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Vendors Address the New Normal

Retailers are cutting inventories by 15 percent or more from a year ago to deal with the new nonshopping consumer.

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Get ready for the Post-Recession Era.

Even as vendors and retailers continue to struggle with nonshopping consumers, declining sales and a near-term outlook that remains uncertain, the outlines of the world beyond the economic downturn are coming into focus. And the result can be summed up in one phrase: Less will be more.

The NPD Group estimates that 12 percent of vendors will not survive the recession and nearly 20 percent will abandon expansion strategies and retrench, focusing on their core products and markets. There will be fewer consumers, which will mean fewer stores, fewer collections, fewer products per collection and lower inventories.

That will be what will be required to adapt. But to survive, vendors and retailers will have to ensure there is less duplication, faster turnarounds and more exclusive, innovative product to excite shoppers.

Here, WWD canvasses manufacturers, analysts and consultants on the key factors that will drive the age of the New Normal.

INVENTORY REDUCTIONS

Retailers are cutting inventories by 15 percent or more from a year ago, meaning reduced orders for vendors, as well. Small manufacturers are the most vulnerable as merchants stick with tried-and-true labels to lure reluctant shoppers back into their stores. Although a painful process, the weeding out is a necessary one, most vendors believe, since it forces them to become more creative to make the cut. It also will benefit retailers as they are forced to edit their assortments and create a distinct point of view.

“[Reducing inventory] is probably one of the healthiest measures being taken, not only to help profitability, but also to help the customer understand a store’s point of view. Assortments have become too homogeneous. There needed to be some editing. It may take one or two more seasons to win back the shoppers’ trust in price-value ratios, but ultimately, our collective responsibility is to delight the customer. If we keep our eye on that, she will return with conviction.” — Marion Davidson, president and chief executive officer, Slane & Slane

“There was just too much stuff out there. Hopefully, retailers will start curating their stores more creatively, in a way that’s more specific to their customers and not be bound to the strange version of a ‘season’ as defined by the current delivery cycle.” — Scott Sternberg, designer, Band of Outsiders and Boy

“Sometimes overassorted categories are confusing. Narrow and deep is good for the retailer, and a very good thing for the vendors that continue to supply the retailer. It gives them greater exposure.” — Jeff Rudes, president and co-founder, J Brand

“For strong brands, these shifts are a good thing, as there will be opportunities to increase market share as retailers further consolidate vendors. The supply-and-demand process is imperfect. There will be an overreaction on the reduction of inventories, which will be followed by an overreaction on increasing inventories when the recovery builds momentum. In the short term, lower inventories will create a much-needed sense of urgency for consumers to shop earlier and pay full price. It will take years to happen, but it also took many years for the U.S. to get into the massive oversupply state that we are currently in.” — Tom Murry, president and ceo, Calvin Klein Inc.

“We’ve been overassorted in national brands and store brands for years. This has been driven by both retailers and manufacturers to meet various distribution and financial strategies. Unfortunately, an excellent example of this can be seen in the current crisis with the U.S. automobile industry. It’s designed to meet short-term goals with often disastrous long-term consequences.” — Richard Leeds, chairman, Richard Leeds International

“I think that the new disciplines we are all executing over the last year will not and should not disappear. The painful learnings on inventory controls, monitoring of our personal overhead and generally bettering expense controls in total are a positive we will all take out of a very difficult time period for retailers and suppliers alike.” — Seth Morris, president, The Carole Hochman Design Group

 


“Yes, there are risks, but it is about controlling the balance, reducing too much and missing sales or not being able to capitalize on trends [that] will hamper growth. You do need to take risks. Most great successes started with risk and a balance.” — Michael A. Herman, senior vice president of sales, merchandising and production, Natori Co.

“The market was oversaturated with vendors, product and retailers. There have been way too many brands and way too many products in a way that was unsustainable. By tightening the assortment, there will be still be many options. Sometimes they don’t need 20 brands — 12 good ones make the same sales as 20. It is all about maximizing your [stockkeeping-unit] assortment so you still have enough variety to give people what they want.” — Daniel Landver, ceo, Lucas Design International

“Weeding out is a reality in the marketplace when times are tough. At this point, being lean is the best way for retailers to be, so it would be more risky to do nothing.” — Max Azria, designer and ceo, BCBG Max Azria Group

“Inventory is a variable of demand. Since the buying power of our consumer is currently reduced, having less inventory on the floor…allows us to focus on full-price selling and operate a cleaner business. When the initial wholesale buy is reduced, there is even more pressure on the buyers to select trend-right product that fits, that is delivered on time and with high perceived value.” — Beth Bugdaycay, ceo, Rebecca Taylor

“It’s a lot better to lose a couple of sales than to be overinventoried. In this case, ‘less is more’ really is true. The industry is learning that the top line doesn’t matter, but the bottom line counts.” — Allen Ellinger, senior managing partner, Marketing Management Group

“Retailers want to keep inventory very tight, but at the same time you don’t want stores to look barren, and you don’t want them to be filled with the same things people saw last season — it will affect consumer perception. Plus, if you can’t meet customer needs, then they’ll go elsewhere to find what they are looking for. It can be a very fine line that retailers have to walk.” — Christine Chen, retail analyst, Needham & Co.

SELLING OUT

For the retailer, it’s a balancing act between creating demand and disappointing the customer. Although stores are counting on being able to reorder midseason, that may not be possible, especially on fashion goods, since vendors have cut back as well so as not to be stuck with excess merchandise. Although Wall Street has traditionally looked at sellouts as missed opportunities, the recession has actually changed their view. Keeping inventories in line is now their primary concern, both for retailers and suppliers.

“Retailers are trying to shift more of the risk to vendors. But for us, we don’t want to take a risk on someone else’s potential sale. We are going to make what they order and there’s no guarantee that there will be more for them to order later in the season. It would be a bad business decision for us to take on more risk. In this environment, if you carry inventory and you’re wrong, the penalty is severe. It’s not worth the possible upside.” — Doug Wood, president and chief operating officer, Tommy Bahama

“Just like fashion trends, lean inventories can be overdone. I’m worried that retailers are going to disappoint customers. There comes a time when shoppers can’t find their size or aren’t seeing fresh trends in stores, and they get turned off. I used to factor in a little extra for reorders, but now I’m actually factoring in possible cancellations. I’m not even buying 100 percent of orders now. I’m nervous just like the retailers are, and I don’t want to stock inventory.” — Karen Murray, president of the sportswear coalition, VF Corp.

“We keep our levels limited. We want to keep everyone hungry and have them order more next time. Reorders used to be about 16 percent of our business, but we’ve gotten very good at keeping our inventory very clean.” — Neal Kusnetz, president, Robert Graham

“If we sold 10 of something in the old days, we would make 12 and count on reorders. Now if we sell 10, we make eight and chase the business. I’d rather have missed a sale than have an unsold garment.” — Marty Staff, ceo, JA Apparel

“These days, we have to be able to react to things that are working. The biggest risk for retailers is that they won’t have enough of the right product. No one will be holding inventories for retailers, and the buying process has to be more focused.” — Chantal Bacon, ceo, Betsy Johnson

“You cannot keep inventories lean and do more with less. [A retailer] can be caught in the last quarter of the year running on empty. There could be a big issue of destocking.” — Santiago Gonzalez, president of Nancy Gonzalez

“I don’t think the inventory is going to drop too low. I think what is going to happen is that [retailers] are going to buy closer to the vest. They are going to need to have support from suppliers to have speed to market. That is the survival-of-the-quickest game.” — Jeff Rudes, J Brand

“There is nothing wrong with creating demand by being out of stock on hot trending items. It serves as a psychological stimulus.” — Seth Morris, The Carole Hochman Design Group

“The vendors, in my opinion, are not taking any risks, even for replenishment items. I think that when it sells out, it sells out. If it means some divisions have to be shut down, they will be. If the line is not something that is to die for, is there really a need for it to exist?” — Jennifer Black, analyst, Jennifer Black & Associates


MARKDOWNS

Full price doesn’t mean much anymore in light of in-season discounts that can hit 70 to 80 percent. As Dana Telsey of Telsey Advisory Group said recently: “Consumers of all income levels are looking for promotional prices. There’s a new way of shopping.” NPD reports that 52 percent of all merchandise is now sold at promotional pricing — five years ago, 52 percent was sold at full price. The risk of such deep discounting is that original selling prices become meaningless and that, even once the economy recovers, consumers will resist paying full price.

“This [markdown trend] is going to be here for at least through the end of the year. We will see a correction when business in general picks up. Right now in this recession we have trained consumers to shop when stores are promoting and on sale. Until the economy picks up, these stores have to do what they have to do to stay in business.” — Jeff Rudes, J Brand

“Both the retailers and the vendors want to manage their inventory levels in order to garner as much full-price selling as there may be, and minimize the markdown rate.” — Dana Telsey, chief research officer, Telsey Advisory Group

BUYING CLOSER TO NEED

J.C. Penney is seeking to reduce its production time to 12 weeks from 25 weeks or more. And Penney’s is not alone. With retailers clamoring for faster turnaround, can vendors answer the call? Fashion firms say anything less than eight weeks is impossible to achieve due to the demands of the production schedule. But those firms that produce in the U.S. have a leg up.

“The concept of retailers looking to buy closer to season generally favors a Made in America company. I believe it would be much harder, if not impossible, for overseas manufacturers to significantly reduce their turnaround cycle. For vendors with overseas production, belt tightening on the part of retailers may be a bad thing due to high minimums. Domestic production allows us to be more flexible.” — Lida Orzeck, ceo, Hanky Panky

“Everyone is looking for shorter lead times, and everyone is looking to book goods as late as possible to get a better gauge on cash flow and demand. Eight weeks is our average turnaround time from order to in-store. It really hasn’t changed.” — Daniel Landver, Lucas Design International

“I think it’s going to be not only more vertical, but they will have to be quick-turn. This is about turn. That is why I am 98 percent Made in the USA. It’s all about timing, not about buying six months in advance. I can’t imagine a buyer buying anything more than three months out — they’ve got to see what’s coming next. If this is July, I’ll be buying for September or October and see what’s moving in stock and what I can get back into.” — Allen Schwartz, owner, A.B.S. by Allen Schwartz

“From better use of IT tools to better communication to clearing goods through Customs faster and receiving and reshipping goods more quickly, it’s all about shaving days off our delivery time.” — Bob Skinner, ceo, Smart Apparel

“Everyone will think differently going forward, and I don’t think we will ever come back completely to where we were. The buy-now, wear-now was a long time coming. To actually have the product in the stores that people can wear right away, that’s what it’s all about.” — Chantal Bacon, Betsy Johnson

“Buying closer to the season to me is one of the most important steps our industry can take. Stores are taking merchandise too early and promoting it at the height of season. The more we can get retailers to bring goods in in-season, the better off they will be. I think it will have to take some time, but it’s certainly worth everybody’s time and investment to create a more intelligent delivery cycle.” — Allen Ellinger, senior managing partner, Marketing Management Group

“Many will probably have to source differently or source closer to home so they don’t have to worry about lead times for shipping from places further away or the need to fly goods in. That might mean higher costs such as for labor, for example, depending on where they now need to source from.” — Walter Loeb, retail consultant, Loeb Associates

VERTICALIZATION

Department stores have been losing market share nearly every year since 2003, and that trend is expected to accelerate this year. According to NPD’s Cohen, department stores, which account for 16 percent of fashion sales, have been losing about 0.5 percent a year, and he expects they could lose up to a full point as mass merchants and lower-priced retailers gain consumer attention during the recession. Fast-fashion chains such as H&M and Zara continue to make inroads, and lower-priced stores from Wal-Mart to J.C. Penney also are poised to exploit the opportunity. And so vendors have a choice: They can either open their own stores — if they’re financially able — or go down-market to increase their reach.

“Opening a new store is not like throwing two more jeans in the line. It is an expensive undertaking. If companies are in trouble, the funding is not there to open stores. The brands that are opening stores are really building their brand, and they are in a strong position.” — Jeff Rudes, J Brand

“If you look at who is doing extremely well, it is H&M, Zara, Forever 21, Topshop because they are giving a good value to the customer and they are completely vertical. They are making the margin that the wholesaler would make and they are making it on both ends. They make a lot larger margins with equal expenses as a department store. That is not to say the traditional retail will become obsolete. It is going to become more narrow.” — Daniel Landver, Lucas Design International

“Forever 21’s ability to move quickly to bring fashionable product to the sales floor in season, not unlike European retail counterparts Zara and H&M, is the model other retailers here might want to emulate. That’s the model that will prevail in this environment.” — J. Michael Stanley, executive vice president, Rosenthal & Rosenthal

“Shoppers are very value conscious, but they certainly remain fashion conscious, too, so retailers are having to adjust to meet those expectations. This will be a new way of doing business. This is precisely why you see people looking for shorter lead times and faster turnaround — they’ve learned from the successes of the fast-fashion model.” — Christine Chen, Needham & Co.

“The smart money today is being invested with Penney’s, Kohl’s, Target and Wal-Mart. Well-known designers are creating licensing deals to design original products within the price points of those individual retailers.” — Richard Leeds, Richard Leeds International

There are a few brands that have chased low-price concepts. When you try to drop price in a tough environment, the image of the company is lost and it just doesn’t work unless you go to the Targets of the world that know how to take something that might have been on its way down and build it at their level. If the [denim] company is not putting out something that is pulsating and new to attract [the customer], you are in trouble.” — Jeff Rudes, J Brand


THE NEW NORMAL

Will there come a time when a retailer picks up the phone to ask for a reorder and is told to call back in six months? Maybe not, but as inventory levels drop at all levels of the industry, that may one day become reality. Either way, it’s likely that many small companies will not be able to survive the recession, leaving fewer larger companies to make up the slack. Regardless of how it turns out, there’s definitely a changed reality.

“It will never go back to the way it was because it’s a new game and these are new times, and it’s good because a lot of people that were in there shouldn’t have been. There was too much of everything. Fashion drives the business, not volume.” — Allen Schwartz, A.B.S. by Allen Schwartz

“Today, more than ever, you have to have a reason for being. It is clearly survival of the fittest. Retailers are viewing open-to-buy dollars as an investment [on] which they expect to get a return.” — Abe Chehebar, president and ceo, Accessory Network Group

“Mediocre performers used to get by, but when a customer is forced to tighten her purse string, they look less desirable. It’s one thing if an item is at an H&M-Topshop price — it’s fine. It’s priced to move. But if it’s in the luxury market and looks mediocre, then why would you buy it? It’s forced designers to rethink their formulas.” — Alexis Bittar, founder and designer, Alexis Bittar

“We are testing and reacting more aggressively as a means of getting product to market we know will sell. It’s all about getting the right product to the stores at the right time.” — Rick Luft, president, Swank Inc.

“I would never say people going out of business is a good thing, but this will make us more efficient. We were over-retailed, overstored, overlabeled. I don’t think one day this is going to be over and the faucet will turn back on. That era of overspending, ‘I’ll just put it on my credit card,’ is over.” — Erin Armendinger, director of the University of Pennsylvania’s Wharton School Jay H. Baker Retailing Initiative

 

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