- Since 2011, consumer spending has been below average overall, and spending on retail apparel has been especially poor.
- A host of factors, from shifting consumer priorities to poor inventory control have forced apparel retailers to compete on price, and sales and profitability have suffered dramatically.
- Premier global brands with differentiated product and strong, flexible supply chains are best positioned to manage through this challenging environment.
Since late 2011, consumer spending has been paltry, with real personal consumption expenditures (PCE) running at a below-average growth rate around 2%. Digging deeper, spending on apparel and other non-durable goods has been weaker than spending on other categories, including durables and leisure. Here we attempt to analyze consumer discretionary spending and determine if there is reason to believe that apparel spending will improve in the second half of 2014.
Macro considerations — Consumers discriminate between durables and non-durables
The aftershocks of the 2008 recession remain a part of everyday life for many consumers. While there has been steady improvement in the unemployment rate and job openings, real wage growth remains muted — less than 1% for the past three years — not enough to offset higher prices for essential goods including food, fuel and healthcare. To this point, Goldman Sachs estimates that essential spending has risen 2%–4% on average over that same three-year period and should continue to rise at a similar rate at least through 2014. For many consumers, especially those less well off, the lack of stability and certainty surrounding the costs of these necessities makes them understandably reluctant to increase discretionary spending on other items. The outlook for essential spending to outpace real wage growth may make it difficult to close the gap between the haves and have-nots.
On the other hand, higher income consumers have enjoyed the financial and psychological benefit of rising stock and housing markets. With household net worth up 35% since the 2009 trough, consumer confidence has risen close to its long-term average, and consumers have indicated increased willingness to reduce their savings and take on debt. Through the Q2 earnings season, several large bank CEOs commented that their consumer credit businesses had recently accelerated, as lending standards have eased and consumers have taken advantage of the still-historically-low interest rates.
However, consumers remain extremely “picky” and continue to focus their spending in certain categories. For the past three to four years, spending on durable goods has outpaced spending on non-durables, including apparel (Exhibit 1). Relative strength in durable goods, including autos and home-related items, likely reflects post-recession catch-up spending and investment in home-related assets supported by strong housing fundamentals and government infrastructure spend. In addition, travel and leisure spending has been strong, as both older and younger generations express their preference for meaningful experiences over material goods.
Micro headwinds — Some cultural, some product-driven
In addition to the aforementioned macro headwinds, there are micro factors impacting the consumer’s willingness and desire to invest in clothing. Specifically, the lack of seasonality in wardrobing, the casualization of the workplace, a need vs want-based spending mentality, and avoiding conspicuous consumption are all weighing on apparel spend. Furthermore, many retailers have reverted to a more basic assortment to better manage inventory and fashion risk, and the lack of fashion newness has turned apparel into a more replenishment-driven business. To this point, in J.Crew’s fall 2014 catalog, Creative Director Jenna Lyons wrote, “Some seasons, new ideas hit you over the head… With others, the changes are a little more subtle… and you need to look a little more closely… This season is undeniably one of the latter.” Apparel consumers are desperate for innovation — with the last major trend of the past several years being colored bottoms in 2012. In fact, 2012 was the only year since the recession when sales outpaced inventory growth for apparel retailers (Exhibit 2). Looking forward, greater innovation in athletics (including apparel and footwear) and accessories (including handbags) will likely see these categories continuing to take share from traditional apparel, even should the recovery’s pace increase.
Oversupply of inventory and real estate exacerbate demand concerns
The aforementioned macro and micro headwinds have been further exacerbated by the oversupply of both inventory and real estate. Poor inventory controls amid a weak demand backdrop have forced apparel retailers to compete on price in an effort to drive traffic to their stores. As a result, both sales and profitability have suffered dramatically. Despite retailers’ commitment to conservatively manage inventory in the second half of the year, their track record is cause to remain skeptical. Coupled with the oversupply of inventory, the supply of retail real estate continues to far exceed demand. In fact, since the downturn, specialty retailers, accessories stores and off-price retailers have grown net square footage in the low-single digit, 20% and mid-single digit range, respectively. Furthermore, with online sales of apparel and accessories reaching $42 billion in 2013 and foreign fast fashion retailers increasingly staking a claim in U.S. soil, the overabundance of retail real estate has placed even greater pressure on the weak demand environment.
Apparel retail is a game of winners and losers
Until the supply-and-demand equation falls into better balance for apparel retailers, expect apparel spending to remain lackluster relative to durable goods and services. Even in a gradually improving macro environment, we continue to expect a divergence between categories, retailers and brands. In other words, it’s a game of winners and losers. Premier global brands with differentiated product and strong, flexible supply chains are best positioned to manage through this challenging environment.