Fashion is still waiting to get a clear picture of exactly what a recession will look like, when it will deepen, and how it will be regionalised. In that context, many brands and retailers are debating whether to focus on driving efficiencies and maximising profit from existing assortments and loyal customer bases, or looking beyond existing walls and securing their positions through geographic, demographic, or category expansion. At the same time, as friction between the US and China continues to mount, brands will need to consider what the possible impact is, on all sides, should things devolve. And in both cases, technology has a role to play.

Key takeaways:

  • Although luxury brands and fast fashion retailers can apparently do both, mass market fashion businesses must debate whether to focus on driving efficiencies and maximising profits, or looking beyond existing walls and securing their positions through geographic, demographic, or category expansion.
  • The most impactful way to improve margins is by making significant changes in the supply chain, but switching to an on-demand model is a long-term task. Instead, increased focus on margins is resulting in greater investment in incremental improvements in logistics, inventory, and warehousing.
  • New developments are demonstrating just how closely Chinese and US fashion markets are linked, not just for the mechanics of international sourcing and manufacturing but for consumption – making any further erosion of the relationship between those countries problematic for fashion.
  • Both inside and outside extreme scenarios, technology could be the key to both shoring up existing US / EU and China supply chain relationships, to minimise the impact of trade embargoes, and to rebuilding domestic production and consumption capacity in both places.

Profit and efficiency versus growth: where is fashion focusing?

As one of the standard-bearers for luxury, Hermès this week announced a new financial milestone, ringing in $218 billion market value for the first time in its history. With that stratospheric valuation coming at a time when consumers and brands alike are tightening their belts and finding creative (or cold and calculating) ways to hold on to existing market share, companies inside and outside luxury are looking on enviously.

In this sense, Hermès is likely to be a lighthouse for companies that are considering either of the two divergent ways to ringfence or raise their own revenue: growth and expansion, or efficiency and profitability. As a luxury brand with near-unmatched heritage, Hermès has been able to both maximise the margins it makes from a narrow collection of evergreen products, and to simultaneously explode on the international stage, with steep growth in overseas markets.

But it’s important to point out that this level of success – running counter to the prevailing downward trend – is also evidence that there’s serious growth potential on the opposite end of the market, with Shein predicting that its revenue will double to reach almost $60 billion by 2025, while aiming for a US IPO later this year. 

The harder position, then, would seem to be in the mid-market, where companies tend towards average price points, thin margins, and less clear-cut value propositions, and where brands and retailers are perhaps more exposed to the kind of outward forces that shape people’s spending patterns. When times are hard, consumers flock to value brands; when they receive a windfall, a lot of them start to increase their spending and look upmarket. 

The middle is a tricky place to be. And this isn’t just social theory: we’ve seen pronounced pendulum swings in both directions in the last couple of years, driven first by the pandemic and then by revenge spending, which have kicked both fast fashion and luxury into a higher gear. And while the same cycles have obviously affected brands and retailers in the middle, most of them have not experienced the same booms as fast fashion and luxury. 

Instead, retailers and brands in that mid market are now learning to make the most of what currently constitutes “stability” in consumer spending, resulting in an increased focus on margins. If you know who you’re selling to and what they’re willing (or able) to pay, the logical place to concentrate is on maximising how much money you make on each turn of that flywheel.

The most impactful way to improve margins is, of course, by making significant changes in the supply chain. This might be accurately forecasting demand, dramatically reducing costs, and all-round optimising the lifecycle of your products – all with a vision to bring the best possible proposition to market, at the best possible time. But these are big changes that take time, and time does not appear to be on fashion retail’s side at the moment.

As a technology publication, The Interline often focuses on the far horizon, and while there’s a huge possibility space for the mass market in shifting from sensing to demand to responding to it – through a spectrum of different means of digital production, bringing things to market in days or weeks rather than months – the infrastructure for achieving that at scale, internationally, and for the entire mid-market  just isn’t there yet. 
Instead, the greatest amount of profitability and efficiency is going to come from incremental improvements on the more mundane side of the supply chain – places like logistics, inventory, and warehousing. Logistics, for example, while definitely being on the less glamorous side of fashion, has the potential to have a powerful effect on the bottom-line, as seen this week with news from Dr Martens. The company is reported to have been dealing with a major bottleneck at its distribution centre in Los Angeles, and as a direct result the footwear giant saw a marked reduction in wholesale revenue (4% in absolute terms).

To mitigate the likelihood of experiencing similar issues, American retailers Walmart and Chewy are focusing on safeguarding their profits through automated warehouses. Unfortunately this automation comes with a human cost: these retail powerhouses have already cut thousands of jobs, and are attempting to counterbalance labour cost through investment in technology. Also wanting to boost its supply chain efficiency in similar ways is ASOS, which is working to expand its offering to customers by facilitating orders to be placed directly on its website or through its app without products being stored in the retailer’s distribution hubs – relying instead on a network of fulfilment partners to maintain speed without shouldering the burden of inventory.

The other engine for success in the middle market would be growth and expansion (new products, new locations, new demographics) and here, again, it would appear that luxury brands and fast fashion forces are setting a template. 

Unsurprisingly, Hermès and Louis Vuitton are focusing their growth efforts on China, along with a variety of luxury brands from Italy who took part in the China International Consumer Product Expo in Haikou, Hainan, and these strategies are already bearing fruit.

But the same attitude to expansion is also visible in fast fashion, with Shein announcing today that it would be investing heavily in shoring up regionalised production to allow it to make an even larger splash in the South American market.

So where should the rest of fashion be looking? Inward, towards greater efficiency? Or outward towards expansion?

The answer, unfortunately, is going to change quickly. Today, the smart bet is likely on improving the success potential of each individual product, but as other sectors – notably tech – are already demonstrating, expectations can swing wildly between profit and growth at an erratic pace.

And the tech sector could also provide a cautionary tale for the tightrope that many businesses try to walk between growth and profitability, with a fascinating first-hand account published this week about why social media channels have their own inbuilt limitations. These platforms must constantly juggle the interests of their customers but at the same time satisfy their investors and advertiser base – meaning that, at any one time, they are being pulled in the direct of cost reduction, growth, and innovation all at once. And as we’re seeing with the apparent downfall of Twitter at the moment, striking that balance is not always possible, leading to interest from users dwindling and revenue from funders following. 

In tech, so far at least, these scenarios end with someone else picking up the baton, promising to be different from everything that’s gone before, while eventually treading the same path. For fashion, the cycle does not necessarily need to repeat, but for the time being it’s likely that all but the companies at the extreme ends of the value spectrum simply need to hold on as the rollercoaster continues.

Could fashion get caught in the middle of fraught US-China relations?

Things are heating up in diplomatic tensions between China and the US, and fashion is one of the next places that the schism is playing out. A recent report from the US-China Economic and Security Review Commission (USCC) claims two popular digital platforms – the aforementioned Shein, and Temu – and other chinese digital startups pose a risk to US customer data and have raised concern over their production processes, intellectual property rights, product safety, sourcing, and potential use of forced labour. 

The focus on fast fashion is the latest indication that ripples from the changing U.S.-China relationship can reach far beyond critical areas such as semiconductors. Beyond the semantics, the report states that the cases of Shein and Temu are “a case study of Chinese e-commerce platforms outmanoeuvring regulators to grow a dominant U.S. market presence.” Or, to put it another way, this is an example of one region recognising that a key variable (labour cost) that cannot be competed with confers an advantage for companies that exploit it to a greater extent than their competition.

This is not, of course, the first salvo of hostility in the fashion arena between China and the wider world in recent history. Recently, the US Government banned the import of products that were processed in, or incorporated raw materials that may have originated from, Xinjiang. This was followed by Chinese domestic backlash to the ban, which saw the boycotting of US and EU brands. 

Every time these spats emerge, the key takeaway for fashion retail is that China/US/EU markets are very closely linked, not just for the mechanics of international sourcing and manufacturing but for consumption. And every time fashion gets closer to becoming a bargaining chip to  be batted back and forth during international tensions.

To run a thought experiment for a moment: what would tighter sanctions, applied by the US to Chinese fashion companies, and then reciprocated, actually look like? In theory, China could adapt to the inability to export materials and finished goods to the US and EU more easily than those consumption markets could handle a sudden divorce from their dependence on Chinese suppliers. 

As we’ve already seen in this week’s analysis, we know that the luxury industry thrives, at least in part, thanks to its courting of China’s “high net worth individuals”. This being the case, the luxury market would obviously not welcome bans or sanctions that restrict or bar their ability to sell in mainland China, but analysis published this week suggests that those consumers are more than happy to travel a short (or even medium) distance to buy those kinds of high-end products anyway. 

And looking at Hermès’s quarterly results, we see that in the most recent quarter sales in Asia were more than double those of sales in Europe. This stands as a reminder that the biggest international fashion businesses can (and right now do) make a lot more money in Asia than they do elsewhere – giving China a strong consumption market position in any kind of trade conflict.

If we test that extreme hypothetical case where China and US relations sour to the point of further sanctions and bans on imports and exports in fashion further, the US might – as a counter – try to diversify its manufacturing base and lean further on sourcing and manufacturing destinations in Central and South America, Puerto Rico, and other geographically proximate regions. But whether those countries have the right combination of supply chain speed and resilience, specialised manufacturing infrastructure and expertise to pick up immediately where China left off, is a different story. In all likelihood, there would be a sudden need to employ digital manufacturing hardware and workflows on an unprecedented scale (digital fabric printing, digital dyeing, automated on-demand production etc) to bridge the gap – bringing us full circle to this week’s debate about what real supply chain efficiency, profitability, and resilience looks like.

Technology could also be key on the other side of that equation: Chinese consumers currently embrace international brands, but the extensive e-commerce and live shopping infrastructure that the country has built could easily be repurposed to allow domestic brands to increase their sales to compensate for a lack of availability of international brands. If a void emerges where Chinese consumers can’t access international labels locally, some will travel to buy them, while others will shift their purchasing habits inward.

A better measure, of course, would be to help blunt the impact of this scenario if it was to occur. And this would likely mean using technology to shore up the existing US and China supply chain relationship, and to have it operate more smoothly and efficiently. In practice this would look like building shorter lead times, establishing mechanisms for more accurate costing and data-backed traceability. This would lessen the risk for both sides in the more likely outcome that fashion winds up being kicked backwards and forwards without outright sanctions or further bans, but in a way that makes the continued international production and retail chain even more unpredictable and risky than it currently is.

The best from The Interline:

This week we published two exclusive stories and pulled back the curtains on our new Tech Hub.

First, our News & Features Editor, Emma Feldner-Busztin, published a deep-dive on the state of metaverse fashion – asking the piercing question of whether or not, with the goalposts moving so far and so frequently, brands should be attempting to follow at all.

Second, we released the last in a series of examinations from Chris Jones and Mark Harrop, which focus on the intricacies of measuring and managing a return on investment in sustainability initiatives.

And finally, our new Tech Hub had its official unveiling – launching with around 25 technology vendors, with more to come very soon. The new home for discovering technology solutions to your most pressing challenges, the Tech Hub makes it easier than ever to jump from reading to taking action.