M&A opportunities for the apparel industry after COVID-19

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Pre-pandemic, the apparel industry had already gone through a decade of change. Digital technologies, changing customer expectations and overbuilding of physical retail upended the way brands delivered goods to market while lowering barriers to entry for new entrants. The pandemic accelerated these changes and hastened industry reorganization through deals.

Pandemic-accelerated market trends

Believing that direct sales would be essential to success, many US apparel companies increased their retail square footage over the past decade. Many of those brands are now struggling with the high cost of maintaining physical stores along with decreasing store productivity accelerated by the pandemic. A continued decline in revenue-per-square-foot has resulted in year-over-year record store closures.

As consumers sheltered in place in 2020, US retailers are estimated to have closed as many as 25,000 stores, according to industry analyst Coresight Research. Dozens of retailers have filed for bankruptcy while others remain at risk.

Teeming supply, flagging demand

For legacy apparel companies, the decrease in profitability is only aggravated by competition from new entrants offering online options. Legacy players that doubled down on digital investment have reaped the rewards while those that ignored the warning signs have been caught off-guard. Rapidly changing consumer preferences are also creating categories of winners and losers in the apparel market.

Financial pressure wrought by the pandemic will force apparel companies to reassess their brand and category portfolios as well as their overall strategies. Apparel companies may well turn to both buy- and sell-side deals.

Apparel consumer spending growth slows

How consumers buy

Online apparel shopping has grown steadily from 7% of the US market in 2010 to 27% in 2019. In 2020, nationwide lockdowns and store closures drove even more consumers to buy online.  While the rise in online shopping kept the overall apparel market afloat, those retailers and brands with exposure to high store counts and poor e-commerce capabilities simply could not compete.

In contrast, leading apparel retailers with strong digital strategies have expanded their contactless fulfillment offerings, including the option to buy online and pick up at a store—as well as curbside pickup. They also offer choices for returning merchandise bought online: in-store drop-offs and returns at kiosks or third-party locations. Combining digital operations with favorable unit economics is essential to competing in a pandemic-informed marketplace.

What consumers buy

Consumer preferences for comfortable work-from-home clothing have been on the rise since the pandemic took hold in spring 2020. As a result, functional and performance categories such as athleisure now dominate at the expense of premium accessories, jeans and professional wear.

A number of high-profile bankruptcies in 2020 illustrate the drop in demand for professional apparel brands and related department stores. This shift toward casual wear can be expected to continue well into the recovery, exacerbating pressure on certain apparel brands.

Athleisure leads 5-year trend

What’s next?

  • Response to reopening: Recovery in consumer spending could lag reopening, leading to long-term reduction in foot traffic at malls and physical stores.
  • Response to infection and vaccination: While vaccination plans are being implemented, surges in infections are also continuing apace. Certain regions could be disproportionately affected, forcing brands to develop multiple plans of action.

Major apparel brands announce combinations

M&A implications

As shopping online continues to increase, expect additional divestments of underutilized physical retail assets as well as secondary banners and brands. Companies that have proven to be agile—pivoting easily to how and what consumers buy—can take advantage of lower valuations, while those behind the digital curve will likely be acquired.

Improving digital profitability will be crucial. Retailers need to create the right channel mix to meet consumers where they want to shop—online, in stores or a mix of both—without sacrificing profitability.

M&A opportunities

Build scale

Acquire competitors that are distressed or devalued by the crisis and likely unable to compete over the long term. Apparel companies holding significant cash positions are acquiring brands with attractive pre-crisis growth.

 

Diversify revenue streams

Acquire pandemic-affected brands with access to attractive customers or channels to diversify revenue streams. Traditional retailers are acquiring severely affected direct-to-consumer brands.

 

Cement capabilities

Build up strengths by acquiring distressed assets with attractive specialties. Mass merchandisers are acquiring distressed specialty players with outstanding fulfillment or digital capabilities.

 

Prepare for recovery

Acquire digital assets to gain a competitive edge in the post-pandemic recovery and beyond. Apparel players are acquiring emerging technologies to improve the digital customer experience.

 

Divest non-core assets

Raise cash by divesting assets that are not core to your business. Apparel players are divesting non-core fashion accessories businesses.

 

Dress for success in a post-COVID world

Evolving consumer preferences in apparel over the past decade—based in large part on changing social norms in the workplace toward less formal business attire—were further accelerated by the remote work trend of the past year. As apparel brands reimagine the future, deals can pave the way for growth and profitability.

Contact us

Isaac Krakovsky

Principal, PwC US

Kaitlin Chester

Director, PwC US

John D. Potter

Partner, Consumer Markets Deals Leader, PwC US

Annie Urish

Sr Manager, PwC US

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