[Note: Originally published May 18, 2020 on my now-defunct Substack]
The consensus view out there is for things to go back to normal. All we need is a vaccine or some very effective treatment, and we can kick COVID aside and return to our normal, fancy lives instead of sweatpants and pasta at home.
So it's kind of shocking that retail has taken such a hit, given that view. If things are going to go back to something resembling normal, there's still a need for Lululemon joggers and Sephora makeup, right? As I've written before lot of the failures - think JCPenney and Neiman Marcus bankruptcies - are due to financials. But there are definitely going to be some retail winners at the end of this - I think Lululemon and TJMaxx (who will get all the high-quality excess inventory from other apparel retailers) are well positioned to make out like bandits in the post-coronavirus world.
Introducing... the ALFs
But let's talk about the now. Retail, and especially luxury retail, are hurting. A recent McKinsey piece noted that retail sales in apparel, fashion, and luxury (which they shorten to AF&Ls, but I’m going to henceforth rechristen as ALFs) saw steep declines for both in-store and ecomm sales after the coronavirus pandemic took hold.
However they see a rebound after this whole thing blows over, though with a fairly substantial portion of sales shifting from brick-and-mortar to digital.
As I have previously asked... what will change in the post-coronavirus world (link)? While I tend to think things will go right back to the way things were -people are just going to accept some level of risk at the expense of not changing behaviors or habits because we’re stubborn like that - let’s take the other side of the argument. What if things do change?
What if the virus-spreading issues around public transport and elevators force us all to work from home permanently?
What if you’re a JPMorgan partner who used to wear a $3,000 DVF dresses to client meet-and-greets, but now you’re stuck doing Zoom conferences from your home?
What if the restaurant scene changes, and we’re all getting Carbone takeout instead of setting reservations months in advance so We Can Be Seen?
Those are all threats to pret-a-porter. There’s only more market-share opportunity for $128 Lululemon pants than bespoke jeans that cost four times as much. That’s precisely the kind of “stay-at-home leverage” we’ve seen with Peloton and Wayfair.
If investment bankers are quickly accepting the new normal and shifting back to more casual (link), everyone else will too.
If banks had already been relaxing dress codes because they have to compete with Google and Amazon for talent, where there’s a completely different culture, then the market for higher-end fashion quickly shrinks.
If Millennials are permanently scarred from this recession like Depression-era consumer were, then there’s a massive block of potential buyers that are going to dissolve into a generation of penny-pinchers.
- Coronavirus exposed a lot of holes in the ALF model, which were patched over by one of the best economic expansions for wealthy consumers ever.
- The shift to ecomm is real, and it’s permanent.
- While things are currently bleak, there are a lot of “ifs” in the bear case for ALFs.