Another Tough Half? Possible War in Iraq Adds To Dire Outlook

Uncertainty. It is the worst thing that businesses can face, but the luxury goods and fashion sectors appear to be headed for at least another six months of it after a year-and-a-half of catastrophe, an economic downturn and financial...

Uncertainty. It is the worst thing that businesses can face, but the luxury goods and fashion sectors appear to be headed for at least another six months of it after a year-and-a-half of catastrophe, an economic downturn and financial scandals.

This story first appeared in the October 4, 2002 issue of WWD.  Subscribe Today.

Now a potential war with Iraq is muddying the picture even further for brands from Gap to Gucci. There are still a lot of questions about whether a war will happen. But Congress is poised to give the Bush administration its nod to use

military force should Iraq not live up to a United Nations disarmament resolution, which has yet to be penned.

One scenario, widely subscribed to in Washington, pegs a war starting sometime after Jan. 1, 2003, if Iraq demonstrates intransigence by concealing an arsenal President Bush says exists and threatens world peace. Such a time frame would mean that retailers would be able to push forward with their holiday selling plans through the end of the year, even as they face a consumer that is already antsy.

“There is a mosaic of fear,” observed Edie Weiner, president of long-term trend analyst Weiner, Edrich, Brown Inc. “There is not a whole lot of good news; the go-go days are gone. People are concerned about potential war with Iraq, terrorism — the whole geopolitical picture. They are worried about the economy — unemployment, the markets — and they are fearful about the future of education and are feeling alienated in an increasingly computerized society.”

That means consumers already are tightening their purse strings, especially when it comes to spending on goods they’ve already stockpiled, like apparel, said consumer trend analysts contacted Thursday. At the same time, however, they noted Americans are continuing to spend on things that make them feel good, from massages and manicures to personal care products and luxurious cotton sheets.

But it is the potential of war that most concerns industry executives, especially those in the luxury sector. “The big question mark is whether there will be a war,” Domenico De Sole, Gucci’s chief executive, said last week in reporting the company’s 55.1 percent drop in net profits. “In a war situation, our industry goes through a lot of suffering.”

The biggest impact would be seen in tourism, which already is suffering in the continuing aftermath of 9/11. Jacques-Franck Dossin, luxury analyst at Goldman Sachs in London, estimated that 40 percent of all luxury goods are purchased by travelers “so an attack, of course, would have a significant impact in the short term.”

For 2003, Goldman Sachs was projecting a 10 percent rebound in sales at Louis Vuitton, an 8 percent rise at the Gucci division of the Gucci Group, and a 12 percent gain for Hermès. “That was if there was no bad news on the macro-political situation. Obviously, a war would have a negative impact on those figures,” he said.

Other analysts weren’t expecting much of a turnaround in the luxury sector in 2003, but the possible Iraq war has them reevaluating even their earlier cautious projections. Sagra Maceira de Rosen, fashion and retail analyst at J.P. Morgan in London, said she was confident about Gucci but cautious about companies like Compagnie Financiere Richemont and LVMH Moët Hennessy Louis Vuitton. Maceira de Rosen was expecting top-line growth to be 12 percent for Gucci Group, 7 to 8 percent for the Gucci division, 6 percent for Richemont, 6 to 7 percent for LVMH, and 13 percent for Burberry.

“But, if a war happens, all bets are off. I will close my models, close my numbers and shut off my computer because there is nothing I’ll be able to do. Travel will stop. You know, we are not talking here about the Balkans, which was an internal conflict. We are talking about the U.S. and the rest of the world bombing Iraq. It’s going to be like the Gulf War, when everything came to a standstill. I also think that if the war is not a short conflict, we’ll have much bigger problems on our hands. If it’s a short conflict, then things will rebound,” she said.

Andrew Gowen, an equities analyst at Lehman Bros. in London, agreed. “We never really thought of 2003 as a spring-back year. Our forecast for top-line growth is 6 percent for the industry, compared with our 4 percent forecast for 2002. If there’s a war, it’s going to be another weak year.”

But it’s not only the luxury sector that would be hit. Executives from manufacturers and retailers across the board admitted their businesses would suffer during a war with Iraq as much as they did during the first invasion of the country in 1991.

Hal Upbin, president, chairman and ceo of Kellwood, said: “It will be a negative on the general economy. It’s the uncertainty of war and people not knowing how long or how intense it will be. All of the unknown puts fear in peoples’ minds. You become more cautious and more careful in your spending.

“I don’t see where anyone benefits from the war, and the severity of the negative impact will be dependent on factors like the length, intensity…whether we’re impacted by chemical warfare. I really do think this is different and has larger implications than the narrow fight we fought in Kuwait. We always stay nimble to begin with…but my immediate concern is the dock strike. It seems one thing after another, doesn’t it?”

Designer James Purcell anticipates a similar reaction to 11 years ago. “Will it affect apparel sales? Absolutely,” he said. “I hope the Bush administration is a little more astute instead of running into this. If it does happen, just like it did during the Persian Gulf War, people will feel guilty for spending money. That will affect our economy, but I think it’s going to crash in January anyway.”

All this talk of war raises the question as to the impact a second U.S. military intervention in the Middle East would have on the entire American economy, which already is sputtering. An Iraq invasion would be on a much larger scale than that seen in Afghanistan, according to forecasts. The Bush administration has figured an Iraq campaign would cost the U.S. economy up to $200 billion annually for as long as it lasts.

Tracy Mullin, president and chief executive officer of the National Retail Federation, said it’s fortunate the Bush administration appears to have relented and will allow U.N. weapons inspectors to confront Iraq first. “If they are going to start with inspectors, it should get us through the holiday season and then we’ll see what happens,” Mullin said, recalling how the short-lived Persian Gulf War cost U.S. consumers $255 million a day in increased oil prices alone.

However, Mullin said if the Bush administration is calculating and enters an Iraqi war with a specific plan, then consumer worries would be kept to a minimum.

Julia Hughes, vice president of international trade at the U.S. Association of Importers of Textiles and Apparel, said a war with Iraq would certainly cause supply chain disruptions in the Middle East. “You’re going to have some problems and companies will definitely look pretty quickly to find alternate modes of shipping their goods” or switch production from the region, she said.

Rick Darling, president of Li & Fung USA, said the biggest question will be what overall effect a war in Iraq would have on the U.S. economy because oil prices might increase. He also noted that ocean carriers typically charge surcharges during wartime, which the carriers typically attribute to increases in their insurance costs during those periods. Higher shipping costs would likely translate into lower retail margins or higher retail prices.

Kevin Burke, president and ceo of the American Apparel and Footwear Association, said the specter of war hasn’t crossed his members’ agenda.

“We haven’t gotten a single call from a single member about a war on Iraq. But we’ve gotten dozens and dozens of calls about the West Coast port situation.”

For many, a war with Iraq would simply contribute to the already difficult circumstances the retail and fashion industries face. The warm weather has not been conducive to fall shopping; dock workers are striking on the West Coast, which could impact holiday deliveries, and the economy is not recovering as expected. Consequently, retailers have revised their holiday sales forecasts downward and lowered comp-store predictions.

As Hal Kahn, chairman and chief executive of Macy’s East sees it, the threat of war against Iraq hasn’t been a factor in the current retail slump. Rather, it’s the economy and the warm weather, in particular, that are hampering sales of big- ticket cold weather items, like coats. There also is a lack of newness in the market.

“The fear factor of war is not the major issue,” said Kahn. “But if there is war with Iraq, it will prevent us from seeing a turnaround. If there is a short war, people spend all day at home watching TV. If it drags out, it becomes another factor, along with the deterioration of the economy, adding to anxieties.”

“Obviously, people are very skittish about the world in a political sense and an economic sense,” said Michael Gould, Bloomingdale’s chairman and ceo. “Sure, it’s bringing down business. Certainly, upper-income customers have to be looking at the stock market. This has an enormous impact on higher-end businesses, and then you have to add less tourism to the mix.”

Peter Boneparth, president and ceo of Jones Apparel Group, said: “What’s hurting a lot is the uncertainty, it’s not the actual war or the prospect of it. We don’t plan our inventories based on a war, but we continue to be very cautious in our planning. It’s less of a function of there being a war, but more of an economic malaise. In 1991, it was very quick. It was a big morale boost and the economy came out in very good shape. What the war ultimately looks like is the key: is it short and decisive or long and drawn out?”

While not pledging support to entering a war, some said there could be a positive side to such an outcome.

“Right now, the fear of the unknown is impacting us,” said James Ammeen, chairman and ceo of Halston LLC. “There is financial uncertainty, there is market uncertainty and, combined with the threat of war, there is an impact on our industry worldwide. If there is a war, it will certainly clear up the uncertainty, and while it may have a negative affect at the moment, if it’s a short war, then it won’t have a long-term impact.”

Todd Slater, retail analyst, Lazard Freres, said, “It is hard to believe a war would impact consumers who are already feeling bunkered down. Typically, consumers do bunker down a little bit during an actual war, but I have a suspicion that a war mentality has already settled in. Our plans are aired everyday around the world and people believe war is inevitable.”

Jennifer Black, Wells Fargo Securities, who’s even more pessimistic, said, “The war puts the nail in the coffin. The impact would be that people would be glued to their televisions and war is not going to be a motivator for shopping. It is going to be another factor that does not stimulate consumer confidence and that could mean people will tone their spending down.”