In view of the war, rising prices and a market environment that has been difficult for some time anyway, Allianz Research expects the fashion trade to continue to face increased insolvency risks in a recent study.
Just at the moment when the corona restrictions are gradually lifting in this country and there is hope for a recovery in the consumer market, the fashion trade is facing the next challenge: “The confidence of European consumers suffered a setback after the invasion of Ukraine”, states Allianz Research in the current study “Is fashion retail falling out of fashion?”. So fashion retail could soon be out of fashion? According to the study: yes.
decline in consumer spending
Against a backdrop of slower economic growth, retailers in Europe could face a €4.85 billion fall in consumer spending on fashion in 2022. Not every country reacts in the same way. According to the study, Italy (with a minus of 1.45 billion euros) and Germany (with a minus of 1.12 billion euros) in particular will have the largest declines. “We assume that the growth in fashion spending in 2022 will only be plus 4.4 percent, whereas before the war we had expected an increase of 6.4 percent,” according to the authors of the study. That means fashion spending will remain well below pre-pandemic levels.
Margins remain under pressure
In addition to this negative impact on revenue growth, Allianz Research expects gross margins to remain under pressure as commodity prices remain high. Cotton, synthetic fiber and transport prices will remain high, leaving brands and retailers with the question of how to compensate for these additional costs. In view of the rising cost of living in general, consumers are also sensitive to price increases.
Fashion spending has been falling for 20 years
All of these challenges are encountered in fashion retail in a market that has had to struggle with a structurally difficult environment in recent years. Over the past 20 years, spending on fashion has declined from an average of 6% of total household spending to 4% in 2020. Per capita spending on fashion is also declining in Italy, France and Spain. “We believe that the consequences of the pandemic are hurting specialist fashion retailers in general, as consumers increasingly choose alternative distribution channels (online), consumption patterns (second-hand) or products (sportswear),” the authors continue. By the end of 2021, monthly sales in fashion stores were still 1.7 billion euros below the 2019 level. Around 40 percent of fashion spending in the euro zone would now be made outside of classic fashion retail, the study estimates.
Insolvency risk in the fashion trade remains
Taking into account a slight sales recovery, a high-cost environment and strong structural changes, the study assumes “that the insolvency risks will remain high in 2022 and 2023.” Since 2016 there have been 78 insolvencies in Europe, involving fashion retailers with annual sales of more than ten million euros were involved, so that a total turnover of around 14 billion euros was at stake. This equates to 27 percent of all retail bankruptcies and 31 percent of all retail sales at stake during the period. The risks not only affect traditional retail, but all retailers with a high proportion of fashion, including department stores and discounters.