By  on June 13, 2005

NEW YORK — The retail landscape is forever in flux, and the latest change is having a seismic impact on manufacturers, suppliers, brand managers and retailers. Call it the "morphing effect."

"It's when retailers transform into manufacturers and suppliers, while suppliers and manufacturers become more like retailers," said industry consultant Emanuel Weintraub, founder of Weintraub & Associates.

Increasingly, retailers are sourcing goods directly, cutting out the vendor and supplier. At the same time, suppliers are stepping into the retail market, selling directly to the consumer — online, at outlet stores and via stores or chains that were acquired. As a result of these changes, there is more weight placed on brands, private label programs and sourcing.

At a recent WWD Financial Forum Roundtable, industry experts discussed this and other trends in the market.

Participants included: Bernard Holtzman, chief executive officer and president of Harve Bernard; Monroe Milstein, chairman, president and ceo of Burlington Coat Factory, the $2.9 billion retailer; Laurence Leeds, chairman at Buckingham Capital Management, and Phillip Bleser, senior vice president and group executive of mid-corporate banking at J.P. Morgan Chase. Weintraub led the panel discussion.

According to Bleser, much of the industry change — whether it's retailers becoming manufacturers or vendors become retail operators — is due in part to changing consumer shopping patterns.

"I think they're looking at where the consumer is buying, what are the distribution channels and are they going to give the consumers the product where they want it. That's going to be the Internet, catalogues, retail stores and in department stores," the banker said.

Leeds said manufacturers have had their own retail stores for years. "The idea of verticality is 50 years old," he said. As for retailers and their private label product, that's been around for 40 years. Dual distribution has been going on for years, he concluded.

He added that a real change in the industry is the creativity that retailers are now procuring from their staff, as well as the market distribution of proprietary retail brands. "What is new today is the ever-expanding talent pool, the designer creativity, in the upper echelon of department stores," he said. "They are creating beautiful clothes, [well] designed and sourced. Probably the best example is Inc. at Macy's," Leeds said.Leeds said Inc. is probably the largest apparel brand sold at Macy's, which is operated by Federated Department Stores Inc. Federated is in the process of acquiring former rival May Department Stores Co. "After the merger, when Inc. is all through May company [stores], Inc. may be the largest brand in the U.S. It [might] be bigger than Polo Ralph Lauren or Liz [Claiborne] or Jones [Apparel Group]," Leeds predicted.

Holtzman, who observed that there's been an acceleration in proprietary and private brands at retail, said that the increase in these brands in the stores may not be good for retail, particularly where the vendor is involved.

"Will [the retailers] preclude people from staying in business? Are you very vulnerable if this happens? Inc. right now commands the best spot in the stores in every single city that they're at. It gets the most attention, the most advertising," Holtzman explained.

For Holtzman, the key question is: "What will happen to retail if in the future everything sold in the store is private label?"

Leeds said retailers might move in that direction. "If I made four or five points more margin on my [private label] than I did on yours, I'd sure give it a prominent position too."

For Leeds, stores flush with proprietary brands isn't so far-fetched, mostly because there's little distinction between the concept of a brand and that of a label.

"I don't think most retailers consider [the bulk] of their 'private brands' as real brands," Leeds said. He said many products have a brand that is more for the purpose of giving the item some kind of romance and credibility.

For Milstein, many consumers truly don't know the difference between a brand and a proprietary product. "Three out of four consumers don't know. I receive letters from customers saying 'Why didn't I have the brand that is in the Limited?'" he said.

From Milstein's perspective, the woes of the apparel industry have a lot to do with the relationship between suppliers and retailers. "As a former wholesaler who is now a retailer, I think the problem has been the narrowing down of the amount of retailers out there. The power runs absolute, and the department stores per se are taking advantage of their so-called manufacturers. They have no feeling for them," he said.As an example, Milstein recounted a story involving his son, who participated in an executive training program at Abraham & Strauss [a now-defunct retail nameplate] years ago. According to Milstein, his son was told, "You can do whatever you want with the market." The retail executive said this attitude hasn't changed over the years. And it is increasingly made worse with retail chargebacks.

"This is growing. There is no real respect for the manufacturers on behalf of the department stores. We complain to them. What I hear from the manufacturers are: 'They hit us once, they hit us twice, and it doesn't stop all season. We keep getting allowances after the deal is made and finished.' The retailers are destroying their partners," Milstein said.

Regarding manufacturers moving into retail, Milstein sees it as a necessity. "Manufacturers are opening their own stores as a defense mechanism, because they're losing control of their businesses from the abuse by the major department stores," Milstein said.

Surely, manufacturers as a rule are not known for their retail expertise. But there are a few companies that have become adept at being retailers. The panel cited examples such as: Liz Claiborne and its Mexx business; Jones Apparel Group with its retail footwear business, along with last year's acquisition of Barney's New York, and Polo Ralph Lauren's freestanding stores and Club Monaco chain.

There are other burdens vendors deal with, Milstein said, such as retailers copying designs and then dropping the vendor to launch the product themselves.

"They're using us as a research center," Holtzman said. "We have that more and more and more. And the point is, we don't let people come into the showroom, because we know exactly what they're going to do."

Weintraub said vendors have to figure out a way to control their own destiny, a move that also ensures having a say over a firm's profitability.

For Bleser, one way to survive these challenges involves "diversifying your distribution channels and [your] brands."

Several manufacturers are already doing this.

"What is new is the development by Liz Claiborne and Jones Apparel Group, and now Oxford Industries and Kellwood to a certain degree, of proprietary brands. They get labels and develop labels and create proprietary brands for an individual or group of stores or chain," Leeds said.Holtzman still expects the presence of private brands to continue. "You have to be very creative, very, very fast and very, very innovative. And you have to hook up with a couple of retailers who believe in you, and you will produce product for them. That's what it will come down to," he said.

Holtzman's survival strategy in the middle market is to work with certain retailers who are seeking creative talent from their vendors. "We're hooking up with certain retailers who want a lot of input from the creative side, and very fast turns. The one I will cite at the moment is Stein Mart Inc., which is enjoying a renaissance like I've never seen before. Their stores are absolutely gorgeous, and they want a differentiation of product. We do an enormous amount of business with a guy who cares about the industry," Holtzman said.

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