WITHERING CONSUMER INTEREST AND A weakening economy have dealt the denim industry a one-two punch over the last year, and the sting may be felt into 2009.
Industry veterans are taking solace in the belief that denim's boom times are never followed by a bust. Growth slows, the market naturally culls those brands that were too weak to survive, but the bottom never really drops out.
Given the proliferation of brands that occurred since 2000, particularly in the premium segment, there was little surprise when the first signs of a shakeout emerged in 2006. It was welcomed by long-established brands, and as the process of weeding out some of the labels that had cashed in on the craze gained steam, the top-tier players regained their space on store shelves. However, women's closets were overflowing with denim by that time and their interest shifted to dresses and accessories.
Over the last several months, the prolonged war in Iraq, the subprime mortgage crisis and soaring fuel prices have stoked fears of a recession and left consumers thinking twice before parting with their disposable income. Denim hasn't been immune.
Evidence of the weak domestic retail environment has appeared in the financial results of retailers and the manufacturers who supply them. VF Corp.'s jeanswear business, home to Lee and Wrangler, saw revenues fall 6.4 percent to $712.2 million during the first quarter of 2008.
However, "the first quarter is not representative of what we expect from our jeanswear business for the rest of the year," said Eric Wiseman, VF's president and chief executive officer, during a conference call with analysts.
According to Wiseman, there is evidence of the economic situation pushing consumers down the price spectrum.
"In times like this, some consumers flock to more value price points. That happens in every channel of distribution," he said. "That's not where our strong brands exist, nor is it where we want them to exist."
Levi Strauss & Co. saw first-quarter revenues in the Americas fall 2 percent to $580 million compared with a year earlier. The decline was attributed to a decrease in the women's wholesale business, as well as the continued slump of the Signature by Levi Strauss mass channel brand. VF and Levi's are both expecting to face challenges for the remainder of the year, as stores become more conservative in their buying.Despite the negative sentiment surrounding retail, statistics from market research firm The NPD Group validate industry veterans' faith in denim. Women's jeans sales in the channels tracked by NPD totaled $7.77 billion for the 12 months through March, a 4.9 percent increase over the $7.41 billion reported in the same period a year ago. In comparison, women's casual sportswear sales, which includes tops, bottoms and outerwear, slid 3.7 percent to $65.5 billion from $68 billion.
As evidenced by some of the names in NPD's top 10 women's brands, the bulk of the market is made up of affordably priced denim. Jeans priced between $10 and $30 account for more than 53 percent of the overall market, and the average price of women's jeans came in at $24.50, a 7 percent increase from $22.91 the previous year.
Surveys of female consumers conducted by Cotton Inc. suggest a healthy appetite for denim remains. During the first quarter of the year, 45 percent of females surveyed said they didn't need any denim, but that they might purchase one or two items, and 32 percent said they were likely to buy several items.
The results are surprising given that jeans are approaching their slowest sales season — the summer — and given how much denim women around the world already own. According to Cotton Inc. and Cotton Council International, women in the U.K., U.S., Brazil, Germany and Colombia own more than seven pairs of jeans on average. In China, Japan and Thailand, the average is more than six. The greatest opportunity rests in India, where women own an average of only 0.7 pairs of jeans. VENDORS' VIEW
Brands up and down the denim price ladder are being confronted with an uncertain retail environment and store buyers who have sought to minimize damage by cutting orders and focusing on basic product.
"The retailers really cut back," said a source involved in the fabric supply side of the business.
According to the source, by October brands and retailers were canceling orders for the last holiday season. Retail inventories that were expected to get cleared out by January were still a problem in March.
Michael Silver, founder of the moderate-price Silver Jeans and premium 1921 label, saw a softening in the premium segment.
"We really felt this was a year to show 1921 was financially sound and that we could make and produce great product consistently," said Silver. "That position alone may be a great position."
With Silver Jeans, he believes he has hit a sweet spot as some consumers retreat from premium levels.
"My back-to-school bookings are as high as they've ever been," said Silver. "We look at it and wonder when it's going to end. Our price point is catching a few people on the low end of the premium side."
Mike Egeck, ceo of Seven For All Mankind, welcomes retailers being forced to more closely examine their businesses.
"Our retail customers are doing all the things you'd expect," Egeck said. "They're really surveying their vendor base and making sure they're backing the winner and being extremely focused on inventory levels and turn."
Egeck expects to see an uptick by the end of the year, following the traditionally slower summer season, b-t-s, and the end of the presidential election campaign.
"I think the category is holding up pretty well," he said. "There's definitely some shakeout...and we think it will go on for a while. There's probably still too many brands there."
Sales are not being driven by a particular silhouette or wash and the lack of a clear trend draws differing opinions in the industry. Some feel it shows a lack of creativity and fails to provide the consumer with the impetus to buy. Egeck, on the other hand, is among those who believe there's been a shift in consumer attitudes.
"I think we as a brand and as an industry underestimated the wardrobing effect, where the customer is open to a lot of silhouettes," he said.
Women have gravitated to trouser-cut styles for work, will purchase a skinny fit for going out in the evening and will have a selection of everyday jeans.
"What we're saying is there's no one must-have silhouette, fit or finish, which is good for the business," Egeck said.
Smaller players are feeling the need to more clearly define their brand's DNA and are aware that hooking new customers will be particularly difficult."There's going to have to be a point of difference and something special for a consumer to respond to it," said Brian Robbins, founder and president of Denim Design Lab. "I think it's going to be not just in product, but in the merchandising."
Robbins acknowledged that chasing the fashions of the moment in an effort to fuel growth was a pitfall he had fallen into that ended up moving the brand away from the vintage concept on which it was founded. Robbins said he's pulling back for the coming season and narrowing the brand's focus toward more vintage and authentic styling, offering 100 percent selvage jeans for women.
"We're going to stick to our guns," said Robbins.
Brands are increasingly aware the retail channels that distribute their products are shrinking. Silver said the number of independent, multibrand specialty and department stores has declined, a trend that has spurred a decision to devote resources to opening a spate of Silver-branded stores over the next five years. Robbins has also seen boutique stores go under as a result of the poor economy.
"I expect there's going to be more," he said.
Scott Bonomo, president of the premium Union label, has also seen boutiques shut their doors.
"That [premium denim] gold rush is over," said Bonomo. "People that weren't in this business for the long haul have found themselves out of it by choice or not by choice. It's a different game. You've got to know who your customer is and know what you're about as a concept."
Bonomo also admitted that Union had tried to chase some fashion trends that took the brand somewhat outside its core.
"Following the fashion trend is the most dangerous thing to do," he said. "We did a whole wide-leg thing for women's. Some stores have sold it well, but what we found was everybody did them and everybody bought them, so it's too much of a good thing."
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