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COVID-19 Unravels the Thread of Clothing Retailers

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by Daisy Feller
May 15 2020

The COVID-19 pandemic has exposed weaknesses in the supply chains of both department stores and smaller clothing retailers. Firms have faced difficulty in sourcing products, as well as stock oversupply due to an inability to cancel orders. Industry firms source a large proportion of products from Asia, where garment factories in countries such as Bangladesh and India have reported pressure from multinational brands to lower prices. In addition, factories in Cambodia, Myanmar and Vietnam have faced difficulty in sourcing raw materials from China. This will likely have a delayed impact on Australian retailers, affecting the winter and spring seasons. Department stores are expected to outperform clothing retailers over the course of the COVID-19 pandemic due to their stronger ecommerce operations, which have been crucial to sustaining business operations. While revenue for the Clothing Retailing industry is expected to decline by 12.2% in 2019-20 to $15.7 billion, the Department Stores industry is only expected to decline by 4.8% to $18.0 billion.  

‘The retailers that are most likely to remain successful through and after the COVID-19 pandemic are those with strong online operations and tight control over their supply chains,’ said IBISWorld Senior Industry Analyst Daisy Feller.

Department stores

The Department Stores industry exhibited a 5.2% increase in sales over March 2020 to total $1.2 billion, as consumers stocked up on products to get through lockdown. Myer and David Jones posted particularly strong growth online, with beauty product purchases on Saturday of Myer’s Easter Treats sale rising by 7,000% on the previous year. In addition, David Jones’ online sales grew by 108% in March. However, Wesfarmers has announced that Target’s sales have declined over the past month, underperforming Kmart.

‘These divergent trends indicate that the COVID-19 pandemic is exacerbating the polarisation of demand away from mid-end retailers. To be successful, retailers must be able to offer products that either target high-end niche markets or products that are highly price-competitive,’ said Ms Feller.

Online retail

The COVID-19 pandemic is expected to spur increased uptake of online shopping by consumers. Online sales have grown from less than 5% of traditional retailing in 2010 to approximately 9% in 2019 according to the NAB Online Retail Sales Index. IBISWorld expects this proportion to increase significantly in the current year, as shops have established and improved their online operations to retain demand despite lockdown restrictions. Australians have historically been slow in adopting online shopping, as shown by their weak uptake of Amazon compared with that of the United States. In addition, older people have traditionally preferred to shop in bricks-and-mortar stores, but COVID-19 has encouraged members of this at-risk demographic to take up online shopping for safety reasons. According to Ms Feller, this shift is likely to be permanent.

‘The COVID-19 pandemic has done what Amazon couldn’t and caused a monumental shift in consumers’ willingness to buy products online, and Australians are likely to increasingly shop online even after social distancing restrictions are lifted.’ Industry operators are also expected to further develop their online operations with customer fulfillment centres that are not open to the public, also known as dark stores. In April, Wesfarmers temporarily closed three Kmart stores and converted them into dark stores to meet increased demand from online operations during the lockdown period.

Supply chain changes

The increasing polarisation of low- and high-end retailers is projected to change the way firms source products over the next five years. International sourcing difficulties as a result of the COVID-19 pandemic may encourage firms at the high end of the market to increasingly manufacture products locally. However, due to the high cost of labour in Australia, firms that target consumers with lower incomes are expected to continue sourcing products from overseas to remain price-competitive.

‘These firms are anticipated to increasingly pursue vertical integration, as seen with Fast Fashion industry retailer Zara, which sources much of its clothing from its own factories in Spain,’ said Ms Feller. Vertical integration allows clothing retailers to more tightly control their supply, by making it easier to cancel production and limit stock oversupply when consumer demand declines.

Outlook

The COVID-19 pandemic is expected to cause long-term changes in the operations of clothing retailers over the next five years. Firms are anticipated to continue increasing their focus on online operations, including incorporating dark stores. High-end firms are anticipated to shift more production onshore, while low-end firms are projected to increasingly vertically integrate offshore manufacturing. Overall, consumers are likely to continue shifting away from mid-end retailers even after consumer sentiment improves and the COVID-19 pandemic ends.

IBISWorld reports used to develop this release:

For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Jason Aravanis
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647

Email: mediarelations@ibisworld.com