5 key issues and challenges fashion and apparel businesses continue to face

ARTICLE | April 15, 2022

Authored by RSM US LLP

What business issues are middle market fashion and apparel companies facing in 2022?

Channel considerations: Reaching your customers

Direct-to-consumer strategies gained prominence among fashion and apparel brands during the pandemic, as online shopping was the best way to reach home-bound buyers. Consumers loved the easy access and efficiency. But as reopening and mobility increase, consumers are reacquainting themselves with pre-pandemic shopping habits. While consumers will continue to shop online in 2022 due to convenience and established behavior, many are yearning for in-person experiences and will moderate their online shopping in favor of a return to brick-and-mortar stores. Smart fashion and apparel companies will need to assess and adapt preferred channels to meet consumers where they are, whether it’s shopping from their couches, in stores or both.

There will also be increased competition for the consumer’s wallet share due to shifts toward spending on experiences and the impact of rising inflationary costs on everyday essentials. Utilizing consumer data effectively will allow middle market fashion and apparel companies to better understand the needs and wants of their customers, thereby protect margins through SKU rationalization and foster consumer relationships developed during the pandemic. However, strong brands should also work with retail partners to co-develop a strong sales strategy. Meanwhile, data security and privacy should be a key priority as well. As educated consumers hear more and more about data breaches, they will be more likely to buy from a trusted brand focused on securing their privacy.

Social responsibility: Consumers are paying attention and so are investors

Consumers are making purchasing decisions that are in line with their values in addition to providing value. Many fashion and apparel companies are adapting by incorporating environmental, social and governance (ESG) issues into their brand strategies. An investment in sustainably sourced materials that go into higher quality, longer-lasting products is key to a growing population of consumers who care about the values upheld by their favorite brands. This type of investment also allows consumers to feel good about the products they purchase, and they may even be willing to pay a premium for them.

And consumers aren’t the only ones with a focus on sustainability in fashion. The investment community has placed a keen emphasis on ESG. Middle market fashion and apparel companies seeking capital often attract new investors and capitalize on higher valuations if they can prove the integrity of their ESG business model.

Supply chain: Adapting to change

Supply chain disruption was center stage for middle market fashion and apparel companies during 2021, due to factory closures, labor shortages, geopolitical concerns and freight challenges. Smart companies have adjusted their business model by moving their sourcing of product and/or factories to new locations, changing their product mix, and trying alternative freight options. Regardless, cost efficiencies and the impact on margins must be weighed in all instances. A shift to improve SKU management in product assortments as well as the adoption of leaner supply chains are additional approaches companies will pursue to optimize overall supply chain management.

Companies should assess consumer preferences for their customer demographic and improve forecasting using a data-driven approach to understand future demand and to remain agile. Middle market fashion and apparel companies will need to pay close attention to inventory levels to ensure balance sheets are not burdened with excess product.

M&A: The right fit

Some fashion and apparel companies have been negatively affected by supply chain disruptions, driving material and freight costs higher in the second half of 2021. These and other challenges had an impact on the pace of closed transactions in the fourth quarter of last year. Still, there are deals to be made in 2022—sellers must be able to demonstrate the ability to protect margins through price increases and cost savings initiatives without compromising sales growth. Alignment of company culture will also be essential between buyer and seller. Shared values, complementary capabilities and a strong management team are key to a successful transaction.

These adjacencies are appealing and can make business integration easier. Something to watch for this year: legacy fashion companies utilizing digital strategies to enhance business operations and increase consumer reach.

Meeting consumer preferences with innovation

In this hypercompetitive market, fashion and apparel companies will need to be creative and innovative to offer the products and buying experiences that consumers demand. This includes using augmented reality and other technologies that mimic traditional in-store experiences, as well as advanced digital transformation solutions for processes like customer service, delivery and returns to optimize speed and accuracy for seamless experiences. Likewise, companies will need to stay on the cutting edge of innovation and develop new sustainable products to remain competitive and expand their customers’ wallet share.

Creative use of social media and influencers should be used to connect and transact with consumers, building community as well as brand loyalty. Finally, the metaverse, a virtual marketplace where next-generation consumers can engage and transact with brands, especially luxury goods, will become increasingly important for companies to interact, understand and meet the needs of their customers.