When the (economic) going gets tough: women keep shopping

Rosemount Sydney Fashion Festival is set to strut its stuff and fashionistas are clambering for their first glimpse of the latest gear, but with retail spending waning, business analysts IBISWorld reveal whether those “must-haves” have become “can’t affords”, or if our national shopping habit is just too hard to give up.

According to IBISWorld General Manager (Australia), Mr Robert Bryant, although retail spending is certainly declining after a robust run over the pat few years, some segments will weather the downturn much better than others.

Hey big spenders

“Research shows that when consumer sentiment trends down, men stop spending while women continue to buy clothing for themselves and their kids,” he said. “So while fashion spending is certainly down – retail sales have fallen by the biggest margin in six years - the womenswear and childrenswear segments will prove relatively resilient.”

And when it comes to buying baby and children’s clothing, Mr Bryant said the fact emotions were often involved makes a difference. “Sales in infants and childrenswear are still decreasing, but these sectors will survive today’s difficult conditions reasonably well. Many parents of young kids have become accustomed to a certain level of spending and to years of prosperity and strong disposable incomes, and they’re reluctant to give it up. The current birth rate – the highest level in more than 30 years – will also help the sector, presenting an opportunity for upmarket infants and children’s clothing retailers to tap into a small but lucrative market,” he said.

Despite the fact foot traffic in retail strips is down, Mr Bryant said average transaction values have not exhibited the seismic decline that many expected. “The primary reason for this is that high income households, though feeling interest rate pain, still have the capacity to continue to spend. We believe in many areas that consumer uncertainty is postponing retail sales rather than canceling them altogether.

“If the next official interest rate movement is down, we forecast a pronounced bounce back in consumer sentiment, which will lead to a mild rise in retail sales for the first quarter of 2009, which should bode well for the fashion industry.”

Made in China

While much of the clothing sold in Australia has been manufactured in China for years, the emergence of rival developing nations will potentially change the landscape of our fashion industry’s production offshore.

Mr Bryant believes Australian fashion labels will use a combination of direct investment, joint ventures and outsourcing to establish manufacturing operations in countries such as China, India, Fiji and Indonesia but many will keep their design and marketing operations local, reflecting the international trend towards globalising supply chain and manufacturing activities.

However, this strategy will not be suitable for manufacturers at the higher end of the market. “Close proximity to the local market is critical for industry players with frequent production runs geared at providing quick responses to fashion trends. Therefore, the decision to retain local manufacturing operations will most likely be confined to designers supplying high-quality, niche markets only,” said Mr Bryant.

In the long term, IBISWorld believes the sustainability of apparel manufacturers in Australia is extremely uncertain. “Manufacturing clothes is increasingly considered the domain either of developing countries with an abundance of cheap labour, or of countries at the centre of the global fashion industry, such as Italy and France. As clothing begins to more closely resemble a commodity product, industrialised nations such as Australia may phase out domestic production almost completely to focus on service sectors such as communications and finance.

Competition from imports and less than desirable production speeds are also threatening the local industry - Chinese imports currently represent about 62% of all clothing imports into Australia - and many local manufacturers are already struggling to make a crust in an industry where turnover has dived steeply in the wake of a shrinking manufacturing base, rising imports and a saturated domestic market.

Mr Bryant said the local industry needed to respond to, and reproduce fashion trends quickly to survive, yet our distance from major overseas markets restricts flexibility in both design and production, leading to sluggish response times to international trends. When further tariff reductions come into play in 2010, IBISWorld expects additional imports from Vietnam and India will penetrate the Australian apparel market, giving China more of a run for its money.

The next big thing

Last financial year the Australian clothing retail industry achieved sales revenue of $10.93 billion, up 6.8% on 2006-07, and this year the figure will be around $11.39 billion, representing a 4.2% rise.

IBISWorld reports that growth will primarily be driven by a strong labour market and new store openings, while high petrol prices and the lag effect of increased interest rates will curtail some demand.

Mr Bryant tipped the infant clothing market and boutiques targeting high-income earners would continue to perform, even though these segments don’t represent a large part of the overall market. “While the big spenders are less affected by a dampening economy, the designer end of Australia’s fashion industry is already saturated with well known local and international brands. This will make for intense competition, not of the margin-destroying variety, but fierce rivalry in terms of marketing and positioning for market share and future growth.”

Another factor which may affect the clothing industry in the coming few years will be the ratification of further Free Trade Agreements, particularly with China, which will essentially reduce wholesale clothing prices, ultimately leading to price reductions at the retail level.

An additional risk will be the depreciation of the Australian dollar, which is likely over the coming years which, together with slower retail growth forecasts, may tip a number of small establishments over the edge.

“Independent operators should continually look to increase efficiencies within their business, ensure branding and marketing is effective and stock items that will remain in demand. Smaller players that successfully differentiate themselves and attack key niche segments have the potential to make strong financial gains,” predicted Mr Bryant.