06 October 2016
Economics and the death of fashion
Have millennials rediscovered the concept of marginal utility?
by Frank O’Nomics
How many shirts does a man need? How many dresses should a woman have? The answer to such questions draws on the critical distinction between the terms “need” and “want”. We might need just 7 shirts to get through the week, but want many more to be able to cater for a variety of different events or moods. In reality I am sure that most of us have considerably more clothes than we need, but that does not stop us from continually refreshing our wardrobe by buying more. Or at least that was the case – but something seems to be changing. While those of us over the age of 35, who are less inclined to follow every new trend, have an appetite for clothes which falls over time, the younger generation has long had an insatiable desire for an expanding wardrobe; but that now seems to be changing. The profits of the major clothing and footwear retailers have plummeted in the last few months, as the volume of goods sold has dwindled. French Connection has not reported a profit since 2012; John Lewis has shown a 75% fall in half year profits; M&S suffered the sharpest quarterly fall in clothing sales in over a decade and Primark (the most visited store on the high street) has reported its first fall in same store sales in 16 years. Overall, retail sales are up over 4% over the last year, yet sales of clothing and footwear have fallen 4.3%, with the decline particularly pronounced over the last 6 months when the number of clothes sold has fallen an average of 4.5% in five of those six. This is a significant shift, because (apart from a 2011/12 blip) people have been spending more in this sector every year since 1999. Are these factors short term? Or has there been a structural change in the spending patterns, especially of the younger generation?
One of the first concepts to which young economists are introduced is the “guns versus butter” model. This is a simple way of looking at how a nation allocates resources between defence and consumer goods, producing a production possibility frontier that demonstrates all possible combinations, from allocating all resources to guns to allocating all resources to butter. The optimal point on the frontier is that at which the nation feels safe and can feed itself. If one extends this analysis to personal spending patterns, we have to work out how to allocate our resources across housing, food, clothing and entertainment, and it seems that the view of the optimal mix has changed. While we spend 3.7% more on food than we did a year ago, we spend 4.3% less on clothing. Some of this may be forced, in that the costs of rent, or building up savings to buy a house, have led to a greater allocation of resources, particularly of young people, towards accommodation, but a growing element of the shift is due to a preference for experiences over possessions. The biggest fall in clothes buying has come in the under-25 age group. Spending on holidays, or on going out to bars and restaurants is taking preference to getting a new pair of trousers or a dress, and it seems that food is the new fashion. Research by Deloitte shows that leisure is attracting 1½ times more discretionary spending than the retail sector, and is growing twice as quickly.
The other economic concept being rediscovered here is that of diminishing marginal utility. If you only had one jumper, it is unlikely that you would opt to do without it, but the benefit from every new jumper you buy will diminish, to a point where you may even have an issue with the extra knitwear causing wardrobe capacity issues. What seems to have happened with the millennial generation is that they have become more conscious of the opportunity cost of buying that extra item – which could mean delaying buying a house or not going out on a Friday night. There are also some broader trends that are developing both with millennials and with the broader clothes buying community. First, it seems that no one will buy anything without being offered a discount. Everyone is now aware of the extremely competitive nature of the retail industry, as well as the cycle of sale shopping. Mid-season or end-of-season sales have merged in a continuous process of discounting, so that if you do not have a voucher or a code to get something cheaper, someone you know will. Only this week H&M, while reporting an increase in sales of 6%, showed a 9.2% fall in profits due to the need for heavy discounting. Potentially the much more critical development is what seems to be a shift away from disposable fashion. It is no coincidence that shops like Primark are reporting a slowdown in sales, and the CEO of Next plc, Simon Wolfson, has described sales as being almost as bad as if we were in a recession. Young people have worked out that one quality item that lasts 10 years is better than 3 that are worn out, or out of fashion, within 2 years. This logic has also helped the growth of spending in vintage (second hand) and charity shops at the expense of the high street.
Some factors, of course, may just be short-term and the plight of clothing retailers may not be terminal. Firstly (and I have had to take advice on this!) there has been a genuine shortage of new fashion trends for quite some time. While there are always subtle variations, there has apparently not been a new major trend since the advent of skinny jeans some 10 years ago – not a look that works for all of us. Whether this is a long-term lack of invention from the industry, or just a pause before we all leap back into flared trousers (please no!) remains to be seen. The other probable short-term factor is that of confidence. It may be no coincidence that the start of the really savage decline in fashion sales occurred through the Brexit vote and beyond and, along with most other areas of the economy, some recovery is to be expected; although the continued rise in spending on leisure would suggest that fashion is being hit harder than it should be. Finally, there is the standard catch-all excuse/explanation of weather. The exceptional late-summer and early autumn we have had may just have led to delays in new season purchases.
From an investment point of view there are some important conclusions to be drawn if this shift in spending is to be sustained. The growth prospects for the latest restaurant chains would seem to be much rosier than those for fashion stores, online or otherwise. The outlook is not helped by the impact on costs of the fall in sterling. The hedges that Next has in place run out next year and they expect their cost base to rise by around 9% as a result. While the FTSE 100 is hitting 16 month highs (up over 15% since the start of the year), the shares of M&S are down 35% this year, and those of Next down 38%. For now at least, clothes buying has gone out of fashion.
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