Apparel & Accessories
Date January 2018
Approximate net recovery on cost
- The value of U.S. nondurable goods manufacturers’ shipments of apparel increased 4.9% year-to-date through November 2017 compared to the same period in 2016
- Rising consumer confidence and disposable income has encouraged consumers to spend more on discretionary products, which results in industry-wide revenue gains. Furthermore, declining input prices for upstream manufacturers and an appreciating dollar have improved average margins
- However, rising vertical integration among apparel retailers has continued to undermine industry operators’ importance within the apparel supply chain
- A major industry risk includes overbuying and the resulting unsold inventory due to misjudged fashion trends
Gender neutral clothing trends: A small but growing portion of apparel retailers have introduced gender neutral apparel options for children. In July 2017, Target released its new back-to-school apparel and accessories collection, which included gender neutral options. The company partnered with Toca Boca to design the collection, and included sizes ranging from 4 to 16. The head of Toca Boca, Mathilda Engman, said in a press release that the collection would be located between girls’ and boys’ departments within Target stores.
Additionally, in January 2018, Abercrombie & Fitch launched the “Everybody Collection,” its first gender neutral line of clothing for children. This first foray into gender neutral apparel is available online and in stores, and features 25 styles, including tops, bottoms, and accessories. The styles incorporate skate and streetwear culture, as well as the military-inspired apparel trend. Abercrombie & Fitch also explicitly added that it is building on the current blurring of gender lines in the wider culture.
This trend of blurring gender lines in apparel and apparel accessories, if it continues, could present an advantage to wholesalers. Gender neutral inventory would mean that wholesalers could focus their attentions on a smaller segment of styles.
Amazon increases third-party seller fees: In January 2018 Amazon raised seller fees for third-party sellers of apparel, accessories, handbags, and sunglasses. This increases the percentage of the sale it takes from third parties. The company raised the fee for the Clothing and Accessories category from 15 percent to 17 percent and for the Handbags and Sunglasses category from 15 percent to 18 percent on items priced above $75. Items under $75 will still be charged the 15 percent rate. According to Instinet, the changes mean that apparel now carries the steepest fees of all categories on Amazon.
There are two reasons Amazon may be increasing its fees: either to dissuade third-party sellers and increase the prominence of its own apparel offerings, or because the company feels confident enough in its ability to sell apparel that it believes sellers will keep coming back despite the price increase. This confidence is well founded, as a survey of 1,500 U.S. shoppers indicated that more than half (52 percent) bought clothing online from Amazon in the second half of 2017.
Changing trade: Based on the outcome of the 2016 U.S presidential election, the Trans-Pacific Partnership (“TPP”), the proposed trade agreement between the U.S., Canada, Mexico, Australia, Vietnam, and seven other countries in South America and East Asia was not ratified by Congress. Along with other objectives, the TPP would have provided duty-free access for Vietnamese clothing imports. Because approximately 90 percent of the apparel sold in the U.S. is produced abroad by U.S. or foreign companies, any reduction in import duty was expected to have a noticeable impact on apparel and accessory prices. Potential tariff reductions, combined with ongoing low transport costs due to lower gas and oil prices, were expected to decrease the price of apparel and accessories for retailers and consumers, potentially increasing demand. Given the current administration’s stance against entering new foreign trade deals, as well as its current focus on renegotiating NAFTA (North American Free Trade Aggreement), it remains to be seen what U.S. and foreign-partner trade terms may exist going forward. Given impending changes to the foreign trade landscape, lenders should continue to partner with appraisers to understand any changes in a company’s manufacturing resources along with any resulting impact on cost of goods and maintained gross margins.
Vertical integration remains a threat: Vertical integration, the process in which several steps in production or distribution are controlled by a single company in order to increase control, is posing an increasing threat to the industry. Major players in the apparel sector, including Vanity Fair Corporation and Philip Van Heusen, have outsourced most of their manufacturing operations to low-cost manufacturers in Asia. In doing so, they now function as both wholesalers and retailers.
It is not just well-established companies disrupting traditional norms. Many smaller players are founding their businesses on the same strategy. Menswear retailer Bonobos, women’s intimates company Adore Me, and menswear brand Frank & Oak are just a few examples of vertically integrated retailers that have gained strength during the past decade.
But they are all overshadowed by fashion giants H&M and Zara, whose vertical integration has enabled them to define the fast-fashion category. It is what enables the companies to turn the latest trend into new product, often in small batches, and have it in stores within just a couple of weeks. Moving into new territory, in January 2018, Zara opened a “click and collect” pop-up location in London where customers can shop online and pick up their orders the same day, creating a faster direct-to-consumer experience.
Vertical integration will remain a threat to wholesalers. Powerful apparel companies will continue consolidating the supply chain to reduce costs and increase profit margins, lowering demand for wholesalers. To remain relevant, industry operators must lower their own prices and widen services available to buyers to avoid becoming irrelevant.