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By The Numbers

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.

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Special Issue
WWD Denim In Depth issue 05/22/2008

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.

This story first appeared in the May 22, 2008 issue of WWD.  Subscribe Today.

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.”

 

RETAILERS’ REPORT

Retailers that cast themselves as denim specialists continue to see their businesses grow while the industry has tempered. Lady Reiss, owner of the Blues Jean Bar, a chain of five stores in Chicago, Dallas, Denver, San Francisco and Santa Monica, Calif., said it was difficult to keep shelves stocked in 2004.

“Obviously, that’s changed,” said Reiss. In response, she diversified her assortment to include T-shirts and accessories. Still, denim represents the core of her business and isn’t likely to change.

“The most surprising thing is that we’re really seeing that true core demand not waver,” said Reiss. “There’s a certain customer who wants to feel good about themselves and jeans are a staple of their wardrobe.”

Customers are more likely to save money on other aspects of their wardrobe like tops, she added.

Reiss has concerns about the lack of a clear new direction in the industry. Skinny and wide-leg styles have established themselves, but colored denim didn’t entice most customers.

“The denim industry hasn’t come up with something super new,” she said. “Eco jeans have been the most recent, but that doesn’t make a huge difference to our customer base.”

Reiss cited the William Rast, People’s Liberation and Habitual labels as some of the smaller brands that had performed well so far this year.

Alison Barnard, owner of In-jean-ius in Boston’s North End, has noticed the efforts of many of the larger premium labels to expand into new product categories in a bid to present themselves as lifestyle brands.

“I’m not needing them to be a lifestyle brand, but I understand it,” said Barnard.

Barnard’s customers are still seeking a new pair of jeans each season, but the task of presenting them with new brands has become more of a challenge now that she’s only bringing in between four and five new brands throughout the year. Fidelity Denim and Fortune Denim have been two strong additions to her assortment.

Barnard said customers have reacted positively to the introduction of petite-sized jeans from many brands.

“We have waiting lists whenever we get a new shipment of a petite jean,” she said.

Thomas George, owner of E Street Denim in Chicago, believes consumers are still more than willing to spend, but have been trained by the continual price promotions at large retail chains to wait for a sale. The problem is amplified by simply the perception of an economic downturn.

“They’re still spending, but the difference is they want to beat the system, so they’re buying price-driven merchandise,” said George.

The number of brands may have vastly increased, but prices have not followed suit, in George’s opinion. When he opened his store in Highland Park in 1993, George said brands such as Replay, Diesel and Miss Sixty retailed for $125 to $135.

“Today, you’re sitting with jeans in the $145 to $175 range,” he said. “I don’t particularly perceive that $30 in 15 years is a great up.”

George said brands chasing fashion trends rather than offering a unique perspective has resulted in a lack of variety in stores.

“Everything should be dark and skinny all at the same time, how did that work out?” George asked rhetorically. “We’ve made invalids out of customers by making them perceive there is a wrong thing to do.”

European retailers have also seen denim sales slacken and are on the hunt for what’s next.

“Premium denim was so strong for such a long time,” said Sarah Rutson, fashion director at Lane Crawford, adding that denim sales have slowed down after dizzy heights of around 200 percent annual growth in recent years. “It’s hit saturation point.”

“What the denim market needs is more [ready-to-wear] collections built around denim,” said Pascale Camart, Galeries Lafayette’s head of buying for women’s wear. “They can’t live with denim alone.”

Camart named Pepe Jeans and Guess among accessibly priced, successful collections for the youth market.

Martin Wieczorek, head of buying at Printemps-owned urban apparel megastore Citadium, said, “For certain brands, there’s an opportunity to develop their denim, such as Pepe Jeans, while others need to develop their rtw, such as Replay, Levi’s and G-Star.”

Guess is a hot brand across all categories at Citadium, said Wieczorek, adding, “The accessories sell insane amounts.”

Camart also believes soaring price tags are presenting a problem.

“The price points of brands like Diesel and Seven are too high now to be sold in our provincial stores,” said Camart. “They only sell well in Paris.”

Among the best-selling brands at Galeries Lafayette are Guess, Le Temps de Cerise, Levi’s and Pepe Jeans. G-Star, meanwhile, is the biggest volume brand at Citadium, though sales have been leveling off because of the demise of the cargo pants trend, said Wieczorek. At Le Bon Marché, the best-selling premium brands have been J Brand, Seven and Citizens of Humanity.

 

THE SIMPLE SOLUTION?

An almost universal belief in the power of opening branded stores has taken hold of the denim industry over the last year. Some brands are investing in stores as a way to provide a platform to launch product extensions. It’s a quest to present themselves to consumers as more than single-product labels. The accepted wisdom is that consumers are buying a lifestyle, not a product. Other brands see their traditional distribution channels weakening and believe they must take matters into their own hands.

Denim designer legend Adriano Goldschmied believes brands underestimate the difficulty in opening and running stores.

“I feel most people say, ‘Oh, the business isn’t doing well,’ so they are going to open stores,” said Goldschmied. “But they’re going to face in a much shorter period of time a more serious problem.”

More often than not, Goldschmied believes the product should get more of the focus. “The fact that the brand has been slowing down in stores doesn’t mean that the solution is to open stores,” he said. “You have to think about your product and be more aggressive and bring more innovation to the market and be more interesting.”

Jerome Dahan, ceo of Citizens of Humanity, believes there’s ample opportunity for brands to succeed with their retail customers. “There is no secret that it has been more difficult in the past six months,” said Dahan.

The number of brands playing in the market has diminished over the last two years and retailers are sticking with their strongest performers.

“[Store buyers] will buy what’s safe, but safe is not what makes you a leader,” said Dahan, “[Retailers] need to look even further. What’s going to be the brand that will bring in newness?”

The Top 10 Women’s jeans Brands by Sales: 2008

1. Levi’s
2. Gloria Vanderbilt
3. Lucky Brand
4. Lee
5. Seven For All Mankind
6. Levi Strauss Signature
7. Riders/Blu by Lee
8. Liz Claiborne
9. L.E.I.
10. Calvin Klein
Source: The NPD Group

Channel Surfing
U.S. Women’s Jeans Sales by Dollar Volume

2008
2007
% Change
Specialty Stores
$3.13 billion
$2.67 billion
16.9
Department stores
$1.22 billion
$1.21 billion
0.07
National Chains
$1.18 billion
$1.24 billion
-5.8
Mass merchants
$1.09 billion
$1.25 billion
-12.7
Off-price retailers
$571.6 million
$462.4 million
23.6
Mail/Internet
$337.8 million
$296.3 million
14
Other
$198.6 million
$184.4 million
7.7
Outlets
$56.8 million
$83 million
-31.6

U.S. Women’s

2008
2007
% Change
Women’s Sportswear (dollars)
$65.5 billion
$68.01 billion
     -3.7
Women’s Jeans (dollars)
$7.77 billion
$7.41 billion
      4.9
Women’s Sportswear (units)
4.05 billion
4.05 billion
     -0.1
Women’s jeans (units)
317.2 million
323.2 million
     -1.9
Average Jeans Price
$24.50
$22.91
      6.9

Pricing It Out
U.S. Women’s Jeans Sales by Price Point

2008
% Change
Under $10
$204.7M
-6.6
$10-$19.99
$1.94B
-12.1
$20-29.99
$2.2B
0.5
$30-$39.99
$1.19B
14.1
$40-$49.99
$712.1M
23.6
$50-$59.99
$480.6M
11.8
$60+
$1.05B
45

 

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