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The financial crisis means more to fashion than lean times and fewer dollars in the till.
Wall Street’s implosion, the economy’s nosedive and shifting attitudes toward saving and spending seem destined to reshape the industry.
This story first appeared in the December 15, 2008 issue of WWD. Subscribe Today.
For starters, fashion is still very much in the grip of the credit squeeze that began throttling banks in September before spreading out to the broader world.
How strict lenders are with their cash and how severe the recession gets are the X factors that will determine how dramatic a shake-up the fashion business faces in 2009 and beyond.
Already, shoppers and brands across the price spectrum — even in the once-insulated luxury market — are feeling the pinch.
“No social or economic class is immune from this crisis,” said Lew Frankfort, chairman and chief executive officer of Coach Inc., in October. “The consumer is fragile. She’s worried about her future. She’s worried about her security. She’s visiting malls and stores less frequently.”
What this means next year for major retailers and their employees, landlords, banks, producers, raw material suppliers and customers, remains to be seen. Additional store closures, layoffs and bankruptcies seem to be a given.
“We’re going to go back to a 1950-, 1960-type mentality, where you save a percentage of your take-home pay to start and you live within your means beyond that,” said Paul Nolte, director of investments at Hinsdale Associates. “That’s going to be a tough one for the Baby Boomers because they haven’t had to do that.”
Major changes for fashion are still largely in the future.
This fall, most of the action was in the financial sphere. Bad bets on subprime mortgages snowballed as they passed through interconnected banks. Although Bear Stearns was an early victim, getting absorbed by J.P. Morgan Chase in March, the infection festered until mid-September, when Lehman Brothers went belly up — clogging monetary arteries as everyone wondered how much the banks owed to each other. Then, in stunning but short order, Uncle Sam took direct stakes in giants such as Citigroup Inc. and arranged mergers between beleaguered competitors. Washington Mutual weighed in with the largest bank failure ever.
Oddly enough, the cost of energy, seen as the dark cloud as prices at the pump soared to more than $4 a gallon and kept consumers away from malls in the summer, would be one of the few silver linings as the year ended — the average cost of a gallon of unleaded plummeted to $1.68 as December began. Economic uncertainty replaced the high price of driving as a shopping disincentive.
Fashion, and the ills it suffered, has so far been collateral damage in the larger fray. Still, it’s been a devastating few months.
Cash has again become king in a world that for years has run on credit. And companies with cash on their balance sheets are suddenly the new prime players, even if sales, at least for now, are stuck in a rut.
So, conserving cash and minimizing debt have become critical. Even discount stalwart Target Corp. slashed planned expenditures by $1 billion and pulled back on its store expansion. Value giant Wal-Mart Stores Inc., one of the few stores to regularly increase same-store sales in the second half, also has cut back. Expansion plans are being trimmed and some real estate portfolios scaled back as “underperforming” stores have simply become unacceptable.
Late last month, shares of Jones Apparel Group Inc. and Liz Claiborne Inc. swooned as their shrinking market capitalizations compelled institutional players to sell and investors fretted over bank credit facilities that expire next year.
Credit experts expect more retailers to drop.
“It could be a slow death for some companies,” said Karen Ghaffari, debt analyst at Fitch Ratings. “On the other side of holiday, we’ll start to see who the stronger players are and who are the weaker players. At that point, we’ll probably see more about store closings. Once we get on the other side of this economic downturn, I think we’ll probably see more consolidation in this industry.”
Home values have plunged and foreclosures have continued to rise as job losses mount. Through November, 1.9 million jobs were wiped off the nation’s payrolls and unemployment rose to 6.7 percent. Following weeks of cable news coverage of bailouts and blowouts, there was little surprise when the Conference Board reported an all-time low in consumer confidence in October.
Shares in the Standard & Poor’s Retail Index fell 8.5 percent in September, 17 percent in October and a further 12.6 percent in November as volatile markets snapped scores of trading records with sharp declines and short-lived rallies.
“People are scared,” said Bill Rhodes, chief investment strategist at Rhodes Analytics, in early October. “Uncertainty is very high and markets hate uncertainty, so what they’re doing is selling into it.”
Shoppers, who had already been holding back, nearly capitulated entirely when the value of their 401(k) portfolios and other investments plummeted. In October, comparable-store sales fell at 27 of the 38 retailers tracked by WWD. Even somewhat recession-resistant luxury retailers were hit, and hard. Neiman Marcus Inc.’s comps fell 27.6 percent as Saks Inc. was down 16.6 percent and Nordstrom Inc. dropped 15.7 percent. The pain continued in November with 29 chains reporting comp declines.
“Now you are dealing, from an emotional perspective, with a customer who is in a state of fear, somebody who doesn’t know how they’re going to pay their mortgage, somebody who doesn’t know if they’re going to keep their job,” said Marc Gobé, president of Emotional Branding, a think tank and consultancy.
Women’s retail apparel prices in October fell a seasonally adjusted 2.5 percent versus September, as men’s apparel dipped 0.1 percent and overall consumer prices slid 1 percent. Apparel prices are lower than they were in 1990 and are likely to fall further with demand soft and factories around the world hungry for production.
“The big concern for retailers is…when deflation gets its start, and especially when it’s this strong, it is a severe disincentive for consumers to come in and buy,” said Charles McMillion, president and chief economist at MBG Information Services. “For a lot of retailers, this is a life-and-death season. A lot of retailers are pulling out all the stops to make sure customers come through their door and not the guy down the mall.”
Nordstrom president Blake Nordstrom, for instance, reported in November, “We have lowered [the] average regular price by an average of 22 percent on over 800 styles.”
“We are promoting out of character,” said Burt Tansky, president and ceo of Neiman Marcus Inc., after the firm reported an 83.6 percent drop in third-quarter profits. “We don’t like it.”
Many are working to conserve cash by cutting frills and appealing to suppliers, already fighting razor-thin margins, to halt or divert shipments or cut wholesale prices.
“Most stores and vendors are trying to be collaborative partners with what they hope will be something that will lead to a win-win for both of them, or, in this case, less of a loss for both of them,” said Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates. “They each want to live for the next positive business cycle. It wouldn’t be in anybody’s interest for key guys to go out.”
For stores, discounts and givebacks from suppliers could rescue the fourth quarter. “It’s going to be the difference between those who have better profits over the holiday season and those who are a complete disaster,” said David Bassuk, managing director in the retail practice at AlixPartners LLP.
That dynamic, though, will sorely test efforts among stores and vendors to work more collaboratively, all the way down to the factory and raw material levels, as each link in the global supply chain is pressured, a domino effect that began when consumers slowed their spending, creating a mass of excess goods.
“I started in retailing at the end of the Great Depression, in 1938, and retailers were falling by the wayside one after another,” said Ira Neimark, former Bergdorf Goodman chairman. “The small ones dropped out, but the ones who had the financial backing were able to continue.”
That process could be repeating itself, and Neimark suggested a survival-minded approach for stores: “When a heck of a storm is coming up, just lower your sails and ride it out rather than try to fight it.”
Fashion, for the most part, seems to be doing just that. The problem is, no one knows when the storm clouds will blow over.