CDI Global

CDI Member Spotlight: Fashion Industry Outlook

CDI Global welcomes two new partners to our Fashion and Leisure practice group: Paolo Torello-Viera and Carmine Pappagallo. Both have long and successful careers in the industry both in Europe and North America. Jeff Schmidt, Executive Managing Director and CEO of CDI Global, met virtually with Paolo and Carmine to discuss the current state of the fashion industry and the implications for deal-making within the industry.

Jeff: Many fashion brands are in crisis right now.Changes in consumer demand and interruptions in the supply chain have forced brands to rethink their traditional approach to survive.

Q: How do you see the current state of the fashion industry?

Paolo: The crisis caused by the pandemic will shake out the weak and strengthen companies with potential. A lot of blame is levied at the pandemic, but in many areas the pandemic is just accelerating issues that were already present in the fashion industry. The number of Chapter 11s shows how many companies were already not in a good position before the pandemic; many of those companies took advantage of the of the upheaval to make their move.

An important point is that companies were in trouble due to bad business models. They were in a weak cash position, running dry after 6 months. Some of the key factors were bad distribution strategy, over-extension of physical footprint, and ignoring the evolving behavior of the customer. Understanding the knowledge of the customer and correlating that with the intrinsic value of the product is key. If client demands are changing, the industry has to change along with it.

Jeff: The pandemic has forced many companies to restructure. There has been a major shift away from in-store sales, which was traditionally key to the fashion industry. 

Q: How do you see the fashion industry emerging after COVID-19?

Carmine: From a numbers point of view, during the previous financial crisis in 2008-2009, the fashion industry experienced a drop of around 15-20%. In 2020 the expectation is that the industry will drop 50% from 2019. Many experts do not see a recovery until 2024. This level of industry shakeup will require a fundamental reshaping of the industry that will touch every single component of the supply chain. Manufacturing companies were the first to be hit in a big way, with textile suppliers running dry after 3-6 months. The business model they had been operating under was very rigid. It used to be that having a good product was enough to expect sales, but this model has been on the brink of system failure.

To recover from this broken business model, we should start to see a lot of consolidation and acquisitions. Strong brands are taking advantage of the distress to buy vendors so they can internalize those parts of the supply chain. This will also help facilitate a necessary shift of the design to market timeframe. A 12-month time to market is no longer viable. To match customer demand, delivery needs to be faster and more frequent. The human experience needs to be front and center, a 360-degree strategy that merges the digital experience with in-store. Custom personalization is key.

Jeff: In the wake of every crisis, new opportunities emerge for investors. For example, Brooks Brothers was recently purchased by an investment group.

Q: What made the Brooks Brothers a smart investment, and what are other restructuring opportunities do you expect to see in 2021?

Paolo: Brooks Brothers is a victim of their DNA, which is a traditional men’s clothing company. The industry was demanding a shift to sportswear, but that is a massive change to the current brand. When you shift a brand, you have to be careful when they are known for one particular type of thing. When they changed their image from traditional suit pants to the skinny pant they jumped too quickly. Without a gradual transition they risk losing old clients without having established a new foundation to capture new customers. However, there is always opportunity to be had with an established brand if you have a good strategy in place for restructuring.

Carmine: Brands with a history and heritage have an advantage; they have a story to tell. The value is not just the material or the product, but the brand name and what the brand story evokes in terms of emotion. Brooks Brothers had not been able to evolve enough to stay relevant in today’s changing world. They could dramatically downsize to reduce costs, or they could take on the longer, more difficult task of changing the brand to make it more relevant today. The latter is the way to do it for better long-term results. If you can make the shift, it becomes an amazing story for the brand.

Jeff:The fashion market sems to be shifting from established brands to young and upcoming brands that focus on sustainability, which the “new” consumer is looking for.

Q: What are some areas of opportunity in the industry, particularly that investors should have their eyes on?

Paolo: There is an abundance of liquidity. Companies in need of money are looking for investors, but investors are showing a lot of caution. It’s important for investors to be brave and invest in innovative and out of the box thinkers. As the industry is changing, and the consumer is demanding more eco-friendly products, companies need to evolve as well. Younger brands that are built on sustainability should be of particular interest for investors looking at future growth.

Carmine: There are a lot of opportunities for investors with small and medium sized companies. They can focus on the supply chain and buy multiple companies in the same segment, and possibly the same geographic locations as well. Consolidating and streamlining supply will reduce many of the problems current companies have been facing. Including a more cutting-edge company in the mix, in the same segment, is a smart investment. While those companies may seem more of a risk, that’s where the best opportunities lie.

Jeff: Thank you for sharing your insights, and welcome to the CDI Global team! We look forward to leveraging your industry knowledge and experience with our clients as they continue to rethink their business models and strengthen competitiveness during these challenging economic times.

Paolo: Thank you, I’m excited to be part of CDI Global. I look forward to all our future collaborations.

Carmine: Likewise. I’m happy to be part of such a diverse team at CDI, identifying investment opportunities in the fashion industry.

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