Fashion Strategy Weekly - 28 July 2022
A publication of It's A Working Title LLC
This weekly publication focuses on how business and economics trends, technology, and the drive for sustainability impact the global luxury and fashion industries. Prepared by the staff of content strategy agency and think tank It’s a Working Title LLC, each week’s issue provides a summary of recent trends across the globe and a leader that conducts a deeper dive into content strategy.
This week’s contents:
Leader: The Impact of a Global Recession on Luxury and How Content Strategy Can Help
Leader: The Impact of a Global Recession on Luxury and How Content Strategy Can Help
After a strong bounce back from the pandemic, the retail luxury sector faces the same headwinds from slowing global economic growth and inflation as the rest of the real economy. The global luxury industry realized a strong rebound from pandemic-driven lockdowns as “revenge buying” (as The Business of Fashion dubbed it) drove sales with consumers seeking a return to their old consumption patterns en masse: luxury sales hit $301 billion in 2021, which was 7 percent above pre-pandemic levels. The share prices of many luxury brands soared above the benchmark S&P 500, which itself was surging.
Yet, as everyone knows, there is trouble ahead as a variety of factors are slowing economic growth and squeezing household budgets. The first estimate of U.S. GDP growth in Q2, released on July 28, suggests that the economy has sunk into recession and there are hints that layoffs are picking up and that consumers are struggling to keep pace with rapidly rising prices. There is a similar story in Europe as consumer sentiment numbers from July were the lowest ever recorded. In this week’s biannual World Economic Outlook update, the International Monetary Fund cuts its global GDP growth forecast by 0.4 percentage points in 2022 and 0.7 in 2023 from what they predicted just 3 months ago. The main centers of luxury sales come in for brutal downgrades. Meanwhile, input prices are expected to continue to climb as the global inflation rate will hit 6.6 percent in high income economies, the highest rate in almost 40 years.
Yet, based on earnings reports released this week, luxury spending is holding up despite all the talk of recession. The world’s largest luxury group, LVMH, reported 28 percent organic growth in H1 sales with broad-based growth across its product lines spearheaded by (leather) goods (31 percent growth), followed by wine and spirits (23 percent), watches and jewelry (22 percent), and perfume and cosmetics (20 percent). Two major drivers included strong growth in the U.S. and Europe, which offset slowing growth in Asia arising from the slowing of consumer activity due to China’s public health policies. Revenue in Q2 also picked up as order levels finally began catching up on backlogs following supply constraints from earlier in the year. Kering and Prada’s H1 earnings report told a similar story with group revenue rising 23 and 22 percent, respectively, over last year on the back of strong growth outside of China.
So how much at risk is the luxury sector to slow economic growth or how cyclically sensitive are luxury buyers? The answer is complicated and more complex than it was 10 years ago. Historically, luxury revenues have held up well during periods of slow economic growth as households at higher income deciles are over-represented luxury goods consumers and may be relatively insulated from moderate business cycle fluctuations. However, luxury goods are, of course, also discretionary so deeper and broader recessions can hit sales even at higher income levels. Moreover, there has been a growing and broad-based trend of offering products to broader base of consumers from across the income spectrum. The more dependent a brand or retailer is on this these offerings for revenue, the more at risk they may be to a weakening outlook for household balance sheets. Yet, beyond these general trends, a note by the Business of Fashion identified a number of recent industry trends that suggest that luxury could remain relatively strong over the next couple of years:
1. Brands are better positioned to respond to unpredictable demand, after the last two years of health and economic crises forced them to improve their supply chain management practices to reduce lead times and shift inventories based on changing demand dynamics.
2. The rapid growth in direct-to-consumer distribution channels could make brands more resilient than in previous recessions. During the 2008 global economic crisis, brands saw revenues crushed by steep markdowns that department stores enacted to shift inventory. Publicly listed luxury companies report that 75 percent of sales originated from direct distribution now as compared to 57 percent in 2007.
Now is the time for luxury and fashion brands to embrace content strategy as a way to align business goals with digital and IRL investments. Adopting a centralized, vision-centric content strategy can help brands create smarter, more consistent campaigns and reduce siloing across teams when it comes to omni-channel marketing, advertising, and social, to cut costs through more integrated systems, and simultaneously to create a better, more seamless customer experience across a brand’s full content footprint from bricks-and-mortar to digital. Content strategy should form one part of an overarching corporate strategy that brands should enact to continue to build resilience against fluctuations in the economic and business cycle.
Economics & Business
Shopify will cut 10 percent of its Staff as the mix of online versus in-person sales reverts to pre-pandemic trends. Canadian e-commerce firm Shopify Inc. will cut about 10 percent of its workforce as chief executive officer Tobi Lutke acknowledged the company’s decision to expand rapidly coming out of the Covid-19 pandemic did not pay off. The move will eliminate about 1,000 jobs out of 10,000 or so total employees at Shopify. Most of the affected roles are in recruiting, support and sales, Lutke said in a memo posted on the company’s website: “We bet that the channel mix — the share of dollars that travel through e-commerce rather than physical retail — would permanently leap ahead by five or even 10 years” because of the pandemic. “It’s now clear that bet didn’t pay off. What we see now is the mix reverting to roughly where pre-Covid data would have suggested it should be at this point.” https://www.businessoffashion.com/news/retail/shopify-will-cut-10-of-its-staff/
The fashion industry is facing a skilled worker shortage. Research by the UK-based think tank Fashion Roundable found that a majority of manufacturers have an extensive number of job vacancies. LVMH’s executive vice president of human resources, Chantal Gaemperle, confirmed the group is facing a shortage of skilled workers, noting that they are looking to fill 2,000 positions by the end of the year, and 30,000 by 2024, as a need for specialized personnel is leaving gaps in the fashion sector. Further upstream, earlier this month, firms in New Zealand and India noted that they are lacking skilled machinists, pattern makers, knitters, and embroiderers. These skills shortages could feed through into product delivery interruptions as well as heightened cost push pressures to add along to the more general, global trend in inputs price inflation.
Retail fashion prices inflation in the UK headed for double digits. Inflation remains a key concern for shoppers with consumer confidence falling on the back of it. The annual rate for clothing and footwear in the UK rose 6.1% in June after a rise of 6.9% in May. This increase came despite fashion prices usually dropping in June as the clearance sales get under way. Even if they have not raised prices, a number of brands have said they need to increase them for the autumn season. There is an expectation that fashion price inflation could hit double digits by the end of year. https://uk.fashionnetwork.com/news/As-fashion-prices-rise-uk-inflation-could-reach-15-by-year-end,1426788.html
Navigating Retail’s New Era of Risk. Like most other industries, fashion has been heavily impacted by the disruptions to global supply chains, and not for the first time in the industry’s history. In many cases, brands are working to transform their supply chains into digital ecosystems where members share risk. An ecosystem operated on a shared platform of data analytics and operational resources, along with a jointly used set of tools for managing demand planning, business continuity, key raw material or product stockpiles, transportation contingencies and even inter-industry materials demands could help to avoid shortages due to spikes in demand across categories. For most companies today, supply chain planning remains largely a finger-to-the-wind exercise. Most use some combination of volume, velocity and visibility to project supply and demand. Many still rely on fairly rudimentary data sets – stock on-hand, sales velocity, order lead-time, and in-transit order quantity. But these approaches only scratch the surface of what brands need to factor into their planning. Weather patterns, industry sales projections, consumer trends and macro-economic indicators are now also vital along with geopolitical risks, macroeconomic developments, and transportation costs, and sustainability concerns. All of these new and dynamic data points are increasingly vital. Therefore, the incorporation of artificial intelligence and machine learning into an organization’s planning systems is becoming a critical investment that is helping pioneering companies outperform competitors in both revenue growth and margin expansion. https://www.businessoffashion.com/opinions/retail/leading-retail-through-the-new-era-of-risk/
Collaborations are paying big dividends for luxury brands. The Q2 Lyst Index, released this week, puts some numbers out there on the beneficial impacts of the now ubiquitous trend of brand partnerships. For example, in the 48 hours after the launch of the limited-edition partnership Gucci x Adidas, searches for Gucci skyrocketed 286% and the Adidas x Gucci Gazelle sneakers came in second on the Lyst ranking of hottest women's products for Q2. The two top brands on the Lyst ranking of hottest brands (Gucci and Balenciaga, in that order) had or announced high profile collaborations in Q2, which the authors highlight was a contributing factor to the buzz generated by the two brands.
Inside the metaverse strategies of L’Oréal and LVMH. There’s no shortage of brands dabbling in the ‘metaverse,’ creating something of a FOMO moment in the industry. Nike launched ‘Nikeland’ last year and now boasts over 7 million visitors to the metaverse story. Gucci claims that over 18 million people have engaged with it on Roblox, setting in motion a wave of luxury brands trying to replicate its success. L’Oréal and LMVH are already some way down the line with their metaverse strategies. Both are keen to stress they are still very much in ‘experiment’ mode, still trying to understand its various iterations and the long-term potential. Let’s look at the LVMH and L’Oréal strategies more closely.
LVMH is taking a different approach than other giant luxury houses. It has hired Nelly Mensah into the new role of ‘head of metaverse and crypto,’ indicating that it sees this as a serious revenue generator down the line. “We’re really thinking about four use cases primarily,” she explained. “One is client storytelling and immersive brand experiences. It’s about transparency, traceability and tracking for authenticity. We’re also looking at digital twins and having an extension of all of our product offerings in the virtual world that allow for personalization and expressing yourself. And finally accepting cryptocurrency for payments.” “The metaverses today don’t have high enough quality to support the positioning of a luxury brand. So what we’re doing is creating our own proprietary metaverse. It’s a concept. We’re creating a learning curve, designing spaces. It’s another kind of creativity,” Paloni explains.
L’Oréal is prioritizing three brands for its metaverse trials: YSL, Mugler and NYX Professional Make-up. Testing the waters on NFTs, it recently launched a branded digital wallet. There’s no measure of success on this activity – it is simply about getting its customers used to engaging with the brand in new web3 environments. L’Oréal is exploring new partnerships. This is most developed with NYX. It is a make-up brand targeted at professional make-up artists largely through social media marketing. But it is now thinking about how the brand can empower a new generation of creators, and has set itself the task of what Dubey describes as “the first-ever decentralized record label for creators in web3.”
Will a Recession Stunt Sustainable Fashion? The global economy‘s last major downturn in 2008 was a huge setback for the push to make fashion more sustainable, which at the time was in its infancy. Things are likely to be different this time around. Though a downturn will still test brands’ and consumers’ willingness to spend on sustainability initiatives and products, the context in which the industry is operating has changed dramatically. Climate change and its impacts are increasingly visible and inescapable. The pandemic has helped elevate social issues in the cultural conversation. Regulators are intensifying their scrutiny of the fashion sector, and consumers are increasingly well versed in fashion’s negative impact for the conversation to dissipate entirely. Over the last two decades, the pace of fashion consumption has increased, leading to a pile of waste and driving up the industry’s environmental impact. A downturn could prompt the slowdown many sustainable fashion advocates have long called for, curbing spending on cheap, disposable fashion. A recession is also likely to fortify the rise of resale and rental, already fast-growing markets that play into the desire for value and bargains that usually accompany a downturn. The secondhand apparel market is expected to be worth $53.2 billion by 2023, according to research firm GlobalData. https://www.businessoffashion.com/articles/sustainability/what-a-recession-could-mean-for-sustainable-fashion/
Influencer marketing stats: How creators have impacted businesses. Many marketers had long underestimated the value of creators in their marketing mix. That is no longer the case. Most brands today have incorporated influencer marketing into their media plans and many intend to allocate even more funds to the tactic this year. According to Insider, almost 70 percent of U.S. marketers from companies with 100 or more employees will use influencer marketing in 2021, up from 62.3% last year. In 2022, that figure will rise to 72.5%. between April 2020 and June 2020, the average monthly number of sponsored posts was down by 42.9% year over year (YoY), according to an analysis of 3.5 million Instagram posts by visual marketing platform Later and influencer marketing company Fohr. By December, however, that figure had bounced back as the number of sponsored posts that month grew by over 20% YoY. In a March 2021 survey by influencer marketing platform Linqia, 68% of U.S. marketers said they were planning to use TikTok for influencer marketing, up from just 16% in February 2020. That made TikTok the third most popular format measured, behind only Instagram (93%) and Instagram Stories (83%). https://www.businessinsider.com/influencer-marketing-important-for-brands-2021-5