The perfect storm | IR News

The perfect storm

Posted Date: 04/09/2012

By Bill Rooney

Australian fashion retailers reeling from the impact of overseas e-commerce businesses selling into Australia will face further pain as the impact of global fast fashion giants entering the Australian market is felt.

Australian retailers need to strategise and act now to survive and prosper in this changing market.

This article aims to give you some insights into the potential impact, and the actions other retailers around the globe have taken in similar situations, and provide you with some strategies to think about.

The Australian fashion industry is estimated to be worth $12 billion and will have an average annualised growth of only 1.2 per cent over each of the next five years, according to IbisWorld research.

In Inside Retail Magazine last issue (Enter the Dragon, April/May 2012), I estimated that within five years the top five global fast fashion retailers will potentially generate $1.3 billion of sales in Australia, based on their track record in the UK and Canadian markets (see figure 1).

Taking into account the market entry of these global giants, the low expected growth over the next five years, and the fact that shoppers are moving towards lower and medium priced clothing, this combination gives us what we call a perfect storm in the fashion industry.

We expect there to be several causalities among Australia’s fashion groups both large and small who are not quick to adapt to these market changes.

Which fashion segments will be impacted the most? Within these segments which companies are vulnerable? What can we learn from overseas companies faced with the same experience? What can you do to prepare and prosper to meet these challenges?

In this article we answer these questions and give you a head start in preparing for these challenges.

Who will be impacted?

The simple answer is that the impact will be substantial across all fashion segments.
We have conducted detailed analysis and estimated the percentage of marketshare that will potentially be lost to this overseas invasion.
The good news is that we expect that these new players and increased activity will draw customers into the fast fashion segment and away from mass fashion, independents, and older demographic retailers.
The most vulnerable segments are:
• Fast fashion – lower pricepoints retailers will lose potentially 36 per cent marketshare and are in our opinion the most vulnerable.
• Fast fashion – medium pricepoints retailers will lose potentially 36 per cent marketshare.
• Department stores – will potentially lose 23 to 25 per cent marketshare.
• Mass merchants and retailers catering to older demographics - will lose potentially 20 per cent marketshare (See Figure 2 for a summary of our detailed analysis).

Which companies are vulnerable?

All companies in the fast fashion lower and medium price point range are vulnerable, as well as the department stores.

Some obvious businesses that will be impacted include:

Witchery and Country Road are vulnerable to Zara, Cotton On is vulnerable to Uniqlo, and Sportsgirl is vulnerable to H&M.

I have highlighted these companies as obvious examples as I believe that they are well equipped to face the challenge with a strong management team, merchandise, track record, and brand identity.

In the fast fashion lower pricepoint segment, most businesses will face difficulty due to thin management structures and the lack of a point of difference and brand identity compared to the global brands – why buy the copy when you can buy the original from fast fashion originators?

The Just Group in particular has several brands that compete in this area that are in need of a major revamp as has been previously reported in retail press.

Department stores will find it difficult as these new competitors resemble mini department stores with average stores generating upwards of $7 million to $8 million per annum, and flagship stores such as Zara in Sydney’s Pitt St Mall generating $30 million to $40 million on a per annum basis. This turnover is not much less than the average turnover of a Myer or David Jones store.

Warning! Australian retailers tend to be reactive rather than proactive in dealing with globalisation issues, the best example of which is e-commerce where for the past five years a majority of retailers have ignored the threat.
The consequences of ignoring the fast fashion phenomenon could be terminal for a number of our well known brands.

What can we learn from overseas?

H&M entered the US market in 2000 and by 2003 had 66 stores and sales of around US$450 million. They are now at US$1.34 billion and 233 stores.

At the same time between 2000 and 2003, J.Crew was experiencing stagnant sales and profits due to increased competition and a lack of differentiation and direction.

In January 2003 Millard “Mickey” Drexler joined the company as CEO and chairman, bringing inspiration, creativity and unparalleled management expertise to J.Crew.
“I look at companies as price players or quality players. The only way to go with J.Crew was quality,” Drexler said.

J. Crew was positioned to appeal to consumers who had graduated from Gap and desired something hipper and less expensive than Ralph Lauren and the like.

Classic American style, with a twist became the design direction. J.Crew ditched the old logo and added whimsical “critters”, new linings and trim detail, and emphasised colors and unique fabrics.
They raised pricing and developed a multi-tiered pricing strategy for high priced designer level goods and lower priced casual items.

Stores were re-made with more vibrant colors, the removal of clutter, and attention to details like music, associates development, and service and sales expertise.

It used brand attributes to resurrect the hotness, without losing the focus on heritage.

J.Crew proved you can move up in fashion and pricepoints.

This strategy took time - upwards of two years - and involved risk.

The company needed to liquidate old inventory, and as a result, losses accelerated in the first full year.

It takes time to develop new looks and get customers back in.

The learning for Australian retail businesses competing directly with global fast fashion retailers is that it takes time and innovation across all areas of your business to reposition yourself to compete and survive.

A store redesign or makeover is a small but important part of the process at the end of an exhaustive re-evaluation of the business model and brand.

How to prepare

Here are some suggestions on how to meet these challenges.

1. First recognise you have a problem - all fashion segments will be impacted materially.
2. Visit overseas markets to better understand your competitors strengths and positioning and how other retailers have dealt with the challenges – you should review the winners and losers.
3. Calculate the impact that these competitors will have on your bottom line, market share and growth.
4. Use outside experts to help you with this process. Businesses faced with the prospect of decline often deny there is a problem until it is too late, or have an overinflated view of the strength of their business viewed from an internal perspective. Retailers are also so stretched these days that they often don’t have the internal resources and expertise.
5. Take time to develop your positioning and point of difference across your brand, merchandise design, pricepoints, service levels and finally store design. To develop a new and unique point of difference is a thee to six month exercise involving several full time and part time internal resources and external experts.
6. Remember strategy first, pilot second, and measure the results. Finally, implement.
A fashion retailer with 50 stores that average 100sqm in size would typically spend $200,000 per store to remodel them over an approximate two year period. This is equal to a $10 million investment.
In this economy with the challenges discussed above, this is a highly risky investment if steps 1 to 5 are ignored and the retailer goes straight to step 6.
My interest in writing this article is to build awareness and help Australian fashion retailers cope with globalisation and minimise the impact that these overseas players will have on their businesses.

* Bill Rooney is a director of 6one5 Retail Consulting Group, specialists in retail strategy, consulting, and retail training. Bill can be contacted by visiting www.6one5.com; email; or phone (02) 94610478 or 0417 362 073.

* This feature first appeared in the June/July 2012 edition of Inside Retail Magazine. For more stories like this, subscribe to Inside Retail Magazine's bi-monthly print edition here.

Keywords: Bill Rooney , inside retail magazine, H&M, fashion

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