Gapping up
In reaction to strong earnings/guidance:
- TGI +19.1%, SMTC +12.5%, TOL +9.8%, DLTR +7.9%, LL +6.1%, SPTN +5.2%, WDAY +5.1%, CSIQ +3.7%, TPX +2.4%, SAFM +1.3%, SHOO +0.9%
Other news:
- PHAS +54.5% (receives FDA clearance to launch trial evaluating PB1046 as a treatment for hospitalized COVID-19 patients)
- TGI +19.2% (selected as supplier of hydraulic components for new Bell 360 Invictus Attack aircraft)
- HPP +14.4% (to join the S&P MidCap 400)
- CERC +13.6% (receives FDA clearance to proceed with a proof-of-concept clinical trial of its anti-LIGHT monoclonal antibody CERC-002 in patients with COVID-19 cytokine storm induced Acute Respiratory Distress Syndrome)
- AOBC +10% (to change name to Smith & Wesson Brands, effective June 1; to trade under ticker symbol "SWBI")
- SLP +9.5% (to join the S&P SmallCap 600)
- GAN +8.3% (Cordish Gaming Group has engaged GAN as their enterprise software Platform provider)
- PLMR +8% (to join the S&P SmallCap 600)
- DHC +5.6% (to join the S&P SmallCap 600)
- BA +4.9% (resumes production of 737 MAX program)
- MRNA +4.8% (Moderna and CordenPharma extend strategic manufacturing services agreement for the supply of lipid excipients to be used in Moderna's vaccine against the novel coronavirus SARS-CoV-2)
- LOGI +3.1% (approves a new, three-year share buyback program, which authorizes the co to use up to $250 mln to repurchase its shares; raises dividend)
- ZLAB +2.3% (announces positive topline results from the Phase 3 NORA study study of ZEJULA as a maintenance therapy in Chinese patients with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer)
- BYD +1.4% (to resume operations at 13 properties)
- GSK +1.1% (intends to produce 1 billion doses of pandemic vaccine adjuvant in 2021 to support multiple COVID-19 vaccine collaborations)
Analyst comments:
- ALLY +2.6% (upgraded to Overweight from Equal-Weight at Morgan Stanley)
- QCOM +1.3% (upgraded to Overweight from Sector Weight at KeyBanc Capital Markets)
European Commission’s decision to block Three-O2 deal annulled
Rationale for stopping UK telecoms deal in 2016 was based on ‘several errors’, says EU court
A top European court has annulled a 2016 decision by Margrethe Vestager, the EU’s competition commissioner, to block a merger of two British mobile telecoms companies on consumer interest grounds.
The ruling by the General Court, the EU’s second highest court, overturns the European Commission’s decision four years ago to block the £10.25bn takeover of Telefonica’s O2 network in the UK by Three, owned by Hong Kong’s CK Hutchison. It calls into question the commission’s approach to merger interventions.
The court ruled the commission had made “several errors of law” in calculating the potentially harmful effects of the Three-O2 deal, and argued it had not proven that prices would rise or that competition would be harmed as a result.
The annulment represents a fresh blow to Ms Vestager, who is serving a second stint as competition commissioner.
The commission blocked the Three-O2 deal on the grounds it would lead to higher prices and less consumer choice in the UK mobile phone market by reducing the number of networks from four to three. Ms Vestager labelled the aborted deal as “bad for UK consumers and bad for the UK mobile sector”.
A similar merger in Denmark was also abandoned at the time due to regulatory pressure as the tide turned on in-market mobile consolidation which had been allowed in markets including Germany, Austria and Ireland under previous commissioners.
The Three-O2 merger would have created the UK’s largest mobile phone company better able to compete with BT and Vodafone. Instead, as a result of the commission’s decision, both networks remained independent and had to rethink their growth strategies in a highly competitive telecoms market. Telefónica this month agreed to merge O2 with Virgin Media in a £31bn tie-up.
CK Hutchison, which had sought to ease competition concerns, challenged the commission’s argument for blocking the mergers. The company said in a statement that the European Commission had blocked its takeover of O2 due to the “misconceived default view” that European markets need four mobile networks to ensure competition.
“The commission’s approach has unfortunately acted as a brake on, or in a number of cases prevented, network improvements and consumer benefits that can be achieved from mobile mergers,” the company said.
Nicholas Levy, a Brussels-based partner at law firm Cleary Gottlieb, said: “This landmark judgment represents a significant setback for Commissioner Vestager. Challenging four-to-three consolidation in the telecommunications sector has been a central feature of merger enforcement under her watch and the judgment will be studied closely to see the extent to which it may allow further consolidation in the sector.”
The Hong Kong-based company’s legal victory could force a rethink of the rules for the scrutiny of future deals by the commission and potentially trigger a new wave of consolidation in the telecoms sector.
A spokeswoman for the commission said: “The commission takes note of the General Court’s decision annulling the commission’s decision of 11 May 2016 prohibiting Hutchison’s proposed acquisition of O2 UK. The commission will carefully analyse the judgment.”
Both parties have two months and 10 days to challenge the court’s decision. Should they decide to do so, the case would move to the European Court of Justice.
Ms Vestager has already encountered setbacks in previous cases. The General Court last September struck down a Brussels order to Apple to pay €30m in back taxes to the Netherlands.
Early premarket gappers
- Gapping up:
- PHAS +68.1%, TGI +13.9%, SMTC +12.5%, AOBC +10%, LL +9.9%, SLP +9.5%, PLMR +8%, TOL +8%, BA +6%, WDAY +6%, HPP +5.9%, CSIQ +4.8%, SPTN +4.3%, DHC +4%, LOGI +3.6%, BYD +3.3%, IMAB +3.1%, DLTR +3%, MRNA +2.3%, ARGX +2.1%, SHOO +0.9%, GSK +0.8%
- Gapping down:
- IOVA -12.2%, ARNA -11.9%, HPQ -6.4%, COHR -6.1%, BCRX -5.7%, PLT -5.3%, VIE -5%, MRSN -4.9%, CRNC -4.6%, NIO -4.1%, MOMO -3.4%, MESO -3%, BURL -3%, NTAP -2.9%, BILI -2.4%, NTNX -2.4%, DSGX -2.4%, BOX -1.5%, GO -1%, ADSK -0.9%
Google explores Vodafone Idea stake as part of India push
Investment in struggling venture could pit search group against Facebook and Reliance
Google is exploring an investment in Vodafone’s struggling India business in a move that could pit the US internet group in a battle against Facebook for the world’s fastest-growing mobile market, according to people familiar with the matter.
One of the people said Google was considering buying stake of about 5 per cent in Vodafone Idea, a partnership between the UK telecoms company and India's Aditya Birla Group that has been under severe financial strain. Another said the process was at a very early stage.
Any push by the Silicon Valley-based company into India would come against a backdrop of intense interest in the country’s booming mobile sector. Reliance Industries’ Jio — owned by Asia’s richest man Mukesh Ambani — has in recent weeks secured more than $10bn in investment from Facebook and private equity groups including KKR, General Atlantic, Vista Equity Partners and Silver Lake.
Google parent Alphabet has also held talks about acquiring a stake in Jio but has lagged behind its rival in securing a deal. Pursuing Vodafone Idea instead would potentially pit Google against Facebook and an increasingly dominant Jio but the company could also make multiple investments in India.
Google’s effort to follow Facebook in securing a foothold in India highlights the appeal of the country, where telecom operators enjoy hundreds of millions of subscribers each.
Even as India’s two-month coronavirus lockdown upends economic activity, many of these users are consuming more mobile data than ever before as well as turning to services such as digital payments and online shopping in increasing numbers.
But US companies have faced competition from Chinese investors. Rising anti-Beijing sentiment in India linked to coronavirus prompted New Delhi last month to tighten restrictions on Chinese foreign direct investment.
“There aren't that many options for big foreign tech companies to invest in India,” said Anshuman Mishra, who advises Asian corporations on strategy. “Jio was able to attract this money first; now everyone else wants to play catch-up.”
Google has long harboured ambitions for India. It has pushed its Android mobile operating system in the country, though an effort to launch a version tailored for emerging markets had mixed success. But its mobile payments service has grown rapidly since its 2017 launch in the country, becoming one of the most popular in a crowded field.
For Vodafone Idea — the product of a 2018 merger between Vodafone and Birla's Idea — an investment by Google could boost the likelihood of its survival. Its future has been uncertain since India’s Supreme Court ruled in October that it owed billions of dollars in retrospective fees, prompting Birla to state it might “shut shop” altogether.
Vodafone has described the financial position of the joint venture as “critical” but refused to inject more equity, having booked billions of pounds of losses related to its Indian foray. Last year it wrote off the entire value of its Vodafone Idea stake.
Vodafone Idea’s issues stem partly from a price war that followed the 2016 launch of Jio, which saw the company offer cheap contracts in an attempt to gain market share. Vodafone Idea, Jio and Bharti Airtel are India’s only remaining private operators, following a wave of consolidation.
However, the prospects for India’s mobile sector have improved after the three companies raised prices late last year, which analysts say should help shore up revenues. On Tuesday, Bharti Airtel's parent raised $1.1bn in a share sale after the company’s stock price hit an all-time high.
Google, Vodafone and Birla declined to comment on any potential investment. Vodafone Idea did not respond to a request for comment.
Tipping Point: Will Fashion Finally Complete Its Digital Transformation?
Experts recommend investments in e-commerce in China, 3-D design and consumer data to improve efficiencies — and to mitigate crises.#
While computers are not immune to viruses, the digital channel was largely left unscathed and operational during the COVID-19 pandemic — a lifeline for fashion companies.
Yet on a scale of 1 to 10 for digital transformation — 10 being a best-in-class technological company — Bain & Co. partner Claudia D’Arpizio rates the most advanced fashion players at 7, and stragglers at 4, underscoring the need for further progress.
Indeed, while some players flexed their digital muscles and eked out revenue growth in the first quarter, including Revolve and Zalando, scores of designers and brands scrambled to ready virtual showrooms, widen online sales bandwidth and brainstorm non-physical ways to unveil new collections.
Proponents of end-to-end digitalization see swaths of fashion still mired in time-sucking manual processes, including a back-and-forth of physical samples from factories. Indeed, one of the reasons most fashion brands have yet to define contingency plans to unveil new resort and spring 2021 collections — almost two months after it was announced that European fashion weeks were canceled — is because locked-down designers had yet to view any completed samples or conduct fittings.
Boston Consulting Group estimates an end-to-end digital transformation at a fashion company can squeeze the product-development calendar by up to 40 percent, and reduce staffing needs by up to 20 percent.
Experts agree fashion companies overall are further advanced in digitalization with marketing and e-commerce, with product development and AI-powered decision-making among the laggards. Several experts also cited shortcomings in digital content, particularly recently.
“Technology on the customer experience side has grown a lot faster than operations, and with limited budgets, companies make difficult decisions to invest in anything that makes them appear tech-savvy through the experience they offer the customer,” said Simon Butler, vice president and head of retail at Capgemini in the U.K. “But in most cases they leave the back-office operations still running manually.”
To be sure, the health crisis has been a wakeup call, and “this moment is going to be a catalyst for the industry to embrace digital more,” said Drake Watten, BCG’s California-based managing director and partner.
Here, experts offer perspective and advice on key areas:
E-COMMERCE:
“Relative to other categories like CPG [consumer packaged goods] or groceries, fashion is actually highly penetrated online. But that’s more due to favorable economics for home delivery versus best-in-class digital capabilities,” said Watten.
The consultant estimates e-commerce pre-COVID-19 accounted for nearly 25 percent of fashion sales, compared to less than 5 percent for groceries. “If you buy one garment or a pair of shoes in fashion, the margin you make typically outweighs the cost you have to incur to get that product to a consumer’s home, relative to groceries, which have more lower-priced items and lower margins,” he explained in an interview. “It’s also favorable when consumers make returns in store: They typically buy more.”
Still, Bruno-Roland Bernard, an independent consultant in corporate and financial communications based in Paris and a lecturer in finance at Institut Français de la Mode, noted that online shopping was hardly a bonanza during coronavirus lockdowns, except for essentials like food and pharmacy.
“Clients have resorted to digital distribution but not to the extent that the servers are overloaded,” he said. “There is an irony that a McDonald’s drive-through reopening creates traffic jams when no digital fashion distribution channel manages to stand out — not forgetting certain retailers which even stopped delivering because of their warehouses.”
Indeed, Butler noted that many companies struggled with operational issues in recent months.
“Warehouses have been overrun with demand, struggling to redesign processes and workflows to meet social distancing requirements and ensure the safety of their staff,” he said, citing British high-street chain Next as an example. Despite its robust supply chain, the retailer closed operations for two weeks while the company implemented safety mechanisms for staff. Many retailers, most notably on the high street, have even struggled to set up their teams Bruno-Roland Bernard or home working in a quick and efficient way.
According to him, pure players fared better, with Asos ramping up its use of augmented reality, giving customers “a realistic view of up to 500 clothing items per week on six real-life models while allowing Asos to adhere to social-distancing restrictions.”
Boohoo.com also powered through during lockdown with swift sales of jogging wear, hoodies and tops due to its agile supply chain, and focus on speed to market.
But these are exceptions, Butler said. Due to closed stores and bulging inventories, most retailers did not have the agility or cashflow to “scale up digital operations quickly enough.”
The consultant lauded players like Revolve and Stitch Fix, e-commerce pure payers that behave “as a hybrid of fashion and tech start-up companies. With low expenditure on physical assets, they have the advantage of investing in new technologies and leveraging the power of artificial intelligence and augmented reality,” Butler said.
Bain-Altagamma’s recent spring update trumpeted that digital shopping habits built during the outbreak are likely to stick — especially if brands raise their game in online assortment, user experience and digital marketing.
“It’s not just investments in technology and digital marketing to bring traffic to the store, but also on supply-chain reinvention to support the growth of the channel, in particular making available the right stock for the channel, good synergy with the retail network globally,” D’Arpizio said.
She urged brands to accelerate their dot-coms, particularly in China. While there are challenges there — with gray market and counterfeit goods present on some platforms — companies should focus on their own channels and operations to ensure traffic, visibility and brand protection.
“China is becoming a big local market. Chinese customers will travel less in the next months and will buy less while traveling also in the mid-term because as we know, price differentials have been reduced and there is a strong push by government to increase local consumption,” she said.
DESIGN AND PRODUCT DEVELOPMENT:
According to D’Arpizio, it’s critical for firms to invest in processes from product creation to showroom in order to “gain time to market,” mitigate situations like the coronavirus outbreak, and reduce travel.
“The lockdown has for sure sped up the digitization of some working practices, starting from virtual showrooms up to trying to digitalize as much as possible the product development process that as you know, is one of the most critical in the industry — a very human-based, artisanal way,” she said. “This is an area where they can gain a lot of competitiveness in trying to digitize some of the steps. The technology is there so you can do 3-D design in really high quality.”
“The current product development cycles are just too long, which will limit fashion companies’ ability to respond to the changing consumption patterns and quickly evolving trends,” Watten agreed in an interview. “So things like team travel to suppliers with physical samples co-developed on site, or selling it to wholesalers if that’s your business model — those things are just disappearing right now.”
Butler said retail brands that invested in digital product development and selection capabilities should have an advantage this fall-winter season. “Technologies such as Browzwear will allow product development processes to continue despite lack of travel, sample-room closures, etc., and these are the opportunities retailers should be focusing on,” he said.
Singapore-based brand Browzwear is a technology firm whose 3-D prototypes can replace physical samples throughout the design, prototyping, fitting and sales processes, according to the firm.
“Driven by sustainability, there is still a lot of opportunity to shorten the lead time for product creation for luxury brands with the use of 3-D prototyping — fashion companies at early stages of product development can use this technology and then produce based on the design of the final prototype only,” Butler said, while acknowledging that luxury and designer firms will have a hard time weaning themselves off touchy-feely practices.
“Designers, buyers and product developers prefer to see the fabrics in person, match the design to the exact fabric color, and feel the quality and finishing. The fit is also very important, especially when customers are spending a lot on an item, so the fitting stage is still quite manual with physical samples,” he said, also noting that “a lot of luxury items are handmade, therefore digital adaptation is a much harder.”
MARKETING:
“Consumers have been massively dislodged from their traditional shopping experience. But a lot of fashion companies just lack the data-driven marketing capabilities to intercept them, and personalization capabilities to draw them in,” said BCG’s Watten. “It’s only going to get more and more difficult as privacy concerns increase and information overloads persist.”
D’Arpizio said brands that invested in areas to increase client knowledge and consumer understanding reaped the benefits during retail lockdown.
“The knowledge of consumers and the ability to stay in touch with consumers was a strong mitigator of this crisis,” she said. “It‘s important to know them and understand their behaviors and shopping behavior across different touchpoints.”
Within luxury goods, digital clienteling is a big opportunity, according to Capgemini’s Butler, citing Harrods and its remote personal shopping services as an example.
“Burberry has already seen success and exceeded sales targets in many areas using this technique,” he said. “Personalization is another area with significant scope for improvement. Being able to identify what customers are looking for and the digitization of customer experience driven by advanced analytics and AI will be the key area of opportunity for retailers.”
Watten stressed that much of customer service derives from operational capabilities, and these are what often prevents consumers from getting what they want. “I’m very bullish on the more we can digitize the supply chain, the more it’s going to enable really great consumer experiences,” he said.
The consultant, who works in Silicon Valley, said even tech companies haven’t yet figured out “how to enable consumers to transact at the point of inspiration. That’s really an operational challenge with connecting the dots between content and sku-level data, so you can actually transact and making sure that you have the delivery network in place to efficiently get the product from a warehouse or store to the consumer’s doorstep.”
Watten said many companies in fashion, meanwhile, struggle to centralize their data. “They don’t have a digitized supply chain to have end-to-end inventory visibility, understand the true cost to serve, and where to move inventory depending on where the demand is. So I think the back-end is also an issue,” he said.
“It’s taken a pandemic for many fashion companies to finally realize that science should have a seat at the table with art. I hope that there’s a little bit of a silver lining from a digital standpoint in the industry,” Watten said.
Butler recommended companies should have “ongoing data cleansing and governance in their day-to-day rather than when migrating to new systems only. Culture will need to change at the core of the organization for everyone to think more digitally, drive and trust technology more for tasks that have traditionally had a high degree of manual input.”
Many companies trying to embrace digital capabilities simply buy software off the shelf, somewhat at their peril, Watten warned.
“They forget the change component required to really drive adoption, because oftentimes you need to customize these types of capabilities to make it work for your category,” he said.
One glaring gap in many fashion firms is AI-powered decision-making across the value chain, particularly in planning, merchandising and pricing, Watten pointed out.
“It’s hard to justify big tech and infrastructure investments and high-priced AI talent when you’re a small-scale player. Even some of the biggest players out there have difficulty competing against the FAANGs of the world for top talent,” he said, using the acronym for the five biggest American tech companies — Facebook, Amazon, Apple, Netflix and Google, which now operates under the name Alphabet. “I think that is a structural issue.”
Watten noted that even the most digitally advanced companies still embrace the artistic side of fashion. Stitch Fix, for example, is “probably one of the most advanced from an AI standpoint” in its use of algorithms and data-driven decisions, yet the California firm still employees thousands of personal stylists.
ORGANIZATION:
According to the independent consultant Bernard, digital in many companies operates “in a bit of a silo, and senior management has never really made the effort to understand how it works. They haven’t spent enough time understanding what digital is going to bring them,” he said. “Everyone involved in digital hasn’t stepped in as a substitute to traditional channels in a time of crisis. Everyone had the processes and know-how to seize the opportunity. It’s up to management to decide how innovative they want to be.”
For many big brands, “all that matters is the [fashion] shows,” Bernard argued. “Now they have to really consider digital for what it means and realize that it’s a crucial tool.”
According to BCG, companies often create a stand-alone digital business that operates outside of the traditional organization, or focus their efforts within specific functions that are limited in scope and business results.
“Most fashion companies recognize that digital matters, but few have real digital talent at the ceo leadership table, which makes it difficult to access tradeoffs at the highest level. I think from a structural standpoint, many of these companies are still organized and even more importantly, incentivized by channel. Which is just not how consumers shop anymore,” Watten said.
Butler noted that many companies still separate the stock for brick-and-mortar and digital channels, and compete with each other for share of sales.
“Digital should not be seen as a separate entity, rather it should be seen as an organic part of operations and it should be everyone’s responsibility to innovate and find efficiencies in their day-to-day jobs,” he said. “Operationally, creating a unified approach in setting KPIs and fulfilling the stock as one pool will have to be the first step in optimizing online sales, and also unifying the back-office operations.”
According to Concetta Lanciaux, a luxury goods consultant based in Switzerland, the answer lies in recruiting many talents across the organization “as it will rarely come from the top” — and empowering those talents to propose projects. She said hiring a digital director is not a panacea, though that person can help coordinate efforts across departments.
Digital transformation must be integrated in all functions, not only the marketing function: “Brand reputation can be made and protected on digital,” she said in an interview.
Lanciaux suggested it might take a generational change before fashion completes its digital transformation, noting that most of the “people in charge” are either Baby Boomers or from Generation X, and “these are not digitally native people.”
“The new generation wants to discover these products and buy these products through technology,” she said. “The consumer has moved from passive observance to enabled dominance by using digital channels.”
What’s more, many top luxury brands are overly reliant on their artistic directors, many of whom are tethered to more traditional forms of image building and fashion messaging, such as fashion shows and ad campaigns. Exceptions include Virgil Abloh, who is hyperactive on social media and proficient at the video medium.
Butler agreed that a designated digital officer can set up competing behaviors. “Instead, digital should be in everyone’s bloodstreams and as with anything strategy, ceo’s and commercial directors should be the ones driving the digital agenda, unifying channels and making digital performance everyone’s responsibility,” he said.
BCG’s Watten noted that the digital channel can get short shrift in fashion companies when most revenues derive from wholesale.
“When you have a very nascent digital business in a legacy wholesale business it can be tough to get preferential online assortment or competitive given the competing channel goals,” he said. “If you are a very nascent digital business, then I think you need to have that head of e-commerce have a seat or at least strong voice at the ceo leadership table, as they represent a key growth engine for the company.
“As digital businesses develop, a forward-thinking commercial chief can take into account both digital and brick-and-mortar, direct-to-consumer plus wholesale — so he or she can make those type of tradeoff decisions,” he explained. “But I would say strongly, having incentives and structure that is only by channel… is a thing of the past. Because consumers do not shop that way, and you start making sub-optimal decisions based on people’s incentives rather than doing what’s best for the consumer.”
D’Arpizio suggested fashion and luxury conglomerates are likely to increase investments in start-ups and incubators, “helping develop what could be leapfrogging for the industry.”
Examples already exist. In 2018, PVH Europe founded a tech incubator called Stitch, whose team of software engineers, 3-D design experts and transformation specialists has developed tools for a fully digital design workflow.
Similarly, LVMH Moët Hennessy Louis Vuitton is a key partner in Paris tech conference VivaTech, where it offers an innovation award and hosts a “luxury lab” showcasing immersive in-store technology, virtual reality and augmented reality.
And Prada Group recently unveiled a partnership with software firm Sprinklr to optimize its digital communications and consumer engagement efforts.
Lanciaux said that 5G technology will offer another step change in digital transformation, particularly in industrial processes. “It will offer a new level of efficiency,” she predicted.
CONTENT CREATION:
According to the consultant Bernard, most fashion companies failed to produce engaging content and create excitement during the lockdown period.
“Brands could have accelerated their digital content production, influencers could have had something to say, but nothing has happened. Designers seem to be shell-shocked, or ashamed of hiding in some holiday homes. Anyway they are just mute, as if just short on ideas,” he lamented. “Whereas digital is meant to be more flexible with younger creatives whose job is to generate fresh ideas, this value chain didn’t prove to be a solution when the physical world was stuck.”
Lanciaux noted that the industry has employed a perfectly tuned but closed system of fashion weeks for decades, which relies mainly on the press to relay information about the runway shows to the public. “Fashion is a prisoner of its own system, speaking only at special times and speaking to only to special people in a special way,” she explained.
That system is hinged partly on the conviction that fashion must convey emotion, and that live events are the best vessel for that transmission. “There’s been a fear that technology would degrade and democratize the image,” she said in an interview.
Echoing other observers, Lanciaux noted that fashion has made good progress in digitalization with e-commerce, but so far, this channel has demonstrated “no intent to create some emotion,” despite some personalization efforts.
In her view, many brands have become over-reliant on influencers to talk about their brands in the digital space, some of whom take a creative approach, while others sell fashion in a banal way. “You wonder why fashion brands could not do it themselves,” she said, likening the influencer economy to a newfangled type of licensing. “The brands are going to other people to spread the message.”
Lanciaux suggested Marlow’s famous hierarchy of needs must be expanded to include amusement. “Fashion never thought of itself as having to entertain,” she explained, “and the digital channel provides entertainment.”
In her estimation, the food, music, art and lifestyle categories did a much better job engaging and amusing during coronavirus lockdowns, and dominated digital media with clever, witty and informative video content that was widely shared on social media and via messaging apps.
“Fashion was largely absent from the Internet in this confinement period,” she marveled. “It’s as if fashion does not feel part of lifestyle. It’s a missed opportunity.”
Exceptions included Bottega Veneta’s virtual residency program and online video sewing lessons from Dolce & Gabbana, plus efforts by Dior, Louis Vuitton and others to retool factories to make masks and sanitizing gels.
“The sell approach-only doesn’t work anymore,” Lanciaux said. “What’s interesting is not fashion itself, but what’s around it. It’s a whole world, and that’s what can attract people to the product itself.”
BCG’s Watten applauded Nike’s “Play inside, play for the world” campaign as spot-on. “I think that captured the essence of what their brand stands for, and what society needed,” he said. “You need to back up purpose with tangible actions. So they backed it up with taking down the paywall for Nike training club, which enabled many more people to be able to experience that offering.”
He also lauded as unique Zappos’ “customer service for anything” hotline that helps consumers, regardless of purchase. “You can discuss any topic, from the weather to social distancing. And I think there’s just an interesting way to say, ‘We are such a customer-first company that we just want to be there for you, for anything,'” Watten said.
FASHION SHOWS:
Watten predicts a rapid pivot from physical fashion weeks to digital ones, citing Shanghai’s pioneering edition in collaboration with Alibaba’s Tmall last March. Besides these, he also forecast more hybrid events with a physical manifestation and a “digital twin,” just as advanced companies have a digital twin in supply chain in order to run hypothetical scenarios on it.
“There could be more frequent digital fashion weeks as well, because right now it’s typically just a couple of times a year, which doesn’t really follow the rhythm of the seasons,” Watten said, noting that these would go beyond simple livestreams, the bulk of content on early digital events like Shanghai’s: “Something more sophisticated, with more functionality and a roundness as opposed to just a one-way stream of it.”
Butler said the traditional industry calendar based on seasonal fashion weeks is under pressure and swiftly becoming irrelevant, citing Saint Laurent’s announcement to withdraw from Paris Fashion Week and set its own timetable.
“Buyers will then start buying and selecting products from digital catalogues or augmented reality and virtual showrooms, as and when the brands decide to launch a new collection,” Butler said.
Gucci Supports Its Supply Chain Facilitating Loans
The luxury brand has teamed up with bank institute Intesa Sanpaolo to guarantee quick access to loans for its suppliers.
Gucci has renewed its partnership with prestigious Italian bank Intesa Sanpaolo to further expand the “Supply Chain Development Program,” first launched in 2015.
Through this partnership, Gucci guarantees to the constellation of small and medium-sized companies composing its supply chain to get easy and quick access to loans with favorable interests in order to obtain the necessary liquidity especially in this delicate moment. In addition, these companies will have the opportunity to benefit from incentives and initiatives which are usually destined only to major corporations, including all the financial tools put in place for the COVID-19 emergency.
Employing over 20,000 people, the companies and small laboratories which are part of the Gucci supply chain, through this program, will be able to finance their growth strategy, boost their internationalization and revamp their manufacturing plants.
“Gucci’s dream of beauty is an Italian dream that tells the world a story about the power of imagination and the incredible skills of Italian manufacturing. For almost a century Gucci’s foundations have been the know-how and skill of a supply chain of small artisans that represents the heart of Made in Italy,” said Gucci president and chief executive officer Marco Bizzarri. “Through the Progetto Filiere Program that we launched today with Intesa Sanpaolo, our goal is to ensure that the Made in Italy flag, while the economy restarts, can continue to represent Italian heritage in the world as it has always done so far.”
Last March, Gucci and Intesa Sanpaolo teamed to launch the “We Are All in This Together” program to raise funds destined to Italy’s Civil Protection.
Can American Retail Survive Without a Middle Class?
Too many stores are chasing a customer who no longer exists. As the pandemic wipes out these retailers, the malls they occupy will also become obsolete.
EAST RUTHERFORD, United States — American Dream, the 3-million-square foot retail and entertainment complex just outside Manhattan, had planned to welcome its first shoppers in March. Instead, developer Triple Five is hosting what might be the world’s most expensive Covid-19 testing centre out of the mall’s parking lot.
As far as symbols for retail’s troubles during the pandemic go, American Dream is not a subtle one. Nationwide, at least 15,000 stores are expected to shutter this year, according to Coresight Research, while a May Gallup survey shows that more than half of American consumers say they’re spending less money in recent months. Triple Five’s Mall of America, the country’s largest indoor shopping centre, has missed two mortgage payments.
There may still be a happy ending: on Tuesday, new data indicated that US consumer confidence rose unexpectedly as stores reopened in certain states. Some American Dream tenants say they expect the mall to open in spring 2021. (A spokeswoman for the mall denied this opening date and declined to comment further.)
But for many clothing brands and the malls that house them, the lockdowns may turn out to be a death sentence. The future of brands that cater to America’s shrinking middle class — the likes of Gap, J.C. Penney and J.Crew — is particularly bleak. Their former customers, squeezed between stagnant wages and rising health and education costs, are settling for cheap fast fashion or bargain hunting at big-box stores. These brands couldn’t keep up with new competition online, and in many cases were weighed down by debt borrowed during better times.
The pandemic is accelerating all of these trends. The US unemployment rate is at an all-time high since the Great Depression. Consumers who are still employed are nevertheless watching their spending in case the recession comes for their jobs, too.
As these chains falter, the spaces they inhabit are also becoming obsolete. Nearly half of all American malls, for instance, depend on J.C.Penney as an anchor and more than 60 percent count on Victoria’s Secret, another brand whose troubles predate the coronavirus, as a tenant, according to Costar. Both retailers plan to close hundreds of locations this year, and their malls will struggle to line up new tenants.
There will always be physical stores, of course. But when the economy emerges on the other side of this crisis, the way people shop will be fundamentally altered. There will be fewer stores and fewer malls, with many of the shopping centres still standing being the ones that cater to the rich. For everyone else, off-price chains like T.J. Maxx, big-box stores like Walmart, and Amazon will reign supreme.
Since the Great Recession, "income inequality rose quite dramatically and we’ll see that again this time around," said Rod Sides, Deloitte’s head of the US retail practice. "Retailers were forced to pick a new position after the last downturn. Those on the high-end did well and those who went off-price have done extremely well ... that [middle] segment really, really struggled because you could buy their products everywhere else, and potentially cheaper."
The Missing Middle
A middle-class consumer isn’t going to walk into a store and drop $800,000 on an alligator-skin coat. But as a group, they contribute more to consumption than the rich or the poor, according to a report from the Organisation for Economic Cooperation and Development.
But the share of households making around the national median income level has shrunk from 61 percent in 1971 to just under 50 percent in 2015, according to Pew Research. Middle-class income grew 28 percent between 1979 and 2014, compared with a 95 increase for the top 20 percent of households over the same period, according to The Brookings Institution.
The shrinking spending power of the middle class has been a driving force behind the so-called retail apocalypse, said Gabriella Santaniello, founder and chief executive of retail consultancy a-line Partners.
It’s no coincidence that many of today’s biggest mall brands — Gap and Victoria’s Secret among them — burst on the scene toward the start of this period and ran aground toward the end of it. Meanwhile, retailers catering to the extreme ends of the income spectrum, from luxury brands at the top to off-price and fast fashion chains at the bottom, are thriving.
On average, sales for clothes and clothing accessories stores have risen 2 percent annually since 1993, when the Census Bureau began collecting the data, compiled by the Federal Reserve Bank of St. Louis.
“This is hardly exciting growth,” said Andres Vinelli, the vice president of economic policy at the American Center for Progress, an organisation that advocates for improved economic mobility in the US. “It’s basically population growth.”
Brands have seen slim margins shrink even further as they were locked into a race to the bottom on price. Clothes that would have cost $100 in 1993 would amount to only $59 today, according to the Consumer Price Index cited by the American Enterprise Institute.
When consumers are worried about their jobs, no price is low enough, however.
“If you are not in the top 10 percent of the income population, you’re fearful about what could possibly happen, so no one is spending money right now beyond household essentials,” said Vinelli.
This mentality can create a cycle of economic deterioration. If no one is spending money, consumer sectors suffer, forcing companies out of business and further driving unemployment. States will see reduced income from sales taxes, resulting in layoffs of public school teachers, municipal workers and postal workers — all bastions of America’s middle class.
“Think of this as the financial crisis on steroids,” said Luigi Pistaferri, a professor of economics at Stanford University. “The [2008] recession took us a long time to recover, but this one will take longer. The amount of debt we’ll have to confront — as banks, as governments, as consumers — will take a long time. The future is not rosy.”
Fashion retailers are already discovering how expendable they are. Spending on apparel plunged nearly 90 percent in April. In states that have reopened, such as Texas and Georgia, foot traffic at T.J. Maxx has rebounded faster than for mall-based department stores like Kohl's and Macy’s, according to Placer.ai.
Too Many Stores
Part of the solution is obvious, if painful: with fewer sales coming in, underperforming stores and brands must close to give the rest a fighting chance.
According to the International Council of Shopping Centers, there are 23.5 feet of retail for every American — more than double most other countries. That wasn’t a problem during the mall’s first few decades; the US is less densely populated than much of Europe and Asia, so retailers needed more stores to ensure they were within driving distance of their customers.
The internet has made this strategy less essential, and so has the rise of big-box stores like Walmart and Target that sell fashion alongside groceries and home goods.
But it’s not easy for brands to walk away from stores, even when they want to. Many are locked into underperforming locations by long-term leases. Some have so much debt that if they close stores, they won’t have the cash to make monthly interest payments. Publicly traded retailers face pressure from shareholders to grow revenue quarter after quarter; closing stores would mean a hit to the top line.
Retailers closed 9,700 stores last year, according to Coresight. Still, even the most troubled chains find ways to stay open long after they’ve been left for dead (Sears and Kmart, the subject of countless business-section obituaries, still operate nearly 200 locations).
“Retailers cannot go on with this many stores and survive,” said David Bassuk, global co-head of the retail practise at AlixPartners. “Now, there’s a force of attrition that’s unfolding and coming to a new balance, a new normal.”
The coronavirus is changing the equation. Many stores will never reopen while struggling retailers will use the pandemic to cull underperforming locations. Gap, for instance, already announced it would be permanently shuttering a portion of its 3,000-some stores.
Leases are also no longer as big an obstacle. Mall landlord Macerich, for instance, said on May 12 that it collected only 26 percent of April’s rent and 18 percent of May.
“Prior [to coronavirus], if the tenant didn’t pay rent, the landlord would evict and replace them,” said Jay Luchs, a retail broker for Newmark Knight Frank. “But now, there are no tenants to replace them.”
Good Malls and Bad Malls
A store closing isn’t an isolated event, however. It can bring down the whole neighbourhood.
Take J.C. Penney: the department store chain plans to close about 240 stores as part of its plan to emerge from bankruptcy. Those locations anchor many of America’s roughly 1,200 malls and will be hard to replace. The remaining stores in these shopping centres will miss even the dwindling traffic a J.C. Penney brought in. For some, it could be what tips them into bankruptcy as well.
This chain reaction was already well underway before the pandemic. Most malls were built between the 1950s and 1980s, when Americans with discretionary income were moving to the suburbs. But as middle-class manufacturing jobs were outsourced or made obsolete, towns lost their middle-income spenders, and the malls their customers. Americans with money to spend were increasingly concentrated in a few affluent metro areas such as New York and San Francisco.
Consumer tastes were shifting as well. The strip mall became more popular among time-starved shoppers hoping to pick up groceries and browse for shoes on the same trip. Millennials increasingly shopped online, preferring newer brands like Everlane and Reformation.
A 2017 report from Credit Suisse had already predicted that one in four American malls would close by 2022, mostly in the suburbs.
Analysts see luxury shopping centres faring better, as their wealthy clientele still have money to spend on clothes. Before the pandemic, the Bal Harbour Shops in Miami saw traffic grow 20 percent year-over-year and was in the midst of planning a substantial expansion that’s been pushed back a year, according to the mall’s chief executive, Matthew Whitman Lazenby.
But even luxury isn’t immune to the changes reshaping retail. Neiman Marcus filed for bankruptcy earlier this year, and American spending on luxury goods is expected to decline over the next few years, according to a recent Bain report. In 2019, Americans accounted for 22 percent of the personal luxury goods market that totals €281 billion ($309 billion). That share will decrease to 16-18 percent by 2025, the consultancy forecasts, which means total luxury sales from American consumers will go from $86 billion in 2019 to as low as $56 billion in five years, while the global luxury market expands.
As for the closed stores and malls in rural and suburban America? Optimistic developers can point to the dead malls that have been converted into entertainment centres, office space, e-commerce warehouses, health care centres and even community college campuses. But the reality is that many have simply ended up as vacant lots.
“The mall failed because the area changed: it used to be a good middle-class area and then suddenly everyone left, and now who knows what you can build there,” said Alexander Goldfarb, an analyst at Piper Sandler. “If you take the classic derelict mall in the middle of nowhere, there’s just not much other use for it.”
Something for Everyone?
American Dream factored all of this — rising income inequality, e-commerce — into its plans. The mall will have a Banana Republic and a Pandora, but also plenty of fast-fashion and luxury options, from H&M to Hermès.
And if those stores fail to draw crowds, there are the attractions, including a Nickelodeon-themed amusement park, restaurants and a three-story candy “department store.” Other malls have begun to add services, dining and experiences alongside retail as well.
Post-pandemic, even that may not be enough.
“Who wants to go to a mall anyway?” said Faith Popcorn, a retail consultant and futurist. “They’re putting ski slopes in there just to get people to go. These days we have Fortnite and Animal Crossing and Oculus VR. Malls are exhausting and uninteresting.”
>>> Up
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>>> Call
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So Tomorrow...