The COVID-19 pandemic has brought about disruptions for businesses operating in the fashion, beauty and home furnishing sectors. This is because of complicated global supply chains and reliance on discretionary spending by consumers amid record unemployment levels. Keeping these types of businesses adaptive is crucial to their recovery and long-term success.
Supply Chain Disruption
“Nearshoring” is a term that describes the relocation of the production of goods so that they are moved geographically closer to consumer-dense regions such as the U.S. and Europe. This has been an attractive option for fashion and home furnishings companies, yet the cost of displacing established supply chains and vendor relationships have prevented them from making the move. But the landscape could be changing due to COVID-19, geopolitical turmoil, and antiquated supply chain practices.
Business in these sectors were already assessing their dependence on Chinese factories even before the pandemic led them to shut down and disrupt apparel and home furnishing supply chains. Factories in Southern and Southeast Asia have become less expensive alternatives while tariffs on U.S. imports from China provide incentive for companies to look elsewhere. Through May of 2020, U.S. furniture imports from China decreased to 43 percent of total imports of this type, down from 66 percent for the previous five years. Apparel companies with products intended for the U.S. were also already moving to countries such as Vietnam, Bangladesh and Indonesia.
As demand returns, manufacturing partners in these countries may be reluctant to return to previous production patterns. Textile producers were stuck holding inventory as U.S. partners delayed or canceled orders, making them hesitant to be opened up to inventory risk in the future.
Nearshoring may become more likely due to the flexibility and reduced import costs that it provides if there are factory limitations and stricter payment terms from Asian partners. Apparel companies are well aware of how the long lead times inherent to the sector make it difficult to adapt quickly to changing consumer habits and plummeting discretionary spending during a recession. For these reasons, the traditional “fashion calendar” has been dumped for digital solutions that speed up the sampling and design process. More technology and more automation in the production process means less dependence on the costly factory or its associated geographical challenges.
The Inventory Factor
The plunge in apparel demand left companies sitting on record levels of inventory. Store closures and liquidity issues were met with postponed, reduced and cancelled orders. Inventory-to-sales ratios skyrocketed, leaving companies faced with tough choices on how to unload inventory and avoid the added costs of holding it. Businesses can benefit from fewer and smaller orders until the inventory backlog sells. Other options involve major discounting through traditional retail channels, and selling to off-price retailers. While these strategies can sustain a business through difficult times by offering immediate liquidity, they can result in long-term damage to the brand, especially for premium and luxury brands. During these times, promoting brand loyalty, value and customer relationship are key.
As brick-and-mortar retail stores see less traffic, digital channels are increasingly vital to the future of apparel and home furnishings companies. Pre-pandemic, these businesses attracted private equity, venture capital, and public investment with the potential to scale quickly and steal market share from mega-brands. They poured funds into customer acquisition measures to advance awareness with the goal of growing topline sales, a process that’s been called into question, as the return for a high-growth consumer brand may not be as profitable as its tech-driven counterparts. As VC and PE investment multiples soften, middle-market companies in this sector must rethink how to allocate funds from raised capital. Traditional DTC models are becoming more expensive to follow in a crowded space with huge digital spending. Businesses need to prove that growth can be sustained. Alternative exit strategies may also be an option, as a strategic buyer may find value in incorporating a platform into a preexisting business model.
Beauty & Personal Care
The consumer area beauty and personal care is typically somewhat recession-proof. COVID-19 has provided an entirely new test for the durability of this sector. Specific categories may be performing differently due to shifts in consumer trends and habits amid the pandemic versus the sector overall.
While people still maintain their personal care routines, they may be less focused on appearances during a time of staying at home and wearing masks in public. Personal and skin care categories were up in March, April and May, outperforming that of fragrances and facial cosmetics. This could prompt mergers and acquisitions, as the major beauty brands may seek to diversify their product offerings in high-growth areas by snapping up dependent brands that need capital but do not have the digital resources needed to reach consumers in today’s low-touch market.
Ready to Make a Move?
We look forward to hearing from you and discussing how our esteemed M&A advisors at Benchmark International can expertly help you grow your business, maximize its sale value, or craft your exit strategy.
Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntl.com
Europe: Michael Lawrie at +44 (0) 161 359 4400 / Enquiries@BenchmarkIntl.com
Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com
ABOUT BENCHMARK INTERNATIONAL
Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $6B across various industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from offices across the world, have assisted hundreds of owners with achieving their personal objectives and ensuring the continued growth of their businesses.