Textile business in upheaval

By Jörg Dehning, Analyst at DJE Kapital AG 

The surprising change in management at Sweden's largest textile supplier and the restructuring measures initiated there are a wake-up call. After all, they show that the textile trade is still in a state of upheaval. While the coronavirus pandemic temporarily strengthened online-only providers in particular, aggressive pricing concepts are now gaining in importance in the wake of excessive inflation. There is no doubt that spending on fashion is not currently the top priority given the loss of purchasing power among consumers. Only "fast fashion" retailers with a convincing product and "omni-channel" strategy can still survive in this extremely competitive market. The number of fashion companies that are or have been affected by insolvency proceedings in Germany alone is long and ranges from Hallhuber and Gerry Weber to Wormland and Peek & Cloppenburg 

Competition from China 

In addition, the traditional market players are facing increasing low-cost competition from the Far East with Shein and Temu. The online marketplace Temu, which is backed by the Chinese internet company Pinduoduo, is already in 4th place in the rankings of German online marketplaces, ahead of Zalando! Both Temu and Shein only act as intermediaries. Their clothing is shipped directly from the Asian factories to North America or Europe. There are no costs for buyers, middlemen and intermediate warehouses. The shopping apps also offer a completely new shopping experience with the help of voucher/discount lotteries. The use of influencers, including TikTok, is also increasing popularity among younger customers.  

Possible compromises in terms of quality are probably often accepted in view of the unbeatable prices, otherwise the rapid growth of both platforms cannot be explained. At best, ethical aspects could jeopardise the expansion of both app operators. The data exchange practices of the companies have already been investigated several times. In the US, Congress has also recently called on the stock exchange supervisory authority to postpone Shein's planned IPO until it has been clarified whether the company does not use forced labour in its supply chain. To polish up its image, Shein is therefore endeavouring to expand its brand portfolio through partnerships or acquisitions. Examples include the recent cooperation with Forever21 in the USA and the purchase of Missguided in the UK.  

Store closures vs. expansion 

Against this background, one thing should be clear to everyone: The potential market volume for brick-and-mortar fashion chain stores will certainly not increase in the coming years. The sales productivity of large stores in particular could continue to suffer as a result. It therefore comes as no surprise that several fashion chains are currently streamlining their portfolios and closing or downsizing numerous shops. It remains to be seen whether the main Spanish competitor Inditex, with its Zara, Bershka, Stradivarius, Pull&Bear and Massimo Dutti formats, will be able to benefit from this. However, the Spaniards had already used the coronavirus pandemic to sell off less productive sales areas. As a result, Inditex, unlike its Swedish competitor, will be able to focus much more strongly on expansion again in the 2024/25 financial year. One focus is likely to be on expanding the North American store network.  

Off-price clothing retailers are also on the rise here. For example, the "off-price" chain stores Marshalls, TJ Maxx and TK Maxx, which all belong to the listed US group TJX Companies, are continuing their expansion unabated. In times of high inflation, TJX attracts customers primarily by offering extensive discounts on products from designer labels and brand manufacturers. The brand manufacturers in turn use these "off-price" platforms to sell unsold surplus goods on the market. TJX can rely on its experienced sourcing managers worldwide, who are constantly trying to track down surplus stock.  

Supply chains, freight costs & currency exposure 

However, the purchasing organisation is also becoming increasingly important in view of the ever more frequent disruptions to supply chains. Cargo ships are still jammed on both sides of the Panama Canal. Shipping traffic has been restricted there for months due to the low water levels. Numerous shipments that were supposed to arrive on the US east coast are now being rebooked to the west coast (Long Beach/LA). European trading companies are keeping a close eye on further developments on the Suez Canal. At the moment, the attacks on container ships in the Red Sea have not yet had any significant impact on the procurement of goods. However, most shipping companies are now rerouting their ships via the Cape of Good Hope following the shelling by the Houthi rebels. This increases the journey time by around seven to ten days. However, due to the longer transport routes, a deterioration in the situation cannot be completely ruled out for the coming months. Negative effects must be expected with a time delay, especially if container availability should fall.  

Due to its business model, TJX could even benefit from the goods flow problems of other retailers in this case by buying up delayed goods at favourable conditions. Furthermore, only around 25% of the US group's freight costs are attributable to shipping freight. As long as freight rates do not return to the levels of the coronavirus crisis, the pressure on margins from logistics costs should remain largely limited, especially as there has recently been further relief in land freight rates. As a reminder: during the coronavirus supply chain chaos, sea freight rates peaked at up to USD 14,000 per 40-foot container (FFE). In the meantime, freight rates on the Asia-Europe route have almost quadrupled again from the interim low, but are still well below the last crisis level at around USD 4,500 per FFE. The Asia-North America routes have "only" doubled so far anyway.  

Similar to TJX, fashion retailers have tended to shift their goods purchasing to neighbouring countries as part of the so-called "nearshoring" trend. The fashion chain store Inditex has always had a higher proportion of its clothing manufactured in Southern/Eastern Europe or North Africa (around 50% share) with a view to faster product range rotation. In addition, significant quantities of goods are currently sourced from Turkey. Inditex's net exposure to Asia in purchasing is likely to be less than 30% and therefore significantly lower than that of many of its competitors. In contrast, its Swedish competitor, for example, is much more exposed to the risk of supply chain disruptions and further increases in the cost of goods with an estimated Asian sourcing share of over 70%. Ultimately, the regional sourcing structure may have an impact on the development of the gross profit margin via the respective currency exposure.  

With a US share of around 30%, Inditex can expect lower margin burdens despite the recent strength of the US dollar, especially as some of its merchandise purchases are hedged on the futures market. Retail companies such as Primark or ASOS, which have to purchase a large proportion of their goods in US dollars, will at some point only be able to pass on the currency disadvantage to their customers. Otherwise, they risk losing their target margins. In order not to jeopardise margins, it is also important to keep an eye on rents in the increasingly dynamic fashion market. Quite a few small market players are now complaining that index rents are too high. Large chain stores such as Inditex have therefore long favoured shorter lease terms depending on location. Thanks to their more solid balance sheets, they also tend to be favoured as anchor tenants in good locations.  


The start to 2024 was more than bumpy for the fashion industry. In addition to unfavourable weather conditions in the USA and in some parts of Europe, farmers' and rail strikes in Germany led to a temporary drop in customer footfall. In view of the very high prior-year basis, German fashion retailers are likely to be more than satisfied with the year-on-year increase in revenue of +1% in January according to the trade magazine "Textilwirtschaft". The ups and downs in sales across the sector are likely to continue as long as inflation remains stubborn and consumer sentiment remains subdued. This could also be reflected in companies' upcoming financial outlooks. Similarly, price setbacks in the wake of an escalation of the Middle East conflict cannot be completely ruled out. As an investor, it is therefore essential to focus on shares of suppliers within the industry whose supply chains are less vulnerable.  

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