By  on December 6, 2004

NEW YORK — The rules of retailing are changing.

As the big get bigger, the pace of consolidation has quickened, which leaves retailers vying for better market positions, and consumer loyalty to traditional retail channels is waning. On the operations side, poor inventory management, once fixed by steep markdowns, may break a retailer.

There are strategies retailers can engage in to grow their business in this climate, said industry executives who took part in a roundtable hosted by Berns Communications Group, a business communications firm specializing in retail and fashion.

The panel, moderated by WWD, included Susan Sokol, president of Vera Wang; Laura Pomerantz, principal at PBS Realty Advisors, a commercial real estate boutique with a focus on retail and fashion; Rick Darling, president of Li & Fung USA, specializing in global sourcing and supply chain management; Gilbert Harrison, chairman of investment bank Financo Inc.; Robert Skinner, president and chief operating officer of Kellwood Co., and Scott Bernstein, principal of SB Capital Group, a Schottenstein Stores Corp. affiliate that provides a wide range of services to retailers.

The panelists discussed how to maximize the supply chain, diversify a brand, reach new channels, leverage retail real estate and identify new growth partners.

Darling tackled the importance of maximizing the supply chain. Companies are looking at the best factories to produce goods “without concern about the best country,” he said.

This phase in the evolution of supply chain management centers on improvements to the entire chain, from product development and sourcing to information technology, as well as social responsibility and compliance.

“And that is a huge fundamental shift in the way people view, not only sourcing, but their entire supply chain,” Darling said.

Other shifts likely will stem from the end of apparel and textile quotas on Jan. 1. “The lifting of quotas [on China] is an issue, but the real issue is the value that is unlocked when you start to look at the best place to make a particular product,” he said. “It’s the ability to look at fabric, for example, from more than one country and saying, ‘That’s the best place to get the fabric,’ and then looking elsewhere and saying, ‘That’s the best place to get the trim.’”While sourcing becomes more complicated, “at the end of the day, it drives better product development, and at some level, better pricing,” Darling said.

On the branding front, the panelists agreed that diversification of a brand is playing a more important role at retail. Sokol said the executive team at Vera Wang, after examining its brand, “found an opportunity to clearly define two segments of the brand: bridal and fashion.”

She explained that the company studied these markets, how their products were positioned and the seasonality of the businesses, “and then we positioned the brand to grow.”

Sokol said it is critical to identify the tangible assets of a brand before marketing or growing the brand. “I also think it is important to look at your total business and identify untapped areas in the marketplace that could be a natural extension of your brand, and then pursue those opportunities for top-line growth,” she said.

For example, when Sokol joined Vera Wang, she worked with the team to identify “a real void in the marketplace,” which she describes as “accessible luxury.” The idea was to offer fashion apparel to aspirational consumers at the right price point.

Sokol offered a caveat, noting that licensing works “if done well, with the right partner and quality of product.”

Pomerantz pointed to a trend evolving in the retail real estate segment known as lifestyle centers, “which are open-air shopping centers that mix national retailers with local boutiques.”

The centers provide upscale shoppers with convenience, she said. “And in secondary markets, it meets a pent-up demand for fashion.”

The overwhelming reason for the success of lifestyle centers is the consumers’ desires for shopping at specialty retailers. The criteria for their development include affluent neighbors and an annual income of at least $75,000, Pomerantz said. “This compares to annual household incomes in other shopping center markets of $35,000 to $60,000.”

She added that the tenant mix includes “a luxury retailer to meet the pent-up demand for those products,” as well as an anchor store, “be it a Neiman Marcus or Saks or whatever.” She said that the idea is to create ambience that is “more Main Street than mall,” with architectural nuances such as a Spanish motif, something “that has charm and personality.”Meanwhile, retailers have been going through a retrospective period in which they looked at their portfolios and asked “themselves what they had, and what they could do with it, so they could impact gross margin,” Bernstein said.

“A no-brainer for a lot of these companies was to look at their real estate,” Bernstein said. “And what they found were some hidden jewels that had real value.”

Real estate offers many retailers “untapped value.” An example is Kmart Holding Corp., which closed stores after its bankruptcy last year, sold off units to The Home Depot and later sold stores to Sears, Roebuck & Co. Asked if he thought Kmart had jettisoned its best stores, Bernstein said: “I don’t know if they sold their best-performing stores, but they sold stores that had significant value. They were the ‘A’ stores in terms of value.”

Bernstein pointed out that the value of a retailer’s real estate is not realized until the leases and/or stores are sold. But when it’s time to sell, retailers reap the benefits right away.

Lord & Taylor is one example where stores were closed and benefits were quickly realized, “which had a direct result on improving gross margin,” Bernstein said. “And this is something that could not have otherwise been achieved through sales growth.”

On the mergers and acquisitions front, Harrison said it’s been a busy year. “And it’s been a confusing one, too, especially with the announcement of Jones Apparel Group buying Barneys New York,” he observed. “Other than the rationale of being able to test consumer reaction to product, I don’t understand what the rationale is with this deal. It will be interesting to see how it evolves, and whether it spurs other ‘out-of-box’ acquisitions.”

Harrison said deals over the past year reflect “the tremendous impact private equity funds are having on the market.”

“They are competing with all of the strategic buyers,” Harrison said. “And in some cases, they may even pay more for a company than a strategic buyer.”

The banker said the private equity funds have about $100 billion to spend. Recent deals include Sun Capital buying Mervyns; Crescent Capital purchasing Loehmann’s, and J.W. Childs Associates acquiring Joseph Abboud.As far as multiples paid for the target companies, Harrison noted that it’s been in the range of six to 10 times earnings before interest, taxes, depreciation and amortization. “There have been some extremely high premiums being paid out there,” he said. But that’s OK, the banker added, “because the quality of the deals is much better.”

Meanwhile, Wall Street has pressured public companies to grow their businesses.

Skinner said for many firms to drive top-line growth, “you need to make acquisitions.”

“We are in a no-growth or nominal-growth business.” Skinner explained, adding that apparel industry sales, year-over-year, barely break 1 percent. “So, for big companies to increase sales, they have to acquire. The second reason why we do them is to raise operating margin and our return on capital.”

Because Kellwood is also in the portfolio-management business, acquisitions are one way to diversify and mitigate the firm’s risks, Skinner said.

He noted that brand acquisitions are often done as a way to branch out into new markets, something Kellwood did this year with the $140 million acquisition of Phat Fashions.

He disclosed that Kellwood’s criteria for an acquisition include brands that resonate with consumers, “and that was not necessarily the case a decade ago.” The apparel firm looks for a company that can grow, and there must be good people in place at the top, he said.

Over the past five years, Skinner noted that VF Corp. has done about 10 acquisitions; Liz Claiborne has completed eight; Jones Apparel, about eight, and Kellwood, seven. Kellwood has done about a deal a year for 20 years, he said.

Skinner and Harrison said price tags on companies also have risen. “Certainly, the prices and multiples are trading up,” Skinner said. “I used to laugh when people talked about deal prices as a ‘times-sales’ rather than a ‘times-EBITDA,’ but we’re getting to that territory pretty quickly.”

Asked if Kellwood would consider acquiring a company with a strong brand, but that was mismanaged, he cited a mantra of Hal Upbin, Kellwood’s chairman and chief executive officer: “It always costs more and takes longer than you think it will.“So, if a situation is troubled, then it could be more troubled than is evident to the eye,” Skinner said.

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