Caution seems to be the word to watch for 2024.
Fashion and retail will likely face economic headwinds this year amid an ever-changing competitive landscape, but how that will all shakeout remains unclear.
Gil Harrison, an investment banker for 47 years—he founded boutique investment firm Financo and remains chairman emeritus following his retirement in 2017—and now a consultant at Harrison Group, said he would be hard-pressed to compare the current retail and economic backdrop to past cycles, even considering the Great Recession of 2008.
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“It’s very hard to tell because the consumer right now is very fickle and you don’t know what they’re going to do,” Harrison said. “You’ve got so many different factors to consider. Will inflation come down? Will the fighting overseas be expanded? You know, I don’t know the answers on a lot of this stuff.”
Harrison said he’s optimistic about the future, but remains “totally confused over everything that’s going on currently.” He said the big difference in the current economic cycle is the impact from the global issues overseas centered on Israel and Ukraine. “This is very different from anything I’ve seen in my lifetime before,” Harrison said.
While the Russia-Ukraine war continues on, conflict in the Middle East has been escalating as well, with Houthi rebels claiming responsibility for an attack on a container ship last month while transiting the Red Sea. Also, major cargo airlines temporarily suspended operations to Israel after the country declared war following the Hamas terrorist attack in October.
Global fashion and retail
Expectations appear to be getting more complicated by the day, given geopolitical concerns, possible supply chain upsets, economic volatility and nagging inflationary issues. A McKinsey study on The State of Fashion 2024 from November indicates that fashion forecasts for the global industry have pegged top-line growth at “2 to 4 percent in 2024” with regional and country-level variations. Sixty-two percent of executives in the study’s survey in September cited geopolitical instability as the top risk, followed by economic volatility at 55 percent and inflation at 51 percent, although that’s down from 78 percent in the same year-ago survey. By region, European and Chinese growth is expected to slow, while U.S. growth should pick up after a relatively weak 2023, the McKinsey report said.
Credit analysts at Moody’s Investors Service were more cautious. While they maintained a stable outlook for the global retail and apparel sectors, growth was projected to rise just 1 to 3 percent this year. “Active and footwear has been hit particularly hard due to weakening demand and inventory misalignment, even after a heavily promotional 2022,” the analysts said in a report in October. A potential slowdown in consumer spending was also cited as significant risk as inflation fatigue has some becoming more selective in what they’re buying. Rising credit delinquencies was another cited risk factor for 2024.
The retail team at Moody’s said home and apparel retailers will be among those impacted the most by margin pressure. They also expect retail inventory levels will need to fall further to align with weaker sales, which could result in an increase in promotions as retailers clear out the excess and realign inventory to meet lower consumer demand.
The concerns cited by the McKinsey study and Moody’s report have not been lost on fashion manufacturers.
The most recent warning came from Nike Inc. when the brand posted second quarter results on Dec. 21 wherein it disclosed a savings plan to “fuel profitable growth at speed and scale,” president and CEO John Donahoe said in a conference call. The savings program—which could save up to $2 billion in costs over the next three years—calls for simplifying Nike’s product portfolio, increasing automation and the use of technology, streamlining the organization and leveraging its scale to drive greater efficiency. The company is setting aside $450 million in pre-tax restructuring charges, with the bulk tied to employee severance costs, meaning that layoffs will be sizable in number.
The company posted a second-quarter profit beat, with net income up 19 percent to $1.6 billion and diluted earnings per share of $1.03, reflecting a 21 percent gain year-over-year. But revenue was $13.39 billion, up just 1 percent from year-ago levels. The company also issued a softer second-half revenue outlook, with Q3 revenue to be slightly negative and Q4 revenue up in the low single digits. The softness reflects in part macro headwinds in Greater China and the EMEA (Europe, Middle East and Africa) region.
US fashion and retail
“Expectations are complicated. It really varies price point by price point and channel by channel,” said Eric Fisch, commercial banking head of U.S. retail and apparel at HSBC.
In reviewing 2023 trends, Fisch said clients in the luxury space were “seeing lower expectations year-over-year” in the “flat to down” range as they came off phenomenal 2022 levels. One step down is the designer contemporary market, which the banker said in 2023 had a “really strong year. We have over a dozen contemporary brands and they are all performing quite well.” He said expectations for this past holiday season were in the “high single-digit growth levels.”
For the mid-priced and lower tier levels, “it’s a bit more complicated in that a lot of those retailers have really taken a conservative stance on inventory. They didn’t want to get stuck with a glut of product the way they did [in 2022], and so they bought conservatively. The hope was to chase product in the season or just hold firm on not having too many promotions,” Fisch said. He noted that the wholesale community and the brands selling into those areas have seen weaker results just before heading into the holiday selling season.
With inventory levels moderating as retailers and manufacturers cut back on orders and production, Fisch is expecting healthier stock levels heading into 2024. So far, retailers have been playing defense and remained conservative in their orders. “First quarter and spring orders are flat to down” versus a year ago, but the banker said that could shift towards a slight uptick if it turns out that demand was strong through the holidays.
One path that some retailers have taken centers on the idea of chasing sales. Instead of making a huge bet on an item, they’ll order conservatively and then wait and see if sales materialize. If they do in a big way, retailers will go back to the manufacturer and order more in the same season hoping to meet consumer demand. It’s a move that can leave some sales on the table if the item can’t be re-ordered, but that’s a risk that some retailers find preferable to having too much and then needing to do multiple markdowns to clear out the stock.
“Wholesalers are able to quickly produce and air in goods and replenish the item. If it’s a particularly hot item, then I’ve seen cases where retailers come back and say ‘If you could give me X amount in the next few weeks, I’d take it’ and that’s a great opportunity. But honestly, other times I’ve see wholesalers say you didn’t order it and I can’t product that fast enough so order more next time,” Fisch said. “It really all depends on how complex [the item] is and what price [retailers] are willing to pay.”
The banker sees a number of shifts in the market. Some higher-end brands are producing fewer items, with an eye to selling more at full price and garnering better margins in the process. The aspirational shopper is trading down from luxury and making purchasing decisions on how to get more back for the buck. And changing trends are impacting what people are buying.
“Denim styles have changed in the last one or two years. So people are replenishing and replacing their denim. There’s more occasions and there’s more travel. There’s a changing environment in workwear. So all these things, each one of those factors have contributed to how people are shopping,” Fisch said.
Fashion and 2023’s social media trend
On the business operations side, Fisch said that in 2023, “we saw amongst our clients an intentional pullback on social media advertising, and they redirected those dollars to some more traditional channels, and then to influencers. They found that more impactful than generic ads.”
The banker thinks that in 2024, “we’re going to see people being a little more circumspect about how they spend marketing dollars online, especially going into an election year where, potentially, the cost of social media ads increase [due to] demand from different campaigns for those same ad dollars.”
Polly Wong, president of Belardi Wong, a marketing strategy and creative services firm specializing in direct mail and print, said digital marketing costs have skyrocketed. That’s one reason why there’s been an increase in direct mailings for customer retention and reactivation for lapsed customers.
“Cost per click prices have skyrocketed. One click is $2. One folded piece in the mail is 50 cents. You can mail four direct mail pieces for the cost of one click,” Wong said.
She said because the cost of catalogue mailing had become more expensive due to paper and postal increases, the new direct mailings tend to be folded pieces of large postcards or smaller postcards. “The card has more real estate for a brand to tell its story than a text link or a link on Google or Facebook,” Wong said, adding that direct mailings are more in use in the fashion categories than home.
She said that people are responding well to the direct mailings, and they tend to spend more and have a higher lifetime value for the brands. Moreover, the direct mailing is viewed as a novelty among the twentysomething consumer base versus the older shopping cohort who tends to prefer flipping through catalogs, she said. Wong expects direct mail to remain popular in 2024.
US economy and presidential election
Looking ahead, Walter Loeb, former retail executive and retail analyst and now a consultant, says he’s “not negative about 2024,” as far as retail sales, although he’s not overly optimistic either.
“We had the COVID pandemic and then high interest rates, which slowed down the economy but did not kill it,” he said. “No doubt things cost more, and the consumer is going to be careful on spending. I think that consumers in general have adjusted to the higher prices.”
The Conference Board’s Consumer Confidence Index rose in December to 110.7, up from a downwardly revised 101 in November. The Present Situation Index on current business and labor market conditions rose to 148.5 from 136.5 in November, while the Expectations Index reflecting short-term outlook jumped to 85.6 in December from a downwardly revised 77.4 in November. The sharp increase in expectations is now back to the levels of optimism last seen in July.
“December’s increase in consumer confidence reflected more positive ratings of current business conditions and job availability, as well as less pessimistic views of business, the labor market, and personal income prospects over the next six months,” the Conference Board’s chief economist Dana Peterson said, adding that consumers’ perceived likelihood of a U.S. recession over the next 12 months abated in December to the lowest level seen in 2023, although two-thirds said a downturn remains possible in 2024.
Loeb’s lack of negativity for the U.S. economy stems from another factor occurring in 2024, and that has to do with the upcoming U.S. presidential election.
“Retailers will remain conservative in their ordering, and they will maintain that stance through the first quarter. By the second half, I think things will pick up in the U.S. President Joe Biden will try to keep everyone upbeat about the economy going into the election. Whoever the candidates are will promise a good economy going forward and that will get people more optimistic about the future,” Loeb concluded.
