INNOVATION DRIVES FASHION FORWARD

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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. With each and every economic crisis, stress tests have become increasingly important for financial institutions as they manage risk.

However, in the fashion and luxury industry, there is little mention of "stress tests". Perhaps everyone tacitly agrees that this is a traditional industry that does not have too many "accidents". Although uncontrollable factors such as climate and public relations crises can  indeed affect sales performance, in general, the fashion market absorbs change well. Even through the usual economic crises, the impact is usually muted.

The sudden outbreak of Covid-19 has forced the global fashion industry to undergo an extremely intense large-scale "stress test". With the press focusing on the sales slump, job cuts, and wage cuts, it is more important to know whether the fashion companies themselves are resilient and flexible enough 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:

Channel:

Over the past few years, a classic Chinese clothing brand has been working hard to upgrade its sales network at all levels, from headquarters through to local stores, in cities  across China. After work resumed following the lifting of  Covid -19 restrictions, its sales recovered more than 70 percent in a month. This was due to the rapid recovery in purchasing power in third and fourth-tier cities, offsetting 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. The sales staff formed a personal connection through WeChat with customers who had visited the store, whether or not they had purchased a product. 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 allowed the business to maintain about half of the sales and successfully convert customers who used to just browse in the store to now make purchases.

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 China in the first quarter of this year have miraculously surpassed those in the same period last year, thanks to an outstanding blow-up performance in March. It is clear that to high-end Chinese consumers, the epidemic/pandemic has not dimmed the appeal of brands at the top of the pyramid.

Globalization:

A European fast-fashion giant quickly transferred goods 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 tackle the outbreak in Europe. Although local factories had to be closed, its partner factories ( scattered around  different parts of the world) ensured continued operation of the supply chain.

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

For fashion designers, "change" and "adjustment" are par for the course. In order to launch a trendsetting new product each season, something must be created out of nothing;  failure or success can never be accurately predicted; and whatever the outcome, the next season starts from scratch.

For fashion entrepreneurs, a "sense of crisis" is standard. Even Bernard Arnault, chairman and chief executive of LVMH, repeats at every shareholder meeting that no matter how brilliant their performance is,  the next economic crisis is not far away -- and that we have to be prepared.

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

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