The Hidden Cost of Cheap Fashion Could Catch Up to Investors

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Cheap, disposable fashion is damaging the planet. If consumers don’t seem to care, should investors?

Clothing has never been less expensive. Globalization helped fashion chains like

H&M,

Primark and Old Navy to move manufacturing to low-cost countries and offer bargains to shoppers back at home. Between 1990 and 2018, the latest annual data available, real prices of footwear and clothing halved in the U.S., an analysis by Cambridge Econometrics shows. In the U.K., where consumers can’t get enough of cheap fashion brands, prices fell by three quarters.

This trend has a benefit: Wardrobes take a much smaller share of the household purse than they used to. U.S. consumers spend just 3% of their disposable income on clothing, down from 10% in the 1960s, according to Bureau of Labor Statistics data. The downside is that readier access to inexpensive garments encourages shoppers to buy in greater quantities.

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The flood of cheap fashion is taking a toll on the environment. Clothing production requires a lot of water and chemicals. Finished garments are shipped long distances by sea—and increasingly by air as online shoppers demand a continuous stream of new designs. The product churn necessary for so-called fast fashion brands to continue to grow generates great waste. Of the roughly 100 billion items of clothing produced each year, more than 50 billion are thrown away and subsequently burned or landfilled within 12 months of being made, according to a recent UBS report.

The situation seems unsustainable, yet investors in fashion stocks face a conundrum: Consumers don’t seem to care. The amount of clothing and footwear sold globally fell 10% in 2020, Euromonitor data shows, but that is easily explained by the pandemic-related lockdowns that kept shops shut. Before the Covid-19 outbreak, the amount sold globally was increasing steadily at around 3% a year.

For now, there is no direct threat of a regulatory crackdown either. The fashion sector’s long supply chain cuts across multiple countries and sectors, including petrochemicals for fibre manufacturing, making it more complex for governments to rein in. That is despite the fact that the fashion industry contributes up to 10% of global carbon emissions. By comparison, commercial aviation generates just 2% to 3%, according to Citi analysts.

Shareholders would still be wise to handle fashion stocks carefully. Environmental, social, and governance risks don’t appear to be priced into the share prices of publicly traded fashion companies, even as analysts report that investors are asking more questions about sustainability. That might help explain isolated examples of extreme share-price volatility. Last year, a scandal about labor conditions at British fast-fashion company

Boohoo Group

wiped 40% off its market value in three trading days.

A couple carry bags from clothing retailer Zara along Oxford Street in London.



Photo:

David Cliff/NurPhoto/Getty Images

It is possible that shoppers aren’t yet aware of the climate impact of their sartorial choices. It may be easier for consumers to understand how long-haul flights boost their carbon footprint than the multi-step process that goes into making a Saturday-night outfit. But that could easily change. More sustainable business models like Rent the Runway—a service for hiring outfits—and used clothing marketplaces such as thredUP are already gaining in popularity.

If the environmental cost of fast fashion does become a hot-button consumer topic, the impact on sales could be sudden. Take Sweden, where “flygskam,” or flight shaming, became a trend in 2018. That led to a 3% fall in domestic passenger travel that year, followed by an 9% drop in 2019, official data shows.

Big clothing chains are well aware of the risk. Zara’s owner

Inditex,

the biggest fashion retailer in the world by revenue, is one of many players to offer ranges made from more sustainable fabrics. H&M has offered a garment collection and recycling service in its stores since 2013. While these initiatives are good public relations, they don’t fix brands’ overproduction problem. Zara releases new designs every two weeks to keep shoppers constantly coming back for more.

Reducing the amount of clothing sold globally will become an even bigger challenge as consumers in emerging countries develop a taste for fast fashion. In 2006, Chinese shoppers bought 14 items of apparel every year, but this number had more than doubled by 2019, according to UBS. Americans’ purchases also increased over the period, but not by as much—from 48 to 54 items a year.

For an industry that prides itself on having its finger on the pulse, the world’s biggest fashion companies could quickly end up on the wrong side of the biggest trend in years. And without a complete overhaul of their business model, there is little they can do about it.

How will the pandemic affect America’s retailers? As states across the nation struggle to return to business, WSJ investigates the evolving retail landscape and how consumers might shop in a post-pandemic world.

Write to Carol Ryan at [email protected]

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