In recent years, political risks around the world have sharply increased: Brexit, Donald Trump's victory in the US elections, terrorist attacks and elections in Europe - all these events negatively affect the fashion industry, and sometimes can significantly reduce its profits. However, strong players who are able to quickly reshape their business models win in all circumstances.
Trump and fashion: the number one enemy of the industry
The new president promises prosperity to the US economy, with US stocks hitting new all-time highs every week since his election. In theory, the consumer should feel confident in the future and shop more, and the profits of stores and consumer goods manufacturers should grow. But in reality, the picture is not so rosy, and here's why.
Rally at Tiffany & Co. and other scandals
Tiffany & Co., a famous jewelry maker, was one of the first to suffer because of Trump. Her flagship store in New York (the same one that Audrey Hepburn dreamed of in Breakfast at Tiffany's) is located on Fifth Avenue next to Trump Tower. The latter became the center of protests against Trump's policies both during his election campaign and after the election: there were so many people that customers could hardly enter the store, and this is the hottest season of Christmas and New Year's sales! The result was not long in coming: sales of the Tiffany & Co. flagship store. during the holiday period (November – December 2016) turned out to be a real disaster, having fallen by 14%.
Another victim of the new president is his own daughter Ivanka Trump: one of the major American retailers Nordstrom recently stopped working with her clothing brand. Trump accused Nordstrom of bias, but data published by The Wall Street Journal (WSJ) suggests that the decision was dictated by consumer choice: Ivanka Trump sales fell by almost a third back in October. It is easy to assume that Dad's election was directly related to the failures of the daughter's brand, and what the consequences will be for Nordstrom is not yet clear.
TIFFANY & CO. FLAGSHOP SALES IN NOVEMBER-DECEMBER 2016 DROPPED BY 14%
But real passions flared up where no one expected: around sportswear. The innocent phrase of one of the New Balance top managers in support of Trump's economic policy caused a wave of emotions: American neo-Nazis proclaimed NB "the official shoes of white people", Trump's opponents are burning their sneakers, no one listens to the company's explanations. Slightly better is Under Armor, whose owner, renowned businessman Kevin Plank, praised Trump in a recent interview, saying that such a business-oriented president is a godsend for the country. As a result, Planck was literally hounded on social networks, and famous athletes and other partners of the brand publicly condemned his position. Under Armor bought out an entire page in the newspaper to explain to the public, see if they can help the company.
Barriers for suppliers from Asia
Meanwhile, if you read more closely, NB did not support Trump at all, but one of his economic decisions, namely, withdrawing from the Trans-Pacific Partnership (TPP), and the company was an opponent of this trade agreement long before Trump appeared on the political horizon. The fact is that the TPP was supposed to provide trade preferences from the United States to a number of Asian countries, including Vietnam, which has recently become a world center for sewing clothes and shoes. This is beneficial to importers of clothing and footwear and not so much to local manufacturers, in particular NB, whose share of production in America reaches 25%.
The agreement was signed under the previous President Barack Obama in February 2016, but has never been ratified by Congress. Trump, who was elected under the slogans "America First" and "Let's Make America Great Again," promised to cancel the TPP during the campaign and kept his word on his first working day. This step pleased NB, but many more companies were unhappy, because they moved production to Vietnam, including in the hope of improving the tax regime. The Footwear Distributors and Retailers of America previously estimated potential trade tariff savings from TPP at $ 450 million in the first year. Duties on shoes are among the highest in America and, for example, reach 20% for expensive sneakers, writes Bloomberg Intelligence; Among the main victims of Trump's decision among shoe manufacturers, analysts name Foot Locker, Nike, adidas, Puma, Wolverine and Timberland.
The main intrigue now is whether Trump is going to fulfill other promises. In particular, during the election campaign, Trump has repeatedly criticized China, accusing it of manipulating currency in order to take jobs from Americans. So far, the new president has not taken decisive steps, but a trade war with China is a nightmare for any representative of the fashion industry, because most of the goods are now produced there.
The threat of tax increases
Another potential threat is the introduction of the so-called US Border Adjustment Tax, proposed by the Republicans. It is assumed that the new tax of 20% will be levied on all goods imported into the United States, after deducting the cost of their production domestically. In this way, lawmakers hope to help local producers; Trump has not yet approved the new tax, but it may well, since it corresponds to his concept of "America first."
American retailers have already dubbed the new tax "hidden sales tax" and warn that its introduction will lead to higher prices. "We see this plan as risky and ill-considered," CNBC quoted David French, senior vice president of government relations with the National Retail Federation. French cites the example of Japan, whose economy slipped into recession shortly after the introduction of the sales tax three years ago.
Bloomberg writes that the average American pays for clothes now as much as it did in the early 1990s, when companies like Nike and Walmart began to massively move manufacturing to developing countries. During the same period, the total value of a basket of goods and services in the United States increased by 80%. America is ranked 50th out of 179 in the World Bank's clothing price rankings, with US shopping being cheaper than most developed countries, including Canada, Norway, Australia, Japan and Germany. Still, the American fashion industry is going through tough times. Quarterly reports of most public companies in the sector - both stores (Macy's, Nordstrom) and manufacturers (Michael Kors, Ralph Lauren) - show one thing: the consumer has begun to shop less and more and more shopping online, where he can get the best the price. In addition, because of the high dollar exchange rate, tourists spend less on purchases in the United States.
ALL GOODS IMPORTED INTO THE USA MAY BE OBLIGED WITH A NEW 20% TAX
Will manufacturers and sellers of clothing and footwear from the mass segment in such a situation be able to shift the new tax onto the consumer? Hardly. RBC Capital Markets analyst Scott Ciccarelli, whose calculations are provided by the WSJ, estimates the losses of the largest US stores from the new tax at $ 13 billion. Executives of the largest retailers, including Target, JC Penney and Best Buy, recently met with Trump to discuss the negative impact of the new tax, but nothing is known about the results of the meeting. In its latest report, Barclays Bank also writes that sports brands, in particular adidas and Puma, may be severely affected by the new tax, since their operating margins are low, and almost all production is concentrated in Asia.
The situation is somewhat better for luxury manufacturers - on average, they account for only 20-30% of the total sales in the US market, and the margin in this segment can reach 70%, which in theory allows them not to raise prices for consumers. The production of expensive goods is also easier to move to America: the owner and CEO of LVMH Bernard Arnault has already met with Trump after his election and promised to expand capacity in the United States (now some of the company's products designed for the local market are manufactured in California).
Brexit and European elections: how a weak currency helped attract tourists
Meanwhile, Europe is also restless, but fashion brands are still benefiting from this. The rise in the number of migrants from the Middle East and terrorist attacks have been in the spotlight in the past year and, combined with a weak economy, have led to the rise of populist parties. Last summer, an unexpected surprise came from Great Britain, whose residents voted to leave the European Union. Continental Europe is in the spotlight this year. Parliamentary elections are scheduled for March in Holland, France is to name a new president in May, elections in Germany will be held in the fall, and in Italy in 2018. If earlier no one particularly believed in the victory of anti-European parties, then after Brexit and Trump's victory, such risks began to be taken more seriously.
British retailers braced for the worst in the immediate aftermath of Brexit, but the decline in sales never materialized in 2016 - according to the National Bureau of Statistics, consumers were happy to shop for the entire second half of the year, and mainly due to increased sales, the UK economy grew in IV quarters of 2016. The Guardian newspaper writes that "52% of those who voted for Brexit spent money because they celebrated a victory, and 48% of those who voted against - to relieve stress." In fact, the British just have not yet really felt the possible negative consequences of their decision, because the formal process of leaving the European Union should be launched only in March. But the prices of imported goods crawled higher due to the fall of the pound (since Brexit the pound fell by 16%), and buyers rushed to stores to buy them cheaper before prices finally rose.
FROM THE MOMENT OF BREXIT THE Pound FALLED BY 16%
In addition, as expected, the weak pound attracted foreign tourists to the UK, especially in November and December, when numbers rose 16% and 11% year-on-year. Especially lucky are luxury brands, whose sales traditionally depend on visitors, especially from China and Arab countries. For example, the UK turned out to be the best market for the local iconic brand Burberry: in the last quarter of 2016, local sales grew by 40%. In addition, part of the company's production facilities are located in England, this will allow it to save about 115 million pounds in 2017, writes Citi analyst Thomas Chauvet. And UBS Bank, citing data from Global Blue, notes that tourists were especially active in spending money in the UK after Brexit: in the second half of 2016, the VAT Refund volume grew noticeably every month, in particular, in December, the growth was 26%.
The online retailer Asos also showed excellent results, but the mass market - for example, Next and Marks & Spencer - are not doing well, but analysts attribute this to a decline in the popularity of department store and street retail formats and increased competition in the sector, rather than to political risks.
Europe was also helped by the currency factor, with the euro falling 9% from last year's highs as the ECB continues to print money and investor fears about the future of the eurozone ahead of the elections have increased. But it is the weak currency that attracts tourists from all over the world. If in 2015 and in the first half of 2016 the tourist flow, especially to France, decreased due to fear of terrorist attacks, then by the end of the year foreigners again reached Europe. According to Global Blue, VAT Refund in Europe as a whole in December grew by 4% compared to the same period in 2015, while in France it jumped by as much as 21% (this is the first increase in more than a year). Leading European luxury names - LVMH, Dior, Hermès, Kering - benefited the most from this, the results of which are highly dependent on visitors and have noticeably improved in the third and especially the fourth quarter. And even the Italian house Prada, which was hit hardest by the slump in Chinese demand, saw sales rise in January 2017 - for the first time in more than a year.
China: Anti-Corruption Kills Luxury Brands
China, with its nearly 1.4 billion population and steadily rising salaries, has long been the most attractive market for fashion companies. Prices for luxury goods in China are usually significantly higher than for the same goods in Europe or America, and the rapid opening of their own stores and the reverence of the Chinese for Western brands guaranteed rapid growth in company profits. For some players, up to 80% of sales growth in the late 2000s came from China and Hong Kong. Only the sales of luxury brands in China, according to various estimates, amount to $ 16-17 billion. Luxury brands in China (including Hong Kong and Macau) account for up to 30% of sales, for well-known sports brands (Nike, adidas) - up to 15%.
But in the past few years, the Chinese market has become a source of problems for several reasons. First, the Chinese authorities began to fight corruption, including gifts to officials, which immediately affected sales of jewelry, watches, as well as the most expensive items of clothing and shoes. Secondly, Chinese tourists have become less likely to visit Hong Kong, which previously had the status of a shopping Mecca, in particular, due to anti-Chinese rallies in the city center (Hong Kong is a special administrative region of China, its residents have repeatedly struck against China's attempts to strengthen control over this territory). Third, the Chinese yuan has been gradually weakening over the past two years, including for political reasons, and this reduces the ability of the local population to buy foreign goods.
CHINA SHARE UP TO 30% OF SALES FOR LUXURY BRANDS
Of course, jewelry and watch companies suffered the most - Richemont (brands Cartier, Vacheron Constantin, Jaeger-LeCoultre, Van Cleef & Arpels, Montblanc, Piaget and others) and Swatch (in addition to the well-known inexpensive watch brand of the same name, it is the owner of such well-known brands, like Breguet, Harry Winston, Blancpain, Omega, Longines, Rado and others), as well as brands of expensive clothing with a large exposure to the Chinese market - members of the conglomerate LVMH, Prada, Bottega Veneta. Sports brands, on the other hand, were doing great, with Nike and adidas sales more than doubling since the 2008 Beijing Olympics.
However, in recent months, sales in China across the fashion industry are starting to recover. First, fashion companies have met consumers halfway and have reduced the price difference between countries (by lowering prices in China and raising prices in other markets, in particular in Europe). Secondly, the companies, together with the Chinese authorities, are fighting counterfeit more severely. And thirdly, the Chinese consumer gradually got used to the fight against corruption and to the constantly devalued yuan, and in many respects returned to their old habits - after all, the country's economy is still growing, which means that people are inclined to spend.
Russia: "period of post-turbulence"
The Russian fashion market was also not spared political risks: in 2014-2015, Western sanctions and the fall in oil prices led to a sharp drop in the ruble exchange rate and, as a result, the purchasing power of the population. At the same time, clothing and footwear became one of the first items to cut spending for Russians. Since the peak of 2013, the fashion market has more than halved (to $ 34.3 billion in 2016), especially in 2015, when sales fell 9% in rubles (43% in dollars), according to a recent study. Fashion Consulting Group (FCG). The brands of the middle price segment suffered the most; some foreign retailers (for example, River Island, Esprit, Laura Ashley), frightened by the crisis, left Russia altogether, and most local players (Vis-à-Vis, Love Republic, Gloria Jeans) reduced the number of stores.
But already in 2016, sales in ruble terms stabilized (+1%), although the total dollar revenue continued to fall (-10%) due to the exchange rate, and in 2017 FCG predicts an increase of 4.8-11.5% in dollar terms. expression, calling the current year "post-turbulence period". At the same time, FCG notes that many foreign brands remaining in Russia (Zara, H&M, Bershka and others) managed to take advantage of the crisis to increase their presence in the Russian market, significantly outstripping local players.
PROFIT IN THE MERCURY CLOTHING DIRECTION (TSUM, DOLCE & GABBANA, TOM FORD AND OTHER BOUTIQUES) DECREASED BY 50% IN FEBRUARY-JULY 2016
A recovery is also visible in the luxury goods segment: over the two crisis years, their sales fell by more than 40%, but already in 2016 the growth exceeded 9% (to 3.5 billion euros), according to a joint study of the consulting companies Exane BNP Paribas and Contactlab and the recovery will continue in 2017. True, some players decided to sacrifice profits for the sake of growth in revenue and market share: for example, in 2016 Mercury followed the strategy of “Milan prices”, reducing prices for luxury goods to European levels and even lower. At the same time, the profit of the clothing direction Mercury (TSUM, Dolce & Gabbana, Tom Ford and other boutiques) decreased in February-July 2016 by about 50%, the RBC agency reported with reference to the general director of TSUM Alexander Pavlov, and separately TSUM - by 10-15 %.
The recovery in sales of luxury goods was facilitated by the stabilization of the economy, the ban on leaving Russia for some groups of officials, as well as a significant influx of tourists from abroad, especially from China. “Russia is becoming the region where people buy,” Valentino CEO Stefano Sassi told Vedomosti last November. “In Moscow, we have increased our presence from one store to four, and sales in all of them are fantastic!” Also, market participants have high hopes for the introduction of the tax free system in Russia for foreigners. The pilot project should start working in 2017 in Moscow, the Moscow region, Sochi and St. Petersburg - and, undoubtedly, for many large retailers that are already betting on the flow of tourists, this innovation will open up new horizons.
