Clothing and fashion, a venture business or a trendy investment?

Clothing is one of our basic needs. But what should you know about the clothing industry before investing? In this article, we will learn a little about the subject.

Human clothing needs vary according to the weather, fashions guided by the opinions of influencers: it is no wonder that the clothing industry is a huge business worldwide. But what does the sector as a whole look like and what opportunities or pitfalls can there be for the investor?

When reading this text as well as other sources on the subject, it is worth paying attention to certain details. The sector is divided into many sources for the manufacture and sale of clothing: estimates of the size of the market can vary significantly depending on whether we are talking about either or both. Also, especially in English-language sources, it is a good idea to take into account word differences that may indicate nuance differences in the market:

Clothing, clothes: these words usually refer to clothing made of natural or artificial fabrics.
Apparel: also refers to clothing, but the term may also include various footwear and accessories.

Clothing – market overview

Market size and growth estimates

Sheng Lu, an assistant professor of fashion and apparel at the University of Delaware, estimates that by the end of 2018, the clothing sales sector would grow at an average annual rate of 5.3 percent from 2017 to 2022. He estimates the sector to be around $ 1.38 trillion worldwide (trillion).

Management consulting firm McKinsey estimates that the fashion industry as a whole will reach $ 2.4 trillion in 2016. In a more recent industry report, the company estimates that the fashion industry will grow 4-5 percent in 2018 and 3.5-4.5 percent in 2019.

In 2018, the business network Common Objective, which operates in the fashion sector, estimates that sales in the dominant sector in ten countries (excluding footwear and jewelry sales) will account for 69% of all money spent on clothing. China and the United States stand out from the crowd: their combined markets account for 42 percent of total clothing consumption. The Common Objective estimates that this is related to consumption power (US) as well as a high number of consumers (China). Five of the European markets rise to the top ten in terms of consumption volumes: (in full order) Germany, Britain, Russia, France, and Italy.

Functional innovations are rare in clothing. Growth forecasts should therefore be assessed in the light of Motley Fool’s article, which states that there is hardly much room for expansion in the clothing sector through breakthrough products. This would limit growth forecasts: Euromonitor forecasts global clothing sales to grow by only 2% by 2022.

On the other hand, technological innovations such as big data, blockchain, artificial intelligence, and 3D printing and rendering may change industry processes and benefit both sales and manufacturing. The above are still strongly evolving technologies, so their long-term impact is still difficult to assess.

Modern business models: fast and digital

Fast fashion is a trend that could have a significant impact on the shape of the clothing industry in the coming years. Sanford Stein writes in Forbes how giant fast-fashion chains like H&M and Zara have managed to compete quite successfully by bringing products to market at a fast pace and low prices.

However, this business model has recently faced challenges. Environmental impacts, as well as labor challenges, have provoked negative reactions to the sector (more on the Risks section), competing players have disrupted the market with a strong focus on the network, and consumer buying behavior shows trends in buying fewer but higher quality products.

As of early 2018, retail giant H&M had amassed an inventory of $ 4.3 billion in unsold clothing, forcing the company to hold clearance sales. The news signals that even large players are not vulnerable.

Another business model that disrupts traditional clothing sales has been online sales. In 2018, online clothing sales in the United States increased 18.5 percent compared to 2017 (all clothing sales increased 5.3 percent over the same period). Online sales accounted for 34.4 percent of all clothing sold in the United States. In the UK, online sales accounted for £ 11.6 billion and 24 percent of all clothing sales in 2018.


Industry internal expectations and outlook
When industry leaders were asked what would be the biggest challenge for the fashion industry in 2019, the uncertainty in the global economy was the most prevalent fear: 15 percent of respondents saw this as the sector’s most significant challenge. The online and multi-channel competition was seen as the biggest challenge by 13 percent of respondents. The third-place shared was the rapid pace of change in consumer habits and the growing need for transparency and sustainable development, which were considered the most challenging by 7% of respondents.

McKinsey’s report on the industry shows how management expectations also vary significantly depending on geographical location and industry segment. This was seen when asked how conditions in the industry would develop in 2019.

  • Strong faith in luxury products, medium-priced and low-cost product categories uncertain. 56% of respondents anticipate an improvement in luxury fashion, 42% in the mid-priced clothing category, and only 27% in the low-cost category. 58 percent expected more difficult times for mid-priced and 54 percent for cheap products, while only 32 percent estimated the situation in luxury fashion to deteriorate.
  • Optimism in the West, Asia less sunny view. Only 30 percent of respondents believed the situation in the Asian market would improve in 2019, while 51 percent believed it would worsen. In Europe, views were fairly evenly distributed: 44% of managers expected the outlook to brighten and 47% to worsen. There was optimism in North America: only 30 percent feared times would harden and 64 percent had hope that the coming year would be better.

Fast fashion against sustainable development

As early as 2016, McKinsey reported that apparel production more than doubled between 2000 and 2014 and that sales growth has been rapid, especially in emerging markets. On the other hand, McKinsey also stressed that the industry has failed to improve its ecological footprint and social responsibility at the same pace as this growth. Labor-related problems have persistently remained the mainstay of the industry; the production of one kilogram of fabric, in turn, produces an estimated 23 kilograms of greenhouse gases.

Water consumption is also a problem for sustainable development in the sector. Many of the stages in the life cycle of clothing, such as growing cotton, dyeing fabrics, and ultimately washing clothes, consume a lot of water. It is estimated that the fashion sector accounts for about one-tenth of all industrial water consumption.

The above are both ethical issues and potential business risks. The industry is showing signs of a shift towards more sustainable processes, such as second-hand clothing outlets and clothing rental services, brand design for sustainability from the outset, the introduction of waterless dyeing processes, and the introduction of more environmentally friendly practices into existing processes.

Businesses are under pressure to consider the ecological impact of their actions from both politicians and consumers: for example, President Emmanuel Macron encouraged the French brand Kering to take the lead in eco-efforts in the sector. The company acknowledged that sustainability is part of consumer demands, especially for the millennia and the Z generation.

Sustainability efforts also face challenges in the sector. Although consumers demand sustainability and companies want to respond to this desire, the industry has failed to make rapid progress or agree on common standards for what constitutes sustainable clothing. The fragmentation of supply chains also complicates matters: achieving more sustainable operations would require action in every area of ​​the manufacturing process.

Workers’ rights

Challenges in the clothing sector also include the promotion of workers’ rights. Poor working conditions and workers’ rights are being suppressed in many manufacturing countries. The five countries that import the most clothing into the European Union all fall into Category 5, “No Guarantee of Workers’ Rights, ”in the 2019 Global Rights Index published by the International Trade Union Confederation. Two of these countries, Bangladesh and Turkey, were among the ten worst workers listed in the report.

An essay by Human Rights Watch from 2017 estimates that the lack of transparency in the supply chains of many clothing manufacturers is part of the problem. Unauthorized subcontracting is common, which gnaws at the quality of control.

Sustainability and corporate responsibility can be both risks and opportunities for clothing companies: much depends on how consumer demands evolve and how strongly public authorities continue to focus on green regulation and the promotion of workers’ rights. It is currently difficult to predict which companies will be in the best position in this field in the coming years.

Placement in the clothing industry

There are several factors involved in the clothing market that an investor should be aware of. As the investment and research company Value Line points out, this is a highly competitive sector: there are large retailers, brands focused on narrower market segments, and companies seeking new market areas. Fashions are also changing rapidly, putting pressure on companies to adapt to new situations at a rapid pace.

Value Line also points out that the industry is sensitive to the general economic situation: consumers buy clothes in good times, but reduce this consumption as the economy turns into a recession.

In 2018, American fashion and beauty startups raised a total of $ 2.06 billion in venture capital investments, up 30 percent from 2016. Industry experts and investors listed certain factors that attracted themselves from an investment perspective: these included: strong strategies in both online and offline environments and core products that favor classic elements that are not affected by seasonal fashion. Friction between companies and investors was caused, for example, by the slow growth rate compared to the technology sector.

According to a survey by Deloitte, the apparel and clothing industry outperformed other product categories in measuring the interest of private equity firms, despite its lower growth forecast to 2021. The reasons for this were thought to range from, for example, higher return expectations to a desire to increase previous market share. However, the interest expressed and the investments made did not always go hand in hand.

Investment in clothing production in the EU has remained stable in the 2010s: although total fell from € 1.8 billion in 2009 and 2010 to € 1.4 billion in 2011, it has remained stable until 2018.

Listings, acquisitions, and unicorns

Unicorns and IPOs in the United States

E-commerce brand Revolve was listed on the New York Stock Exchange in the summer of 2019: the company raised $ 212 million through its IPO and was estimated to be worth $ 1.8 billion. Revolve has made strong use of its algorithms to calculate trends for large amounts of data, as well as its online presence: the company reaches 5.5 million followers through its Instagram account and leverages more than 3,500 influencers.

Another brand with a strong network focus, StockX, received $ 110 million in funding this year as well as $ 1 billion in valuation. StockX is focused on reselling sneakers. The company’s pricing processes and the detailed sales and price development histories formed for different products take the model of the stock market rather than the ordinary shoe trade.

Startup companies

Successful clothing startups can also be found in Europe. Venture capital company Panostaja acquired a 43 percent stake in children’s clothing company Gugguu in November 2018; the purchase price was not disclosed. Recycling of plastic including coffee and sneakers preparatory Rensistä, in turn, became one of Finland’s most successful Kickstarter projects: the company received orders worth more than half a million euros in the summer of 2019. Rens success also attracted well-known angel investors in the financing of the company.

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