While Germany is busy sewing fabric masks at home, closed stores, interrupted supply chains, staff cuts, and declining purchasing power are bringing the fashion market to its knees. Even before the coronavirus crisis, however, the fashion industry was in a critical state. Which mistakes from the past are now falling at the feet of fashion companies?
It’s time for the fashion industry to take a close look in the mirror, say Dr. Christian Gerloff of Gerloff Liebler Rechtsanwälte and Dr. Michael Meister, director at enomyc. What will stationary retail look like in the future? Which hurdles will the fashion industry have to overcome, and how should medium-sized companies take advantage of the industry consolidation now?
Learn more in our expert interview.
Dr. Meister, you have been a consultant at enomyc for ten years now and previously worked in the textile industry for many years. How do you see the current developments?
MM: Anyone who has looked at the fundamental data knows that the German SME sector in fashion was already in a critical situation before the coronavirus crisis. The situation has now been made even worse by the pandemic. For many companies it will bring about a knockout.
Which fundamental data were already inaccurate before 2020?
MM: Too much was always reported about the positive overall market development and it was suggested that every company could participate, if only they did it correctly. That is wrong. Instead, many small and medium-sized companies were essentially excluded from this positive overall market development. The number of companies in German clothing retail has more than halved since the turn of the millennium. This has been particularly at the expense of the traditional specialist trade, which has lost its market share to vertical suppliers, discounters, and e-commerce. This trend will continue at an accelerated pace in 2020 and in the following years.
What did the shift in sales channels lead to?
MM: It led to many medium-sized companies trying to compensate for the drop in sales through alternative channels. Many companies actually succeeded in doing so on the top line, but in doing so, earnings often fell by the wayside. This is obvious when it comes to sales expansion via outlets and factory sales. There are few companies that manage to make sales via this channel profitable. Those who manage to do it cost-neutrally are already doing well – but most companies generate losses this way.
Dr. Gerloff, you are an industry expert and very experienced in the insolvency cases of fashion companies. Currently, you manage Laurèl and accompany Hallhuber in the protective umbrella proceedings under your own management. What mistakes do you think the big fashion companies have already made in the past?
CG: For me there are two themes that stand out – the first concerns the excessive expansion of numerous companies. If you look at the last 20 to 30 years alone, you can see that expansion has been far too extensive and in some cases pointless – with shopping malls, outlet centers, expansion of space in cities, and additional shopping streets. The companies expected the expansion to result in an increase in market share. In the meantime, however, the market shares have more or less remained the same – only the market has grown larger. At the same time, however, the sales areas must be used.
What is left at the end of the day? Let’s take a previously highly profitable company like Gerry Weber: Its expansion led it into the crisis in the end. The same is true of many other companies: expansion no longer leaves many business models.
What would be the second theme?
CG: The expansion is at the expense of quality and fashion. After all, one has invested in expansion, but not in the product. Fashion – especially in the middle segment – is therefore cheap, interchangeable, and increasingly subject to a certain arbitrariness. It has become boring; the highlights are missing. The special fashion – for special occasions – has been lost.
The result: brand loyalty is almost nonexistent. In department stores, consumers do not recognize the brands without looking at the label. Think about the last item of clothing you bought that you really remember. With these developments, it’s no wonder that consumers prefer to invest in good food rather than expensive clothing.
What will the future bring for the fashion industry?
CG: I think there will be a market shakeout, which has been going on for quite some time. It is now only being accelerated by the coronavirus pandemic. There will be players disappearing from the market. The arbitrariness I was talking about will certainly lead to a reduction in the amount of space available. This will be a painful process of adjustment. But it is a fact – we will have to take capacity out of this and many other markets. Take Lufthansa: it says that it will need 20 to 30 percent less capacity after the crisis. That will have huge consequences for companies. It will not be possible without painful consequences. We expect high unemployment, which in turn will result in less purchasing power and also less willingness to buy. This will have an impact on both stationary and online trading. There is a lack of innovation. Innovative business models must now be developed again!
Are the large multilabel department stores still needed at all?
CG: I think new business models will develop and this question will arise. Stationary retail will continue to exist and the big retailers will have the advantage of being able to combine different brands and outfits. However, this concept only works through personal consultation, and I have observed that during the crisis retailers are taking staff off the floor and severely curtailing marketing. I would caution against this. Retailers will actually lose their advantage completely. It often consists of marketing and personal advice. So when I talk about sharpening the brand, marketing is definitely part of it.
Dr. Meister, what do you think? How should medium-sized companies deal with the sector-wide shakedown?
MM: Those who act are at an advantage. From my point of view, there are basically two options for medium-sized companies. Option number one is concentration and focus on their own product; there will always be room in the fashion industry for well-designed niche products, specialization, and profile. Two questions that need to be answered here are: Does the brand have the potential for this? Do the financial means suffice for the brand to last? If both can be affirmed, the question arises as to whether the company can be transformed. In addition to the possibility of transforming the company to a lower appropriate cost level, it must be examined whether it has the necessary capabilities. These include flexibility, agility, and online competence.
What is the second option?
MM: Mergers and acquisitions – the sale of the company. Fashion is a topic for strategists, for private equity, and for family offices. I believe that for a substantial number of companies it will be best to take a proactive approach here.
Dr. Gerloff, you mentioned that innovation is lacking and innovative business models need to be developed. What kind of business models could these be? Are there already concepts that point towards the future?
CG: There are always certain approaches. However, I don’t think it has yet become accepted that the existing structures of the fashion industry are no longer up-to-date. Perhaps new brands will also have to emerge: Look at brands like Escada, Rena Lange, and Strenesse. They started in Germany, were ultramodern and gained a worldwide reputation. What, on the other hand, have we produced in the last ten or 20 years? The question arises as to whether it is necessary for something to die on the one hand, so that on the other hand something new may emerge again.
You talk about structures that are no longer up-to-date. What kind of structures are these and what do you recommend to replace them?
CG: The big manufacturers have four collections a year – the two main collections in summer and winter and the smaller ones in spring and autumn. Some of these collections are developed a year and a half before they go on sale. If it weren’t for the pandemic at the moment, the first themes of the autumn collections would be delivered now – in the second half of May. All this is no longer up-to-date. This is how the reaction time is lost! If, for example, summer temperatures continue into October, the whole schedule simply no longer fits. Do you really need the autumn collection in May? That is insane. It is delivered too early, which in the long run destroys the business.
The industry must question itself and determine whether the structures it is pursuing are still in line with developments – even before the coronavirus crisis. I would like to see it continue to block the current phase – this approximately two-month shutdown – in the future. This would bring us closer to the issue again and the relevant collections would then be on the hanger when the consumer needs them.
Dr. Meister, what is the current situation in e-commerce?
MM: It pays off for many companies through their own online shop. But here the top line is limited and can only be increased with a disproportionately high marketing effort. For this reason, many companies tend to expand the top line via platform deals in a further step – here we have hardly seen any companies that generate income when viewed precisely and honestly – these efforts consequently serve to conceal the reduction in sales in other channels.
What are the chances for the future?
MM: E-commerce will continue to gain importance in the coming months of the current crisis. What is striking, however, is that even here, sales have been declining in recent weeks. It is therefore important for companies to position themselves professionally here. But that won’t be the solution for the top line. Concrete proposals for solutions are only ever possible here against the background of the individual company.
Dr. Gerloff, what guiding questions and recommendations for action would you like to give to the stationary trade?
CG: For me, it’s primarily a question of two components. For a long time – at the expense of the product – we only invested in expansion. The product and product quality have suffered greatly as a result. My advice is therefore to invest in your product again! The fashionable degree must be sharpened again. The product and the brand must fit together. The strength of the stationary trade lies in the personal fashion advice given to customers - in other words, quite clearly in the personalities of the employees. I also recommend technical innovations in shopping to make shopping an experience.
The second component contains the guiding question: What kind of supply chain do I have? This also includes: Where do I get my goods from? Where do I have my goods produced? Many who are supplied purely from Asia now realize that their supply chains are far too long. Before the goods arrive, they are on the ship for six weeks alone. In this respect, there will certainly be a turn towards countries like Turkey, Bulgaria, and Romania. That is simply faster. However, I would advise that political unrest in these countries should also be taken into account in the planning. I do not believe that production will be shifted back to Germany. A mix makes sense, though. The whole system will have to become more flexible and more responsive: if the summer lasts longer, other goods will have to be developed and delivered just as quickly.
Dr. Meister, what hurdles will medium-sized companies have to face in the future?
MM: The hurdle that a large number of German SMEs have to overcome is the honest observation and analysis of their own situation. Companies must now realize how pointless it would be to continue to expand unprofitable sales and to place their hopes on the same topics every year or season – such as the weather, the next collection, or the new social media campaign. These and other factors will not work in the long term. It will also not be enough to get a grip on the pressing operational issues in cost cutting and the supply chain. Now it is all about the future of the company and how to secure it, and quickly. It is therefore – now more than ever – a matter of speed. Often, consulting external advisors in this process proves to be very helpful.
How do you assess further developments, Dr. Gerloff?
CG: We have an incalculable market. You don’t know when it’s going to really take off again. Six weeks ago, I assumed a “buying mood” – according to the motto “We have overcome the crisis,” but there is no end date for the crisis. Instead, there is always the uncertainty of whether there will be another shutdown after the shops open. Maybe there will be a certain peak, but people will feel that they won’t be able to spend much money on fashion anymore. The fear of possibly losing their jobs will also shape consumer behavior. Both manufacturers and retailers will have to prepare themselves for this as well.
The focus should now be firmly on one’s own market and one’s own customers. Much can be gained through customer retention and customer education during the shutdown period. These are difficult times. I hope that we will all survive them well, both in terms of health and economy.