A finger put up to the wind in fashion today will find, not just change blowing through the industry, but a whirlwind threatening to carry away everything not tied down.
The headline-grabbing designer debuts this past season — from Matthieu Blazy at Chanel to Demna at Gucci — are just a sign of how powerful a storm is passing through.
There’s also the continued slide of the American department store, the near-complete digitization of marketing, President Donald Trump’s trade war with the world, the after-effects of the pandemic, the tech dominance of a few large players like Meta and Google, and so on and so forth.
The industry is just different today, even from only seven or eight years ago.
And as the changes started to pile up, the old business models stopped working or stopped working well enough to avoid some kind of a big transformation project.
The numbers just aren’t adding up the same way.
Antony Karabus, a longtime strategic adviser to retailers, gave a back-of-the-envelope accounting of how the costs of all the retail must-haves have changed since 2017 or 2018.
- “In retail, IT was somewhere between 1.5 percent and 2 percent of sales,” Karabus said. “Now it is anywhere from 3 percent to 5 percent-plus.
- “Marketing has gone from under 2 percent to somewhere between 3 percent and 5 percent of sales, which is massive,” he said. “Today, the cost of digital technology, digital marketing is dominated by Amazon, Facebook, Instagram and Google.”
- Logistics costs have “exploded” from a range of 3 percent to 4 percent of sales to anywhere from 5 percent to 10 percent as the industry seeks to keep up with Amazon’s free shipping and returns for Prime members.
Taken together, that’s a 5- to 10-point swing in costs that has brought the respectable 10 percent or 12 percent EBITDA (earnings before interest, taxes, depreciation and amortization) margin down into the doldrums of the midsingle digits.
“It’s getting a lot harder to make money,” Karabus said. “And whenever you think you’ve got a really strong position, it’s not guaranteed. The great example is what’s happening with Lululemon right now with Alo and even Costco at the other end of the spectrum getting stronger and stronger. [Lululemon was] considered to have had a strong moat around their business. You see it even with folks like that.”
Fashion has always been competitive and brands have had to push to keep improving. But getting just that much sharper might not be enough.
“If you continue to incrementally get better, you are falling further behind Amazon, Costco and Walmart, because they have more wherewithal to leapfrog further,” Karabus said.
And even the very big have proven to be able to be agile, too, with Walmart standing as Exhibit 1, as it seems to be successfully retooling to meet the competitive threat of Amazon.
Since that divide between the very big and everyone else in retail is not a new thing, the giants have already taken big steps ahead.
Investment banker David Shiffman, head of consumer retail at Solomon Partners, said: “Of the top 150 publicly traded retailers, 82 cents of every revenue dollar goes to the top 20. The bigger you are, you have greater scale, you enjoy lower cost of capital, you have a stronger balance sheet, you have the ability to reinvest more.”
Business is draining away to the extremes.
“Where has market share gone? Luxury players selling to U.S. consumers and fast-fashion players — Zara and H&M — have done fantastically well. Off-price has taken enormous share,” Shiffman said.
“What’s left are the lifestyle brands that are predominantly the specialty retailers that have been around for decades, that are very mature, have large store bases, have large DTC businesses that now are lower margin businesses,” he said. “The market doesn’t ascribe high values to them. The middle has gotten hollowed out.”
This all goes a long way to explaining fashion’s curiously active deal market, which was supercharged instead of shut down when Trump again ratcheted up tariffs on U.S. imports.
Dick’s Sporting Goods Inc. snatched up Foot Locker Inc. in a $2.4 billion deal. Prada is buying Versace from the struggling Capri Holdings. Authentic Brands Group is taking Guess Inc. private and bought Dockers from Levi Strauss & Co. Bluestar Alliance is buying Dickies from VF Corp.
At the other end of the retail market, Saks Global is shopping a stake in Bergdorf Goodman and The Webster sold a majority position to Frasers Group.
Bergdorf Goodman
courtesy image
Shiffman is bullish that there’s more activity ahead for the deal market as companies come to grips with the change that’s still to come in retail.
“When you have black swan events, hundred-year floods, they’re supposed to happen infrequently. The reality is, in retail, they’re happening annually,” he said.
“Those who are miscapitalized — either undercapitalized or over-leveraged — are going to have to remedy balance sheet-types of challenges. You’re going to see more large-cap multibrand players continue to prune their portfolios. You are going to see a growing appetite by brand management companies to deploy more capital and buy more businesses and buy businesses of size and scale.”
That leaves the giants playing in another league entirely, the rare unique companies starting up their growth curve, everybody else looking for traction and the brand management crew, which at the very least has a clear vision for the future.
“The predominant portion of the companies that are for sale today are distressed,” said Heath Golden, chief executive officer of Marquee Brands, which owns the intellectual property of Martha Stewart, Ben Sherman, Anti Social Social Club, Body Glove and many more.
“Either it’s a healthy brand within a distressed company or a distressed company,” Golden said. “Liquidity can be challenging and that’s causing people to seek buyers.
“Then there’s other companies maybe that aren’t yet distressed, but in this environment with the challenges that are happening out in the sourcing world, largely tariff driven, there’s companies that are just struggling to see where the growth comes from — so trying to sell before anything turns too bad on them. The brand management companies have an advantage in that situation because our model helps to solve for those things.”
And that’s really what everybody’s looking for — a solution for an uncertain future.
The Bottom Line is a periodic business analysis column written by Evan Clark, deputy managing editor, who has covered the fashion industry since 2000.
