know that the growth of last year to a €1.38 trillion was driven almost entirely by Gen Z and Gen Y. And already Bain & Company said that the spending of Gen Z and even the younger Generation Alpha is set to grow three times faster than other generations through 2030.
What happened in 2022 has actually confused us as the luxe boom was not fueled by the consumers from China as they were under lockdown for most part of the year. It was led by the U.S. market and New York City has been known as the capital of the luxury market of the world, although sales picked up in cities like Miami, Los Angeles and even Austin.
From what I have seen and read that the ultra-rich will go stronger.
Consumers’ Confidence Rose in January – WSJ, February 16, 2023
Retail spending went up 3% in January which was the largest increase in nearly two years as reported by the U.S. Commerce Department after a decline in the final two months of 2022. Shoppers are spending on furniture, clothing and dining out.
The same time job growth surged at the beginning of the year and unemployment reached a 53-year low. Manufacturing output increased by 1% after dropping in the final two months of 2022.
In another word that everything was up in January. This led to the forecast from the Federal Reserve Bank of Atlanta that the first-quarter U.S. gross domestic product to the growth of 2.4% annual rate from 2.2% earlier on.
Retail sales went up in almost every category including restaurants, car dealerships, department stores, furniture retailers and appliance outlets. Spending at restaurants and bars went up 7.2%, the most since March 2021. But grocery-store sale and gasoline stations where the sales were flat.
Sales of vehicles and parts rose 5.9% after falling 1.8% in December.
Bank of America said payment by its debit-and-credit card customers rose 5.1% in January compared with the year before, and up 2.2% increase in December.
Introducing Extended-Producer Responsibility Program (EPR) – WSJ, February 17, 2023
It is said that around 85% of textiles end up in landfills or are being incinerated when most of the materials could be reused. In according to the United Nations, some $500 billion is lost every year because clothes are underused and not recycled. The fashion industry causes about 10% of global greenhouse gas emissions and this is bigger than aviation and shipping combined, Most of the emissions are coming from farming, manufacturing, shipping and fossil-based chemicals.
This Extended-Producer Responsibility Program (EPR) will be charging a small fee from the relevant products to fund waste collection and recycle and this include packaging, electronics and clothing for instance.
Right now the European Union proposed the EPR rules for the textile industry across its 27-member states in June. Fashion retailer H&M, Hennes & Mauritz, is helping to build the infrastructure to support the program. Together with the German waste management company, Remondis SE, a new company known as Looper Textile Co., will collect, sort and sell unused and unwanted garments collecting from H&M’s stores and garment collection bins in many international cities. It plans to sell to secondhanded businesses including Renewcell AB where H&M has a stake. This venture aims to process 40 million garments this year and this will be a profitable business.
There is this Recycling Partnership, a non-profit group supported by Coca-Cola Co., Amazon.com and PepsiCo Inc., who mentioned that this can boost the recycling rate. ERP program already drove collection and recycled materials such as printed paper and packaging in countries such as British Colombia, Belgium, Spain, South Korea and the Netherlands to more than 75% and with Portugal and Quebec reaching more than 60%.
In the U.S. so far only California and Colorado have launched programs for packaging so far. The fee will be collected and more states will join.
But recycling garments is more challenging than with waste made from one material. Garments often contain more than one material and they cover a mix of synthetic fibers from the fossil fuel, and organic materials such as viscose and cotton.
The use of enzymes to break down polyester for instance can be mixed with other fibers for recycle. This emerging technology of France’s Carbios SA is backed by Patagonia and Puma for instance.
The U.S.-based Unifi has recycled waste products, such as polyester fabric and plastic bottles and they have produced 600,000 pounds of recycled fiber since 2009 through a program it piloted in 2011. Companies like Levi Strauss & Co., and VF Corp., are participating.
The Europe Commission published a plan to aim for longer lifespan and recyclable garments for all clothes sold in the 27-member bloc and this would include non-European companies. The EU rules would require member states to separate textile waste from other trash by 2025 and the strategy will expand for going forward.
The Future of Fashion Sourcing – FT, February 20, 2023
For the past four decades, China has been the leading manufacturers and suppliers of fashion. But in the recent years, a combination of supply chain chaos, inflated manufacturing costs and concerns about its working conditions is forcing some Western brands to rethink their sourcing strategy.
The fashion brands have started to replace some of their Chinese suppliers with those in Portugal and Turkey and this has been happened since 2021. Many companies have started to review their exposure to China as the sole and majority supply base. They are looking to reduce their reliance on China and want to make their sourcing more resilient.
Its disadvantage has been exposed especially during the three years of Covid pandemic whereby the disruption of the supply chain led to the quick jump in freight costs, as well as the significant shipping delays at the loading/unloading ports and the Covid issues led to the closing of the factories during its peak season.
The previous cost advantage to remain in China has diminished as the days for the cheap labors have gone. In according to the China’s National Bureau of Statistics, the average factory wage double between 2013 and 2021. It was from RMB 4,600 (US$6,844) per year to RMB 92,000 (13,628). This has made China not as competitive than before. Together with the import tariffs, freight costs and other costs, the price is not as attractive again.
The latest market trend which is to reduce the delivery lead time as customers want trending fashion, and together with their changing of purchasing behavior, the market is more demanding and speed and efficiency has made the use of the suppliers closer to home.