Margins

The fashion sector has its hidden secrets and urban legends. An often heard urban legends is that the consumer spends less and less on fashion, and is highly price conscious. I have been hearing that ever since I work in fashion, that is now 33 years. The second urban legend is a statement of the kind that "the consumer does not ask for...". I do not know what you know, but how often is something asked to you in a store, or how often do you ask something to a shop assistant. My normal shopping trip consists, of walking into 4-5 stores before buying something, with no questions asked. Since we have stopped to do structured market research we know nothing about the customer, we only know about the client, and what we only know is what happens at the cash till.

A hidden secret is the development of margins. In my Ph.D. Thesis (1992!) I stressed that over the research period the average retail margin had grown from 2,2 to 2,4. I als quoted Chapman (1989) who assessed that the retail margin was around 1,6 in the 1960s. In my inaugural speech as professor at Saxion (2006!) I guessed that on average a retail margin would now be around 2,8. In a recent conversation my antagonist suggested that it was now over a factor 3. So in 1968 a shirt would cost ex works 20 Euro's and sold a 32 Euro's in 2021, the same shirt would be sold for 59,99, or inversely the manufacturer would get 11 Euro's for the same (?) 32 Euro shirt. I challenge anyone to do a better research (can be done by a systematic analysis of annual reports over 50 years). The same phenomenon applies to brand manufacturers. At the time of my Ph.D (1990) a normal gross margin for a manufacturer (the difference between fabric+manufacturing) and the sales price would be between 1,4 and 1,5. Now it is between 1,6 and 1,7. So for the 32 Euro shirt, the manufacturing costs would be 14 Euro's in 1968, while in 2021 it would have been 7 Euro's.

All the debates go on the fair price for making and materials. You will understand that for 14 Euro's you can make a product in Europe, but for the half of it, you need to source in low cost countries. But no-one debates or researches the increased gross margin's of brands and retailers. Some people speak about de-materialising of the product, this is the theory that people are willing to pay for a shitty product, if there is a logo of a polo player on it (logo's is what Derrida calls marginal differentiation). Dematerialisation is also the tendency to spend increasing marketing budgets to convince people of the intrinsic quality of having a polo player embroided on your chest. Another theory, advanced to me by a property developer when I was a regional politician, is that there is nothing more profitable than a square meter fast fashion with jeans and embrodied/printed shirts in town. The share of retail rent is now possibly higher in a garment than the entire manufacturing costs.

What I found shocking, rereading my own PhD (1992), is that dematerialisation has also expressed itself in a tremendous inefficiency of the supply chain. Between 1984 and 1989 the share of products sold in clearance sales had grown from 29% to 33% for ladies skirts, from 16% to 21% for men suits. I much less detailed survey in 1995 showed that roughly one third of products are sold at discount, and I have now indication that despite better ICT it is now lower. What struck me also in my PhD is the depth and quality of statistics available at the time. For at least The Netherlands (NTexB), Germany (Gruner+Jahr) and France (INSEE, CTCOE) we have quite precise data. All these data collections have disappeared over the last 10 years.

The following conclusion can be made. That the consumer is paying less for fashion, is a statement that can not be underpinned by data (because we simply do not know). That retail and brand margins have increased can be fairly well underpinned by data (but can be better). We can estimate that rents (basically the remuneration of property developers and real estate investors - hence pension funds) are higher than any value put through work into a fashion product. We can also estimate that the efficiency of the value chain has not improved over 40 years (despite all the ICT). We can be sure that we drive faster in the mist, lacking proper data on real trends. When you drive too fast in the mist, with no lights on and without good navigation, you crash. Of the 300 companies (retailers, manufacturers) I interviewed in 1987/1992 less than 10% exist now. 90% have crashed (including household names and high street molochs).