The UK middle market in clothing could soon cease to exist according to new research. The traditional mass market is being squeezed by value-led retailers on the one hand and smaller fashion multiples on the other, forcing retailers such as Marks & Spencer and Next to adapt their business models to a hybrid of the two polar opposites.

The UK clothing market is highly fragmented - particularly in women's wear, the main driver - and is highly competitive.

The market is polarising into two main models say the latest reports from Verdict Research: 'Verdict on Womenswear Retailers 2005' and 'Verdict on Smaller Fashion Multiples 2005.'

On the one hand, the reports say, the market is value-driven with low prices and high volume sales; while the other consists of smaller fashion multiples that have lower volume but a higher margin.

But both produce stronger growth than the mass middle market, which is being squeezed out of the equation.

Over the past five years a selection of the best-known smaller fashion multiples tracked by Verdict have more than doubled their share of the women's wear market from 3.2 per cent to 6.8 per cent.

At the same time, the eight largest value-led retailers have increased their share from 10.3 per cent to 17.6 per cent. In the middle market, by contrast, only Next has seen any significant increase in market share and collectively the top five middle-market players (M&S, Arcadia, Next, Debenhams and Bhs) have lost a whole percentage point share since 1999.

Price is not the only driver
The success of smaller fashion multiples such as Hobbs, Monsoon and Oasis demonstrates that price is not the only driver in the clothing market.

Smaller fashion multiples are unable to compete with high volume value-driven retailers on price, but having unique design content justifies their higher price positions.

A common feature of the successful operator is a dedicated in-house design team and a tight control over a direct supply chain. All the retailers profiled in 'Verdict on Smaller Fashion Multiples 2005' have made market share gains over the past five years and in 2004 the sales growth of all but Rubicon and French Connection outperformed the market by at least 3.8 points - generally producing double-digit growth.

Space growth is a contributor but smaller fashion multiples are producing some good like-for-like sales as they extend their ranges into related product categories such as accessories and lingerie. They also produce among the highest operating margins in the clothing sector and have been a main target for investors.

Womenswear market shares - top ten retailers 1999-2004
1999
2000
2001
2002
2003
2004

%

%
%
%
%
%
 Marks &  Spencer
15.0
13.8
13.1
13.8
13.5
12.6
 Arcadia  Group
10.3
12.4
11.3
9.9
9.2
9.0
 Next
4.5
5.0
5.3
5.9
6.5
7.0
 New Look
2.9
3.2
3.4
3.5
3.6
3.9
 Debenhams
3.0
3.1
3.1
3.0
3.1
3.1
 George at  Asda
1.9
1.7
2.1
2.5
2.8
3.0
 Bhs
2.5
2.7
3.0
2.9
2.8
2.6
 Matalan
1.3
1.8
2.3
2.4
2.4
2.5
 Primark
1.1
1.4
1.6
1.9
2.1
2.3
 Peacocks
0.7
0.8
0.9
0.9
1.0
1.1
Debenhams' market share excludes concessions
Source: Verdict Analysis

 

Smaller fashion multiples women's wear market shares 1999-2004
1999
2000
2001
2002
2003
2004
%
%
%
%
%
%
 Mosaic Fashion  Group
-
-
-
-
-
2.16
 Oasis/Coast
0.92
0.96
1.01
1.03
1.24
1.42
 Karen Millen
0.40
0.44
0.47
0.44
0.42
0.54
 Whistles
0.14
0.17
0.14
0.13
0.14
0.20
 Rubicon Group
-
-
-
1.53
1.56
1.56
 Principles
-
-
-
0.85
0.86
0.85
 Warehouse
-
-
-
0.68
0.70
0.71
 Monsoon
0.61
0.66
0.66
0.63
0.66
0.80
 Inditex UK
0.07
0.11
0.16
0.27
0.40
0.56
 French  Connection
0.27
0.32
0.39
0.44
0.48
0.43
 Jigsaw (Kew)
0.39
0.39
0.39
0.40
0.40
0.42
 Hobbs
0.20
0.21
0.20
0.22
0.28
0.30
 Phase Eight
0.09
0.12
0.13
0.14
0.17
0.19
 Ted Baker
0.07
0.09
0.14
0.16
0.18
0.19
 Reiss
0.00
0.01
0.03
0.04
0.08
0.12
Source: Verdict Analysis


Value-led retailers such as Primark, George at Asda and New Look, by contrast have been the drivers of a shift in consumer perceptions.

They have the 'wow' factor of being able to offer fashion led garments at very low prices. This factor is becoming much more attractive to the typical middle market shopper - the more affluent shoppers who, as home owners, have reined in their spending out of fear of tax and interest rises and a depressed housing market.

They can get their fashion fix without feeling guilty and, because it is fashion and fashion has a very short shelf life, the longevity or appropriateness of the garment (eg hippy chic tiered skirts for the over 40s) does not come into question.

Dedicated middle market shopper is extinct
Indeed the dedicated middle market shopper no longer exists. Consumers today, especially women, are much more democratic in their shopping habits.

Because the value retailers provide a much more sophisticated offer now, often with more design input than traditional middle market operators, women regard mixing value fashion with designer labels as being clever whether they are on a budget or not.

Middle-market players are evolving their models as they struggle to compete with this price competition on the one hand and the high fashion offering constant newness and niche appeal on the other.

Marks & Spencer, which has lost 2.4 percentage points of its market share over the past five years, is moving towards a model which combines elements of these two opposites, bringing down its entry-point prices with the aim of selling higher volumes, and introducing new, fashion-led product into stores on a weekly basis in a bid to compete with smaller fashion multiples.

Debenhams' introduction of fashion-led Designers at Debenhams has been key to its small market share gains over the past few years. And Next has brought down entry point pricing steadily over the past two years.

This said, Verdict believes that although Next has achieved strong market share gains on the back of aggressive physical expansion and reasonable like-for-like growth, going forward it will need to provide more fashion, and inject more newness into its offer if it is to achieve respectable like-for-like growth going forward.

Cutting prices
Price deflation is forcing retailers to cut prices to remain competitive, but this means that unless they sell much higher volumes and/or cut costs drastically, they will eat into their margins and become far less profitable.

This has resulted in the trend for high street retailers to move to out-of-town sites where operating costs (particularly rents and staff costs) are much lower.

However this is not a long term solution - the demand for out-of-town space will lead to higher rents eventually - and therefore retailers must tackle the dilemma of how to increase turnover without relying on space growth.

The response in the market has been more grouping of smaller fashion brands like the Mosaic Fashion Group.

This strategy reduces risks and costs while maximising the strengths and growth opportunities of smaller fashion multiples and as a consequence the value and market share of the business is increased.

Mosaic for example has a business now worth £355 million (including its international sales) with a 2.2 per cent share of the women's wear market - almost equivalent to Primark's share.

And of course Inditex is a perfect example of using a multi-brand format to build a global business worth £3.9 billion, yet retaining the niche status of each of its brands in the eyes of consumers.

2005 will be a challenging year for women's wear retailers says Verdict.

"We have already witnessed the downfall of Allders, the exit of Etam from the UK market and administration for Pilot and Eisennegger. Meanwhile Littlewoods is for sale and looks more likely to be bought by a competitor than an investor in the brand. The middle mass market is changing beyond recognition.

"Improved consumer confidence will underpin sales growth in women's wear towards the end of the year, but we do not expect to see a repeat of the high sales growth of aummer 2004.

"Furthermore, with no let up in deflationary pressure, margins will continue to be squeezed and we expect to see more casualties."