MARKET WATCH
Fast-fashion giant ASOS is launching a sustainable fashion training program. The course will teach members of the company’s design team to implement “circular practices” 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, particularly among Millennials. At the same time, fast fashion is far from dead; if anything, the leading brands are getting even faster. The success of these seemingly contradictory business models reflects two competing impulses: Millennials want environmentally friendly clothes, but they also want them cheap. Left in the lurch are conventional mall brands, which are scrambling to revise their styles and supply chains in order to keep up.
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.
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.
So which types of brands are best suited to today’s fashion landscape? The biggest natural advantage (in terms of Millennial appeal) goes to discount brands high in sustainability/values. 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. 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 retail stores—around 7,000—shutter in 2017.
So what’s a retailer to do? One of the few bright spots in this industry has been J. Crew’s sister brand Madewell, which has seen consistent sales growth as the flagship battles a slump. Madewell, which launched in 2006 and sells more casual clothes than J. Crew, offers lower price points while still emphasizing quality and durability. Its design and stocking strategies, which are constantly reevaluated, resemble those of an online, direct-to-consumer brand rather than a traditional retailer. Stores offer customers discounts if they bring in old jeans to recycle.
Madewell’s success suggests that while brick-and-mortar apparel stores certainly face considerable challenges, it’s still possible to thrive in the retail apocalypse era. But it’s more than likely that it will take dramatic changes to their pricing, mission, or quality to pull it off.
TAKEAWAYS
- Forget everything you thought you knew about the fashion industry. Growing interest in sustainable fashion appears to be bearish for conventional fast-fashion brands that largely ignore sustainability. But paradoxically, the fast-fashion space continues to thrive. 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 that leaves room for all comers.
- Understand why most ‘90s fashion retail brands are failing. The list of dead and near-dead retail brands 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 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.
- Identify the (few) direct trading opportunities out there. 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 premium, conventional “luxury” brands (Gucci, Nordstrom, Saks) and “stuck 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.
- For other trading opportunities, get creative. Private brands can still exert influence over investors’ portfolios. Rental outlets and thrift shops, 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. Keep tabs as well on the IPO market. 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.
