Katie Nagy de Nagybaczon is a partner at international law firm Olswang
Katie Nagy, Olswang
Looking back 20 years ago to the launch of AIM, the fashion industry was a very different place. Out of town shopping malls dominated, and many of the successful brands listed on AIM today were just a twinkle in an entrepreneur’s eye. 1995, the year AIM opened its trading doors, arguably also saw one of the most pivotal retail innovations of the 20th century: Amazon and eBay introduced online stores, effectively inventing etailing and irreversibly changing our purchasing habits.
Fast forward two decades and technological change has led to the emergence of multiple purchasing channels and revolutionised the retail fashion supply chain. Over that period, AIM has also changed from a fledgling exchange to a robust market housing 1,100 companies with a combined value of about £70bn.
With an annual contribution of £180bn to UK economic output, the retail industry has a crucial role to play in Great Britain plc. AIM tells a similar story: 65 consumer goods companies with an aggregate market capitalisation of £5.3bn. High-growth market AIM loves companies that have cornered a niche, such as the market’s biggest company, Asos.com. AIM investors were hot for apparel last year with IPOs including online fashion retailer Boohoo.com, discount shoe retailer Shoe Zone, womenswear retailer Bonmarché, online shopping club Mysale.com, Israeli suit maker Bagir Group, and Koovs, the Indian fashion website set up by the former chairman of Asos.
So what are the challenges ahead for the retail sector, fashion brands currently trading on AIM and those seeking to be listed in the years to come?
Investing in technology
Just as technology has transformed the sector over the last 20 years, it will continue to disrupt and shape the future. Fashion retailers understand that they need to invest in technology, in their websites and their internal systems, but will shareholders be prepared to prioritise investment over dividend returns? Part of the appeal of AIM for retailers is that it provides a platform for investment in high growth companies. Growth is expensive and only about one-fifth of AIM companies pay meaningful dividends. However as more investors take advantage of the ISA eligibility of AIM shares, we may see greater demand for a regular return from AIM listed fashion brands.
Agility and flexibility
Fashion businesses will need to be nimble and quick to react to changing customer demands. As customers embrace click-and-collect and other omnichannel solutions, retailers will need to retrain staff and adapt their infrastructure. Fashion stores will need to “showroom” a greater range of products, have a dedicated collection point with connected changing rooms and the ability to return unwanted product there and then. Asos, whose fulfilment proposition is considered by many to outshine its competition, invested £50m last year into its warehouse capabilities. Most retailers looking to join AIM won’t have that kind of budget, but the cost associated with not getting omnichannel right could derail any IPO hopes.
As a business moves towards IPO, potential investors will want to see a coherent and well thought out omnichannel strategy, with visibility across the supply chain, robust contracts with providers and integrated internal systems. Consistency of brand across platforms and stores, data-driven customer intelligence, which requires integration of cross-channel data and the ability to personalise the offering will also be important.
Know your customer
The profile of the average British shopper is also changing. Our ageing population means retailers will need to increasingly listen to the Grey Pound, and we may see more businesses with specialist products for the over 50s joining AIM. Bonmarché, which is fast becoming the “go to” destination for female shoppers over 50 years, was one of the best-performing AIM IPOs last year.
Equally, the change in the cultural mix of the UK and the rise of the single person household will change the types of products consumers buy, with greater variations by geographical location. Value footwear retailer Shoe Zone, which also floated on AIM in 2014, is benefitting from demographic changes including high levels of immigration to the UK and greater numbers of school-aged children. Having seen the success that Shoe Zone has made of this opportunity, AIM investors will have more appetite for other retailers targeting their product offering around these cultural and geographical shifts.
The burden of greater regulation
Another challenge for AIM-listed retailers will be complying with changes in the law. Enhancement of consumer and shareholder rights, greater regulation of data processing and laws to implement social change, such as increases to the national minimum wage and the plastic bag levy, all increase the compliance burden. Following the introduction of the national living wage, Next – understanding the power of early communication – published detailed analysis of the effect rising wages would have on its business in order to reassure investors that whilst it might need to raise prices to compensate it was “unlikely to have a material effect on the trading performance of the business”. Many other retailers have missed the opportunity to reap good publicity from announcing their reaction early. It is not just the actual cost to the business that retailers have to bear in mind, but also investor reaction to how a retailer plans to implement a regulatory change. AIM retailers will have to actively engage with their investor base over the impact that changes in the law will have on the business, rather than leaving investors to assume the worst.
The global economy has an impact on all listed businesses, but for those fashion brands that rely on India and the wider Asia-Pacific region for manufacturing or sales, demands for more responsible sourcing or a Chinese slowdown will be felt more deeply. One solution implemented by Asos is its zonal pricing software which enables it to charge different prices across the globe and adapt to exchange rate fluctuations. Given the price sensitivity of its product, this is an important development for Asos and one which boohoo.com may wish to introduce as its international sales grow. By contrast, leather handbag brand Mulberry has countered declining sales in China and Hong Kong following economic uncertainty in those markets with a renewed focus on the home market and getting the product and pricing right for British customers. Each retailer will need to tailor its response to global events depending on its own particular challenges.
Whilst IPOs continue to be seen as the pinnacle of exit strategies by private equity and trade owners, we are certain to see more fashion retailers come to market over the next few years. How a business chooses to face the above challenges will determine how likely the realisation of that dream is.