Fashion Changers talks with Anna Yona and Sebastian Feuss about price increases and the current economic climate.
Ever since the COVID-19 pandemic, it feels like we have been overwhelmed by crises and conflict. With multiple crises unfolding all at once – the post-COVID crisis, Russia’s war of aggression against Ukraine, the energy crisis and the ensuing surge in prices, along with mounting inflation – we are left feeling as though we live in a permanent state of emergency, a situation that is exacerbated by the media’s incessant coverage. Not to mention the climate catastrophe, a long-term crisis that impacts our everyday lives head-on and permanently alters the way we live. With multiple crises occurring all around us, some experts consider this an age of permanent crisis.
Of course, the past decades have also been marked by crises, and both business and society have had to find ways to deal with them. Take the nuclear disasters of Chernobyl and Fukushima, with their lasting consequences for health and the environment. Or 9/11, which sparked the wars in Iraq and Afghanistan and permanently reshaped Western foreign and security policy. Or the financial meltdown of 2008, which made commercial loans more expensive and triggered economic downturn on a global scale.
Yet all the same, crises constitute a kind of stress test for society as a whole. Much of the time, we tend to react passively to the things that are happening around us. Rarely are we prepared to respond resiliently to whatever lies ahead. The need to (re)align our behavior for the long term and to keep a watchful eye on values like sustainability is something that the present economic crisis makes abundantly clear. The good thing is that every crisis eventually brings with it a tipping point that leads to solutions.
Recent developments in the fashion industry
Right now, we’re all feeling the weight of rising prices. Companies are confronted with increased costs in many parts of the supply chain, even as the suppliers themselves face mounting energy, procurement, and labor costs. Service sectors such as payment providers, shipping and transportation are also growing more expensive. Once the companies reach a point where they can’t keep absorbing these higher production costs themselves, consumers start to feel the pinch.
According to the BTE, Germany’s trade association for textile, footwear, and leather goods retailers, a majority of fashion retailers were unable to achieve 2019 sales levels in 2022, and overall sales for apparel, footwear, and leather goods were down two percent compared with the pre-COVID period. On the other hand, German market research institute GfK reported improved consumer sentiment in January 2023, although it remained depressed. With further price hikes likely, the BTE estimates that fashion companies will need to generate an additional 8 to 10 percent in sales in 2023. Faced with a tense and uncertain situation, many companies are grappling with major challenges.
An article in Die Zeit in November 2022 entitled “Fair Fashion: Die Insolvenzwelle rollt” (Fair fashion: A rising wave of insolvencies) documented just how severely the situation is hitting the fair fashion industry. To help buffer the impact of the crisis, generate cash flow, and clear out inventory, many fair fashion labels have turned to price discounts. Mimi Sewalski is CEO of Avocadostore, Germany’s largest marketplace for eco-fashion and sustainable products. In the article, Sewalski notes that she has never seen so many sustainable stores and labels offering such steep discounts – with prices being slashed by 50% and more instead of the usual 20% or 30% off. As she states in the article, “At Avocadostore, we’ve already seen 20 bankruptcy-related layoffs this year, whereas it’s normally one or two.” In response to our inquiry, Sewalski reported that the Avocadostore already had three insolvent merchants in 2023, albeit not from the fashion sector.
Slower growth and lower consumption
In light of this permanent state of crisis, the “State of Fashion 2023” report published by The Business of Fashion and McKinsey & Company predicts that growth in the fashion industry will taper off in 2023. With rising costs in areas such as manufacturing and distribution, coupled with declining consumption, fashion companies will need to cut costs in 2023. While that’s bad news for the growth-driven system that we’re familiar with, it’s good news for our planet. Indeed, a strategic reduction of resource consumption in the Global North is an effective and urgently needed climate protection measure – and one that scientists have been advocating for quite some time. From this perspective, these crises can also serve as opportunities to scale back production and consumption, and to explore new approaches that consider an economic system rooted in solidarity and not obsessed with growth and competition.
Inflation inevitably shifts consumer behavior, particularly among low-income individuals. Consumer researchers explain that in times of crisis, people reconsider purchases that go beyond basic needs, scrutinizing unnecessary spending with greater diligence. What’s more, customers increasingly seek brands that demonstrate presence, transparency, and reliability, and seek out products that offer genuine added value, writes Birgit Langebartels, psychologist at the rheingold institute in Cologne, Germany, in a study on the prevailing consumer sentiment in Germany.
Since the noughties, fast fashion has meant that apparel has moved beyond a basic need to become a “nice-to-have” commodity for many people. As a consequence, the current need to economize forces consumers to be more selective for their part, while brands are compelled to increase their focus and their relevance. This is why experts are recommending that companies offer high-quality, multi-seasonal, and gender-fluid products, and prolong the service life of their products by offering repair services or second-hand merchandise. Does this mean that the crisis is also an opportunity for companies to operate with more sufficiency as part of a post-growth society, and to restore the missing balance of economic, ecological, and human needs?
We spoke with Wildling Shoes managing directors Anna Yona and Sebastian Feuss about the present circumstances, the company’s realignment, and price increases.
A lot of companies are struggling at the moment – in light of rising energy prices, inflation, and lingering COVID-19 after-effects. How is Wildling Shoes doing?
Anna: The present economic climate is certainly difficult. Multiple crises affect different areas of the company and compound one another. That makes things complex. It means that you need not just one coping strategy, but several.
Sebastian: The three most significant negative factors for us right now are shrinking purchasing power, rising costs due to inflation, and a team weighed down by external concerns. Of course, our ability to influence the external factors is limited. For our customers, we’re constantly working to provide relevant products and services that we continue to refine and optimize. We adjust our production volumes to reflect actual demand, and engage in collaborative negotiations with our suppliers with a view to keeping cost increases within reasonable bounds. We are also keeping our financial focus on the essentials: our most relevant products, advancements, and good quality.
Anna: To compensate for rising costs, we also have to use another form of leverage and increase our prices. That’s a difficult step, of course – especially as consumer purchasing power is dwindling. At this point, however, we see this as our only alternative. In an effort to avoid placing an undue burden on families, though, we aren’t touching our prices for children’s shoes.
Why did you feel it was important not to raise the prices on children’s shoes?
Anna: We had to choose between raising all prices or differentiating between children’s shoes and adult shoes. We chose the latter because we especially want to keep children’s shoes accessible to as many people as possible. That’s why we aren’t changing the prices for children’s shoes. To compensate, we have to raise prices significantly in the adult segment.
When compared head-to-head with our competitors, this means we are still providing a very high-quality, sustainable product at a very fair price. Even if the jump is no doubt a painful one for our regular customers. It is, nonetheless, the only way for us to continue to invest heavily in further enhancing the functionality of our products, in quality, sustainability, and fairness in our choice of materials and production sites. And without that, Wildling Shoes just wouldn’t be Wildling Shoes.
How have you been able thus far to keep investing in sustainable development without raising your prices?
Sebastian: Our margins were always very tight, since from the beginning our aim was to produce children’s shoes in Europe using high-quality materials, while keeping them affordable. The only way we could afford to do this was by selling our products directly to our customers and not having to factor in a trade margin.
Anna: Over the years, our manufacturing costs have continued to rise. We have progressively invested in achieving a transparent, regional supply chain, which has made our materials more expensive rather than cheaper. The process of making the shoes is elaborate and involved. Even producing in larger quantities doesn’t cut costs for us, since most of the work is done by hand. Besides, abusing a supplier’s increasing dependency as leverage to lower prices doesn’t reflect our understanding of the partnership we have with our manufacturers.
And then there’s inflation, which is bound to impact your partners as well.
Sebastian: All of the service providers and supply chain partners are increasing their prices by between 6 and 30 percent. We can’t absorb those costs ourselves any longer. Up until now, we have been able to do that quite often, as long as demand continued its steady upward trend. In the current economic situation, however, that’s just not possible for us anymore, and we had to make a strategic decision. We want to continue to invest in the development of sustainable, durable materials, we want to offer repairs, and find ways to recycle shoe components. If we drop below a profitable margin, none of these developments will be possible in the future. Which would defeat the very purpose of our company.
Quite the balancing act. Why do you care so much about investing specifically in sustainable development?
Anna: Essentially, it’s about striking a good balance among the disparate needs of the various participants in the business relationship. Our customers want a good product at the fairest possible price. Our suppliers want commensurate payment and a stable partnership. The needs of our habitat are all too seldom loud and clear, yet we’re all dependent on the ability to find ways to manage things differently. This all requires ongoing investment in order to create sustainable solutions.
And last but not least, Wildling Shoes has a need to generate a margin from which the company can exist and pay salaries. We’re not talking about luxury investments, year-end bonuses, or dividends here, it’s simply a matter of ensuring that we work together in a fair and meaningful way. All of these needs translate into product manufacturing costs, and a margin that is critical to Wildling Shoes’ survival, both of which yield a price that we hope adequately reflects the value of the product and all that goes into it.
Nonetheless, you recently had to cut one sixth of your staff. How did that decision come about?
Sebastian: We have been working hard within the company on cost transparency, budget planning, and more targeted investments, and as a team we have also made a clear decision to do less – fewer projects, fewer topics, fewer things we are trying to do simultaneously. And despite this, sadly, we haven’t escaped the difficult decision of downsizing our team, the single largest cost driver, and laying people off. In order to come to terms with this difficult experience together and to overcome the alienation brought on by these last pandemic years and the concerns that came with it, we’re going to put a very big focus in the next few weeks and months on pulling closer together again as a team and reconnecting with our collective strength.
And how do you foresee the next few months in terms of business?
Anna: The fact is that we are facing difficult times. But I think it’s going to be a time for all of us to get back to what’s essential. We are focusing on achieving a new balance involving adjusted or reduced growth and a sensible cost structure. And we're focused on nurturing existing customer relationships and re-establishing a common presence within the team.
What can other sustainable companies learn from Wildling Shoes’ experience?
Sebastian: Unfortunately, we don’t have a simple answer either. I think that now, more than ever, it’s important to offer customers products and services that are relevant and that address real needs and real problems. When fundamental needs like security, basic amenities, and one’s own personal ambit become paramount, it’s a lot more difficult to generate artificial demand. This has the very positive effect of lowering unnecessary consumption, but at the same time, it increases the pressure on companies to hone their offerings and stay relevant.
Anna: What I find sad and disturbing right now is the fact that it’s the smaller, independent brands in the sustainability space that seem to be most impacted by the current circumstances. That’s no doubt attributable to the fact that our target customer base – the middle class – are more prone to shift their consumer behavior as a result of the economic downturn. Brands in the lower price segment are gaining new customers who are increasingly having to cut costs. Brands in the high-end and luxury segments retain their target group, which is only moderately affected by the constraints, if at all. This means that particularly in the mid-range segment, there will be fewer customers, as many who previously purchased these products primarily out of conviction now have to give much more thought to whether they can afford to buy them.
And how will the sustainable industry as a whole navigate its way through this?
Sebastian: Companies that are committed to sustainability and social responsibility inherently have higher operating costs than companies that focus only on their core business. These costs stem from higher material and production prices; salaries for employees who work to ensure supply chain transparency and social conditions; product development towards more sustainable alternatives and circular solutions; and the resources needed to build a humane corporate culture, for sharing ideas, creating, and regenerating.
Anna: Politically, it’s not sustainable in the long run – a focus on the common good cannot be based on personal initiative and volunteerism for the long term. Nor can it be sustained over the long term solely on the basis of a company’s own financial resources and sense of responsibility. The current economic framework within which social and sustainable businesses have to operate creates unfair competition between those companies that address such issues and others that instead pour their financial might into advertising and growth. In times of crisis, the worst-case scenario is one in which only the large and irresponsible remain standing in the aftermath. This is where support and initiatives are called for, things like tax breaks for companies that focus on the common good, that create closed-loop solutions, and that foster a people-centered organizational culture – which, by the way, also assumes an educational mandate and creates urgently needed spaces for regeneration. That’s the only way to transfer some of the unfairness to the companies that optimize for shareholder profits at the expense of society.
Sebastian: This might also be a wake-up call for similar socially-minded, small and independent businesses to join forces and collaborate – whether it’s to create synergies in the circular economy, leverage their collective reach and save on advertising costs, or share knowledge and human resources. The greatest challenge is that this crisis is simultaneously requiring us to focus on the essentials. Working together with other companies, trying to find the common denominator, and creating new collaborative structures appears to be at odds with this for the time being. But working together may be our only shot at weathering the storm and preserving our diversity.
Anna and Sebastian, thank you very much for the candid conversation.
Picture: Nora Tabel | Wildling Shoes
