Our clothing needs change according to weather, our fashions according to trendsetter whims: it’s no wonder that the apparel industry is a global juggernaut. But what does this giant sector look like as a whole - and what opportunities or perils does it hold for investors?
When reading this text (as well as other sources) it is advisable to pay attention to certain details. The industry is split in many sources into manufacture and retail, and estimates of the market size can vary notably depending on whether one or both are included. Additionally, terminology may cover different fields or scopes within the market:
- Clothing: usually refers to garments made of manufactured or natural fabrics.
- Apparel: can also include footwear and accessories in addition to clothing.
The Clothing Industry - Market Overview
Market Value and Growth Estimates
Associate Professor Sheng Lu, Department of Fashion & Apparel Studies at the University of Delaware, estimated in late 2018, quoting Marketline, that the global apparel retail industry would see a CAGR of 5.3% from 2017 to 2022. He estimated the sector’s global value in 2019 would be ca. $1.38 trillion (a trillion = one thousand billion, or one million million).
McKinsey estimated the fashion industry as a whole to reach a total value of $2.4 trillion in 2016. In a more recent industry report, they estimated the growth in the fashion industry to be 4-5% globally in 2018 and 3.5-4.5% in 2019.
According to a 2018 estimate by the fashion industry business network Common Objective, ten countries dominate fashion retail (footwear and jewellery excluded), accounting for a combined 69% of all spending. China and USA stand above others: their combined markets represent 42% of all spending on clothes. Common Objective attributes this to purchasing power (USA) and high number of buyers (China). Of European markets, five are in the top 10 by spending value: (in order of size) Germany, UK, Russia, France and Italy.
Functional innovation is rare when it comes to clothing: growth estimates should be considered in the context that, like this article by Motley Fool states, the apparel market seems to currently have little to no ways to expand much in terms of new breakthrough products. This would limit growth prospects: Euromonitor predicts that global apparel sales would increase by 2% by 2022.
However, it is possible technological innovations such as big data, blockchain, AI and 3D printing and rendering could change industry processes and benefit both retail and manufacture. The aforementioned are technologies very much in their development stages so it is currently hard to predict their long-term impact.
Modern Business Models: Fast and Digital
A trend with major potential implications to shape the clothing and apparel industry in the coming years is fast fashion. As Sanford Stein argues in his text in Forbes, giant fast fashion corporations such as H&M and Zara have managed to compete highly successfully with their ability to bring products to the market with a fast pace and low prices.
This business model has, however, seen challenges as of late. Ecological impact and labor issues have created backlash towards the industry (more in the Risk Factors section), competing players have disrupted the market by focusing heavily in an online presence, and consumer consumption has seen a trend towards spending on fewer but more quality items.
In early 2018, retail giant H&M had accumulated an inventory worth $4.3 billion in unsold apparel, forcing the company to hold clearance sales; this seems to indicate that even major players are not invulnerable.
Another business model disrupting traditional garment retail has been online sales. In 2018, the online apparel sales in the U.S. grew 18.5% compared to 2017 (the total apparel sales growth was 5.3%) and represented 34.4% of the total U.S. apparel sales. In the UK, online sales represented £11.6 billion and 24% of all apparel sales.
Expectations and Views Within the Industry
When fashion executives were asked to name the fashion industry’s biggest challenge for 2019, the uncertainty of the global economy dominated: 15% of respondents considered it the sector’s biggest challenge. Online and omnichannel competition came close with 13%, with the rapid pace of change in consumer preferences as well as the increasing need to be transparent and sustainable on shared third place (7% each).
Industry segment and operating environment can also affect expectations. McKinsey’s industry report showed executives’ expectations differed significantly according to segment and geography, when they were asked how they felt conditions would develop in 2019.
- Stronger belief in premium, doubt for mid-market and value. 56% of respondents expected conditions to get better for luxury fashion, 42% for the mid-market segment, and just 27% for the value segment. 58% expected worse conditions for mid-market and 54% for value segment, and just 32% for the luxury tier.
- Optimism in the West, less so in Asia. Only 30% of respondents believed 2019 would improve things for Asia, with 51% believing things would get worse. Europe was split quite evenly, with 44% of executives expecting improvements and 47% fearing for declining conditions. North America was optimistic: just 30% feared things to trend worse while 64% felt hopeful of a better 12 months ahead.
Fast fashion vs Sustainability
As pointed out by McKinsey in 2016, the amount of clothing produced more than doubled between 2000 and 2014 and the growth in sales has been fast especially in emerging economies. However, they also highlighted how the industry has failed to improve its environmental footprint and social responsibility measures in step with that growth: a variety of serious labour issues persists and the manufacture of a kilogram of fabric produces an estimated 23 kilograms of greenhouse gases.
Another sustainability issue is water consumption. Parts of the apparel lifecycle, from cotton farming and dyeing fabrics to washing clothes, are water-intensive activities. It is estimated the fashion industry represents more than one tenth of water used across all industries.
These are both ethical issues and potential business risks. There are some signs of the sector moving towards more sustainable practices, such as second-hand sales platforms and apparel rental, designing brands with sustainability in mind, using a waterless dyeing process and integrating more eco-friendly practices into existing processes.
Companies are feeling the pressure to be more mindful of their environmental impact from politicians as well as consumers: for example, French brand Kering was encouraged by French president Emmanuel Macron to lead an eco-push and the company acknowledged sustainability to be a demand especially among millenial and Gen Z consumers.
Sustainability aspirations have their challenges in the industry. While both a consumer demand for sustainable clothing and a company interest to answer it seem to be there, the industry has not managed to move fast or set down standards for sustainable manufacturing. The fragmentation of supply chains also complicates the issue: a greater measure of sustainability would require activities in all areas of the manufacture process.
Another garment sector issue is workers’ rights. Apparel is produced in many countries with poor working conditions and labour rights problems: the top 5 countries importing clothing to EU were all rated in category 5, “No guarantee of rights”, in the International Trade Union Confederation’s 2019 Global Rights Index. Two of them, Bangladesh and Turkey, were on the report’s list of the world’s ten worst countries for workers.
A Human Rights Watch essay from 2017 suggests a part of the problem is the lack of transparency in the supply chains of many clothing manufacturers. Unauthorized subcontracting is common, which erodes scrutiny.
Sustainability and corporate social responsibility can pose both risks as well as opportunities for apparel companies, depending on future consumer demands and how much authorities will focus on ecological regulation and labour rights. For now, it’s hard to predict which companies will be in the best position on this front in future years.
Investing in the Clothing Industry
The clothing and apparel market involves several considerations that investors should be aware of. As the investment and research company Value Line points out, the sector involves a great deal of competition: major retailers, niche businesses catering to specific market segments, and companies aiming to enter new market regions. Fashions change quickly, which requires clothing companies to adapt to changes fast.
As Value Line notes, the sector is also sensitive to the broader economic environment: consumers buy clothes when times are good, but can cut back on their apparel purchases if the economy experiences a downturn.
In 2018, American startups in the fashion and beauty sectors attracted a total of $2.06 billion in venture funding: this figure was up 30% from 2016. Industry experts and investors list some qualities drawing interest, such as competent strategies in both online and offline environments as well as core products with classic elements, independent of seasonal fashion. Factors causing friction between companies and investors included slower growth rates compared to for example the tech industry.
In a survey by Deloitte, apparel and accessories surpassed other segments in private equity investor interest despite having a lower growth forecast until 2021. Reasons can be varied, such as a higher expected returns or interest in growing market share. Expressed interest and actual investment did not always correlate, however.
In the European Union, investments in the clothing manufacturing industry have stayed at a steady level during the 2010s: while the total invested dropped from the €1.8 billion of 2009 and 2010 to €1.4 billion in 2011, the figure has kept at this level up until 2018.
IPOs, Acquisitions and Unicorns
Unicorns and IPOs in the US
Online retail brand Revolve listed on the New York Stock Exchange in the summer of 2019, raising $212 million in its IPO and being valued at $1.8 billion. Revolve has leveraged algorithms that calculate trends from vast amounts of data, and its online presence, reaching 5.5 million Instagram followers and making use of more than 3,500 influencers.
Another online brand, StockX, received financing of $110 million with a valuation of $1 billion this year. StockX is focused on the re-sale of sneakers, emulating stock markets with its pricing methods and detailed sales and price development histories for various products.
Startups and an Old Classic in Finland
There have been some recent cases of successful apparel startups also closer to home. The VC firm Panostaja bought a 43% share of children’s clothing company Gugguu in November 2018 for an undisclosed price. Rens, manufacturing sneakers from recycled plastic and coffee grains, became one of the most successful Finnish projects on Kickstarter as they received orders for more than €500k through the platform in the summer of 2019. Rens’ success also attracted some notable business angels to invest in the company.
Of established Finnish brands, Marimekko has displayed a positive trend as the company’s stock has risen 47% in value during 2019 and 308% over three years; there is, however, skepticism over if the company can keep surpassing expectations after this growth period.