Apparel Outlook: Another Tough Year Ahead

It’s been a tough year for apparel, as consumers channel their spend on recreational and leisure activities, rather than footwear and clothing. But what does 2017 have in store?

We asked by John Mercer, Lead UK Analyst at Fung Global Retail & Technology, for his insights.

The downturn in the UK apparel market has been sudden and severe. It began in late 2015, when a warm autumn initially appeared to be hitting fashion sales. An exceptionally weak performance through much of 2016 has made it clear, however, that the downturn is not just due to the weather.

What happened in 2016

2016 has shaped up to be the weakest year for apparel sales since the great recession. By the end of this year, Brits will have increased their spending on clothing and footwear by around 1% year over year to £60.8 billion, we estimate — the lowest annual growth since 2008. Sales of clothing and footwear fell in four of the first ten months of 2016 (latest).

One reason for the weakness in apparel looks to be that British consumers have been prioritising spending on leisure, such as recreational and cultural services and dining out. Brits upped their spend on these categories by fully £2.4 billion in the first half of 2016 (latest), while they cut their spend on apparel by £221 million. The UK’s second-biggest apparel retailer, Next, has been among those to note this apparent shift to leisure at the expense of retail, and especially clothing and footwear.

The strength of the UK economy, including high employment levels, low inflation and solid wage growth, means there is little fundamental reason why shoppers should have limited their apparel spending so severely this past year.

What we expect to see in 2017

In 2017, we expect the apparel market to be defined by low category growth, very low inflation and brick-and-mortar players continuing to lose share to Internet pure plays.

Low category growth

We see little reason to expect a solid near-term bounce-back. If the apparel category is indeed being impacted at least in part by a cyclical shift to spending on leisure services instead of apparel, then softness in the category is likely to be a medium-term trend.

We expect UK apparel sales to grow at a muted pace of around 2% in 2017, lagging the average annual growth rates of the past few years of approximately 4%, and well below the 4.7% growth seen in 2015 as a whole. One positive factor for 2017 growth is that it will be measured against the undemanding comparatives of 2016.

Very low inflation

We do not expect to see any substantial top-line boost from raised inflation. Higher overall shop prices are widely expected as a result of the depreciation of the pound, but we do not expect to see any major jump in inflation in the apparel category. We think that the exceptionally strong competition in the market will keep a lid on price increases, and so anticipate that apparel price inflation will average only 0%–1% in 2017. Marks & Spencer and Primark are among those that have signalled they will avoid hiking prices.

Bricks-and-mortar players will continue to lose share to Internet pure plays

A lot of the competitive pressure that will keep a lid on price rises is coming from online-only retailers, and we expect them to continue to win share in 2017. While many commentators insist multichannel propositions will ultimately win out, this is certainly not being reflected in the relative online performances of pure plays and bricks-and-mortar stores.

Young-fashion pure plays ASOS, boohoo.com, Missguided and PrettyLittleThing captured combined UK sales of approximately £700 million in fiscal 2015, and we estimate this jumped by 30% to slightly more than £900 million in fiscal 2016. We forecast these four pure plays will break the £1 billion barrier in fiscal 2017—and all of this is coming at the expense of store-based rivals.

The consensus among analysts is for ASOS to grow sales by one-quarter and for boohoo.com to grow sales by more than one-third in fiscal 2017. These will be big winners in apparel in 2017, and they will almost certainly be joined by other pure plays such as Amazon, Missguided, PrettyLittleThing and Zalando. So, even if category growth picks up, store-based retailers will be fighting over a diminishing share of the pie.

For more insights, download Fung Global Retail Technology’s UK Apparel Handbook

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