Does the willingness of US consumers to splash out on sportswear, at a time when spending power is weak, indicate a shift in apparel demand culture?
Sportswear growth slows in the US
Cheap chic, the apparel growth engine of the post-Lehman Brothers era, is finding life increasingly tough in its core mature markets. It is not only that high commodity prices and rising Asian labour costs are putting the low-price fundamentals of the category under strain, there is also the problem that rising grocery inflation is weakening consumers’ monthly spending capacity for non-essential goods.
The stormy economic climate that worked well for cheap chic has, it would seem, become so inclement as to threaten its future survival. Even if retailers do not pass on their higher production costs to consumers (and some, like Primark in the UK, are not) there is no guarantee that demand will pick up.
What must be frustrating for fast fashion retailers is that while consumers are cutting back at the cheap end of the market, they seem to be spending with greater verve at the middle price point. This is where Nike and the world’s leading sportswear labels are positioned. For the year to the end of May 2011, revenue in Nike’s sports clothing category broke the US$2 billion mark in North America, an increase of 21% over the same period in 2010.
It is the type of growth one might expect in China or Brazil, but not in the cash-strapped US where the recent trend has been for consumers to trade down. Indeed, according to data from Euromonitor International, retail sales of clothing in the US dropped 5% by value between 2007 and 2010.
What we are seeing with Nike in the US is indicative of a consumption shift towards affordable quality. The luxury goods market has been the trailblazer, with second-tier or so-called diffusion lines bulking out the middle price point of consumption. This revamped middle ground has now become synonymous with affordable quality. As such, it is picking up new consumers from both the high and the low price spectrums of the market.
Specifically, while designer label consumers are trading down to more affordable diffusion brands, so fast fashion consumers are trading up. The rationale of less well-off consumers is to buy less, but invest in better quality (longer lasting) items. It has pushed the middle ground of apparel into a purple patch of growth in the US, of which Nike is a key driver. Critically, we could soon see the same happening in Western Europe.
Emerging markets not the only growth story
For the second half of this year, reported futures orders of Nike goods in North America are up 14% compared with the same period in 2010. And they are up a robust 11% in Western Europe. Nike sportswear and fast fashion retailers operate in different price zones in Western Europe, but their consumer base is actually not so different.
As a result, concurrent with trends in North America, the sportswear category is set to become an increasingly strong competitor to cheap chic as we head toward Christmas 2011. This will pile further pressure on the low-price business model of the leading fast fashion retailers.
The problem for cheap chic, and the opportunity for mid-priced sportswear, is that Western European consumers are starting to believe that economic fragility is here to stay for the long term, rather than the short term. This shift in perception appears to have already happened in the US. That means people are thinking long term in their purchases, and channelling money into quality and durability rather than opting instinctively for the lowest price short-term option. It is a different mindset from the initial period of economic crisis in the developed markets.
China and the emerging markets are also showing strong futures orders growth for Nike over the second half of the year, but that is to be expected given trends across fast moving consumer goods. China, in particular, is driving the growth strategy of many multinational consumer goods companies.
However, while China is a vast opportunity for international sportswear brands, the likes of Nike will not have everything their own way over the next 10 years. This is because China is developing sportswear brands of its own, with their own global ambitions.
Li Ning, for example, is aiming to be one of the biggest sportswear brands in the world by 2020. That type of domestic business development is a key difference between China and most other emerging countries. And it is further reason why Nike needs to nurture the new middle ground of consumption in its core Western markets.