deep dive: uk value clothing market— pure plays drive market … · 2017-04-04 · poundland....

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DeborahWeinswig,ManagingDirector,FungGlobalRetail&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

1) Majorvalueretailersaccountforalmostone-quarterofthetotalUKclothingmarket,weestimate.Thevalueapparelmarketwasworthnearly£10billionin2016,andsalesincreasedataCAGRof3.4%overthepastfiveyears.

2) NewentrantsandhigherstandardshaveboostedtheUKvalueclothingmarket.Thestructural“winners,”suchasPrimarkandBoohoo.com,arethosethatofferafast-fashionproducttoayoungtargetcustomer.

3) Groceryretailersareprominentinthevalueapparelmarket,andtheyappeartohavegainedsalesasaresultoftheBHSclosureinAugust2016.

4) Higherstandardsandanexplosioninchoiceareheapingcompetitivepressuresonlong-standingvalueplayers.

Deep Dive: UK Value

Clothing Market—Pure Plays Drive

Market Growth

Deborah Weinswig

Managing Director,

Fung Global Retail & Technology

[email protected]

US: 917.655.6790

HK: 852.6119.1779

CN: 86.186.1420.3016

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TableofContents

ExecutiveSummary..........................................................................................................................3

Introduction.....................................................................................................................................4

ValueRetailersCaptureOne-QuarteroftheClothingMarket...........................................................5

TopRetailersinValueClothing.........................................................................................................6

MarketShare........................................................................................................................................6

Retailers’Revenues..............................................................................................................................7

Offline-OnlyRetailers...........................................................................................................................8

SegmentReview:GroceryRetailers,InternetPurePlaysandNewEntrants......................................9

GroceryRetailersareResurgent..........................................................................................................9

Pure-PlayGameChangers..................................................................................................................11

NewEntrantsareWideningChoice...................................................................................................12

LikelyWinnersandLosers...............................................................................................................14

KeyTakeaways...............................................................................................................................16

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ExecutiveSummaryMajorvalueretailersaccountforalmostone-quarterofthetotalUKclothingmarket,weestimate,basedonEuromonitorInternationaldata.Thevalueapparelmarketwasworthalmost£10billion(includingVAT)in2016,andsalesincreasedataCAGRof3.4%overthepastfiveyears.Twomajorfactorshaveunderpinnedgrowthinthevalueclothingmarketinrecentyears:

1. Theproductofferinghasbeenvastlyelevated:Valueretailersaremorepopularbecausevalueapparelisbetterthanever.Theselectionofstylishandattractiveproductavailableatverylowpriceshasdramaticallyincreased,especiallyinmerchandiserangestargetedatmillennialandGenZconsumers.

2. E-commercehasinjectednewvigorintothevaluemarket:Sophisticated,fashionableonline-onlyplayersaredistinctfromthesomewhattiredformatsofpreviousgenerationsofvalueretailers.Boohoo.comandMissguidedhavebeenvastlyoutperformingtheirmultichannelpeers,evenwhenmeasuredonlyagainstthoseretailers’onlinesales,aswellastheirbrick-and-mortarpeers.

Primark,withtotalUKrevenuesof£2.9billioninfiscal2015(latestavailabledata)andAsda’sGeorgebrand,withestimatedclothingandfootwearsalesofaround£2.1billioninfiscal2016,arethebiggestplayersintheUKvalueclothingmarket.Groceryretailersandonline-onlyretailersaretwohighlysuccessfulsegmentsinthemarket,andnewentrantscontinuetopilein.

Groceryretailersareprominentinthevalueapparelmarket.Tesco,Sainsbury’sandMorrisonsappeartohavegainedsalesasaresultoftheclosureoftheBHSchain.EachoftheseretailersremarkedthattheyhadseenstrongapparelgrowthovertheChristmas2016period.ThisbenefitwillfallawayaftertheanniversaryofBHS’sfinalclosure,whichwasinAugust2016.

Internet-onlyretailerssuchasBoohoo.com,PrettyLittleThingandMissguidedaregrowingrapidly.Boohoo.comrecentlysaidthatsalesforfiscalyear2017(endedFebruary28),wereupabout50%,aheadofpreviousguidanceof46%–48%growth.Boohoo.comrecentlyacquiredPrettyLittleThing,whichwillfurtherboostitsUKrevenues.PrivatelyownedMissguidedrecentlyreportedthatsaleswereup34%intheyearendedMarch2016,andthatsalesrose60%inthesubsequentsix-monthperiod.

Newentrantsareheighteningcompetitioninthemarket.TheseincludePep&Co,whichisnowrollingoutclothingtostoresinitssisterchain,Poundland.Reserved,aPolishretailbrand,issettoopenitsfirstUKstoreshortly,onLondon’sOxfordStreet.AndAmazon,whichalreadyofferslowpricesonbrandedfashion,issettolaunchprivate-labelproductsdesignedspecificallyfortheUKmarket.

Higherstandardsandanexplosioninchoiceareheapingcompetitivepressuresonanumberoflong-standingvalueplayerssuchasMatalan,NewLookandBlueInc.So,growthintheoverallvalueclothingmarketisnotarisingtidethatisliftingallboats.

E-commercehasinjectednewvigorintothevaluemarket.

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IntroductionInthisreport,weexplorevalueclothingretailingintheUK,includingreviewingleadingvalueplayersandanalyzingdriversofgrowth.Welookatthesizeandgrowthofthevalueclothingmarketandthemarketsharesoftopretailers,discussgroceryretailersandInternet-onlyretailersthatsellvalueapparel,andidentifylikelywinnersandlosersin2017.

Wedefinevalueclothingretailersasthosethatofferlowpricepointsthataregenerallysignificantlybelowthoseofmidmarketrivals:inessence,thevalueretailersarewhereshoppersarelikelytoturniftheyarestrappedforcash.Almostallvalueretailersfocusonprivate-labelfashionsratherthanonthird-partybrands.

RetailersinthismarketincludePrimark,Boohoo.com,NewLook,Matalan,H&M,Peacocks,Pep&Co,Missguided,Forever21,SelectFashion,BlueIncandthenow-defunctBHS.Wealsoconsidertheprivate-labelapparellinesofferedbygroceryretailersTesco(F&Fbrand),Sainsbury(Tubrand)andAsda(Georgebrand)aspartofthevaluemarket,aswellasapparelofferedbygrocersAldiandLidl.

Source:Shutterstock

ThereisacaseforincludingSportsDirectandT.K.Maxxwithinthevaluemarket,astheytypicallysellbelowfullretailprice,oratleastwiththeappearanceofadiscount.However,weconsiderthemadjacenttothevaluesectorfortworeasons.First,inmanycases,theyaresellingatpricesthatarestillsubstantial.Second,andrelatedly,SportsDirectandT.K.Maxxalsoprovidecustomerswithsubstantialbrandedofferings,includingbig-namemass-marketbrandsand,inthecaseofT.K.Maxx,premiumlabels.

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ValueRetailersCaptureOne-QuarteroftheClothingMarketMajorvalueretailersaccountforalmostone-quarterofthetotalUKclothingmarket,weestimate,basedonEuromonitorInternationaldataon14majorvalueretailers:

• Thevaluemarket’saggregatemarketsharehasincreasedbyapproximately510basispointsinthelast10years,asdepictedinthegraphbelow.

• ThesizeoftheUKvalueclothingmarketwasalmost£10billion(includingVAT)in2016,andsalesincreasedataCAGRof3.4%overthepastfiveyears.

Aswediscusslater,however,notallmajorvalueretailershavegainedovertheperiod.

Figure1.UK:MajorValueClothingRetailers’Sales(LeftAxis,GBPBil.)andAggregateShareofTotalUKClothingMarket(RightAxis,%)

Thegraphshowsthesumof14majorvalueretailers’estimatedclothingsalesandmarketshares:theretailersareAsda,Primark,Matalan,Tesco,NewLook,H&M,Peacocks,Sainsbury’s,Lidl,Aldi,Boohoo.com,Missguided,Forever21andBHS.Source:EuromonitorInternational/FungGlobalRetail&Technology

Twomajorfactorshaveunderpinnedgrowthinthevalueclothingmarket:

1. Theproductofferinghasbeenvastlyelevated:Valueretailersaremorepopularnowbecausevalueapparelisbetterthanever.Theselectionofstylishandattractiveproductavailableatverylowpriceshasdramaticallyincreased,especiallyintermsofmerchandisetargetedatmillennialsandGenZers.

2. E-commercehasinjectednewenergyintothevaluemarket:Sophisticated,fashionableonline-onlyplayersareprovidingaverydifferentshoppingpropositionfromtheoccasionallytired-lookingstoreformatsandrelativelybasicproductofferingofpreviousgenerationsofvalueretailers.Asaresult,Boohoo.comandMissguidedhavebeenvastlyoutperformingtheirbrick-and-mortarpeers,evenwhenmeasuredonlyagainstthosecompanies’onlinesales.

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Majorvalueretailersaccountforalmostone-quarterofthetotalUKclothingmarket.

Valueretailersaremorepopularnowbecausevalueapparelisbetterthanever.

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Forthesereasons,thevaluemarkethasattractedabroaderandmorediverserangeofconsumers,includingyoung,fashion-consciousshopperswhohaveturnedtopureplaysandmiddle-classconsumerswhoaretradingdownforcertainpurchasessuchasbasicswhilevisitinghigher-endstoresforinvestmentitems.

Reflectingthehigherstandardsinthesegment,thegrowthinvalueretailhasnotbeenarisingtidethathasliftedallboats.Undistinguishedmiddle-groundretailerstargetingshoppersinthefamilylifestageoroldershoppershavestruggledtogaintraction,justastheirmidmarketretailpeershave.Forexample,MatalanhasposteddecliningsalesandBHScloseddowncompletelyinAugust2016followingyearsofrevenuedeclines.TopRetailersinValueClothing

MarketShareBelow,webreakdownthevalueclothingmarketbyretailer,basedonEuromonitordata.Somesmallerplayers,suchasSelectFashionandBlueInc,arenotincluded.Thestill-tinymarketsharecapturedbyInternet-onlyretailersisnotable.Forexample,Boohoo.comandMissguidedcaptureonlysmallshares.Wethinkthisunderlinesthefactthatthereissubstantialscopeforgrowthatthesetypesofretailersasmorevaluespendingmigratesonline.

WestripoutBHSdatainthegraphbelow,duetotheretailer’sclosureinAugust2016.Basedonourownestimates,wethinkthatEuromonitor’sfigurefortheGeorgebrandatAsdaisimprobablyhighrelativetothePrimarkfigure(seeFigure3forourownestimates).Moreover,pressreportssuggestthatbothKantarWorldpanelandVerdictRetailseePrimarkastakinggreatersharethanAsda.

Figure2.UK:LeadingValueClothingRetailers’EstimatedShareoftheValueClothingMarket,2016(%)

Source:EuromonitorInternational/FungGlobalRetail&Technology

Fast-growingpureplayssuchasBoohoo.comandMissguidedcaptureonlysmallmarketshares.

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Retailers’RevenuesBelow,werankmajorvalueretailersbytheirlatestfull-yearrevenues.ForspecialistretailerssuchasPrimarkandMatalan,thisincludesanynon-clothingrevenues.ForgroceryretailersAsda,TescoandSainsbury’s,thefiguresareourestimatesfortheirnetsalesofclothing,footwearandaccessoriescombined.UK-onlydataforsomevalueretailers,suchasForever21,arenotavailable.

Figure3.UK:LeadingValueClothingRetailers’RevenuesExcludingSalesTaxandYoY%ChangeinRevenues

Revenues(GBPMil.) Year-End YoY%Change

PrimarkUK 2,891 Sep15 3.8

Asda(George)* 2,100 Dec16 N/A

NewLookUK** 1,268 Mar16 4.3

H&MUK*** 1,094 Nov16 3.4

Matalan 1,061 Feb16 (3.0)

Tesco(F&F)* 1,000 Feb17 N/A

Sainsbury’s(Tu)* 800 Mar17 N/A

Peacocks 370 Feb16 5.1

Bonmarché 188 Mar16 5.3

Boohoo.comUK 130 Feb16 37.9

Missguided 117 Mar16 34.4

SelectFashion 81 Jun16 (5.9)

*Estimatesforclothing,footwearandaccessories**Includesanelementofinternationale-commercesales***EstimatedbasedondatathatincludedsalestaxSource:S&PCapitalIQ/companyreports/FungGlobalRetail&Technology

TheclosureofBHSin2016freedupseveralhundredmillionsofpoundsofapparelsales.BHS’slastfiledaccountswerefortheyearendedAugust2014,whenitturnedover£668million.Itsrevenueswereconsistentlydecliningyearoveryearintheprecedingyears.Theclosureofthebusinessopenedupopportunitiesforotherretailersthattargetcustomersaged45andolder,asBHSdid.WebelievethatthegroceryretailerswilltakesomeoftheremainingBHSclothingshareandthatMatalan,Bonmarché,PeacocksandPep&Coalsohavetheopportunitytogainsales.

Wealsonotethattworetailersadjacenttotheprivate-labelvaluemarket,T.K.MaxxandSportsDirect,havebeenoutperformingthetotalapparelmarket:

• TJXUK,theparentcompanyofT.K.MaxxandHomeSenseintheUK,grewrevenuesby10.9%,to£2.4billion,intheyearendedJanuary2016(latest).Atthetimeofwriting,thecompanyoperatesmorethan350T.K.Maxxstoresand30HomeSensestoresintheUKandIreland.

TheclosureofBHSopenedupopportunitiesforotherretailersthattargetcustomersaged45andolder.

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• SportsDirectgrewtotalsalesby14.2%inthefirsthalfofitsfiscalyear2017,endedOctober2016(latest).ItscoreUKsportsretailsegmentgrewrevenueby7.4%intheperiod,andoperated454storesattheendoftheperiod.Grouprevenuestoodat£2.9billionintheyearendedApril2016,withUKrevenuesaccountingfor£2.3billion.Theretailersellsamixofthird-partybrandsandproprietarybrandswithadiscountpositioning.

Offline-OnlyRetailersAswehavealreadynoted,Internet-onlyretailershavehelpeddrivegrowthinthevalueclothingmarket.And,aswiththeoverallapparelmarket,moreandmorevalueclothingspendingwillmigrateonlineinthecomingyears.

Amongbrick-and-mortarretailers,thereareveryfewholdoutsagainste-commerce,buttheyfeaturedisproportionatelyinthevaluemarket.E-commercelaggardshaveincludedSainsbury’s,whichlauncheditsTubrandonlineonlyinAugust2015.

Source:Shutterstock

Primarkistheonlymajorapparelspecialistthatdoesnotsellonline.Thecompanyindicatedthattheeconomicsdonotstackup,givenitsultralowpricepoints.GeorgeWeston,CEOofparentfirmAssociatedBritishFoods,underlinedthispositioninthecompany’smostrecentearningscall,whenheconfirmedthatanalystscouldruleoutamoveonlinebyPrimarkbecause“theeconomicsofthestoresarejustmuchbetterthantheeconomicsofonlineclothingretail.”DiscountfashionchainPep&Coremainspurelystore-based,too.

Amongthegroceryretailers,Lidlremainsasolelybrick-and-mortarretailer.RivalAldilaunchedatransactionalnonfoodUKwebsiteinJanuary2016,throughwhichitsellsitsclothingranges.Morrisonsisalsoplanninganonlinelaunchforitsclothingranges,aswediscusslaterinthisreport.

PrimarkistheonlymajorUKapparelspecialistthatdoesnotsellonline.

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SegmentReview:GroceryRetailers,InternetPurePlaysandNewEntrantsInthissection,wereviewthreenotablesegmentswithinthevalueclothingmarket:groceryretailers,Internet-onlyretailersandnewentrantstothemarket.

GroceryRetailersareResurgentSupermarketretailersaccountfor10%ofthetotalUKclothingandfootwearmarketbyvalue,accordingtoKantarWorldpanel.Butthisshareisdepressedbytheirlowaverageunitprices;theycapturealmostone-quarterofthemarketwhenmeasuredbyvolume.

Onechallengeforthissegmentisthatconsumersarechangingtheirgrocery-shoppingbehavior.Britishgroceryshoppersareincreasinglyturningawayfromlargeout-of-townsuperstoresinfavorofsmallersupermarkets,discountsupermarkets,conveniencestoresandtransactionalwebsites.Intheory,thisshouldbehittingtheclothingsalesofmajorsupermarketretailers,assupermarketfashionreliesonlarge-storefootfalltogenerateincrementalclothingsalestocustomersdoingtheirregulargroceryshopping.However,theUK’sthreepubliclytradedsupermarketgroupshaverecentlynotedstronggrowth,notdeclines,intheirfashionsales.TheyhavelikelymoppedupsharefromBHSfollowingitsfinalclosureinAugust2016.Ifthatisthecase,theyear-over-yearboostinsalesenjoyedbythegroceryretailerswillannualizelaterthisyear.

• SectorleaderTescosaiditscomparablefashionsalesroseby4.3%inthesixweeksendedJanuary7,2017.Tesco’sfashionlabelisF&F.

• Second-placeSainsbury’snoteda10%leapinitsclothingandfootwearsalesinthethirdquarterofitsfiscalyear2017,whichcoveredtheChristmas2016period.Sainsbury’sfashionlabelisTu.

• Fourth-placeMorrisonssaiditsNutmegclothingbrand“performedwell”initsnine-weekChristmastradingperiod,whichendedJanuary1,2017.

Source:Shutterstock

Walmart-ownedAsdaisthebiggestretailerofapparelamongthegrocerychains.Itslong-establishedclothingbrandiscalledGeorge.Asdahasbeenpostingnegativecomparablesalesgrowthintotal,buthasfailedtodisclose

Supermarketretailerscapturealmostone-quarteroftheUKclothingandfootwearmarketbyunitvolumesales.

Asdaisthebiggestretailerofapparelamongthegrocerychains;itsGeorgeclothingbrandiswellestablished.

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performanceinfashionrecently.Asda’stotalcompsfellby2.9%inthefourthquarterofitsfiscal2017year.Trafficwasdown1.8%inthequarter—anddecliningstoretrafficissuretohaveaffectedclothingsales.

However,significantsequentialchangesinAsda’squarterlycompsandtrafficsuggestthatthesemetricscouldswingtopositiveterritoryinthecomingyear.Iftheydo,theGeorgefashionrangeshouldbenefit,andTescomaybenegativelyimpacted.

Figure4.Asda:TotalComparableSalesandTraffic,YoY%Change

Source:Companyreports

Sainsbury’shaslikelybenefitedfromanumberofinitiatives,includingthelaunchofane-commercesiteinAugust2015andthereleaseofanupmarketTuPremiumrangeinSeptember2016.ThecompanyrecentlysignedretailexpertMaryPortastohelpmakeTua“destinationbrandforhigh-streetfashion.”

Morrisonswaslatetotheapparelcategory,launchingitsNutmegbrandonlyin2013,andinitiallyonlyinchildrenswear.Theretailer’stypicallysmallersupermarketspresentrangingissuesforclothingandfootwear.Nevertheless,inFebruary2017,Morrisonsannouncedplanstoextendthebrandtowomenswear.

E-commerceremainsanopportunityforNutmeg,andinMorrisons’March2017full-yearresultspresentation,CEODavidPottssaidthatthecompanywouldexpanditsonlineofferingtoincludeclothingatanunspecifiedtime.E-commercecouldprovideaboosttothecompany’sclothingsalesthatisproportionatelyhigherthanwhatitprovidestosupermarketrivals,giventhespacechallengesthatMorrisonsfacesinmanyofitsstores.

Seekingtotaptheathleisuretrend,Tescoenhanceditsapparelofferingwithanactivewearrangeforspring2016.

Meanwhile,AldiandLidlhavemademovestocapturegreatershareinclothing,too,withspecial,short-livedcollectionslaunchedwithintheirrotatingnonfoodspecialbuys.In2016andearly2017,forinstance,Aldilaunchedon-trendfashionlines,officewear,runningapparel,cycleclothing,skiwearandevenridingapparel.

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E-commerceremainsanopportunityforMorrisons’Nutmegapparelbrand.

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Pure-PlayGameChangersBoohoo.combringsexceptionalspeedandagilitytothevalueclothingmarket.Coupledwithultralowsellingprices,thismakesforacompellingpropositionthatisfarmoresophisticatedthanthemediocreshoppingenvironmentsandundistinguishedproductrangesthatcharacterizedsomepreviousgenerationsofvalueretailers.

Boohoo.com’s“testandrepeat”modelisbasedonstockingalimitednumberofunitsofeachnewstyle,andthenbuyingdeepervolumesifastyleperformswell.Thecompanysourcesaround50%ofitsproductsintheUK,which,combinedwiththetest-and-repeatstrategy,enablesittocatertoshoppers’demandsforfastfashion.Boohoo.com’sonline-onlyoperationbringssimplicitytothismodel,whereasotherfast-fashionretailersmustdealwiththecomplexityofstockingnewproductsinmultiplestores.

Boohoo.comcanreportedlygetaproductfromconcepttosalewithintwoweeks.Thecompanysaysitoffers20,000differentstylesandintroducesupto100newstylesaday,andthat“thespeedandagilityofthegroupenablesittobefirsttomarketwiththelateston-trendstylesandfashion.”

ThecompanyacquiredUKpureplayPrettyLittleThingandtheUSpure-playbrandNastyGalinlate2016.Boohoo.com’ssalesjumpedby50%inits2017fiscalyear.

Missguidedoffersasimilarmixoflow-pricedfastfashionaimedatyoungshoppers.Theprivatelyownedcompanysaysthatitaddsmorethan50newstylestoitssiteeachday.

MissguidedfounderandCEONitinPassitoldTheGuardianin2015,“[W]e’rerapidfashion….Ifatrendcomes,weneedtohaveitonoursiteinunderaweek.”Thecompanysaysitcanturnsamplesaroundinaday,anditreportedlygetsproductstomarketmuchquickerthanfast-fashionlegendZaradoes.Passihasstatedthathisambitionistoturnthecompanyintoa£1billionbusinessinfiveyears.InNovember2016,thecompanyopeneditsfirstbrick-and-mortarstore,atLondon’sWestfieldStratfordCitymall.

MissguidedretailstoreattheWestfieldStratfordCitymallSource:FungGlobalRetail&Technology

Boohoo.comcanreportedlygetaproductfromconcepttosalewithintwoweeks.

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Missguidedisadistinctiveplayer,eveninacrowdedyoung-fashionpure-playsegmentthatincludesPrettyLittleThing,ASOS,LittleMistress,Bejealous,BrandAtticandRomwe.Thesee-commercenamesspanthevalueandmidmarketsegments,andweexpectthemtocapturesharefromlegacystore-basedyoung-fashionretailerssuchasNewLookandTopshop.

NewEntrantsAreWideningChoiceCompetitioninthevalueclothingmarketwillonlyincreasewithnewentrantssuchasReservedandAmazonUK’sprivate-labelapparellines.

Pep&Co

• Pep&CoisanewUKwomenswear,menswearandchildrenswearbrick-and-mortarvalueapparelconceptstartedbyformerAsdaandBain&Companyexecutivesin2015.ThecompanyisownedbySouthAfricanretailholdingcompanySteinhoff.Pep&Coopened50storesacrosstheUKinsummer2016andplanstohave85storesintheUKbytheendof2017.

• Followingatrialperiod,Pep&CowillalsorolloutPep&CoclothingshopswithinlargePoundlandstores.Pep&ComanagementstatedthatitsgoalisforPep&CotobetoPoundlandwhattheGeorgebrandistoAsda.

• Thefashionchainisaimedatmothersonabudget.Pricesstartat£1and95%ofproductsalesareunder£10.

Reserved

• ReservedisownedbyLPP,anapparelretailerbasedinPoland.ReservedwillshortlyopenitsfirstUKstore,intheformerBHSsiteonOxfordStreetinLondon.LPPgeneratedPLN6,021million(£1.1billion)in2016.AnalystsexpectLPPrevenuestoincreaseby17%yearoveryearin2017andby12.7%in2018.

Amazon

• Amazonhaslaunchedeightown-labelfashionbrandsonitsUSwebsite.ThelabelsareonlyavailableforAmazonPrimemembers.SeveraloftheselabelsofferitemsatvaluepricepointsandarecreatedbyandexclusivetoAmazon,includingFranklin&Freemanformen’sshoes,FranklinTailoredformen’sformalwear,James&Erinforwomen’sclothingandScout+Roforchildren’sclothing.

• InFebruary2017,DrapersreportedthatAmazonisplanningtolaunchprivate-labelclothingrangesdesignedfortheUKmarketandthatthecompanyhasrecruitedseniorapparel-buyingexpertsfromPrimarkandMarks&Spencer.

• Separately,AmazonisplanningtodevelopitsownlineofworkoutapparelinordertocapitalizeontheongoingstrengthoftheathleisuretrendintheUSandEurope.

ReservedwillshortlyopenitsfirstUKstore,intheformerBHSsiteonOxfordStreetinLondon.

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Source:Amazon.com

• Amazoncanleverageitsvastamountoftransactionandconsumer

browsingdatatodevelopsuccessfulprivate-labelfashionlines.

• Awayfromprivatelabel,Amazonroutinelysellsbrandedfashionbelowregularretailprices,withvariousdepthsofdiscounts,arguablymakingitsofferingsimilartothatofanoff-priceretailer.

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LikelyWinnersandLosersFinally,inthefollowingthreetables,weoutlinesomenotableretailersthatlook,respectively,likelytooutperformthevaluemarketin2017,broadlykeeppacewiththemarketorunderperformversusthemarket.

Figure5.ValueClothingRetailersthatAreLikelytoOutperformtheValueMarketin2017

AldiandLidlGrocerydiscountersAldiandLidldonotconsistentlyfeatureclothingranges;instead,theyofferselecteditemsforashortperiodwithintheirweeklyspecialdeals.However,theirofferingsfrequentlycapturetheattentionofthespecialistandmainstreammedia,propellingwhatareoftenhighlylimitedrangestopublicattention.

Thisisinthecontextofveryrapidtotalsalesgrowthattheseretailers.AccordingtoKantarWorldpanel,bothAldiandLidlgrewtheirsalesbyaround13%inthe12weeksendedFebruary26(latest).However,inthelatestfour-weekperiod,alsoendedFebruary26,Aldi’sgrowthacceleratedto14.2%andLidl’sacceleratedto16.5%.

Boohoo.comBoohoo.comrecentlysaidthatsalesforthefiscalyearendedFebruary28wereupabout50%,aheadofpreviousguidanceof46%–48%growth.Moreover,thisgrowthhasnotbeenattheexpenseofprofitability;adjustedEBITDAmarginsareexpectedtobeatthetopofthecompany’sguidancerangeof11%–12%.Analystscurrentlyforecast40%revenuegrowthforfiscal2018.Boohoo.com’srecentacquisitionofPrettyLittleThingwillboostitsUKrevenues,anditspurchaseoftheNastyGalbrandintheUSwillbolsteritsinternationalsales.ReflectingBoohoo.com’sstorminggrowth,itssharepriceclimbed281%inthe12monthsendedMarch10,2017.

MissguidedPrivatelyownedMissguidedrecentlyreportedthatsaleswereup34%intheyearendedMarch2016,andthatsalesroseby60%inthesubsequentsix-monthperiod.Some40%ofthecompany’ssalesaremadeoverseasand,likeotherpure-playretailerswithsignificantinternationalsales,itssaleswillhavebeenflatteredbythedepreciationofthepound.

Sainsbury’s(Tu)TheUK’ssecond-biggestgroceryretailer,Sainsbury’s,reportedstrongclothingsalesinthethirdquarteroffiscal2017,withsalesofitsTubrandup10%yearoveryear.Inthefourthquarter(latest),Tubrandclothingsaleswereup5%.UnlikeTescoandAsda,Sainsbury’shasconsistentlyreporteditsapparelsalesinrecentyears,andthosesalesappeartohavebeenconsistentlygrowingaheadofthemarket.Growthhasbeensupportedbythecompany’smovetostartsellingTuonlineandlikelybytheBHSclosure,too.

Source:Companyreports/FungGlobalRetail&Technology

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Figure6.ValueClothingRetailersthatAreLikelytoKeepPacewiththeValueMarketin2017

H&MH&Mdoesnotfrequentlyprovideupdatesonitsperformanceatanationallevel,butitcontinuestopostweakglobalcomparablestoresalesgrowth,whichhasoffsetbyexpandingnewstoreopenings.ThelatestcompanydatafortheUKisfortheyearendedNovember2016,whensaleswereupbyamodest3%inlocalcurrency,versusa6%increaseinUKstorenumbers.SomeanalystsestimatethatH&M’sfourthquarter2016comparablesaleswerebroadlyflatintheUK.Asoftheendof2016,thecompanyhadasubstantialbaseof281storesintheUK.ThatmeansitsfutureexpansionopportunitiesarelimitedandthatitcouldbevulnerabletosharelosstoInternetpureplays.

PrimarkPrimarkistheleadingvaluespecialistanditcontinuestogainshareoftheoverallapparelmarket.Butmanyofitsgainsarenowdrivenbynewstoresandrelocations;underlyinggrowthisnowmuchsofterthanitwasinpreviousyears.PrimarkgrewitsUKcomparablestoresalesby2%inthefirsthalfoffiscal2017,endedMarch4,2017.Inthepriorfiscalyear,UKcompsfellby2%.AccordingtoKantarWorldpanel,Primarkgained10basispointsofshareofthetotalUKapparelmarketyearoveryearinthe12weeksendedDecember18,2016,anditgained19basispointsofshareinthe12weeksendedJanuary15,2017(includinggainsfromnewsellingspace).

Despiteinputcostpressuresresultingfrompounddepreciation,Primarkstatedthatitwillnotincreaseprices—whichsuggeststhatitdoesnotwanttosacrificetop-linegrowthtoshoreupmargins.Theabsenceofane-commerceofferingcouldbeadragontop-linegrowthinthecomingperiod,particularlyifPrimarklosessharetoBoohoo.com,whoselow-price,fast-fashionmerchandiseappearstooverlapwithPrimark’soffering.However,Primarkwillenjoyinsulationfromthemargin-depletingeffectofe-commerce.

SelectFashionPrivatelyownedSelectFashiongrewsolidlybetweenfiscalyears2010and2015,withrevenueup135%overtheperiod.However,infiscal2016,revenuefellby5.9%,despiteanundisclosednumberofnewstoreopenings,andthecompanyreturnedtoanetlossafterthreeyearsofreportingpositivebottom-linenumbers.SelectFashionnowlooksvulnerabletothegrowthofpureplayssuchasBoohoo.com.

Tesco(F&F)Britain’sbiggestgroceryretailer,Tesco,reported4.3%comparablesalesgrowthforitsF&Fclothingandfootwearbrandoverthesix-weekChristmas2016period.However,theabsenceofanycommentaryinprecedingquarterssuggeststhatthiswasanatypicalperformance.

Apotentialthreatin2017isanAsdarecovery,aswediscussinmoredetailelsewhereinthisreport.Animprovementathypermarket-focusedAsdawouldlikelydrawshoppersfromTesco’slargerstores,hittingimpulsesalesofTesco’snonfoodranges,includingclothing.AnygainsfromtheBHSclosurewillannualizelaterin2017.


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Figure7.ValueClothingRetailersthatAreLikelytoUnderperformtheValueMarketin2017

BlueIncandTheOfficersClubBlueIncandTheOfficersClubaresisterbannersthatbothfocusonmaleshoppers(althoughBlueInchasdiversifiedintowomenswear,too).BlueIncacquiredTheOfficersCluboutofadministration(bankruptcy)in2011.InJanuary2016,BlueIncbroughtinadministratorstoitsA.Levy&Sonsubsidiaryandclosedsome76OfficersClubandBlueIncstores.InMarch2017,BlueIncfiledforaCreditVoluntaryAgreement,whichproposestoreducerentsandcloseunprofitablestores.AccordingtoreportsinTheTelegraphandDrapers,somelandlordshaveraisedconcernsaboutthecompany’sviability.

ThismarksafallfromgraceforBlueInc,whichwasplanninganIPOin2014,butwhicheventuallyoptedforaprivatesaleinstead.BlueIncoperatesapproximately157stores(includingOfficersClubstores).Itslatestaccounts,fortheyearendedDecember2013(priortotheraftofstoreclosures),showedthatitgenerated£99millionofrevenuethatyear.

BonmarchéBonmarchéoffersfashionsformatureshoppers.Totalsalesweredown4%inthefirsthalfoffiscal2017,endedSeptember2016.Totalgrowthrecoveredto3.3%inthethirdquarter,butthatwasinthewakeofrivalBHSshuttingitsstoresbetweenJulyandAugust2016.BonmarchéshouldbereapingtherewardsofBHS’sclosure,giventhatBHSalsohadanoldercustomerbaselookingformiddle-of-the-roadstyles.However,Bonmarche’suptickinthethirdquarterwasonlytepid:onlinesalesweredown3.8%andstore-onlycompgrowthwasamodest0.8%,suggestingthatstoreopeningshavebeentheprincipaldriverofgrowth.Thecompanyisworkingtoimproveitsproductofferingandisphasingoutitsalready-limitedmenswearrangesinordertofocusonitscoreshopper.

MatalanMatalanfocusesonshoppersinthefamilylifestage(i.e.,momswithkids).Thecompany’srevenuesdeclinedby1%inthethirdquarteroffiscal2017,endedNovember2016.Matalanappearstobelosingsalestootherretailersthatofferamorefashionableofferingandamoreappealingshoppingexperience.Moreover,wethinkMatalan’sretail-parklocationsputitatadisadvantagetomall-basedandhigh-streetretailers:storesinretailparksdemandproductthatiscompellingenoughtoenticeshopperstomakeaspecialtriptoastand-alonestore.

NewLookNewLook’sUKcomparablestoresalesdeclinedby7.3%yearoveryearintheninemonthsendedDecember2016,includingadeclineof4.6%inthethirdquarter.Thecompanysaidthatitexpectssalestoremainchallengingfortheremainderoffiscal2017andintofiscal2018.NewLookisalegacyyoung-fashionplayer,anditappearsvulnerabletothegrowthofonline-onlyplayerssuchasASOS,Boohoo.comandMissguided.AsmoreyoungconsumersturntotheInternet,thecompetitiveadvantageofNewLook’ssubstantialstorenetworkwanes:thecompanyoperated575UKstoresasoftheendof2016.


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KeyTakeaways• NewentrantsandhigherstandardshaveboostedtheUKvalue

clothingmarket.Thestructural“winners”looktobethosewithfast-fashionproductandayoungtargetcustomer.MarketleaderPrimarkandfast-growingBoohoo.comandMissguidedsharethesecharacteristics.

• Groceryretailersareprominentinthevalueapparelmarket,andTesco,Sainsbury’sandMorrisonsappeartohavegainedsalesasaresultoftheclosureofBHS.ThissupportwillfallawayoncewelapthefirstyearsinceBHS’sfinalclosure,whichwasinAugust2016.Sainsbury’slookstobethemostconsistentoutperformerinthegroceryapparelsegment.

• Higherstandardsandanexplosioninchoiceareheapingcompetitivepressuresonlong-standingvalueplayerssuchasMatalanandNewLook.

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DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comJohnMercerSeniorAnalyst

EvaKubickaSeniorResearchAssociate

HongKong:8thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKongTel:85223004406London:242-246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NewYork:1359Broadway,9thFloorNewYork,NY10018Tel:6468397017

FungGlobalRetailTech.com

deep dive: uk value clothing market— pure plays drive market … · 2017-04-04 · poundland....

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