http://www.morssglobalfinance.com

Introduction

In Part 1 of this series, I described the global economics of the clothing industry: where is the demand, where is it produced, etc. This part will focus on fashion. Since I know little about fashion, I have asked a friend who works in the fashion industry to comment.

What Is It?

“Fashion” applies to a lot of things: furniture, artifacts, architecture, watches, pens, dishes, stoves, cooking utensils, wine selections, coffee makers, bathroom fixtures, dishwashers, and, oh yes, even clothing. Something new can be fashionable, just as many traditional styles are also in fashion. In economic terms, fashion can be defined as the premium people will pay over “necessity costs” for a product. Necessity costs? The minimum people have to pay for things like food and clothing.

While basic necessary clothing is always available and changes little year-to-year, leaders of the fashion industry manage to set new trends season after season, constantly offering the consumer something new. Certain trends catch on while others fail.

Fashion Friend’s Comment: There is an entire portion of the industry devoted to trend forecasting and color forecasting. Fashion designers are always working on seasons years in advance. Spring fashion week is in February; fall collections are shown in the spring. At fashion week this past September, designers showed their Spring 2011 collections, which were probably in the works for about a year. Things have to happen way in advance so that designers can get their fabrics ordered/made and their clothing produced. And they must have several fits for each garment before approving them. And then after the show there must be enough time to put everything into production and ship to stores by promised delivery dates. Fashion directors of major department stores and buyers from all over attend fashion shows and try to pick what trends will catch on and place orders for their stores.

Is clothing fashion any different than wine? I quote from an article I wrote on wine:

Wine choices are rarely connected to taste. And further, price does not accurately predict taste: in carefully conducted large blind tastings, more expensive wines were not preferred. It appears that people buy wine based on its color, brand name, label, and ratings (experts frequently disagree on their ratings). And some people buy wine because it is expensive.

Fashion Friend’s Comment: I think this is a great comparison. Many people do only buy things because of a label or price tag, without giving any thought to the actual quality of the garment, or whatever it may be. I think sunglasses are a great example. Perhaps the lens quality changes slightly, but honestly what is the difference between plastic frame sunglasses from a street vendor vs. Dior ones. A huge logo on the side.

The major difference between fashion and wine is that fashion is constantly changing and evolving, offering entirely new products, while wine has been made for centuries in the same way and aside from different grape harvests each year, it sees little change in the end product.

Does it matter that fashion and wine choices are based on somewhat whimsical criteria? I don’t think so. If people are willing to pay a premium for whatever reason, value has been added. I recently found that globally, people spend more on drinking, entertainment drugs, and sex than any other entertainment category. These purchases were valuable to the buyers.

How Big Is Fashion?

People need to be clothed, sheltered and fed, and the necessity costs on these items should not be attributed to the fashion industry. Clothing fashion applies to the premiums people pay for clothing. Consider China: the country spends $150 billion on clothing, or 1.6% of GDP.[1] That works out to $112 per person. While fashion is rapidly growing in China, we can assume that very few people pay a premium for fashion there. In short, this $112 figure is the minimal clothing necessity outlay. On average, France, Germany, Italy, Japan, the UK and the US spent $1,150 per capita on clothing, or 2.6% of GDP. Global GDP in 2008 was $61 trillion, and if you assume that overall, the world spends 2% of its GDP on clothing, global clothing outlays were $1.22 trillion.

But let’s return to fashion. Is the entire 1 percentage point difference between China’s per capita clothing expenditures and that of the wealthy 6 nations attributable to fashion? Is the per capita difference of $1,038 attributable to fashion?

No. China produces clothing more cheaply than any other nation. So part of the difference is attributable to costs and transport. Let us assume that costs and transport account for $500 of the difference. In wealthier nations, people can afford to have more clothing. So let’s assume another $300 of the differential is attributable to simply buying more clothes (the clothing closets in developed nations have expanded rapidly in recent years). That would leave $238 attributable to fashion.

To estimate the size of the fashion industry, I developed a regression equation[2] from two observations: per capita incomes of $57,000 (developed nations’) and $6,500 (China’s) and per capita fashion outlays of $238 (developed nations’) and $0 (China). I used the results to estimate the per capita fashion outlays in all countries of the world. I then multiplied the estimated number by the population of each country. The result? Global clothing fashion expenditures were $192 billion in 2008.

To provide some context for this number, consider the findings of my entertainment article where I estimated what is spent globally on different entertainment categories. The leading categories are presented in the following table along with the estimate of fashion expenditures.

Table 1. – Entertainment Outlays (bil. US$)

Entertainment Category Amount Alcohol 1,163 Entertainment Drugs 546 Sex 497 Clothing Fashion 192 Restaurants 183 Movies 180 Gambling 110

Source: http://www.morssglobalfinance.com/the-economics-of-the-global-entertainment-industry/

Clothing fashion ranks just above restaurants and significantly below drinking, drugs, and sex.

Women’s Fashions – Who Benefits?

Fashion has benefited women. Bras (breast enhancement), girdles (flat stomachs), and high heeled shoes (butt enhancement) have made women look better. And certainly the traditional Chanel dress: its simple elegance enhances the female figure.

Fashion Friend’s Comment: I’m not sure “benefits” is the right word here. Certainly fashion has made individual women feel better and have more confidence. There are a number of TV shows based solely around this concept – What Not To Wear on TLC for example.

The show is supposed to teach woman how to dress specifically for their body. There are so many silhouettes and options in fashion today, so finding what looks best on you can be difficult for a lot of women. Consider the fact that most runway models are around 5’10” and weigh about 120 lbs. A very small percentage of our population looks like them. Clothes are thought to look better on longer leaner bodies, but as a result, a lot of styles shown on the runway look awful on people with different figures.

It is interesting to look at how different decades highlight different aspects of the woman’s figure. Take the US in the 1920’s for example. It was a time of economic strength, some repression (Prohibition), and overall, a period where the youth rebelled. Skirts got shorter. Flappers chopped their hair off. The younger generation started a truly radical movement. Dresses were somewhat shapeless, but they were shorter hemlines[3] than ever before. Legs were highlighted (rouging knees). The shapelessness of the dresses and the short haircuts are thought to have looked “boyish” which may reflect newfound feelings of somewhat greater equality after women gained the right to vote in 1920.

Fashions clearly change, but some changes are more influential and lasting than others.

Fashion Friend’s Comment: In my opinion, the most important fashion changes in the 20th century include:

Chanel was certainly a huge movement in fashion. Coco Chanel was the first designer to make women’s clothing inspired by menswear. That is huge. Think of women’s apparel throughout history. Common trends were cinched waists, voluminous skirts, large sleeves, etc. Then comes Chanel. Straight skirts and jackets. Some things were double breasted. Women had never dressed like this before. No more corsets or crinoline underskirts with Chanel. Just take a look at a typical outfit from a few years before – http://www.amazon.com/exec/obidos/ASIN/048629370X/thecostumersmani.

The ‘New Look’ by Christian Dior, introduced just after WWII. Finally a feminine silhouette again, setting the stage for women’s fashion to come. During the war there were restrictions on how much fabric you could buy, so as soon as the war was over he created a skirt that used a crazy amount of fabric (I want to say 9 or 10 yards).

1992- Marc Jacobs (arguably one of the most influential living fashion designers today) introduces his grunge collections, a trend that carries through the 90’s. This collection gave Marc a ton of publicity and people started to pay serious attention to him afterward.

From New York Magazine: “In 1992, Jacobs showed a landmark collection, one that people still marvel over thirteen years later. Jacobs was into grunge, and he decided to put it on the runway: flannel shirts, thermals (his reimagined in cashmere, a Jacobs signature to this day), Doc Martens, layers and layers, all of it topped with a little crocheted skullcap.”

Think about that for a minute. Did the flannel shirt not define 90’s fashion!? It all started from Marc….

Comfort and Allowance for Different Shapes

Bras, girdles and heels made women look better, but they were not comfortable. The designers have gone a long way to make bras comfortable. With sizes going from 28 to 58 and AA through DDDD to N, there are 297 sizes available. The designers have been slower to make slacks comfortable. Until about five years back, jeans had one butt size to fit all.

Fashion Friend’s Comment: Different decades have offered different silhouettes (the 50’s accentuated the waist; the 70’s highlighted legs again – high-waisted bellbottoms and platform shoes helped to make legs look endlessly long). Today many silhouettes are present all at once in fashion. For a lot of people fashion is a direct reflection of their lifestyle and opinions. Today we are much more conscious of what looks good on our figures on an individual basis and many options are available to accentuate different areas, suck different areas in, etc. For example, take a look at the Spanx website.

The Male Perspective

For this article, I talked with 17 men living in Europe, Latin America, Asia, and the US. They were unanimous in saying fashion was only valuable to them if it enhanced the natural beauty of the female body.

But the discussions also uncovered a number of cultural differences on what constitutes female beauty. While these differences are influenced by men, women ultimately make the choices. The cultural differences are summarized in Table 2. The Middle East is not included in this table, because the shape of women’s bodies are not supposed to be seen outside of the home. In contrast, the exposure on beaches in Brazil leaves little to the imagination. Makeup remains “in fashion” in Latin America. But even there, the trend is to lighter and more natural applications.

Table 2. – Cultural Differences in Female Fashion/Beauty

Item Asia Europe Latin America US Exposure Conservative Moderate Extreme Conservative Makeup Moderate Moderate Heavy Light Breasts Natural Enhance Enhance Natural Bush Enhance Natural Natural Shave/Wax Butts Enhance Natural Enhance Natural[4]

Considerable money is spent to enhance breasts in Europe and Latin America. This used to be also true in the US, but the well-publicized problems with silicone implants has reduced the demand. US women have led the trend to shave/wax pubic hair. In contrast, pubic hair implants are popular in many Asian nations. Both Asia and Latin American women pay for butt enhancement.

Investment Recommendations

I know nothing about individual fashion stocks. Like all other luxury items, high end products took a hit during the global recession.

[2] The regression equation used to estimate fashion expenditures was: Fashion = -30.63366 + (0.0047129 X GDP/P).

[3] According to The Hemline Index Theory, hemlines should be shorter in recessions because they require less fabric and hence would be more affordable. The theory clearly did not apply in the ‘20s.

[4] A lot of money has been spent to reduce butt size in the US. This is because more than 60% of US women are overweight and more than one-third are obese.