Gearing Up For Investment: What Fashion Brands Need to Know

Lorna Hopkinson, (pictured right) M&A Managing Director in the Retail and Consumer team at BDO, who advised  Never Fully Dressed on its recent investment from Refined Capital Partners

The fashion M&A market has been relatively subdued over the past couple of years. Weaker consumer confidence, inflationary cost pressures, higher interest rates and continued pressure on margins have made buyers more cautious.

However, this does not mean that investors have lost their appetite for fashion. Instead, they have become more discerning about the businesses they are prepared to back.

We are still seeing good transactions across the sector – but only for stronger brands. Brands with a clear customer proposition, robust economics and a credible growth strategy can still attract significant interest. For those without these fundamentals, securing investment has become harder.

With the bar becoming higher, fashion brands considering investment should prioritise building a business that can demonstrate quality, resilience and a clear opportunity for growth.

Know your customer

Firstly, a clear understanding of the customer is fundamental to building an attractive fashion business. That does not necessarily mean having broad appeal. A brand can be highly attractive to investors if it owns a particular niche and has built a strong, engaged customer base within it.

Brands need to understand who their customers are, why they choose the brand and what differentiates the proposition from competitors. A strong niche can be extremely valuable when a business genuinely understands and owns it.

This understanding should also inform product development. Listening to customer feedback and using it to understand what audiences want can help a brand keep its proposition relevant as it grows.

Get the revenue model right

Investors are placing greater focus on the quality and relevance of a brand’s revenue model. Businesses need to understand where their customers expect to shop and whether their channel mix is appropriate for the next stage of growth. That means considering whether direct-to-consumer, marketplaces, wholesale or physical retail are the right channels, alongside which international markets may offer genuine opportunities. This doesn’t mean being everywhere – it means being in the right places for the customer.

As a business grows, its revenue model may need to evolve. Brands should have a clear view of their future revenue mix and where they see the strongest opportunities for growth.

Focus on the fundamentals

Investors are keeping a keen eye on the underlying economics of a business. Sourcing, gross margins, supplier relationships and product quality are all key considerations. Businesses need to demonstrate that their economics are robust and that growth can translate into sustainable profitability. Investors are looking beyond headline sales to understand what is driving growth, what the margins look like and whether the model can scale effectively.

Consider the role of physical retail

Physical retail is evolving – rising rents, rates and other costs have made large store estates harder to justify. However, stores have not lost their relevance all together.  We are increasingly seeing brands consider a smaller number of flagship locations, alongside pop-ups as a way of testing demand and understanding whether a permanent store makes sense.

The right approach will depend on the customer and wider revenue model. The key is understanding where physical retail fits within the business and whether it supports the next stage of growth.

Build the business before seeking investment

The most important thing for fashion brands is to build the business you would want to invest in, rather than trying to position it for a transaction at the last minute.

Start with the customer – brands should be clear about who they serve, why customers choose them and what differentiates them from competitors. They should then assess their revenue model, considering where customers want to shop, which channels are appropriate and which markets offer genuine potential.

The fundamentals also need to be strong. Businesses should understand their margins, sourcing, supplier relationships and cost base, and demonstrate that they can grow without compromising profitability. When it comes to marketing, brands should be able to explain how they acquire customers, which channels work best and whether their marketing investment is generating an appropriate return.

Finally, the management team needs to be ready for the next stage of growth. Investors need confidence that the business has the people, structure and expertise required to scale.

Never Fully Dressed: a brand that got it right

Never Fully Dressed is a good example of a brand that has been clear about who it is and who it serves and has recently secured investment from Refined Capital Partners.

The brand has built a distinctive proposition around its customer and developed a strong position within its market. Instead of trying to appeal to everyone, it has built a loyal community around a clear understanding of what its audience wants. Close relationships with customers allow the brand to use feedback to inform product development and understand what customers want next.

What makes Never Fully Dressed stand out is the creative identity behind the brand. Its founder has a distinctive point of view around fashion, styling and inclusivity, and gives the business consistency and personality. This is supported by a clear value proposition: offering good-quality products at accessible prices while retaining a distinctive identity.

For other retailers, the lesson is clear. You do not necessarily need to be the biggest brand in your category to attract investors. You need to know your customer exceptionally well, understand what makes your proposition different and demonstrate that you can translate this into sustainable commercial performance.

The opportunity for fashion brands

There is still opportunity in fashion M&A, despite the more subdued market. Investors remain interested in the sector, but they are looking for evidence of quality. Ultimately, the businesses standing out in the current market are those with clarity about their customer, proposition, economics and future direction. For fashion brands considering investment, that clarity needs to be built into the business well before a transaction is on the table.

Intro image via pexels.com