Understanding the trends in the global FMCG market and in particular the apparel industry is a key reading for any investor. It reflects the economic behavior of a broad-based population, across multiple regions and countries; its readings are precursors for global economic trades, employment, and consumer behavior.
The industry, while being highly fragmented and hugely segmented (sportswear to business attire, discount to luxury) has relatively short product life cycles for more or less standardized products which differentiate over time by color and style. Yet, the industry’s production cycle is relatively complex, and supply processes are rather long and complex. Historic apparel brands, operating through shops include Nike, Zara, Adidas, Lululemon, H&M, Puma, The Gap, and TJX, among others; the sector is disrupted by online marketplaces such as Shein.
While the US market is the biggest by size ($312 billion), Europe is home to some of the most lucrative markets (in terms of margins) for apparel and clothing worldwide. Europe is also the home to some of the largest apparel companies.
Historically, Europe’s most fashion brands sell through franchises and outlets. It is only recently that these key brands have turned to marketplace opportunities such as Zalando to cover a growing consumer demand. Yet, there is a new trend unfolding.
The fight against Shein, which is exclusively operating via an e-commerce model is the creation of Lefties. The entity is pushed forward by the biggest listed fast fashion company by sales, i.e. Inditex. The brands of Amancio Ortega have become less competitive recently since Inditex started hiking prices to cover for higher input costs, to adjust for stubbornly high inflation causing wage inflation to take place, and to re-center its traditional brands. Officially, ITX communicates that it will shift its attention to the core brands Zara, Bershka, and Massimo Dutti, among others, but the launch of Lefties allows ITX to quietly grow its low-end affluent market share.
Very initially, Lefties started as an outlet for leftovers from ITX’s stores, initial shops were found in emerging mass markets such as Egypt, Turkey, and Mexico, but also in mass tourist destinations such as the United Arab Emirates and Turkey.
More recently, Lefties established itself also in its home market and Portugal where the economic downturn hit hard the local population. With rock-bottom prices, Lefties offers a valuable opportunity for locals to shop for quality goods. According to research obtained, Lefties has now close to 26 stores and its recurring customer base is around 5 million, which is slightly lower than the number of regular visitors to Shein’s marketplace (5.2 million).
Market segments require different marketing approaches
To attract new consumers, the largest fast-fashion retailer, i.e. Shein, which is unlisted for now but its IPO is planned for later in the year, uses micro-influencers on Instagram and TikTok. In contrast, Inditex which focuses on high-end affluent shoppers primarily approaches the market via a high-performance and aesthetic sober social media marketing strategy.
Another differentiation factor is delivery time. Traditional marketplaces such as Zalando and Galaxus have powered up an infrastructure to deliver a purchase order within 48 hours. Some competitors such as Primark (ABF.L) have entered a new chapter via home deliveries, with guaranteed distribution within 12 hours of placing the order. In the case of Shein, delivery still takes between 10 and 12 days. This evidences the difficulties most new market entrants face, i.e. building a suitable infrastructure that does not destroy profitability but can cope with fast-rising demands.
To mitigate late deliveries, Shein’s strategy consists now in opening pop-up stores where the most wanted items can be picked up by consumers. Shein has such facilities in Berlin, London, Paris, Rome, and other places that will be added throughout 2024. So, even for the most modern marketplaces, the winning strategy is about “Welcome back to the past”!
Other trend observations to give some considerations:
- New entrants such as Lefties and Shein intend to grab market share by addressing specific segments’ specific needs. For now, this was performed with below-average industry returns. Provided these marketplaces (online and physical) can extend their market share it will be cannibalizing profitability and market share for the remaining brands.
- Store count: Inditex is the prime example in this case. To keep up the overall operation ratio, Inditex had 585 fewer stores by October 31 2023 than a year previously. H&M did reduce the number of stores too, not that it was a deliberate strategy, but rather the safeguard its business.
- 2nd-hand purchases: 46% of the cohorts Generation Z and Millennials (also known as Generation Y) say that they had bought second-hand apparel, footwear, and other accessories. In contrast, only 20 % of all baby boomers say that they have bought 2nd-hand goods.