Expert Call with Alfonso Segura x RBC Capital Markets


I’m excited to have participated again to an expert call with Richard Chamberlain, Head of Consumer Discretionary research at RBC Capital Markets Europe. Richard covers the General Retail sector and oversee the Luxury Goods and Internet sectors. We started our collaboration a few years ago and I really appreciate RBC Capital Markets insights which give me deep understading of retail industry financials and macroeconomic trends.

This is the first part of our latest discussion that took place last 25th of April.

RBC: In an environment of higher inflation, how do you see consumer behaviour changing in fashion eg do you expect much switching or trading down?

Alfonso Segura: Inflation erodes purchasing power, this is no secret. But it is also true that consumer patterns have changed since the pandemic. I don’t think we can use the same methodologies or tools to predict the impact of microeconomics on the consumer behavior. You can analyze price elasticities, for example, trying to understand consumer behavior or consumer sentiment with algorithms. But there is an important psychological aspect when people make fashion related shopping decisions. And this is not only happening in fashion by the way.

This is like the pyramid of Maslow (physiological to self-actualization needs). In this case, you save money purchasing essential goods (what can be considered as physiological need here) but you also give yourself a gift and purchase quality items.

At Carrefour, one of the leading food retailers, we analyzed how consumers were rebalancing their portfolio, spending less in categories where they don’t favor any particular brand, and spending more in others. So, Consumers reduced the expense in some categories or switched to private labels (example: cleaning supplies). But in some categories or products, they kept purchasing their favorite choice. Example: chocolate, like Nutella, a bottle of wine or a cosmetics cream.

Therefore, I expect a similar behavior in fashion, where consumer could reduce/switch the purchase of essentials but will purchase affordable or luxury items because summer is coming and want to feel pretty (therefore, I expect second hand fashion market keep growing too). It’s like purchasing at Zara but also at Louis Vuitton because I want a special bag and it will raise my confidence, social standing or self-esteem. Companies in the luxury segment or brands like Nike that is trying to become a luxury brand, won’t suffer as much because their customers are high-income consumers or middle-class searching for aspirational clothes and accessories.

RBC: Are you seeing consumers combining high ticket and low ticket items?

Alfonso S.: New generations are used to combining luxury and high street items eg by pairing $30 jeans with $300 sneakers. Part of this is due to the fact that it is easier to see the brand in sneakers but less obvious for the jeans. It is a way to seem cool but also to save money.

RBC: If retailers like Inditex and Next are raising prices by at least mid single-digit this year, do you expect volumes to be affected later this year?

Alfonso S.: As I commented before, I don’t think fashion customers are so sensible to such price changes. In other words, elasticity is not high. I feel brands like Zara will benefit from this “permanent crisis” (covid, inflation, war in Europe, higher production costs, logistics costs…). Savings increased during the pandemic, while fashion customers purchased mostly casualwear. The increase of socialization, events, ceremonies will boost sales. People want to dress well, feel pretty, elegant and sexy. Therefore, I expect fashion brands increasing like for like sales in the following months.

What I think could change in the mid term is the perception of brands not only because of price but because of sustainability or quality reasons. If consumers see that a €3 T-shirt lasts only 6 months they could switch to more quality, even if it’s more expensive. The concept of product lifespan will increase its priority within the purchase decision process.

Therefore, Next private label could benefit from this situation in the short term but would need to ensure the quality is acceptable. So, it’s not price only that could affect volumes but quality/sustainability purchasing reasons/or shopping mission in the mid term.

RBC: In a consumer downturn do you expect retailers to slow down their spend on technology and business transformation, or to accelerate this to differentiate themselves more from the competition?

Alfonso S.: When I published Fashion Goes Tech I commented that becoming a data driven company was key to adapt to omnichannel, but also to permanent volatility. Fashion companies didn’t spend much on technology apart from legacy systems like big ERP software. Retail has changed, a lot. Today, doing a great marketing campaign and having a high gross profit margin is not enough. All the value chain should be efficient and fast enough to deal with uncertainties. Technology is not only about moving faster but being more flexible and agile. Having the right data to make the right decision, on time. Companies that invested in technology are the ones that are better adapted to the current scenario.

Nike x RTFKT (RTFKT is Nike’s latest acquisition)

We can see improvements in technology every year, and more and more startups are enhancing circularity, last mile logistics, demand forecasting, virtual reality showrooming, and so on. Niche players are transforming the industry and this is why LVMH, H&M or Nike are acquiring startups or creating innovation accelerators. Tech transformation is aligned to business transformation, and this is about continuous improvement.

So, yes, I see fashion companies spending in tech to adapt to the digital era. They must do it, if not it would be too late.

RBC: We’re seeing retailers like Inditex and H&M invest in various smaller start up companies to help with sustainability, convenience and payments. Is this because they don’t have the expertise themselves?

Alfonso S.: Yes, we see more and more retailers acquiring companies, not only brands but startups that are accelerating the digital change. Fashion brands are best-in-class in product development, design or supply chain but it’s not usual to find in-house innovation. Innovation labs or RD&I departments are not so common in apparel retail, but large companies or conglomerates have their own accelerators like LVMH or incubators like Walmart Store nº8. It’s faster to acquire a niche expert, than moving an elephant… Sometimes, large companies struggle with innovation, and this is very well explained by Bob Iger in his book about how The Walt Disney Company was managed when he became CEO. Too much bureaucracy, control and centralization created a creative block there (2019. The Ride of a Lifetime: Lessons in Creative Leadership from 15 Years as CEO of the Walt Disney Company).

Nike latest acquisitions include Zodiac, Invertex, Celect or Datalogue. These startups are focusing on predictive analytics, 3D customizations, virtual designs or data integration. I think acquiring is more expensive than investing internally, but also faster. Many companies prefer to focus on their competitive advantage. And today, speed is essential, so acquisitions are booming.

In relation to sustainability, there is still room for improvement. There is lack of talent here in my opinion and regulations are still changing or being defined, while many certifications are fake. I expect huge regulations in the short term that could impact on the profitability of mass-market brands in case they don’t provide transparency. Finally, an example in relation to green finance: Mango just refinanced its debt linking to sustainability targets. The agreement, managed by CaixaBank, involves the issue of a new syndicated loan for the total sum of €200 million which will reduce if the brand achieves its 2025 targets of using 100 per cent ‘sustainable’ cotton and recycled polyester, as well as a 10 per cent reduction in scope 1 and 2 carbon emissions (Ecotextile News).

RBC: How can fashion retailers best cope with volatility in their supply chains and cost bases?

Alfonso S.: Volatility seems a normality and includes delays in product delivery, higher shipping costs, exchange rate risk, raw material price inflation and manufacturing wage inflation, just to mention a few. Retail companies that invested in agile and integrated supply chains are the stronger ones to deal with this. Pablo Isla, Inditex former president, was a visionary implementing RFID and integrating physical and online channels within the fast-fashion business model.

Today Inditex SINT (Integrated Stock Management System), which enables shipping more than 46 Million orders from stores. This system is allowing e-commerce channel to take profit from stores inventory, enhancing omnichannel model and improving last mile logistics efficiencies. Sharing inventory is a best-in-class capability today, but you need excellent operations and processes to control loss-sales and over-stocking or improve customer experience.

Another key success factor is nearshoring, which reduces order-to-delivery lead time to stores. Inditex nearshoring production represents around 60%, meaning its risk of securing inventories are lower compared to competitors like H&M or brands like Nike. Other factors to reduce uncertainty are the hedging or overstocking of raw materials and also investing in agriculture (like cotton farms). In some cases, like in the luxury segment, vertical integration is a key competitive advantage.


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