By  on December 31, 2009

Denim proved to be a winning category for retailers throughout the recession and its momentum carried through the holiday season — but the warning lights are flashing.

While the better-than-expected sales have been welcome news for brands and retailers alike, December’s results offered a clear picture of consumers’ pricing limitations as the new year approaches.

“The reset button has been pressed,” said Andreas Kurz, former head of Diesel USA and Seven For All Mankind and now president and owner of fashion consultancy Akari Enterprises LLC. “We are back at the level where we were two years ago, and we have to start over again and with different rules.”

Lawrence Scott, owner of Pittsburgh Jeans Co., has seen the change in his customers. They’ve continued to buy, but their tolerance levels on pricing have become pronounced and aren’t likely to change soon.

“Nobody wants ridiculously overpriced jeans,” said Scott. “Anything over $300, they’re really not interested in it right now. Even in the mid-$200 range, you’re on shaky ground. It’s going to take a long time to get back to those higher levels.”

And difficult economic conditions may have brought an early end to the vintage and distressed looks seen a year ago.

“I’ve seen a lot of khaki and cargo looks — it’s going back a little more clean,” said Candice Gallagher, owner of the Billie Jeans boutique in Cranberry Township, Pa.

Customers are balking at paying upward of $250 for jeans that look worn or have holes in them, said Gallagher, adding: “I think the manufacturers are seeing that.”

“Customers are always asking if we’re running promotions and they’re quick to leave if we aren’t,” said Gallagher. “We’re relying a lot on my loyal customers.”

That said, shoppers have been drawn to denim leggings, which are generally cheaper.

Scott and Kurz said the holiday season solidified the $100 to $175 price zone as the denim industry’s clear sweet spot. Kurz noted Joe’s Jeans shifted its assortment to offer more styles at its opening price point, while Rock & Republic introduced its Recession Collection earlier in the year. New entrants to the market, said Kurz, are going straight to the $150 price point.

“Everyone is trying to cover this price point,” said Kurz.

During a conference call on Wednesday to preview December comparable-store sales, due out next week, Stifel Nicolaus retail analyst Richard Jaffe offered further warning about consumers’ mind-sets heading into the new year. Consumers might have salvaged the holiday season, but Jaffe believes they’re likely to retreat once again and focus on saving. This could make spring particularly challenging for retailers that have already cut their costs and reduced inventories. “The game’s gotten much harder for these retailers,” said Jaffe during the conference call.

Scott is expecting to see similar behavior from customers at his store.

“We’re playing it safe still. We’re keeping inventory tight and not keeping the huge inventory levels that we used to,” he said.

Working this way is proving to be the new rule rather than the exception. As a result, new brands looking to enter the market are likely to encounter even greater resistance from the specialty store buyers on whom they depend to build their image and credibility.

“We’ve become so used to this over the past year and a half that it’s in our makeup now to be careful,” said Scott. “For 2010, we’re really focusing in on who does well for us and I’m going deep into those guys. I’m not testing as many brands for spring as we usually would.”

Despite the prospect of lower prices, there’s ample reason for continued faith in the category. The women’s denim market has managed to generate steady growth despite widespread economic decline and a pullback in consumer spending, a development brands and retailers attribute to the higher perceived value and versatility consumers associate with jeans when compared with products such as designer handbags, accessories or tops. WWD’s annual Denim in Depth issue, published in May, found that women’s jeans sales in the U.S. had risen 4.6 percent to $8.03 billion for the 12 months through March, achieving growth through one of the most challenging retail environments in decades.

“I think what we’re beginning to see is that denim has a life of its own,” Marshal Cohen, chief industry analyst at market research firm The NPD Group, which provided the data, told WWD at the time. “I don’t want to say recession-proof, but it was able to maintain whatever growth it had.”

The trend continued through the summer and set denim on solid footing heading into the holiday season. According to NPD data for the 12 months through September, women’s denim sales in the U.S. rose 6.3 percent to $8.36 billion from $7.86 billion during the same period a year ago. The average price women paid for jeans fell 1.3 percent to $23.59 from $23.90. Sales of men’s denim remained essentially flat, logging a 1 percent decline to $5.38 billion from $5.43 billion. Men paid an average of $23.21 for jeans compared with $23.38 a year ago.

“Back-to-school was nonexistent, but after that, October through November was good,” said Scott.

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