Is There Any Opportunity For Small And Medium-Sized Enterprises To Eat Small Fish In Fashion Industry?

In the fashion industry, "winner takes all" is getting more and more. Economic profit (the difference between company's income and cost) is gradually controlled by a few enterprises rather than most enterprises. To be exact, in the past ten years, the top 20% enterprises almost occupied the entire economic profits of the whole industry. Worse still, at least for most companies, polarization is accelerating; the size of the "winners" is shrinking every year.

In recent times, the most powerful driving force of industry dynamics is the decline of physical store traffic, which is a price war, especially in the middle end and value segmentation market, and is increasingly turning to Asian demand. Against this background, fashion companies need to invest a lot of money in online stores, operations and physical stores. If they want to continue to survive in the industry, they must make changes.

In increasingly polarized industries, these developments are well known. But few enterprises can think of effective countermeasures. Luxury goods are good at controlling this trend, while discount products are better. However, some iconic brands are being hit hard, and the mid end market is being squeezed. In terms of product supply, department stores are generally struggling, while mature markets are facing great challenges.

Most importantly, 80% of the fashionable listed companies have failed to make profits. The worst performing 20% almost undertakes all the losses of the industry. However, enterprises with medium performance are also in a difficult position. In 2017, the share of these enterprises (20% to 80% percentile) in the whole industry dropped to 6% in the industry's economic profits, while the proportion from 2007 to 2011 was 16%. At the same time, 46% of fashion companies lost their economic profits in 2017, compared to 34% from 2007 to 2011.

Return on investment

Going deep into these data will see that the growth rate of income is not the key point. In fact, in the fashion industry, the incomes of all enterprises are increasing, and in some cases, the growth momentum is quite strong. In 2017, the average growth rate of the top 1/5 enterprises was 11%, while the median 1/5 growth rate was 5%. The average growth rate for enterprises with the bottom 1/5 is 4%. Similarly, when relative performance is concerned, profit margins are less important. In 2017, the average profit margin of intermediate enterprises was between 5- 15%.

The real difference between winners and losers is capital efficiency. In short, many companies have invested heavily in growth, operation and channels, but only a few companies have received enough returns. The enterprises with the best performance accounted for 39% of the total income, while the 1/4 enterprises accounted for 64% of the total income. In other words, the best performing company earns 1 dollars per investment, less than 40% of the worst performing 1/5 companies.

That is to say, if you don't have clear investment direction, you can't solve the problem by spending money. On the basis of the lack of clear understanding, a few successful enterprises have adjusted their strategies, defined the value proposition, and carried out the key capital investment to implement the strategy. Of course, the actual way of operation varies from company to company. For example, we can see that some companies have completely reinvigorate their brands, invest in online stores and store stores to create new images. At the same time, other companies have grasped the economies of scale of the network to achieve rapid growth.

It is not surprising that there is a strong correlation between EBITDA and economic profits. The top 1/5 enterprises with higher economic profits usually have higher EBITDA. The worst performing 1/5 companies in 2017 were 5% on average EBITDA, less than 1/3 of the top 1/5 companies. However, the average EBITDA profit rate of the 1/5 medium enterprises is about 9%, which is barely enough to offset depreciation and interest. Their economic profits are almost zero.

Risk of getting into trouble

A worrying trend is that 1/5 of enterprises are short of liquidity in the long run. Five years later, nearly 3/4 of the enterprises are in the middle level. About 1/5 of enterprises will fall to the bottom 1/5 in this period of time and become a value destroyer. Opportunities for entry into value creation are very small. Only about 1/10 of enterprises can achieve this leap.

History shows that in the past three years, the income growth rate of 1/5 enterprises has dropped from an average of 8% to 1%. Similarly, EBIDTA dropped from 11% to 6%, while the proportion of investment in revenue rose from 40% to 48%.

However, it is somewhat surprising that falling to the bottom may be a way of salvation. In the bottom of the list, more than 60% of the companies ranked higher in the next five years. About 56% of enterprises have been upgraded to "medium" enterprises, while 6% of them have jumped to the top.

In order to improve ranking, enterprises need to change and improve their strategic direction. Repeated application of the same strategy is not obvious. Only by consistently integrating the typical elements of value proposition can the wealth of enterprises increase.

Consumers have more reasons to buy. Usually, the company has made progress in brand building, pricing, product / design and shopping experience.

Enterprises streamline the operation process to improve the efficiency of the value chain. In terms of physical stores, this usually includes adjusting the store network.

Enterprises should increase investment in different channels, links and markets. In this way, enterprises can benefit from changing consumer behavior.

What is the most important thing? The fashion industry is facing a series of serious situations. As far as economic profits are concerned, those enterprises that are not ranked the top 20% are faced with the arduous task of adjusting their development path. The situation is likely to get worse. Therefore, enterprises must make a brutal assessment of their assets and capabilities to understand which ones are still working and which have been eliminated and what are missing in the strategy. Enterprises must be prepared to make radical and consistent decisions to update their brand, customer relationship and distribution mode. If you don't do this, you may be able to put your success in the trend of last year. Authors: Achim Berg and Karsten Lafrenz