By  on October 29, 2008

Northern California’s Silicon Valley, an incubator of consumer affluence as well as technological innovation, is starting to feel the impact of the financial crisis — creating a chill for industry retailers.

“The economic fears really grabbed us here on Sept. 22 with the stock market meltdown,” said Robert Reedy, a senior vice president with RMSA retail consultants, who advises 35 independent fashion boutiques in the San Francisco Bay Area, including several in Silicon Valley. He has told merchants to prepare for potential sales declines of about 20 percent.

Reedy said he is advising Silicon Valley clients and those elsewhere in the Bay Area to “be very realistic. Money is getting tighter. Sales will be less. You have to control your inventory and develop a strategy to maximize foot traffic.”

Malouf’s in Burlingame, Calif., which offers St. John, Carmen Marc Valvo, Marc Jacobs and David Yurman, has refocused its business to counter soft sales. It added two associates to boost customer service and re-merchandised to include European product like Armani, René Lezard, M Missoni, Hache, Etro and D&G, as well as U.S. designers Tory Burch and Lafayette 148.

“Times are tough, but there are still many highly successful people who like to shop,” said Scott Malouf, who oversees women’s wear. “Since we don’t sell anything anybody really has to have, we are pushing creativity, value and trust.”

Warning signs are proliferating. The jobless rate in Silicon Valley (Santa Clara County) increased to 6.5 percent last month compared with 5.1 percent in January. The statewide jobless rate is 7.7 percent. Apple Inc., one of the Valley’s many high-profile companies, has warned of a slowdown in sales after reporting robust fiscal fourth-quarter profits. Apple closed at $99.91 on Tuesday, compared with a 52-week high of $202.96. Until Tuesday’s stock market run-up, shares in marquee companies such as Google Inc., Cisco Systems Inc., Intel Corp. and Oracle Corp. had been battered despite revenue increases.

EBay Inc., the online auction giant, has forecast year-end revenues would decline for the first time in its 13-year history because consumers are shopping less, and Yahoo Inc. plans to trim at least 10 percent of its 15,000 workers.

Silicon Valley extends south of San Francisco to San Jose and other parts of the Bay Area. The entire region has a population of 7.5 million and is a key driver in the California economy, one of the world’s largest. The local economy has shown resilience even as the rest of the state has been hit hard by the housing sector implosion, job losses, tight credit and other woes, manifested by the liquidation of Hayward, Calif.-based Mervyns, the moderate-price chain with 149 stores and its headquarters in the Bay Area.

Although venture capitalists, the lifeblood of Silicon Valley startups, are still funding projects, they are being more cautious, particularly with companies that rely on the purchase of products by consumers in the next two to three years, said John Taylor, vice president of research with the National Venture Capital Association.

“The venture capital industry is concerned the business climate overall is worsening and there has been a cutback in consumer spending,” Taylor said.

One-third of all venture capital funding in the U.S. is in Silicon Valley and goes to start a variety of high-tech businesses and projects involving the Internet, health care, computers, consumer software and eco-friendly technology.

“This is a global economic problem,” said Greg Rosston, deputy director of the Stanford Institute for Economic Policy Research at Stanford University in Palo Alto, Calif. “As it becomes more questionable about the worldwide economy, Silicon Valley’s prospects could lessen, since companies sell a lot to Asia where demand could drop.”

However, technology companies in the valley, and elsewhere in the Bay Area, are better positioned to weather a storm than they were during the dot-com bust six years ago, Rosston said. More are well funded — Google has $14.1 billion in cash and marketable securities — and high-tech infrastructure, such as fiber optic cables, is already in place and paid for.

Although Silicon Valley and the Bay Area have been relatively unscathed by economic weakness, the headwinds of the slowdown have arrived.

“Sales are definitely off,” said Amy Healy, owner of Amy B., a boutique selling designer ready-to-wear in Los Gatos, Calif., in Silicon Valley. “Customers are still coming in, but they are being choosier about what they are buying.”

Recent sellers have included a $565 Kooba purse and a Diane von Furstenberg midnight blue wool skirt ensemble, $975.

Christine Campbell, owner of contemporary fashion boutique Crimson Mim in Los Altos, Calif., said slower sales have coincided with the stock market decline. Customers have been gravitating toward midprice points, like $130 cotton jersey boat-neck dresses by Velvet. Although special pieces, such a $650 Philip Lim wool cape with cross-stitch rose embroidery or $445 oxford shoes by Bay Area designer Anyi Lu, are also being bought, she said.

In addition, Campbell is benefiting from customer relationships built on trunk shows, in-store parties and personal service. “We definitely still have a base of customers who are waiting for the new deliveries,” Campbell said “One customer who works with Smith Barney who just bought a lovely Loeffler Randall pencil skirt [$295].”

At Alta, a contemporary retailer with four stores and a presence in the valley for 25 years, the ups and downs of the high-tech industry are nothing new.

“Companywide we’re still experiencing growth,” said Lea Swenson, manager of the Los Gatos store, who has noticed a new sensitivity among shoppers. “A customer who might have bought several items is now saying, ‘I have to pick and choose.’”

Retailers said the weakened economy is not changing their long-term plans for the region, and affluence is clearly a key reason. Among U.S. metropolitan areas, San Francisco ranks third in per capita income at $61,377, and San Jose-Greater Silicon Valley is fourth at $58,716, according to Commerce Department statistics.

In the next couple years, there are plans for a 240,000-square-foot expansion of the upmarket Stanford Shopping Center in Palo Alto. In addition, Neiman Marcus and Bloomingdale’s are slated to open in 2011 in the Valley Fair Mall in San Jose. In 2010, Neiman’s plans to launch at Broadway Plaza in the upscale East Bay town of Walnut Creek.

“We’ve looked for expansion opportunities in the Bay Area for years,” said Wayne Hussey, Neiman’s senior vice president for store development, noting the scarcity of available high-end shopping center space in the region. With the two new stores, Neiman’s will have four units in Northern California and four in Southern California.

“This, too, shall pass,” Hussey said of the financial crisis.

In San Francisco, the focus of much international retail expansion over the last four years, the unemployment rate is 5.6 percent but has been increasing since February, when it was 3.9 percent. Foreign tourism and business travel are still robust and there has been a recent surge in bio-tech company investment, experts said.

“It’s not like the economy is flat on its back in the Bay Area by any means,” said Sean Randolph, president of the Bay Area Council, a business group. “There is a lot of money here, but it’s just not circulating. Given all the volatility it’s hard to say what the landscape will look like in a couple months.”

Marty Murphy, owner of M Clothing, a designer sportswear boutique with three locations in the Bay Area, said each store began having softer sales a few months ago. “Thank goodness we’ve worked hard on customer service,” said Murphy, noting recent popular sellers like $300 Inhabit stretch cashmere sweaters and $700 Catherine Malandrino trenchcoats. “Business is hard. We’ve bought less. It’s stressful.”

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