You can find fault with Alan Greenspan, point a finger at Allen Questrom or Arthur Martinez and even put some of the blame on old Sam Walton. But apparel prices are going down and the shift in price direction is changing the face of apparel retailing.
Deflation, the specter of falling prices, has been stalking the apparel marketplace for the past six months. It cuts into margins. At the cash register, it turns healthy unit gains into anemic sales growth. Deflation shrinks asset values and is turning all apparel retailing into a no-margin-for-error business.
Less Money Chasing More Goods
Inflation has been defined as too much money chasing too few goods. Alan Greenspan has been busy the past year fighting to make America safe for banks, foreign capitalists, AARP members and bond investors by bringing down the rate of inflation. The Fed has fought the battle by raising interest rates faster than at any time in the past decade. Higher rates drain consumer buying power and put a damper on consumer demand and inflation. In the market for apparel, inflation is about as dead as the proverbial door nail. In its place, Mr. Greenspan has unleashed a different kind of monster: deflation. During the second half of 1994, spending on apparel rose less than 2 percent at an annual rate--a steep drop from the 6.5 percent pace of the prior six months. This drop in spending was driven by a shift from apparel inflation to apparel deflation. Apparel prices have fallen every month since June 1994. Apparel retailers enter the spring 1995 season with prices just a fraction above spring 1992 levels. Deflation is affecting merchandising and channel management. Apparel prices are falling, despite the sharp rise in wool and cotton prices this year. Imagine how happy this makes apparel manufacturers. Squeezed by rising costs, increased foreign competition and falling prices, domestic apparel suppliers are finding their order books shrinking and their margins reduced as well. Even the apparel industry's best and most seasoned executives have no past experience when it comes to deflation. Aside from a brief drop in prices in 1986, the last period of sustained decreases in apparel prices was the first Eisenhower Administration in 1954. This new deflation puts apparel retailing into uncharted waters.
Who's to Blame?
Apparel retailers can find one sources of deflation in their distribution centers and on their selling floors--abundant inventory. Apparel inventories are up 3 percent at specialty stores in last year and 8 percent in department stores at a time when demand has risen just 2 percent. The channel is literally choking on too much merchandise. Apparel retailers planned aggressively for the fall and winter season, only to be disappointed. Warm weather and lukewarm, middle-of-the-road fashions have kept consumers out of stores. The only tool retailers have in the short run to get them back is price.
This is not the first time in the past 40 years that apparel retailers have had excessive inventories, but it is the first time they have experienced real deflation. So what's changed?
Department Stores Cut Costs
One source of deflation is the changing dynamics of the department store industry. Department stores, led in part by Federated, Sears and May, have taken enormous strides in reducing their costs of doing business. In 1994, selling, general and administrative expenses for the department store industry fell below 27 percent, compared with 30.1 percent in 1992. Cost-cutting will continued in earnest in 1995. Department stores drove down their costs by expanding and upgrading their private label offerings, in part by sharply increasing their use of overseas sources. They also reduced costs by relying more on information technology.
Wal-Mart Devours The World
The growth of Wal-Mart over the past 25 years has been nothing short of phenomenal. No other retailer on the planet boasts a quarter-century of compounded growth of more than 25 percent. In its wake, Wal-Mart has left countless drugstores, discounters and apparel retailers in bankruptcy, struggling or trying to develop a strategy for survival. It doesn't matter who it is--Bradley's or Caldor, Kmart or Kohls--the discount department store's strategy is to get out of the way of Wal-Mart. By doing so, discounters everywhere have gotten more heavily into apparel. The increase in upscale discount store focus on apparel has added to the competitive intensity of the industry and put downward pressure on prices.
Everyone Heads for the Middle Of the Road
As discount department stores have moved into apparel, they have positioned their offerings in a slightly more upscale manner. The result has been the very workable oxymoron of upscale discount stores. This discounter shift into apparel has put them in the same middle-of-the-road market as everyone else. The result has been a sameness in stores and merchandise, an overall lack of fashion innovation or direction, and a reliance on price to move the merchandise.
The Benefits Of Free Trade
First it was the Caribbean Basin Initiative. Then it was NAFTA. More recently, GATT. All these trade agreements reduce tariffs, particularly tariffs on textiles and apparel. As tariffs drop, so do prices. Free trade, by its very nature, is deflationary. Among the most protected industries in the U.S., the domestic textile and apparel industries are most at risk as free trade increases, and American consumers have the most to gain. The shift to free trade in apparel and textiles is creating a shift in market share to imports. The gains in efficiency are reducing the cost of goods sold to retailers and the price paid by consumers.
Deflation And Shopping Behavior
Inflation spurs the consumer to buy now, use credit and go deeper into debt. Deflation rewards the consumer for waiting, discourages the use of credit and rewards saving. Deflation hurts debtors at the expense of creditors. It helps older consumers who have net household savings at the expense of younger, more fashion-oriented consumers, who are debtors.

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