Ragtrader founder Fraser McEwing offers his opinion on how consumer spending will shift in the current climate - and asks major fashion retailers and experts to weigh in on their strategies.
The likelihood of clothing sales being hammered over the next couple of years is built on a simple question. If the essentials of life are accepted as food, shelter and clothing, and the heavy economic squeeze continues, where will consumers look for savings to get by?
Let's start with housing.
It is beset by a shortage of supply, bringing crippling mortgage rates for those buying, and steeply increasing rentals for those leasing. New dwellings are projected to fall well short of future demand, meaning that the light at the end of the mortgage tunnel is likely to be an oncoming train. And then there is the forced switch from fixed interest rates to variable, just to make it tougher to put a roof over a head. We can't, therefore, look forward to discretionary money being released from housing.
Food and household bills like electricity have gone up in price outrageously over the last 12 months.
Supermarkets are noticing a trend towards their customers buying cheaper products but this has a limit when it comes to bailing out the family budget. Same for grow-your-own, which requires land and gardening skills – offset by apartment living and the likelihood that a personal turnip is going to be realistically dearer and a good deal uglier than the one at Woolworths. If we lump food in with household expenses, savings are meagre – if at all.
Then we come to clothing.
The good thing about today's man-made fibres is that they virtually never wear out. That's also a bad thing. Polyester, acrylic and nylon can see out 100 years as landfill without degrading. The result is that they are discarded out of boredom rather than the ravages of wear. The vast majority of the Australian population has wardrobes full of virtually indestructible clothing. Apart from familiarity breeding contempt, most of these clothes don't have to be replaced for years, if not lifetimes. Even cotton is a tough critter when it comes to wearing out. So, if need be, the family clothing budget can be slashed to nearly zero – with a few exceptions like the needs of growing children.
Suppliers and retailers are well aware of a threatening sales famine. I wanted to find out how they intended to protect themselves until it passed, which might take years.
I went first to Scott Evans, CEO of the Mosaic Group with some 1500 stores over a multitude of brands – most concentrating on budget womenswear leaning towards the mid to older market.
"You can already see a move to curb discretionary spending," he says. “This has come off the end of COVID which had a huge impact on bricks and mortar retailing. Some companies benefitted from it, but not us. We always seemed to come down on the tough side.”
One effect of the end of COVID has been for people to continue spending on having a good time, almost like a celebration. Eating out is still booming, despite being contrary to saving money.
"The apparel market is made up of many layers and they will all behave differently when facing pressure from the economy,” Evans continues. “The luxury end, for instance, probably won't see much downside. Those consumers will still have the money to spend on luxury goods that take their fancy. Down at the other end, as volume-value retailers, we're probably going to pick up business from people moving into lower-priced goods but will lose from those who stop buying altogether. And don't forget that we have a lot of customers in the mature market that is not impacted nearly as much as the younger group.
"Because there are so many variables, we can only guess how it will turn out. But, in the meantime, we're concentrating on running more efficiently and putting more pressure on suppliers to come up with lower prices."
Julia van der Sommen, who runs The Sample Room in Melbourne which specialises in providing services to start-up designers, says that the downturn was evident from the beginning of this year. Orders to her short-run factory have got down to the point that her customers are no longer carrying stock, but are making to order. Although there is still some flow-on from undelivered orders, she expects that to quickly dry up. Moreover, her start-up designers are finding it hard to pay their bills.
She is now in the process of offering her design, patternmaking and sampling skills to the film and television industries - something she has never had to do before.
The mid- to upper-market is where many observers think the crunch will be severest, based on the logic that financially squeezed consumers, if they want to buy clothes, will head down-market.
But Solomon Lew, chairman of Premier Investments – which controls the brands Dotti, Smiggle, Peter Alexander, JACQUI.E, Jay Jays, Just Jeans and Portmans – has a different take on it. He said that there are six categories of non-discretionary spending that come before clothing gets a look-in on the discretionary list. They are (not necessarily in order) mortgage/rental, utilities such as electricity, fuel, technology, food, and medical.
These are markedly different to a list you might have made 30 years ago, where clothing would have been a certain inclusion - and at that time nobody could see how a mobile phone would become an essential brain add-on.
"People buy for more than one reason," Solomon Lew told me. "They want value – which means the right item at the right price. In upcoming seasons that is going to mean safer colours and styling that won't date. So that"s where we are headed, always bearing in mind that we must give the customers what they want, not what we"d like to sell them."
It is worthwhile noting that Premier's brands have topped the market in terms of growth and profit. In the half year ending in December 2022, the group came up with a profit of $174 million on a turnover of $905 million, which was up 6.5% on 1H22 and up 75.0% on pre-COVID 1H20. In the present climate, this was a staggering result. No wonder the company has become the current poster-child of apparel retailing in Australia.
David Jones, which has been performing spectacularly on mid- to high-fashion brands is probably the most indicative bell weather of all retailers facing the squeeze. A gobsmacking current sales downturn has nothing to do with poor management or unpopular brands. It is purely about being forsaken by consumers who find themselves progressively shorter of discretionary spending. David Jones in Sydney's Warringah Mall is down 20 per cent year on year and so is the store in Melbourne's Highpoint Shopping Centre. It gets worse at Eastland David Jones where sales have dropped their pants to the tune of 39 per cent.
The Sydney flagship store has fared better with a drop of eight per cent. This indicates that outer suburban locations are where the struggle is greatest because their demographics are being hit the hardest by the economy. Of course, David Jones sells more than designer clothing. There is probably a downturn across all departments but the loss of brand support would appear to be most evident in fashion apparel.
There is further evidence coming from boffin-land. Almost half of Australians are shopping for lower-priced brands, according to a Monash University Pulse Survey taken in April 2023. By now, the move south on prices would have increased – probably dramatically.
Paul Zahra, CEO of the Australian Retailers Association, who has his finger on the pulse of the economic squeeze on retail sales, had this to say:
"Clothing sales won't be immune to the cost-of-living pain being felt across Australian households. With rising inflation and consecutive interest rate rises, many shoppers are limiting their spending to the essentials. Australian Bureau of Statistics data already suggests spending on clothing is softening. In January 2023, clothing, footwear and accessories recorded a 17.5 per cent spending increase year-on-year. In April, clothing, footwear and accessories year-on-year growth had slowed to 4.9 per cent.
"Anecdotal feedback from retailers suggests that current trading for discretionary items has significantly slowed. Retailers and suppliers need to be strategic and deliberate in their focus as the consumer becomes more of a 'value shopper'. Some of the ways to best minimise the impact may include catering to varying budgets – or it could be doubling down on your brand and focusing on quality and durability and ensuring long-term value of your products.
"Other important measures include running sales and promotions, providing flexible payment options and considering the implementation of loyalty and reward programs to incentivise repeat customers. The key message for retailers is that the tide has turned and it's important that they reduce their inventory settings to maintain their profitability."
How fashion suppliers are going to deal with the approaching black hole must be the prime topic at strategy meetings throughout the industry. Too many, I fear, will adopt the ego-driven belief that 'while the others might suffer, we won't, because nobody understands the market better than we do.' They are likely to be flattened. And so are the hundreds of small, niche online designer brands. They will sink without trace or media funeral rites.
While price will be important it is not likely to be the only factor in consumer purchasing decisions. If ever there was a time for retailers to get inside their customers' thinking it is now. They'll need continuing focus groups and surveys and they'll need buyers with that special ability to sniff preferences in the wind. Fashion is turning into a mind game with the prize being survival rather than profits.