19 April 2021
As the economy begins to re-open later this year the UK could experience a ‘going out boom’, according to Brewin Dolphin, which would have a knock-on effect for well-placed clothing and fashion brands.
The wealth manager said that retailers – particularly in clothing – have had a stark experience of the Covid-19 pandemic, with some companies thriving while others focussed more on surviving. The last 12 months have not only accelerated the pace of change in the sector, with online dominating sales, but they have also made a clearer separation between the success of different business models employed by fashion brands.
With excess savings of more than £100 billion in UK banks1 last year – only likely to have increased – and international travel likely to remain limited, fashion brands could be in line for a boom as Britons ditch the leggings and tracksuits of lockdown, to buy new outfits and go out on the town. Boohoo has even created a whole section for June 21st outfits, when the economy is expected to re-open in full.
Nicla Di Palma, equity analyst at Brewin Dolphin, said: “As people, especially young people, start to go out again properly – whether to restaurants or bars – there is likely to be a knock-on effect for clothing retailers. Although some brands have performed well during the pandemic, a lot of what they sold was comfortable clothing for being in the house, like active wear, pyjamas, and leggings. Outfits for going out and enjoying nightlife will make a comeback and some fashion brands will be well-placed to reap the benefits of that shift – particularly if they weathered the worst of the pandemic last year. A wealth manager, like Brewin Dolphin, can build these themes and trends into your investment portfolio.”
Brands go for a bargain
Among the big changes in retail during the pandemic has been the collapse of some of the biggest names on the UK high street. In turn, this led to consolidation in the sector, perhaps most notably Asos’s purchase of Topshop, Topman and Miss Selfridge and Boohoo’s acquisition of the Dorothy Perkins, Burton, and Wallis brands for £25 million.
Nicla Di Palma said: “Boohoo didn’t pay much for the brands – £25 million versus its market capitalisation of more than £4 billion. If they succeed, then the company will have brands that appeal to a different demographic to its typical customer profile. And, in the beauty operation it bought from Debenhams, has an opportunity to enter a new market altogether.
“It is unprecedented to have so many big brands coming onto the market at once. It is a big opportunity for the surviving retailers. Even Marks and Spencer made an acquisition in the form of Jaeger. Like many industries, fashion retailers have either fallen by the wayside during the pandemic or emerged stronger and ready to lean into the recovery through acquisitions and strategic moves.”
Still a role for shops
The measures brought about by the pandemic have accelerated the shift towards online shopping for clothes. According to statistics from the Office for National Statistics, the share of total retail purchases made online hit record levels in 20212. The trend has caused some to questions whether physical shops will be required in the future.
Nicla Di Palma said: “Despite the changes brought about by the pandemic, there will always be a role for shops. People still want to try on clothes and returning items to online vendors is still an imperfect process – particularly when some brands don’t provide free returns. Shops can be a place to market clothes, pick them up after ordering them online, try on in store, and provide refunds straight away.
“There may be fewer stores for every brand and, with that, landlords may have to accept lower rents, but there will also be places to see and appreciate fashion collections. There’s a big difference to how they look online and offline and people will likely enjoy the experience of going shopping again after lockdown.”
It’s all about the model
The pandemic has caused a clear distinction between successful and unsuccessful business models in fashion retail. E-commerce companies have been the clear winners, with shops disrupted by lockdowns throughout the year, but not all online operators are the same.
Nicla Di Palma said: “The pandemic made it clear that you either need to be a strong brand with loyal customers that keep coming back or have excellent technology at your disposal. If you’re one of the many and don’t have differentiation in either respect, be prepared to see declining sales.
“It also made clear that, if you’re a distributor of third-party brands then you have no pricing power. Consumers will inevitably choose whichever retailer can offer the cheapest price, which puts downward pressure on brands that can be bought in multiple places.
“When a company owns a brand or has exclusive rights to its product range, then consumers have to pay what they charge. This is one of the reasons why Asos bought Topshop. While it may require some investment and revival, unlike many of the other brands on its site Asos isn’t buying Topshop products wholesale and distributing them, meaning they have greater control over margins.
“There have been lots of winners online, but even they have different models. Many e-commerce retailers have seen sales shoot up with Covid-19, but will need to choose the strongest model for when growth normalises. Asset-light models make much more sense, for example, rather than holding inventory. Looking to the long term, you need to choose a company with clear plan and a good strategy that is being implemented.”
In fashion:
Zalando – Berlin-based Zalando operates across 17 markets in Europe, offering fashion and lifestyle products. It is a product of the Rocket Internet hub that has produced a number of Germany’s biggest e-commerce companies. Nicla Di Palma said: “Zalando is different to most fashion companies – while it is still largely a traditional wholesale model, it is increasingly moving towards selling services to retailers. Over time, this will mean a greater focus on providing logistics and technology to members of its partner programme, rather than buying stock from brands to sell itself. Eventually, that should mean it doesn’t have to manage inventory or risk being left with surpluses.”
Farfetch – Farfetch is an online luxury fashion platform, selling hundreds of products on behalf of boutiques across the world. The company recently announced a significant boost to revenues as a result of lockdown3. Nicla Di Palma said: “Farfetch operates a similar model to Zalando, only it is much more focussed on luxury brands and is very asset-light. Boutique retailers put their products on the website and retain the inventory and price risk, paying a fee to use the Farfetch service when they sell items.”
Inditex – Inditex is best-known in the UK for being the owner of Zara, but is the company behind a range of brands including Massimo Dutti and Pull&Bear. It sells in 202 markets and has a physical retail presence in nearly half of those4. Nicla Di Palma said: “Inditex is a very strong retail company. It is particularly good at making small batches of items, trying them, and making more if they sell well – unlike traditional retailers which will typically produce two collections per year and end up with much more inventory. The company is taking hard decisions around closing stores and focussing efforts on its online channels, and marketing brands to specific age groups.”
Out of fashion:
Marks and Spencer – Marks and Spencer (M&S) is one of the UK’s most iconic brands. After seeing declines in sales over the past decade, questions have been asked over the future of its clothing business. Nicla Di Palma said: “M&S changes strategy very often, and from one CEO to the next. When he was CEO, Marc Bolland tried to take the company down a more fashionable route. However, trying to change key customer tends not to be a good move, and so we have seen a return to more traditional staple clothing with Steve Rowe. There is nothing wrong with being a mass-market fashion retailer and brands should stick to their strengths.”
Ted Baker – Ted Baker is an iconic British fashion brand. Two years ago it issued several profit warnings after it announced a series of problems in its business. Nicla Di Palma said: “From a strategic perspective, Ted Baker is a bit all over the place. Its well-publicised issues aside, the products come at a premium price; yet, you can buy it more or less everywhere. If you want to be a premium brand, you can’t be ubiquitous. This is where growth can come at the expense of perception.”
Boohoo – Boohoo is the fast-fashion business behind a series of brands, including NastyGal. Last year it was rocked by allegations over the working conditions at some of its suppliers. Nicla Di Palma said: “The main risk from Boohoo’s perspective is governance. Even if the company’s supply chain situation is remedied – and its business model is sustainable following that – there are still concerns over the company from many quarters, despite the arrival of new brands and, with them, potentially new customers.”
1Source: https://www.theguardian.com/business/2020/dec/07/uk-covid-savings-haldane-bank-of-england
2Source: https://www.ons.gov.uk/businessindustryandtrade/retailindustry/timeseries/j4mc/drsi
3Source: https://www.standard.co.uk/business/farfetch-results-revenues-pandemic-lockdown-b921334.html
4Source: https://www.inditex.com/en/about-us/our-brands/zara
PRESS INFORMATION
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NOTES TO EDITORS
Disclaimers:
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Brewin Dolphin is a UK FTSE 250 provider of discretionary wealth management. With £51.4* billion in total funds, it offers award-winning personalised wealth management services that meet the varied needs of our clients including individuals, charities and corporates.
We give clients security and wellbeing by helping them to protect and grow their wealth, in order to enrich their lives by achieving their goals and aspirations. Our services range from bespoke, discretionary investment management to retirement planning and tax-efficient investing. Our focus on discretionary investment management has led to significant growth in client funds and we now manage £44.6* billion on a discretionary basis.
Our intermediary business manages £15.8* billion of assets for over 1,700 advice firms either on a discretionary basis or via our Managed Portfolio Service and the MI Brewin Dolphin Voyager fund range.
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*as at 31st December 2020