MARKET INTELLIGENCE
SHORT READ
PART 1
2023 OCTOBER ISSUE
Written by : Andrew Sia
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From the Desk of the Publisher
With this report we wrote about the consumption of fast fashion and footwear is expected to grow by 63%, from 62 million tons in 2019 to 102 million tons in 2030. For the fast fashion brands, it is on average for a garment to be worn less than one year to be discarded.
It is important to cut the environmental footprint by the fast fashion brands. They are disposed either by incineration or landfills. It is aiming at improving the recyclability of their products and growing a secondhand market.
We read that Inditex pledged to reduce its emissions by more than 50% by 2030 and even claimed that the new targets will lead it to achieve net zero by 2040. Their management mentioned that the targets are extremely ambitious. They offered “Zara Preowned” services which allow customers to repair, sell or donate used clothes.
Others are following the repair services. We can see that anything to help to reduce the waste is the trend to go.
Lawmakers in Europe are drafting new laws to call for fashion companies operating in Europe to adopt a higher environmental standards to make their production processes greener and take greater responsibility for waste control with their products. The cost to build in the price of €0.12 per T-shirt has been suggested by the EU.
We can see that the United Nation-led fashion charter is strategizing all the efforts and we will read more about it in the future.
Contents:
The Great Britain Sewing Bee Season 9
Putting Fast Fashion on Track of Sustainability is an Uphill Battle
Inditex’s Ambitious Announcement About the Combat of Zero Carbon Emissions
Macy’s Introducing “On 34th” A New Brand
Burberry’s Reality Check
Inditex’s Beating Market Expectation
Uniqlo’s Striving
Ralph Lauren is leading the Rally
Marks & Spencer Marble Arch Flagship
Adidas’s Episode with Yeezy Sales
Secondhand Seller’s Learning Curve
Fast Fashion Retailers Are Offering Repair Services
Gucci is Buying a Stake in Valentino
The Great British Sewing Bee Season 9 – FT, July 8, 2023
Season 9 of The Great British Sewing Bee began May 24 and once again the series was showing a new batch of contestants battle it out in a series of challenges for the title of Britain’s Best Amateur Sewer. This TV show features a Transformation Challenge in which amateur garment makers recycle ball gowns as beachwear or trench coats as trousers.
On the other hand, we have noticed that Brussels wants the garment industry to pay for discarding clothing. The scheme would cost €0.12 per T-shirt.
This is all because of the fast fashion business who has doubled the garment production globally in the past 15 years. It resulted in the EU that nearly 80% ends up in landfill or incinerators. In fact, the fashion’s externalities are created by its inputs rather than its outputs. We all know that making a pair of jeans would use 7,500 liters of water. Vast cotton monocultures harm the environment in China and India. We can go on and on.
The fast fashion companies are not doing enough and if only using recycled materials in production, it is too little to make any difference yet. It is already realized that recycle polyester are problematic because they shed microplastics.
It is time to look into externalities and to look from the root cause. It is also the causing of the climate change which is a bigger picture to ignore. You can watch the season 3 through the link as provided:
The Great British Sewing Bee 2023
https://youtu.be/snCcb9CGWAI
Putting Fast Fashion on Track of Sustainability is An Uphill Battle – FT, July 6, 2023
EU wants the textile industry to pay for the processing of discarded clothing and footwear under new rules and hopefully that it will cut the environmental footprint by the fast fashion brands. It is aiming at improving the recyclability of their products and growing a secondhand market.
An equivalent of 12 kilos of clothes and footwear per EU citizen is discarded each year. More than three-quarter of it is incinerated or goes to the landfill. The consumption of clothing and footwear is expected to grow by 63%, from 62 million tons in 2019 to 102 million tons in 2030.
Companies that sell to consumers in EU would be responsible for paying for the treatment of the waste textiles. Already countries like France and Spain are putting in their system for collecting textile waste by 2025 with their rulings. It is already mentioned that the equivalent of €0.12 per T-shirt has been suggested by the EU.
Euratex, the textile industry body, claimed that it is working on pilot projects with small fabric manufacturers in 11 textile producing regions to create a closed-loop system with clothes better design for recycling. But it is doomed to fail as lawmakers in the European parliament have failed to set specific targets for textile waste collecting, preventing and recycling.
The blames on fast fashion on the players like H&M and Inditex have come under increasing pressure.
Inditex’s Ambitious Announcement About the Combat of Zero Carbon Emissions – Drapers, July 11, 2023
During its General Meeting on July 11, it announced its focus on low-impact fibers, supply chain transformation, biodiversity and circularity initiatives. It pledged to reduce its emissions by more than 50% by 2030 and even claimed that the new targets will lead it to achieve net zero by 2040. Even its chief executive, Oscar Garcia Maceiras said that the targets are extremely ambitious.
It mentioned that it is ensuring 40% of the fibers used by the Inditex brands are coming from recycling processes by 2030. And roughly 25% of the fibers will be the “next generation” fibers made from waste products and another 25% will come from organic or regenerative agriculture.
Like everyone else, the using of circularity initiatives, in their case is the “Zara Pre-Owned” to support biodiversity.
Macy’s Introducing “On 34th” A New Brand – WSJ, July 19, 2023
It is said to tackle the department store’s problem of inconsistent sizing and a new private label, On 34th, is introduced.
On 34th is its most significant private-label launched in nearly two decades. It is a line of women’s apparel and accessories and it will be available in stores and online beginning August 17. “On 34th” is also the address of its Manhattan flag-ship store.
This is also the first of the four private-labels that Macy’s plans to add through 2025. it is part of a broader overhaul of its in-house brands.
Clothing sizes have been a headache both for the frustrated shoppers and also for retailers. They are the cause of returns. Brands have been trying to use analytics to pair the customers with the right fit. It is also the time now to go back to the drawing board and develop new sizes and silhouettes that can better match the modern body shape.
On 34th has been developed for two years and it is targeting women ages 30 to 50. It is meant for both work and casual attires. The line includes 250 styles that can carry 1000 outfits with the price range from $19.50 for a tank top to $299.50 for a leather jacket. It carries size range from 0 to 26W and XXS to 4X.
Formerly, Macy’s had five different fits for all its private brands, ranging from extra curvy to straight. Going forward, it will only have two fits, one slightly curvier than the other. Over its 25 private-label brands, Macy’s is going to replace some and refreshing others.
Private labels are important for retailers to differentiate themselves from the competition. They are also more profitable than national brands because they cut out wholesaler and give them more control over design and production.
Macy’s has engaged Alvanon, a fashion-technology company for its sizing and fit for the garments. It has a data base of thousands of body scans over the past two decades.
Burberry’s Reality Check – FT, July 15, 2023
Founded in 1856 and listed on the stock exchange since 2002, Burberry is operating in a highly competitive market sector known as the luxury market. It found out that it is not enough for its posh trench coats and its checker pattern as its trademark. Meanwhile, it has to reach its midterm target of £4 billion in annual sales, which is up a third from its current level.
Its first quarter sales growth of 18% against a soft comparable period last year, puts Burberry a quarter behind from rival Hermès.
It has to take the brand further upmarket. Although the big spenders from Europe, the U.S. and China are immune from the cost of living crisis, that has to do with high-end fashion and jewelry brands.
Burberry’s current sales per square meter of retail space on only a quarter of Hermès and LVMH. It has targeted toward £25,000 which is more than double of its current sales per square meter. Its stock is up 28% over the past year, while LVMH and Hermès are up more than 45 and 80% respectively.
Among all its peers, such as Louis Vuitton, Chanel, Hermès and the like, Burberry is the only British brand in the world’s top ten luxury brands. Like all the other brands, it has been focusing on Asian-Pacific market, where the luxury products are selling well. The region accounts for 46% of its sales, compare with 57.4% for Hermès. Burberry is presence in China, Hong Kong, Japan, South Korea and is now entering into Thailand.
The U.S. market is only accounted for 25% of its total revenue. Need also to mention those high-end clienteles in Europe, Middle East and Africa (EMEA), which represented 29% of its revenue. Tourist business is generated from these regions.
Clothing is 63% of its turnover, with men’s at 29%, women at 28% and children at 6%. The rest 37% are those accessories, such as caps, belts, wallets, scarves, umbrellas, glasses, socks and ties.
From the above chart, Burberry is catching up its sales, but its operating profit is still lagging behind with those of 2013/2014 and it was at 20%. But at the end of 2022, it was only at 18.5%.
Between 2018 and 2021, its management team has been focusing to redefine its brand image. It moved its leather goods upmarket. In 2022, it redesign its stores to increase its productivity by 15% and refocus on its historic British character. Its new strategy will become useful in the years ahead.
In order for it to keep pace with its French and Italian competitors, it is going to be tough for Burberry.
Inditex is Beating Market Expectation – FT, June 8, 2023
The market has valued this Spanish fast-fashion group to more than €100 billion for the first time since the pandemic. Despite of the inflation pressure, under its new leadership, Marta Ortega who is also the generation to the founder, beat the expectation for the first-quarter earnings. Revenues in the three months to the end of March were up 13% to €7.6 billion. The group is now 30% bigger in sales terms that before the pandemic. Its rival, H&M, is only coming through its 2019 level, and Asos of UK finds itself declining.
Inditex found its way working with suppliers and avoid the discount of its merchandise. Despite inflation, it managed to lift its gross margin to 60.5%, 10 points higher than H&M, its arch rival. It culled its shop space , managed to get more revenue out of every square meter.
Inditex becomes the world’s fourth most valuable clothing retailer, behind LVMH, Nike and Dior. Its share rose to €33, the highest since August 2017. It is known for its reaction to the trends on the catwalk and remained popular with its customers despite the rising prices. It is operating nearly 7,500 stores in more than 100 countries. It is mentioned in its plan to invest €1.6 billion to help to increase its space by 3%.
Its second-quarter sales, from May until June 4, were up 16% year-on-year.
It is betting on its growth in the U.S., its second largest market after its exit from Russia. Its current presence in the U.S. is still very small. In Spain, it has 1,200 stores. Inditex has only 2% of the market share globally. It has many opportunities and gain shares from those weaker fashion specialists and even department stores.
Uniqlo’s Striving – FT, July 14, 2023
Its parent company, Fast Retailing, has not been able to regain its profit after China’s reopening. The Chinese consumers have refrained from spending as the country’s economy faltered. It is supposed to benefit Uniqlo for its very affordable clothing.
The trend for the global inequality has been on the rise as it creates continuous growth for the luxury goods.
Fast Retailing posted its record third-quarter earnings to ¥110.3 billion ($797 million), and it beats market expectation.
With Uniqlo’s 1,000 outlets in mainland China, they have been generating strong sales growth. Fast Retailing raised its full-year forecast to ¥370 billion for the year. Its full year being September to August so that we know.
Its growth has been dimmed by China’s economy outlook. Consumers are affected by its growth in economy, youth unemployment hit the record high, collapse of its real estate market, this has all led to the spending of those low-cost items.
Fast Retailing’s shares are up a third this year. They trade at 42 times forward earnings. It doubled the number of Inditex. Fast Retailing is the sixth-largest Japanese stock by market cap. It is said that in longer term, the China sales may not justify the stock price premium. Fast Retailing is still behind Inditex in inventory turning and operating margins. Inditex has a wilder portfolio of brands and more dynamic pricing.
Uniqlo has still to win over the European and the U.S. market and it is yet to build a strong market presence. Its 10-year goal of tripling sales to ¥10 trillion ($72 billion) which is a tall order of today’s market cap.
Ralph Lauren is Leading the Rally – WSJ, July 11, 2023
Ralph Lauren continues to keep commanding higher prices on its clothing and it shares are reflecting the same as well. Its share price surged as it stands above its peers.
In its quarter earnings ended April 1, it said that its average prices rose 12% compared with a year ago. It was on top of a rise of 77% over the past five years.
Compared with its peers, Levi’s announced to cut its prices on some of its value-tier jeans in order to move its inventory.
We have mentioned about Ralph Lauren’s increase of its average selling prices, but it is worth mentioning that its margin has been shrinking for four consecutive quarters. Ralph Lauren is selling a higher mix of more expensive categories, but once if it has lost its cachet, it might send its average selling prices into a downward spin.
Marks & Spencer Marble Arch Flagship at 458 Oxford Street in London W1C 1AP
458 Oxford Street, London owned by Marks & Spencer has highlighted the developer dilemma will cost more than 30,000 tons of CO2 due to the following consideration:
New building, including demolition and removal would mean 40,000 tons;
Refit would amount to 9,000 tons of CO2.
It falls victim to remote working, new environmental regulations, weaker demand for old office space.
Landlords need to renovate and refurbish the older office space for a greener, less costly alternative to demolition and rebuilding. This will still cost 9,000 tons of CO2.
Marble Arch flagship is 90 years old, and it has a complex and confusion layout.
New flagship for M&S offers a positive vision of Oxford Street’s environment, culture and economic sustainability with innovative retail, highly sustainable workplace and enhance public realm.
The decision will be made by end July whether to go for rebuild or refit. If rebuild, the completion is expected in 2026. It will be a 9 story building. It will have multiple extra floors, including two in the basement. The net construction will be almost £300 million. In total it will give 63,898 square meters.
Adidas’s Episode with Yeezy Sales – New York Times, August 4, 2023
Adidas took in €400 million sales, or about $437 million in US dollars for sales of Yeezy sneakers after it annexed relationship with Kanye West, the rapper, also known as Ye. And as part of the pledge, It was the first release of more than $1 billion worth of Yeezy sneakers. Adidas has already donated €110 million of the proceeds to organizations that counter hate and antisemitism, and an additional €100 million to be donated. The donation is not a percentage of the sales. It is just the company’s gesture.
The Yeezy sales added €150 million to Adidas’s operating profit for the first half of the year. The sales was a step forward resolving a $1.3 billion inventory that had plagued the company since it dropped out with its collaboration with Ye in last October. The shoe line was hugely profitable for Adidas, has remained popular despite the furor over the rapper’s anti-Semitic remarks.
The second batch would hit the market in the following weeks. They would include some of the most popular designs, such as Yeezy Boost 350 V2, 500 and 700, as well as the Yeezy Slide and Foam Runner.
In 2022, Adidas was hit hard by the sudden ending of its highly profitable Yeezy brand, the exit from the Russian market after tie Russian’s invasion in Ukraine and lockdowns and anti-western sentiment in China.
It gave a slightly more optimistic outlook for its 2023 after an overall sales in the second quarter went up. Its second quarter sales in China was up 16%, but fell by the same rate for the U.S.. In Europe they declined 1%. Operating profit increased more than half in the second quarter to €176 million, excluding the part of Yeezy.
Adidas said that it doesn’t expect to be profitable until 2025 at the earliest. At this time its loss would be smaller than expected.
We have to know that Kanye West, or Ye joined Adidas in 2015, and became an important partner with Adidas. By 2022, the Yeezy brand generated €1.7 billion in sales and close to €700 million in operating profit. In its first online sales, Adidas offered 15 different Yeezy models and included the popular 500 Utility Black which fetched €268 a pair on online reseller platform StockX.com and sold out almost immediately.
Secondhand Seller’s Learning Curve – WSJ, August 10, 2023
It is agreed in theory that a weakening economic environment would be good for secondhand merchandise. People would sell items from their closets and bargain hunters would be out buying. But in practice, it is a bit more complicated.
Take RealReal for example, this online market place for luxury resale told the market that its sales fell 7% in its second quarter, worse than the 5.7% as predicted by the Wall Street analysts.
But for ThredUp, who sells more generic brands, fared better by reporting growth of 8% exceeding the market expectation.
Both reported narrower net losses than analysts expectations. As the result it sent both companies share price up. Although its better-than-expect profits is encouraging, and yet operator like ThredUp still tries to keep its pricing 60-70% lower than what consumers could buy from a regular retailer. It is facing a very promotional environment in which brands are more promotional. Both companies are expecting a slight decline in sales volume because of the slowdown in its sales growth compared with 2022.
Both operators haven’t been in business long enough to know how their target buyers and sellers behave during the business downturn. And during the weakening economic business environment, secondhand goods are not taking off.
Fast Fashion Retailers Are Offering Repair Services – WSJ, August 2, 2023
In order to reduce their environmental impact, fast fashion retailers like H&M, Zara and Uniqlo are offering their repair services. This can reduce waste and it is now the trend to go.
Zara launched a nationwide wide repair services in several of its largest markets. COS, owned by H&M, is working with a startup to help customers to fix their jackets and dresses. Uniqlo is also setting up repair studios in their stores.
Unlike the high-end brands who have long been offering this service to their customers, now these mainstream fashion retailers who are typically cheaper, are rolling out this service as well.
Zara, for instance, is rolling out its “Zara preowned” services which allow customers to repair, sell or donate used clothes in France, Germany and Spain this year. It also mentioned that the service will be available in all of its major markets by 2025. It continued to say that repairs are key to its sustainability efforts and enable customers to extend the life of their clothes while reducing waste.
It is known in the industry that 92 million tons of clothing are tossed annually into landfills. For the fast fashion brands, it is on average for a garment to be worn less than one year to be discarded.
Lawmakers in Europe are drafting new laws to call for fashion companies operating in Europe to adopt a higher environmental standards to make their production processes greener and take greater responsibility for waste control with their products. Under an UN-led Fashion Charter, signatories including Gap, H&M and Inditex have committed to reduce their emissions.
Unlike the luxury brands, these mainstream brands selling cheaper clothes, the repair and the resell doesn’t entice the consumers. The attitude is correct, but the price to begin with is too low and the practicality behind this effort is whether justifiable or not is really debatable.
In my opinion that it is not a profitable operation no matter how you would dress it up. Without question it is a good discussion piece and good also for PR.
Gucci is Buying a Stake in Valentino – WSJ, July 28, 2023
Kering, the French luxury conglomerate that owns Gucci, is purchasing a stake in Valentino and added it into its stable. The Pinault family who build Kering, acquired Saint Laurent and Balenciaga has been very quiet in recent years. This time it is buying a 30% stake in Valentino for €1.7 billion, or $1.9 billion with an option to buy the whole company by 2028.
Founded by Italian designer Valentino Garavani in 1960, and later it was bought by the Qatari royal family, the Mayhoola Group, in 2012 for €600 million. This group also owns Balmain in 2016.
Kering has been lagged behind the major competitors like LVMH and Hermès because of its struggle with its biggest brand, Gucci. We saw the departure of its CEO, Marco Bizzarri, as part of its management reshuffle.
Kering also bought high-end perfumer Creed for €3.5 billion, paying 25 times earnings from EBITDA.
Valentino operates 211 stores worldwide and generated revenues of €1.4 billion and EBITDA of €350 million last year.
In the past 12 months Kering shares have fallen 3.4% giving it a market value of €66.7 billion. In comparison, LVMH shares have risen 26.8% over the same period and have a capitalization of €435 billion.
Kering’s latest financial report showing total sales grew 2% to €10.1 billion, its operating profit fell 3% to €2.7 billion compared with the previous year.