- Apparel companies, especially those in the middle market, will need to pay close attention to inventory levels to ensure balance sheets are not burdened with excess product.
- Beauty and personal care brands should experience strong performance as customer mobility increases and COVID-19 cases recede.
In 2021, apparel companies bounced back from a challenging 2020 in which COVID-19 limited customers’ mobility and willingness to spend in that category. As COVID-19 cases receded and vaccinations were deployed, and with schools, offices and event venues reopening, consumers used elevated disposable income to retrofit wardrobes in 2021. Consumers’ willingness to spend helped companies overcome supply chain challenges, and performance improved for the year.
In 2021, spending on clothing and footwear reached $5.6 billion, an increase of 29% from 2020 and 18% from 2019. Clothing and footwear accounted for nearly 2.97% of consumers’ individual wallet share, a level not seen since 2015, when clothing and footwear accounted for 3.01%. One factor driving elevated levels of spending was the enhanced child tax credit, beginning in July 2021. Based on information compiled by the U.S. Census Bureau Household Pulse Survey, monthly payments were used by consumers largely to fund food, utilities and clothing purchases.
To support elevated sales, apparel companies increased their inventory levels through winter 2021. As of November 2021 (the latest available information), wholesale apparel goods inventory reached $29.5 billion, the highest since June 2020, but still below the same period in 2019.
In 2022, apparel companies, especially those in the middle market, will need to pay close attention to inventory levels to ensure balance sheets are not burdened with excess product. In the last 10 years, clothing and footwear purchases as a percentage of consumers’ wallet share have increased only once, from 2011 to 2012. Given that history, combined with uncertainty surrounding the continuation of the child tax credit in 2022, apparel companies should not expect a repeat of a 2021 performance. Companies should ensure that the appropriate data analytic tools are in place to evaluate consumer trends and that inventory levels and product availability properly reflect current consumer preferences. Additionally, companies with elevated inventory levels should consider engaging alternative sales channels in the event 2022 apparel spending declines.
Consumer spending: Goods vs. services
Aided by government stimulus and wage rate increases since March 2020, consumers have amassed record disposable income and find themselves in a stronger buying position than in any period prior to the pandemic. While COVID-19 is still affecting consumers’ willingness to travel and use disposable income on services, additional dollars have been spent on goods.
Consumers have overlooked supply chain-driven price increases and less product discounting, contributing to a strong 2021 performance for electronics, toy manufacturers, apparel and home products. However, even with record back-to-school and Halloween shopping seasons and strong winter holiday 2021 sales, consumers are signaling a shift to spending on services. From March 2021 through December, the trailing 12-month services spend increased each month, a feat not accomplished since prior to the outset of the pandemic.
Looking at 2022, we expect this trend to continue as consumers stretch additional dollars toward experiences rather than goods. As the spring and summer months approach and COVID-19 caseloads recede, consumers will likely be more willing to leave their homes after two years of being largely limited in their activities.
For middle market consumer goods companies, the adoption and expansion of reliance on data analytics and the ability to identify and nimbly adapt to shifting consumer behaviors will be critical to maintain strong performance levels. While companies may not achieve the same levels of growth experienced in 2021, the reliance on data will put middle market companies in a strong position to compete in 2022 and beyond.
Continued resilience of beauty and personal care companies
Strong demand for beauty and personal care goods continued through the end of 2021, despite adverse conditions late in the year. Prior to December, consumer travel and dining out nearly reached 2019 levels; however, mobility contracted in December as cases increased and fear of the omicron variant grew during the holiday season.
Data compiled by IRI’s CPG promotions index indicated promotional pricing from October through December 2021 for beauty products was below the same period in 2020, driving prices higher for consumers. However, IRI’s CPG demand index showed consumer demand above 2020 levels for the same period, indicating consumers largely overlooked these price increases. This growth was seen across most beauty categories, but most notably in cosmetics, which experienced double-digit growth each week from October through December.
Online sales continue to fuel beauty’s growth. According to IRI’s CPG e-commerce demand index, online demand for beauty products expanded every month from February through December 2021, with the exception of May, which experienced slight contraction. At the same time, the category is not giving up on in-person shopping, evidenced by Sephora’s and Ulta’s willingness to open 60 and 44 retail locations, respectively, in 2021, based on data compiled by Coresight Research.
Customer preferences continue to shift towards natural and organic ingredient-based products. This trend is attracting investors, with natural and organic beauty companies benefiting from an active mergers and acquisitions market.
Looking ahead, beauty and personal care brands should expect to experience strong performance as customer mobility increases and caseloads from COVID-19 recede in the spring and summer months. Additionally, these companies should fully embrace digital tools to meet customers both in-store and online, maximizing customer exposure and investor interest.