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Fashion sales edged up over the holiday period as retailers targeted cost-conscious consumers with generous deals and extended discounts. However, in luxury, high inventory levels were not matched by demand, leaving a glut of unsold stock to clear this month against a backdrop of promotional fatigue and high return rates. What does this mean for the season ahead?
“The fashion sector performed reasonably over the holidays,” says Neil Saunders, managing director and retail analyst at analytics firm Globaldata. “In value terms sales were up; in volume terms sales were up marginally over last year. However, retailers had to work hard for these gains — stimulating consumers into buying with discounts and deals. Initial indications suggest a soft start to the new year.”
It comes at a critical time for the multi-brand fashion retail sector, which is contracting as some of its biggest players hit financial difficulties. South Korean e-commerce giant Coupang rescued Farfetch from potential bankruptcy with a $500 million loan, but that meant the latter’s deal to buy loss-making Yoox Net-a-Porter from Richemont was scrapped, and it leaves questions over the future of Farfetch-owned London retailer Browns. Matches was bought by Frasers Group for £52 million, while Macy’s has also reportedly received a $5.8 billion buyout offer.
Holiday shopping in the US drove a record £222.1 billion of online sales this year, up 4.9 per cent compared to last, according to Adobe. The proportion of fashion products advertised with markdowns in December rose from 55 per cent last year to 60 per cent this year in the US, while in the UK it inched up from 40 per cent to 43 per cent, according to retail intelligence platform Edited. As of 3 January, over half of products online were still advertised as “on sale” across both markets — an increase on last year.
Edited’s data shows the average discount over the holiday season was shallower, suggesting the strategy has shifted to “discounting a broader assortment of products at a lower discount to try and preserve margins during this promotional-heavy period”, says Kayla Marci, senior retail analyst at Edited. She notes that the discounting period has grown longer. “Despite the bump in sales activity, aggressive markdowns from Black Friday bled into the festive period and New Year.”
Black Friday weekend delivered big discounts. But how should luxury players balance markdowns with their premium positioning?
Retailers note that purchases were more considered. “The challenging economic environment encouraged shoppers to be more thoughtful in their spending this Christmas, with our customers remaining keen to purchase but more discerning in what they chose,” says John Edgar, CEO at UK premium retailer Fenwick, which stocks brands including Boss and Ralph Lauren. “Many hand picked fewer, more premium gifts for family and friends, which led to strong performance in areas such as fragrance and accessories. In fashion and partywear we saw people looking for unique, interesting pieces, which can’t be easily found elsewhere.”
Fashion retailers delivered a 51 per cent increase on releasing new styles in January compared to last year, per Edited data. This relates to a number of factors including misjudged consumer demand, late orders or delaying the phasing of deliveries until after Christmas, says Marci. “Even with the markdown hangover, which will continue throughout the month, and the fact that we are just within the first week of the New Year, there is a notable accumulation of product inventory,” she says.
Michael Kliger, CEO of luxury e-tailer Mytheresa, observes that discounting in the run-up to Christmas brought back luxury’s aspirational shopper, who had previously reined in spending as the cost of living continued to rise. This was only a temporary trend, however. “Currently there’s too much stock in the market as well as promotional fatigue. It’ll take some time before less wealthy shoppers will return,” he says.
However, he notes a strong performance among Mytheresa’s top-spending customers. Multi-brand retailer Matches reports the same: “Throughout December our Mayfair townhouse, 5 Carlos Place, was fully booked with private shopping appointments as our top-tier customers continue to stay loyal to Matches, a testament to our curation and strong edit,” says chief commercial officer Carl Tallents.
Kliger anticipates a rightsizing of inventory levels for the Spring/Summer 2024 season. “The industry is quickly adjusting to the ‘new normal’, as it will be the first season bought by retailers and produced by brands under a clear understanding that there is a slowdown, meaning there will be a better balance between supply and demand, which ultimately should improve the health of business for luxury brands and platforms.”
He observes that shoppers waited a little later to spend this year. “Holiday sales online showed a later shopping pattern than usual,” says Kliger. Top-spending high-net-worth customers, who are the largest consumer group for Mytheresa, were more interested in new styles than discounted older ones, as Kliger predicted following the company’s latest earnings. “While there was a continued appetite for sale, our top spending customers were much more interested in new season styles for Spring 2024.”
The holiday sales suggest in-person shopping will become increasingly prevalent in 2024. “Online pure play struggled more [during the holidays] as consumers have shifted back to shopping in person — a trend we have witnessed growing post pandemic, especially with Gen Z who want to experience shopping on the high street,” says PWC UK industry leader for consumer markets Lisa Hooker.
The returns problem
Returns are a bigger problem than last year, for two key reasons. “First, consumers are a bit pickier and seem to be making more returns than usual. Second, the cost of processing returns is higher for various reasons [including freight and labour costs], so returns have more of a negative impact on retail margins,” says Globaldata’s Saunders.
Over the holiday period, as much as 30 per cent of merchandise — totalling $82.1 billion — was expected to be returned in the US, up from 19 per cent in 2022, according to CBRE and Optoro.
Dealing with returns can be a balancing act, depending on the retailer’s priorities. “Some are charging for returns, although this risks undermining the customer experience,” says Jaqueline Windsor, head of retail at PWC UK. “Some are actively encouraging return channels with lower costs, such as free in-store returns for retailers who operate across both the high street and online. Some are limiting return windows to get stock back on shelves faster. And some are using returns as an opportunity to cross-sell future purchases.” Mytheresa’s Kliger says returns are an “integral part of the service offering of any e-commerce business” and he is not too concerned about a post-holiday spike.
Experts are hopeful that insights from the past year on how certain returns strategies are performing with customers may point to a solution to the multi-billion-dollar problem. “Charging customers for returns has been a key trend over the past year, so in 2024, retailers will have more significant insights into how consumers respond to these costs and if the savings outweigh sales,” says Marci.
Overall, the outlook for 2024 in the luxury retail sector may be better guided by the market’s volatility and consolidation instead of simple sales performance. “Holiday sales suggest that volumes in fashion will remain subdued as we move into 2024. They also suggest that retailers will need to persuade consumers to buy with selective discounting,” says Saunders. “Trends point to a market that will remain polarised with a number of players performing well, but with a longer tail of players performing below average. 2024 won’t be a disaster for fashion, but neither will it be an easy year.”
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