While Fashion Weeks follow one another from New York to Milan and from London to Paris, the industryis struggling to find a sustainable model between the energy crisis, economic slowdown and climatechange. The European luxury sector slightly underperformed the market, down 22% compared to theEuro Stoxx 600 index, but better than the consumer discretionary sector, which has massivelyunderperformed (-27%) since the beginning of the year.
Sustainability and digitalisation of the sector are increasingly being emphasised in the strategies of luxuryand ready-to-wear companies. In a highly competitive sector, these transformations, although costly, arecrucial to ensure future success.
Luxury still sells dreams, but the digital transformation of the sector that accelerated during the Covid-19pandemic, seems to have paused. Fashion shows are no longer held in the metaverse, even though themetaverse is increasingly attracting new generations. What will be the strategy of the major groups in thisrespect, and can the metaverse provide a solution to reducing their carbon footprint? We are hearing lessabout the metaverse shows for the spring-summer 2023 season, but it undeniably offers manyopportunities to make the sector more sustainable: brands can reduce their waste by producing digitalclothes, by exchanging with other designers via virtual or augmented reality tools. It also democratises theworld of luxury, allowing fans to attend fashion shows without having to travel to the world's capitals
The current energy crisis in Europe, home to many luxury companies, is a reminder that the fashion industryis a major consumer of water and energy. Italy's famous textile industry, worth almost €100 billion a year, isat risk of seeing its small and medium-sized enterprises go out of business under the weight of gas costs. TheseSMEs are the backbone of French and Italian fashion houses.It is therefore becoming increasingly urgent to find innovative or at least more sustainable materials andworking methods. (see WIF of 2 May 2022). In the coming years, one of the main challenges will be the abilityof the players to adopt sustainable materials on a larger scale in order to reduce their costs compared totraditional materials. There is also a need to change the mindset of designers to promote sustainablematerials from the start of the product design. Increased use of sustainable materials will also have an impacton other factors, including water consumption and pollution, land and fertiliser use, and eutrophication. Thedyeing and printing of textiles is particularly energy intensive. Many start-ups are looking for innovativetreatments to make this step less polluting and more economical (see Fig. 3).
The textile industry is taking steps to encourage the shift to more sustainable materials. The Corporate Fiber& Materials Benchmark (CFMB) programme, launched 7 years ago, is the textile industry's largest peercomparison initiative, generating, among other things, the Material Change Index (MCI). It tracks the progressof the apparel, footwear and home textiles sector towards more sustainable material sourcing, as well asalignment with global efforts such as the Sustainable Development Goals (SDGs) and the transition to thecircular economy
The service offering further integrates the fashion sector into the circular economy. Second-hand clothingshops can extend the average life of products by 1.7x. Clothing rental is assumed to extend the life ofproducts by 1.8x, based on the average number of rentals during the life of a product. Repair, on the otherhand, offers a more modest extension of 1.3x, assuming professional repairs. Finally, refurbishment has thepotential to double the lifetime extension, reflecting potential collaborations between brands andmanufacturers around recycling.Hermès, like most luxury brands, already offers repair services to its customers to ensure that their purchaselasts over time, even over generations.Brands will have to rethink their business models. For example, renting or selling second-hand clothesrequires new logistical capabilities. Repair and refurbishment models require garment skills. All actors inthe value chain need to be involved in circular economy models, from the retailer to the artisan, if brandsare to retain control of their products and their value after the sale.
According to a survey of 292 brands andretailers by the Textile Exchange, thenumber of items incorporating a form ofcircular economy has risen sharplybetween 2019 and 2020. Items repaired orresold as second hand have increased by149% and 136% respectively (see Fig. 4).
Luxury companies are once again remarkably resilient, but the energy crisis threatens to erode theirmargins. Indeed, the entire value chain is likely to suffer from this crisis, particularly in Europe. Climatechange and inflation could also change the paradigm of a well-established sector.The luxury sector must lead the way for the rest of the clothing industry. Its generous margins allow it totest more environmentally friendly materials before they are produced on a large scale.However, there are divergences between brands in terms of performance linked to the growing attractionof the clientele, particularly Chinese, for "grand luxury" items such as Hermès, Chanel and Dior. Beyond thegrowth in revenues, which is excellent for all the players in the sector, margins are evolving differently.
Gucci, from which Kering extracts two thirds of its turnover, announced a less positive outlook for itsmargins than its counterparts Louis Vuitton and Hermès. Thus, despite solid fundamentals, an almost debtfree balance sheet and an expected increase in free cash flow generation, Kering is struggling to recovervaluation multiples in line with its peers. Investors are therefore watching for the slightest weakness, evenin the biggest brands.
Fashion is changing and Kering needs to prove that Gucci and its other houses can attract a sustainablecustomer base. The best way to do this today is to make the luxury industry more sustainable and to sellproducts that appeal to generations. To do this, the entire value chain needs to be involved, from cottonplantations to designers. There is a real shift in attitude and more conscious choices towards a consciousand sustainable lifestyle. The volatility of the markets should not make us forget the long-term efforts toachieve sustainable development goals.