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IN-DEPTH | How Can The Fashion Industry Pass This Unprecedented "Stress Test"?

April 17,2020

In the financial industry, "stress tests" are often used to measure the performance of financial institutions or asset portfolios under pressure to see if they are sufficiently resilient. These tests have become increasingly important for financial institutions as they attempt to manage risk during each and every economic crisis. However, there is little mention of "stress tests" in the fashion and luxury industry, which may be because everyone tacitly agrees that this is a traditional industry that does not have too many "accidents". Although uncontrollable factors like climate change and public relations crises can affect sales performance, the fashion market generally handles  change well. The impact is usually muted through normal economic crises.

However, the sudden outbreak of Covid-19 has forced the global fashion industry to undergo an extremely intensive large-scale "stress test". With the press focusing on the sales slump, job cuts and wage cuts, it is more important than ever to know if the fashion companies themselves are sufficiently resilient and flexible to cope with such extreme circumstances, and whether they can minimize the risk, reduce the negative impacts, and recover quickly.

Luxe.CO has selected two luxury companies from the “Luxe.CO Monthly Luxury Index List” as examples and conducted a simple "stress test" through their financial statements.

For example, Italian luxury brand Salvatore Ferragamo, which has reported lackluster performance over the past few years, achieved sales of 1.38 billion euros in 2019, gross profit of 890 million euros, and sales and administrative expenses of 760 million euros. Assuming that Ferragamo’s annual sales and gross profit fell 15 percent, and operating expenses continued as per usual, the company would still be able to break even. Even a 40 percent fall in sales and gross profit for the year would still be manageable if we count  the company's 220 million euros in cash reserves. Furthermore, since Ferragamo is in good financial shape, with a balance-sheet ratio of just 2%, the company is likely to be able to obtain more funding through bank credit.

French luxury giant Hermès had  4.38 billion euros in cash in its bank account at the end of 2019, compared with 2.39 billion euros in annual sales and administrative expenses. If Hermès did not lay off one single person, close one single store and rely on cash reserves alone, it could hold on to "zero" sales for two years. It is therefore no wonder that Hermès, most of whose  factories are in France, was the first to announce that it would continue to pay basic salaries to all its 15,500 employees and not seek any government subsidies during Covid-19.

Luxe.CO has collected some data from domestic and overseas enterprises to help understand how to build a fashion and luxury company with risk tolerance:

Luxe.CO selected two luxury companies from the “Luxe.CO Monthly Luxury Index List” and conducted a simple "stress test" based on their financial statements. It was found that the Italian luxury brand, Salvatore Ferragamo, which has had a lackluster performance over the past few years, achieved sales of 1.38 billion euros in 2019, a gross profit of 890 million euros, and had sales and administrative expenses of 760 million euros. Assuming that Ferragamo’s annual sales and gross profit fell by 15 percent, and its operating expenses continued as usual, the company would still be able to break even. Even a 40 percent fall in sales and gross profit for the year would still be manageable if the company's 220 million euros in cash reserves is included. Furthermore, since Ferragamo is in good financial shape, with a balance-sheet ratio of just 2%, it is likely to be able to obtain more funding through bank credit.

The French luxury giant, Hermès, had  4.38 billion euros in cash in its bank account at the end of 2019, compared to 2.39 billion euros in annual sales and administrative expenses. If Hermès did not lay off a single person, close a single store and rely on cash reserves alone, it could hold on to "zero" sales for two years. Therefore, it is no surprise that Hermès, which has most of its  factories in France, was the first to announce that it would continue to pay basic salaries to all its 15,500 employees and not seek any government subsidies during Covid-19.

Luxe.CO has collected data from some domestic and overseas enterprises to help to understand how to build a fashion and luxury company with risk tolerance:

Channel:

A classic Chinese clothing brand has been working hard over the past few years to upgrade its sales network at all levels, from its headquarters to local stores in cities  across China. When work resumed after the Covid -19 restrictions were lifted, its sales recovered by more than 70 percent in a month due to the rapid recovery in purchasing power in third and fourth-tier cities, which offset the continued slow traffic in major cities such as Beijing, Shanghai and Guangzhou.

Users

An international womenswear brand with thousands of stores in China has been working on its local CRM system for years. Its sales staff have formed a personal connection through WeChat with customers who have visited the store, whether they purchased a product or not. While the physical stores were almost completely closed during the Covid-19 outbreak, the close connection between the staff and customers on WeChat and the strong CRM background support enabled the business to maintain about half of its sales and successfully convert customers who used to just browse in the store to make a purchase.

Products:

A top luxury brand, which saw a big sales drop in January and February at the peak of the Covid-19 epidemic in China, has seen a rapid rebound since returning to work. Sales in the first quarter of this year have miraculously surpassed those in the same period last year in China, thanks to an outstanding blow-up performance in March. It is clear that the epidemic/pandemic has not dimmed the appeal of brands at the top of the pyramid to high-end Chinese consumers.

Globalization

A European fast-fashion giant quickly transferred goods it had originally prepared for the European market to its Chinese stores. It then brought back medical supplies such as face masks and personal protective equipment from China, via its cargo plane, to help to tackle the outbreak in Europe. Although its local factories had to be closed, its partner factories (scattered around various parts of the world) ensured the continual operation of the supply chain.

With thousands of stores forced to close around the world, its e-commerce business, which it already operates in more than 200 countries, played a bigger role.

"Change" and "adjustment" are par for the course for fashion designers. Something must be created out of nothing in order to launch a trendsetting new product each season, and  failure or success can never be accurately predicted. Whatever the outcome, the next season starts from scratch.

A "sense of crisis" is standard for fashion entrepreneur. Even Bernard Arnault, chairman and chief executive of LVMH, repeats at every shareholder meeting that “no matter how brilliant our performance is, the next economic crisis is not far away, and we have to be prepared for it.

Creativity, flexibility, refined management and strategic vision are essential weapons the fashion industry needs to withstand greater risks and pressure in future.

| Photo Credit: Pixabay

| Author: Alicia Yu

| Translator: Lilian Sun

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