United States: Apparel Quarterly Update - Winter 2018

Last Updated: February 22 2018
Article by Brian Little and Joshua Benn

Summary

We continued our run with the bulls: the stock market surpassed all-time highs and posted strong gains over the course of the year. The continuation of the bull market bode well for subsectors —the Consumer Discretionary sector outpaced the S&P 500 by nearly 2%. Despite strong performance overall, retail stocks generally struggled as investors carefully watched the industry transformation underway.

In the United States, retail sales grew 4.2% in 2017, backed by strong consumer confidence and rising levels of disposable income. While online purchases helped drive retail sales growth, traditional retailers experienced one of the strongest holiday seasons in years.

Retailers continue to adapt their business models in this evolving environment. Amidst nearly 7,000 store closures4, retailers were committed to investing in technology, experimenting with innovative retail experiences and fortifying their online presence.

Businesses appealed to consumer preferences by: incorporating aspects of product customization to appeal to more millennials; expanding their athleisure assortment to benefit from positive market growth; and broadening their product assortment to capture underserved markets, including plus-size, which represents a nearly $20 billion opportunity5.

Whether companies grew organically, merged or conducted strategic acquisitions, a spirit of adaptation pervaded the retail market in 2017. This update highlights four key trends impacting the apparel sector which will likely continue in 2018: adapting business models of traditional retailers, digitally native brands pivoting to offset customer acquisition costs, the use of big data to drive sales, and consumer engagement through content.

With continued revenue growth and improving EBITDA margins, investors will be carefully watching capital investments throughout the year and tracking their success. 

TRENDS AND INSIGHTS

1 Brick and Mortar: Getting the Customer Back

Retailers continue to embrace technology to win over customers, including innovative solutions ranging from virtual reality showrooms to augmented reality.

Retailers are focused on creating enhanced in-store experiences and strengthening local marketing efforts to help offset store closures and draw foot traffic. Companies, including Nordstrom, are reimagining the traditional retail experience with small format stores that feature experiential services like personal styling, in-store bars and manicures.

  • 82% of mobile users search for a local business online6 and 18% of local searches lead to a sale within 24 hours7
  • E-commerce/digital influences up to 56% of in-store purchases8 and 50% of millennials prefer going to stores9
  • 86% of all millennials use their phones while shopping in stores10

2 Digital Native Brands Comes to Life

As customer acquisition costs (CAC) continue to rise, digitally native brands are opening physical locations with favorable unit economics that support in-store customer acquisition, helping reduce CAC costs.

Acquisition of costly, price-focused new customers has left its scar on online retail, with many brands instead choosing to try out brick-and-mortar, where lease costs are much more predictable and far less volatile. These store locations provide a platform to strengthen branding and enhance customer satisfaction by providing a seamless omni-channel experience and exciting customer experiences.

  • Online-only retailers that open a store see an increase in sales of 5 to 8 times11
  • The pop-up store phenomenon now accounts for approximately $10 billion in sales annually12
  • 86% of shoppers like "experience stores," where they can test products in the store but buy via mobile or online13

3 Big Data = Big Sales

From complex algorithms analyzing online activity to smart fit mirrors in stores, companies are increasingly relying on analytics and machine learning to help drive sales.

By building out customer profiles based on shopping patterns, companies can create a curated customer experience across its platforms and develop a rich understanding of trends. Analyzing data from multiple site and store visits allows retailers to discover valuable insights into each customer's personal style, preferences and fit. Using data, retailers can react to individual customer demands.

  • In-store analytics offers a $61 billion value stake for retail in 201814
  • 85% of retail customer interaction will be managed and tracked by Artificial Intelligence by 202015
  • Versace targeted and scored website visitors in real time based on their purchases, yielding a 35% increase in online sales and a 300% increase in average order value16

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Footnotes

1."Mergers & Acquisitions Review -Full Year 2017."Thomson Reuters.

2.Thomson Financial Securities Data (U.S. deals $75M < $225M, including deals without a disclosed value). Full years 2013 through 2017.

3."Advanced Monthly Retail Trade Survey." January 12, 2018. U.S. Census Bureau.

4."Weinswig'sWeekly."January 5, 2018. FGRT.

5."2015 Women's Special Sizes Study."The NPD Group, Inc.

6."How Mobile Has Redefined the Consumer Decision Journey for Shoppers." July 2016. Think with Google.

7."Understanding Consumers' Local Search Behavior." May 2014. Google.

8."2016 Digital Influence Survey." Deloitte.

9."Millennials: Where they shop, How they shop, Why it matters." SmarterHQ.

10."ICSC Retail Technology Survey." January 2018. International Council of Shopping Centers.

11."Why retailers are trying on showrooms." April 2017. RetailDIVE.

12."Profile of the Pop-Up Industry in the United States."PopUpRepublic.

13."Reality of Retail: Consumer Connection." GPShopper.

14."A Roadmap to Digital Value in the Retail Industry." Cisco.

15."Gartner Customer 360 Summit." Gartner.

16."Think Tank: To Thrive, Luxury Brands Must Embrace Data-Driven Marketing." May 24, 2017. WWD.

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