ACCA SBL

MOCK 1: PRE-SEEN INFORMATION SMARTWEAR

1 Introduction
SmartWear is a clothing retailer in Noria.
SmartWear has a year end of 30 June.
It is currently August 20X3.

2 Retail industry information – Noria

Overview
Noria is a highly developed northern European country. Retail is a dominant business sector in Noria,
representing approximately 5% of gross domestic product and approximately 10% of its workforce (the
largest private sector employer in Noria).
The clothing retail sector represents approximately 25% of the overall retail sector. This has grown in
the last 25 years from 10%.
Many clothing retailers offer both an instore and a website shopping experience. A minority of
retailers focus on one or the other. Such retailers may sell their branded items through their own
website or a third-party web marketplace.

Retailer types
There are many different types of clothing retailers, but broadly the clothes market can be divided into
four ‘bands’. In terms of price and purpose, there is substantial cross over between high street chain
stores and fast fashion brands with the key distinguishing features being products, price and quality.
High end fashion boutiques These are luxurious and sell expensive brands. They are limited to flagship
stores in significant cities, for example, a country’s capital city, or cities with
particular ties to the fashion industry, for example, Milan in Italy. They are a
destination as well as a retail experience and tend to have close links with
the fashion industry and current trends.
High street chain stores These are premium chain stores, offering good quality clothes at a lower
higher price than high end fashion boutiques. These will follow some
fashion trends but are also likely to carry ‘standard’ ‘basics’ lines of items
consistently needed by shoppers as well as more fashionable lines. This
‘band’ of retailers covers a fairly wide range of price, quality and value and
is likely to ‘cross-over’ with the ‘band’ described below.
Fast fashion brands These stores target a mass market with cheap fashion, with an emphasis on
looking good (similar to high fashion brands) but in lower quality as a result.
They may also carry some ‘standard’ ‘basics’ lines, but usually at lower cost
and quality than high street chain stores. The distinction between high
street chain stores and fast fashion brands is likely to be more in terms of
product, with a high emphasis on seasonal fashion, so as noted, there can
be significant cross over with the high street chains.
Specialist clothing retailers These stores are similar to high street chain stores and fast fashion brands
but are specialised to a particular area, for instance, shoes, maternity or
sports clothes. As a result this ‘band’ of retailers covers a large number of
different types of retailer.

As noted, all these types of retailer are likely to operate both ‘online’ and ‘in store’, although this is not
exclusively the case.
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Industry challenges and developments

Noria is currently in the middle of a deep economic recession. The country is also experiencing political
uncertainty because of its coalition government, who many influential commentators believe will not
last for its full term of office.
These two factors have contributed to record high levels of unemployment, low business confidence
and a steady decline in the standard of living of the general population, leading to a slowing in growth
in consumer spending.
A recent report issued by the Finance Ministry has forecast negative economic growth, which in reality
means further decline for Noria during the whole of this year and possibly beyond. Critics complain
that by some measures price inflation has been running at nearly 7% for over a year, which is high for
the Noria economy, but with a stagnating economy the central bank will be reluctant to raise interest
rates. So, with more than 8% of the adult population currently unemployed and an austerity
programme imposed by government because of reduced taxation revenue – critics feel that the
prospects in Noria look poor.
The Government’s Finance Minister is quoted as recently saying ‘If we are able to successfully survive
the 20X3 period without any more important businesses going into liquidation or further heavy job
losses, then it seems that an economic recovery may start as early as next year ... that is our
expectation, but we have to wait and see.’
This type of economic situation presents varied challenges for the clothing retail industry. The sale of
clothing falls into both essential and discretionary spending, in that consumers need to be clothed, but
the more influenced by ‘fashion’ the clothing items are, the more discretionary the spending can
become.
While this is a simple economic reality, the complex truth is that fashion is popular and the market is
diverse in terms of the age, income and preferences of its consumers which means that the future for
the retail industry is likely to not to be simple.
However, the industry is also going through a period of profound change, with technology
transforming how people shop. Online retail is a fast-growing area of the retail market, and the market
is seeing an increase both in traditional retailers operating though e-commerce and in start-up
retailers operating solely online.

Innovation and sustainability

Fashion is inherently an innovative business, in that designers strive to bring ‘new looks’ to the market,
and certain consumers are keen to wear the new looks.
In addition, given cost pressures in the fashion industry, fashion retailers seek to innovate to generate
cost benefits, and, as noted above, the use of technology is transforming how retail operates.
Sustainability is also an important consideration in the clothing retail industry, as more consumers
become aware of the environmental and social impacts of their purchases. There is a growing demand
for sustainable fashion, with many high street retailers introducing sustainable lines.
In addition, how fashion itself is being consumed is subject to shift, with a small but increasing interest
in re-wearing, recycling and upcycling fashion items.

Key performance indicators

The clothing retail industry depends on a complex group of performance indicators, given the
importance of customer experience to the retailer in a competitive industry. However, a key financial
performance indicator is the ‘sell-through rate’, ie how much stock is turned over in a season.
Retailers are also concerned with product life cycle, as different clothing and fashion items will have a
different length of life (for example, ‘basic’ items will have a longer life cycle than ‘high fashion’ items,
which are likely to be seasonal and short-lived).
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Industry body
Most retailers in Noria are members of the Noria Retail Consortium (NRC). NRC’s purpose is to make a
positive difference to the retail industry and the customers it serves, today and in the future. It works
with its members to drive positive change and use its influence to create an economic and policy
environment that enables retail businesses to thrive and consumers to benefit. It is committed to
ensuring the industry thrives despite challenges and developments in the industry.

3 SmartWear overview

Background
SmartWear is a long-established clothing retailer in Noria.
Since it was listed on the Noria Stock Exchange five years ago, SmartWear has enjoyed meteoric
success. At that time, it had only 40 retail outlets in Noria, but since then through careful and planned
investment, the company has achieved sustained growth and become a substantial multi-national
business with over 100 outlets in Noria and a similar total number of stores in Southland and Centrum,
two other European countries.
SmartWear has enjoyed long-term business success mainly due to the fact that it has carefully
positioned itself towards the lower end of the clothing retail sector. It sources its products directly
from suppliers in low-cost economies, and it has been able to target a mass market with consistently
low prices. This has meant that during the recent economic downturn in Noria it has been able to
profit from the growing number of price-sensitive consumers, who have switched from the more high-
end of the clothing retail market to more budget retailers like SmartWear – who are the market leader
in this high volume market.
SmartWear’s long term strategy has always been based on a low cost – low price business model,
which is described through its mission statement and strategic goals. However, following a prolonged
period of expansion and growth, including successful penetration of other European markets as
mentioned, the company is for the first time experiencing a marked downturn in both its operational
and financial performance, particularly in Centrum. This appears to be in part due to economic
pressure and the growing intensity of competition in all of its markets, both at home and abroad.

Ownership and governance

As noted above, SmartWear is listed on the Noria Stock Exchange. It has a number of institutional
investors who the board engage with closely.
SmartWear has a balanced board of directors, most of whom have been with the company for more
than a decade and whose responsibilities cover all of its core business functions. The five
Non-Executive Directors [NEDs] ensure that the board and the company remain fully compliant with
the Noria Code of Corporate Governance; a listing requirement for all companies on the Noria Stock
Exchange.
The NEDs, being part of the unitary board, discharge their duties and responsibilities through a
number of sub-committees [e.g. the audit committee] with expressed authority to challenge and
scrutinise the executive members of the board.

Information systems
SmartWear’s systems are unsophisticated compared to some competitors. In particular, it does not
analyse detailed customer data available to it in the same way that some of its competitors do, which
industry analysts have commented upon as such practices grow more common in retail markets.
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Products
SmartWear’s range covers the main areas of clothing (ie Underwear, Outerwear and Accessories) such
that a consumer could use SmartWear as a ‘one stop shop’.
SmartWear’s low cost – low price model places them somewhere between ‘fast fashion brands’ and
‘high street chain stores’. As noted, SmartWear are a market leader in a high volume retail model.

Suppliers
SmartWear’s core suppliers are all based in countries in south east Asia.
Supply chain management is particularly important to SmartWear because as a retailer a very
significant proportion of direct costs relate to inventory purchases, which in turn directly impacts on
corporate profitability and investor returns.

Distribution
SmartWear distributes 100% of its products from its retail outlets in Noria, Southland and Centrum.

Risk
The key risk noted by industry analysts is that SmartWear has never exploited e-commerce
opportunities, when there have been several new entrants into the market in the past few years who
only sell online. The convenience and quality of service that these e-retailers provide has proven to be
very appealing to many of SmartWear’s traditional customers, who have shifted their shopping
patterns and loyalty.

4 SmartWear website extracts

About us
SmartWear Mission Statement

Our mission is to make the widest range of good quality fashion,

which is responsibly sourced, available to everyone at affordable
prices.

SmartWear Aims
(1) Customers: continue to invest in all of our core markets that continue to offer significant growth
opportunities to satisfy the needs and demands for low-cost products and services of all our
customers.
(2) Suppliers: develop strong, long-term relationships with our key suppliers based on mutual
respect and serving each other’s interests.
(3) Social responsibility: function with the highest ethical standards of social responsibility,
expecting the same from all business partners.
(4) Investors: maintain a successful and viable company that delivers healthy financial returns to
our investors.
(5) Sustainability: be a responsible custodian and user of natural resources which are managed in a
sustainable way.
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5 SmartWear financial information – selected summary

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