Fashion’s way forward: An action plan for the hard-hit fashion industry

October 31, 2016

Executive summary

For Western fashion companies, the last few years have provided a sobering reminder of the perils of making the wrong investments. Many companies in Europe and the U.S. increased their retail store space; others invested heavily in their e-commerce websites, believing that direct sales from their own branded stores would be essential to their success. Not all of these bets were right for every company, and companies that got it wrong have been penalized heavily. Many of them are struggling with the resulting high fixed costs and diminished retail store productivity.

The companies’ challenges are evident in declining profits and sharply lower shareholder returns. Strategy&, PwC’s strategy consulting business, analyzed 41 Western fashion companies (publicly listed European apparel manufacturers and retailers and U.S. fashion players with significant European business) and determined that they provided an average total shareholder return (TSR) of 5.8 percent on a compound annual basis from 2013 through 2015. That is a significantly lower TSR than most other consumer sectors achieved and represents a steep falloff from the fashion companies’ returns just a few years earlier. Luxury fashion companies and middle-market fashion companies have deteriorated the most, Strategy&’s analysis shows. Two other fashion segments — sportswear and best value — have been more resilient from a TSR perspective thanks to their better fit with consumer trends.

This is an important time for fashion companies to make sure that their strategies are clear and differentiating. The companies’ priorities should include making operations leaner and using any freed-up funds to push their organizations to be more entrepreneurial, more customer-centric, and more adept at connecting to outside partners through technology. The fashion companies that make these adaptations will be in the best position to prosper — and return more to their shareholders — in the years ahead.

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Prerequisites to success

Companies, much like individuals, sometimes pay a price for being too exuberant in their investing. That partially explains what has happened to Western fashion companies in recent years.

When added to the ripple effect of changing consumer preferences, ill-conceived investing decisions have left many of these companies with asset or capability investments that have become hard to justify. They must now rethink these tactics and carefully consider whether their strategies will win going forward.

In a world in which customers want to engage with their favorite brands digitally, every traditional fashion company is going to have to make adjustments. To start with, such companies need a crisper brand position. They also will have to lay the groundwork for greater entrepreneurism in their organizations, and move toward IT systems that can easily connect with outside gatekeepers and other partners. Guiding this activity should be a clear, bold strategy that employees understand and that drives their daily — indeed hourly — decision making. Companies that show discipline about this will have the best chance of profitable growth and of rewarding their shareholders in the years ahead.


Fashion’s way forward: An action plan for the hard-hit fashion industry