Fashion, Fast and Slow

MARKET WATCH: What’s Happening: Growing interest in sustainable fashion has given a lift to new and old players in the fashion industry, including slow-fashion retailers, secondhand stores, and clothing rental startups. At first glance, this emerging trend appears to be bearish for conventional fast-fashion brands that largely ignore sustainability. But paradoxically, the fast-fashion space continues to thrive. How can this be?

Our Take: To understand how sustainability and fast fashion can coexist, we must expand our traditional way of thinking about the industry. We have always considered price to be the primary dividing line between fashion brands. But once we add sustainability/values into the equation as its own variable, a new picture of the fashion industry emerges—one in which there are four main types of fashion companies, each with its own set of opportunities and challenges.

THE POWER OF SUSTAINABILITY

Fast-fashion giant ASOS is launching a sustainable fashion training program. The course will teach members of the company’s design team to apply circular design techniques and to minimize waste. ASOS is tapping into growing demand among shoppers for sustainable fashion, which has boosted not only “slow-fashion” ethics but also secondhand and resale options like thrift stores.

Interest in sustainable fashion is rippling out across the industry in several ways. Brands that emphasize social and environmental responsibility are flourishing. Profits at Patagonia, perhaps the best-known embodiment of sustainability, tripled from 2008 to 2016. At Everlane, whose brand tagline touts “radical transparency,” sales have doubled annually for the past three years. Up-and-coming brands like Reformation, Amour Vert, and Rothy’s tout their use of low-impact materials and other environmentally friendly practices. Popping up alongside them are dozens of higher-end retailers, such as Elizabeth Suzann and Pyne & Smith, whose garments are all made to order to eliminate waste.

Secondhand clothing is also enjoying newfound popularity. The stigma once associated with browsing hand-me-downs at Goodwill and the Salvation Army has evaporated. Resale sites like Poshmark, Depop, and ThredUp move a wide range of brands, while Tradesy and TheRealReal specialize in luxury items. According to ThredUp’s latest annual report, 1 in 3 women—or 44 million shoppers—shopped secondhand last year. That’s up from 35 million in 2016. Through 2022, the resale apparel market is projected to grow far faster than retail apparel (15% annually vs. 2%), with 71% of consumers saying they plan to spend more on resale shopping and less at department stores. While interest in thrifting originally surged thanks to the Great Recession, the desire to avoid disposable, trendy clothes and the thrill of the hunt has kept buyers coming back.

Meanwhile, clothing rental startups have made it possible for fashionistas to stop adding to their closets altogether. The most popular, Rent the Runway, rents out everything from weekend wear to evening gowns at a fraction of the original price. The company has opened brick-and-mortar stores in several major cities, with foot traffic nearly doubling over the past year. According to market research firm Forrester, the share of shoppers who rent clothing is small (about 6%). But separate data show that 62% of young adults say they want more brands to offer this option. They’re getting their wish: Ann Taylor just started offering workwear rentals, and Nordstrom modern-cut suits and tuxedos. Even DSW is considering shoe rentals.

All of the above approaches emphasize saving the environment and reducing waste. They offer shoppers a sense of purpose. But sustainability comes at a price: A plain T-shirt from Reformation might be $30, and a similar one from Goodwill $3. For many Millennials, the sticker shock makes these brands more aspirational than affordable.

Given the embrace of sustainable fashion, one might assume that fast fashion is falling out of favor. Indeed, sales at two of the biggest chains—H&M and Forever 21—have declined sharply, leading to huge markdowns and multiple store closures. But business is still booming at their established brick-and-mortar peer, Zara—and what’s more, it’s even better at online fast-fashion purveyors, among them ASOS, Boohoo, and Missguided, which have seen double-digit sales growth in recent years.

A NEW WAY TO THINK ABOUT FASHION

How can sustainable fashion and fast fashion both be thriving? In order to better understand what’s happening, we need to think about the fashion industry in a new way.

The usual spectrum on which we see fashion brands has only one variable: price, with “premium” brands on one end and “discount” brands on the other. But let’s add another variable to the equation: mission, with “sustainability/values” on one end and “conventional” on the other. Sustainability/values brands incorporate traits such as renewability, eco-friendliness, authenticity, and minimalism into their business practices. Conventional brands, on the other hand, do not highlight these traits—instead, they rely on traditional notions of style and prestige to sell their products.

In effect, this new schema leaves us with four broad types of fashion brands. Think of a Cartesian plane, with price on the Y-axis on and mission on the X-axis. The four different types of brands can be grouped into four quadrants:

• In the NE quadrant (premium and conventional) are “luxury fashion” brands.
• In the SE quadrant (discount and conventional) are “fast-fashion” brands.
• In the SW quadrant (discount and sustainable/values) are “thrift-shop fashion” brands.
• In the NW quadrant (premium and sustainable/values) are “slow-fashion” brands.

Next, we will provide our take on each quadrant, including notable constituents, winning strategies, dangers, and the bottom line.

NE QUADRANT: LUXURY FASHION

Snapshot: High-margin, aspirational brands that rely on prestige and quality to sell products.

Notable Constituents: LABELS: Burberry, Coach, Fendi, Gucci, Prada. RETAILERS: Bloomingdale’s, Nordstrom, Saks.

Winning Strategies:

• Stand out through heritage branding and unique storytelling. Put the emphasis on the long history of the company and the quality of materials rather than on status. Burberry is often cited as an example of a once-flagging luxury brand that turned things around, partly by employing effective brand storytelling. Luxury fashion items also could be rebranded as a way to commemorate personal and professional achievements, such as an anniversary or a job promotion.
• Pick a generational lane. If accessibility and Millennial appeal is the goal, luxury brands could partner with rental or secondhand stores, which would offer young shoppers an affordable way into the brand. Stella McCartney recently took this course by partnering with online consignment store TheRealReal. If brands want to maintain their inclusivity and prestige, they would be best served focusing on existing Gen-X and Boomer clientele.
• If appealing to Millennials, scale back on logos. Instead of peppering their products with logos, some brands are letting the products speak for themselves. Brands such as Burberry, Céline, Hermes, and Louis Vuitton have either scaled back on logos or removed them altogether. This strategy appeals to Millennials who stay away from traditional signifiers of wealth and status—and has the added bonus of making a product stand out at a time when logos are ubiquitous.

Dangers:

• Encroachment from slow fashion. At the margins, the rise of sustainable, high-quality retailers of competing products has a negative impact on luxury brands. For young consumers who care more about message than prestige, an Opelle bag (which retails in the hundreds rather than the thousands) may be preferable to a Céline bag.

The Bottom Line: While the Millennial aversion to overt status symbols is a headwind for luxury, there is still a place for high-quality brands with simple, beautiful designs—especially those that employ effective brand messaging. Social media is a tailwind for this quadrant, giving rise to a new aspirational class who may have never otherwise encountered luxury.

SE QUADRANT: FAST FASHION

Snapshot: Low-margin, accessible brands that rely on speed and affordability to sell products.

Notable Constituents: BRICK-AND-MORTAR: Charlotte Russe, H&M, Zara. ONLINE-ONLY: ASOS, Boohoo, Missguided.

Winning Strategies:

• Cut costs. Fast-fashion retailers are constantly altering their practices or investing in new upgrades that deliver them bigger returns. ASOS, for instance, offers tracking on every order to cut down on the cost of missing or lost orders. Another strategy is to use local and regional suppliers to fulfill time-sensitive orders. Finally, online fast-fashion retailers often manufacture products close to home—ASOS, Boohoo, and Missguided are all based in the U.K. and at least half of their production takes place there or nearby.
• Make designs in small batches. One of the reasons H&M is struggling is that it has a massive amount of unsold inventory. “Ultra-fast” fashion retailers like Zara make designs in small batches to test demand. If items prove to be successful, they can quickly be reproduced because their manufacturing takes place nearby. The online stores—and the brick-and-mortar stores, to some extent—also use technology to track what’s selling well and make new designs based on these data.
• Exploit short-term pricing power. With near-zero margins, it’s important for brands in this space to jump on new trends quickly, which gives them a (temporary) leg up on competitors. Missguided founder Nitin Passi says that the brand aims to have new fashion trends on virtual store shelves within a week of release.
• Don’t underestimate the power of organization. With so many products available, it’s important that fast-fashion retailers make it easy for shoppers to find what they’re looking for. Online retailers excel in this area: Shoppers can sort items not only by occasion (e.g., weekend, going out), but also by dozens of qualities (e.g., length, pattern, design, style).
• Find other ways to stand out from the pack. Fast-fashion retailers could try to develop a loyal following by offering a certain type of product that the others don’t. One example is H&M’s modest fashion line, which immediately sets them apart. Some brands are also “moving west” on the quadrant by touting their social responsibility: The websites of Boohoo and ASOS each have an extensive, multi-part section dedicated to their social responsibility efforts.

Dangers:

• Ultra-low margins. In this space, low cost is key, and there’s always a chance that someone else will be cheaper. Fast-fashion retailers also run the risk of inventory pileup—which, as H&M can attest, will decimate their margins.
• PR debacles. Quick turnaround leaves little time for quality control. Add lots of young, inexperienced managers, and that introduces the possibility of huge PR snafus. Recent infamous examples include H&M’s “monkey” shirt debacle and Zara’s various anti-Semitic slip-ups.
• Encroachment from slow fashion. It’s possible that the demand for sustainability will override fast fashion’s pull to the point that sales decline—especially considering that a growing number of slow-fashion brands sell goods at price points not far off from fast fashion. At the same time, however, there is a specific niche that fast fashion fulfills. People might be able to replace their H&M T-shirts and pants with Everlane, but Everlane isn’t selling clubwear.

The Bottom Line: Fast fashion benefits from strong Millennial demand for affordability. But competition in this space is more intense than ever. Boohoo adds more than 100 new products to their site every day, while Missguided adds 1,000 new products per week. Online brands are faring the best because they have the shortest and leanest supply chains: Some have cut their concept-to-store cycles to as little as a week. The slower stores in the group, such as H&M, must figure out a way to keep up with the competition.

SW QUADRANT: THRIFT-SHOP FASHION

Snapshot: Low-margin, accessible brands that rely on mission and affordability to sell products.

Notable Constituents: BRICK-AND-MORTAR: Goodwill, Rent the Runway. ONLINE-ONLY: Etsy, Le Tote, Plato’s Closet, ThredUp.

Winning Strategies:

• Highlight thrift as the best of all worlds. ThredUp’s latest annual report portrayed thrift as the best option when it comes to pricing, novelty, and sustainability. The only thing thrift can’t guarantee is quality—but everyone has a story of finding some luxury item mixed in among the duds.
• Make it easy to find items. Just like fast-fashion stores, thrift stores must deal with a large quantity of items that turn over quickly. Some in-person retailers sort by color—but Rent the Runway takes it a step further by enabling shoppers to sort by event.
• Highlight cleanliness. Thrift’s biggest competitors are off-price retailers like TJ Maxx or Marshalls that offer new goods at a similar price point. Rent the Runway tries to address the hygiene issue by dry-cleaning items after each wear.

Dangers:

• Too much competition and not enough differentiation. What used to be a hyper-local thrift market has expanded vastly in the last few years. Companies seem to be trying to capture wider sections of the market, which homogenizes the space. Recent examples include Rent the Runway expanding from just luxury gowns to all kinds of clothes, as well as ThredUp launching a section for luxury goods (ThredUp Luxe) to compete with TheRealReal.
• Compromising values. Thrift-shop brands are at risk for having a ton of stock they can’t sell. If these goods end up in a landfill, that’s not exactly living up to their sustainable mission. ThredUp attempts to assuage these fears by saying that clothes they don’t sell are “donated or recycled responsibility.”

The Bottom Line: Thrift stores may be in the Millennial sweet spot (sustainability/values combined with discount pricing), but the space is somewhat of a Wild West, with a growing number of formal and informal competitors. The best chance for brands in this space to keep growing is to capitalize on their sustainable reputation while also instituting more buyer-focused policies and protections.

NW QUADRANT: SLOW FASHION

Snapshot: High-margin, aspirational brands that rely on mission and quality to sell products.

Notable Constituents: RETAILERS: Amour Vert, Cuyana, Ecoalf, Everlane, Nisolo, Patagonia, Reformation, Veja. MADE-TO-ORDER BRANDS: Elizabeth Suzann, Not Perfect Linen.

Winning Strategies:

• Highlight sustainability to drum up appeal among values-centric buyers. Brands in this space all showcase their commitment to sustainability on their websites—from showing how much water was saved in the creation of various items (Reformation) to publishing the cost of materials and labor (Everlane). Amour Vert sends you a plant when you place your first order. The most overt player is probably Patagonia, which sacrifices Black Friday sales in the name of sustainability.
• Have another hook in addition to sustainability. One of the reasons Patagonia is so successful is because of their high-quality outerwear. Similarly, Reformation’s dresses fill a womenswear niche (sexy but not clubwear). Linjer’s hook is “minimalism”; all of their products are unbranded and don’t have any bells or whistles. In other words, shoppers may be attracted to mission, but the best brands in this space lead the way in utility and quality.
• Key in on inclusivity. Both brick-and-mortar and online-only brands have found success catering to a wider range of customers—in other words, by being more inclusive. Lingerie startup ThirdLove, for instance, offers 70 different bra sizes in an attempt to meet the needs of every customer. Apart from satisfying underserved consumer groups, inclusivity campaigns are also designed to make privileged shoppers feel better about their purchases. (See: “Madewell Stumbles with Millennials.”)
• Try to “move south” by cutting costs. Slow-fashion goods are generally around 10 times more expensive than fast-fashion goods. Shops that can cut down on this premium have a sizable advantage, because they are then competing with brands from the SW quadrant. Everlane leads the way: The brand has a “choose what you pay” section on their site that enables them to discount overstocked items.

Dangers:

• Competition. The recent surge of competition in this field leaves consumers with a ton of options to choose from, many of which look remarkably alike. It’s no longer enough to just have sustainability; there has to be something else to make shoppers choose one sustainable company over another. That variable is often price.

The Bottom Line: Slow fashion benefits from rising demand for sustainability. There are plenty of opportunities for companies to show just how committed they are to the cause (recycling programs, scholarships, and environmental reports, to name a few). The tricky part is figuring out how to remain affordable. Brands like Everlane or Not Perfect Linen—more expensive than fast fashion, but more affordable than Anthropologie—siphon demand from both the NW and SW quadrants.

GENERATIONAL DRIVERS

If there’s one primary driver in the fashion industry, it’s generational change. Case in point: The industry’s biggest decline has taken place among 1990s young adult brands. The list of dead and near-dead retail brands is heavy on Gen-X teen nostalgia, and includes once-vaunted names such as Aeropostale, Claire’s, Hot Topic, Wet Seal, Rue21, and The Limited. The ones that aren’t dead yet, such as Abercrombie & Fitch, continue to struggle with poor Millennial positioning despite their best rebranding efforts. A number of these brands have been bought up and sold for parts by vulture capital king Sycamore Partners.

What do these brands have in common? They all resonated perfectly with Xer young adults, who loved dark, edgy brands made for cool kids only. Not so much for Millennials who are inclusive, positive, and sociable.

So which quadrants are best suited to today’s fashion landscape? Any of them, if strategized properly. But the biggest natural advantage (in terms of Millennial appeal) goes to the SW quadrant, whose brands are both cheap and sustainable. According to ThredUp, 18- to 24-year-olds are the most likely age group to want to shop from environmentally conscious brands. Moreover, trade association Cotton Incorporated finds that 25- to 34-year-olds are ten percentage points more likely than older shoppers to check the country of origin information before buying clothing.

Thanks in large part to Millennial buyers, sustainability has rapidly emerged as the fashion industry’s trend du jour. Brands are quick to highlight their sustainability efforts in ad campaigns and website “About Us” sections. Emerging metrics such as nonprofit Fashion Revolution’s Fashion Transparency Index grade brands and retailers using criteria such as supply-chain transparency.

But sustainability is not the only path to success. ThredUp’s report also shows that Millennials are the most likely to have discarded clothes after only one to five wears—a disposable mindset that favors fast fashion.

For better or worse, Millennials are accustomed to the convenience, novelty, and low prices of fast fashion. Like thrifting, it gives them the ability to put together varied looks without making a big investment. And it’s clear that Millennials don’t want to make a big investment in clothing: The average 25- to 34-year-old householder spent just 3.7% of their income on apparel in 2016. This runs counter to the Sex and the City stereotype of young people as fashion-obsessed shopaholics.

What a brand can’t be, on the other hand, is stuck in the middle. While department stores like JC Penney, Macy’s, and Sears have made some changes in an attempt to draw young shoppers, they’ve generally been less innovative and much slower to adapt. In the traditional schema, “death in the middle” refers to price. In our model, it refers to price and mission. These middle-market retailers have neither bargain-bin discounts nor sustainability/values built into their business models. This is one of the big drivers of the ongoing “retailpocalypse,” which saw a record number of retailers—around 7,000—shutter in 2017.

INVESTMENT IMPLICATIONS

So how does an investor play the situation?

Profiting from these trends through direct trades is difficult because so many apparel brands are privately held. The main exceptions include much of the NE luxury quadrant (Gucci, Nordstrom, Saks) and “death in the middle” department stores. There are a few direct plays from other quadrants as well. Investors high on fast fashion, for example, could target Zara, a subsidiary of publicly traded Inditex. Other “just outside the middle” brands such as Target, Columbia, and TJ Maxx are viable public plays as well.

Even if most of the apparel industry cannot be directly traded on, it will still exert an influence over investors’ portfolios. Privately traded SW firms, for example, may siphon market share from other quadrants, effectively creating a shorting opportunity. The most coveted private firms may also become acquisition targets for large public players. Additionally, the ranks of publicly traded apparel firms may soon be expanding. Online retailer Revolve, which curates pieces from selected designers, plans to go public later this year. TheRealReal, valued at $170 million, launched a new round of funding in April. Meanwhile, Rent the Runway—valued at nearly $800 million—recently received $20 million from the founders of e-commerce giant Alibaba. Stay tuned.