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Coping With Uncertainty Over War

Waiting, watching — and devising contingency plans, if at all possible. That is what retailers and manufacturers worldwide are doing as they, like everyone else, keep an eye on the situation in Iraq and wonder what the U.S. and other countries...

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Waiting, watching — and devising contingency plans, if at all possible. That is what retailers and manufacturers worldwide are doing as they, like everyone else, keep an eye on the situation in Iraq and wonder what the U.S. and other countries might decide to do. One signal was expected to come late Tuesday in President Bush’s State of the Union address, although a senior White House aide, speaking on condition of anonymity, said the President will use a few new pieces of recently unclassified intelligence to outline his case against Iraq. Though he won’t declare war, the President’s intentions will be clear — and Bush’s patience is limited, the aide said.

It is almost the worst possible dilemma a business can face: immense uncertainty that could end in war. The current situation is forcing companies to adapt almost daily to new consumer moods, a continuing slide at retail, possible disruptions in their supply chains and rising fuel prices.

The uncertainty already is having a chilling effect on consumers and businesses, as proclaimed by everyone from Bernard Arnault of LVMH Moët Hennessy Louis Vuitton and Domenico De Sole of Gucci Group to Bill Gates of Microsoft and investor Peter Soros. The disruption compounds an already difficult situation, with Western economies in the doldrums, no sign of an upturn in the important high technology, finance and tourism sectors and an equally perilous political situation in North Korea.

“The uncertainty is almost as harmful as an actual war, because it creates a lack of confidence in the markets,” a Prada spokesman said Tuesday. “A war would cause a drastic drop in tourism because people would be afraid of terrorist attacks and to travel, and this would negatively influence our business. It’s difficult to forecast the implications of a war — it depends on how long it will last and what kind of reactions it will cause around the world.”

But Prada, like others, is trying to cope by continuing to cut costs and be more flexible, a process that started after the terrorist attacks of Sept. 11. LVMH has continued to move in the same direction — in the last 10 days alone it has announced plans to divest of some of its smaller operations and already sold its beauty businesses Hard Candy and Urban Decay as well as its remaining stake in the floundering auction house Phillips, de Pury & Luxemborg. Gucci also has tightened up costs.

An immense caution permeates retailers and vendors at a time when consumers complain of a lack of excitement at retail while, in turn, play it safe themselves. John Idol, chief executive officer of Kasper ASL, noted that, from the manufacturing standpoint, companies have become increasingly more conservative in their planning since 9/11 with the assumption that a war would further deteriorate the business.

“Obviously, the macro political or economic events are things that you think about to the extent that you can account for them,” Idol said. “Not many people are planning their businesses aggressively this year because they think the economic situation will remain difficult. We’re cautious of the possibility of war this year, and regardless, will remain so whether or not there is a war.”

Ralph Toledano, president of Chloé, said store buyers have become more prudent and more anxious. “They want to know what’s going to happen just down the road,” he said. “And they don’t. Shops in holiday destinations like Cannes or Saint-Tropez want to know if tourists will be there. They don’t. It makes everyone more hesitant and cautious.”

Retail consultant Walter Loeb agreed tourist destinations will likely suffer, as might shopping malls in general. “Consumers are likely to start to save more. I don’t believe you’ll see many flamboyant spenders. Some, however, will accelerate their purchases of commodities and necessities, buying more basics. We will be in a very down mood. I hope it will be a short war, like many people are saying. A longer-term war could mean gasoline rationing and all sorts of things that we are not even thinking about.”

Howard Socol, chairman, ceo and president of Barneys New York, said the store’s January business has been slow, a result of the limping economy and concern over war with Iraq. If there is a war and it’s resolved quickly, Socol suggested that could speed an economic and retail recovery.

But two leading market researchers disagree about the possible impact a war would have. Apparel retailers “would feel the pinch,” said NPDFashionworld co-president Marshal Cohen, while C. Britt Beemer, chairman at America’s Research Group, foresees “virtually no impact.”

“We’ve done three series of interviews [between Labor Day and New Year’s] and in each case, only 6.5 percent of the panel said it would have an impact of any kind on spending,” Beemer related. Another 12 percent told America’s Research Group there “might be some impact,” depending on how long a war lasted.

Most of those contacted by ARG expect any conflict with Iraq to be short-lived, though, amounting to 10 days at most. “They don’t expect Sadam Hussein to be any more dangerous than last time,” Beemer said.

Not so, maintained NPDFashionworld’s Cohen. “Whenever there’s a war, traffic at stores and malls drops,” Cohen stated. “Because we’re dealing with terrorism, the [implied] message will be to stay away from heavily trafficked areas, like malls and stores.”

Even if people adapt a live-for-today mind-set rather than hunkering down, apparel is more likely to suffer a spending falloff than other goods, Cohen projected. “I foresee an episode of cocooning in which people would spend more time at home,” he said. “They will buy things for the home and do home improvement projects. But the only apparel likely to sell would be basic commodities that need to be replaced.”

Adam Winters, senior vice president of Merchant Factors, said most of his vendor clients are concerned about the economic impact a war would have. “When they provided projections for the year, almost all had a caveat that said that the [estimates] assumed there would not be a war. That leads me to believe that there is a cautiousness and concern about a war.” Winters added that while consumer confidence and retail sales are expected to dip, the depth and duration of that drop are still hard to quantify.

But while American and European retailers and vendors are cautious, at least one affected retailer is bullish about business — Majed Al-Sabah of Villa Moda in Kuwait City. Al-Sabah is in the middle of plans to open a Villa Moda in Dubai, as well as a beauty store and a Roberto Cavalli store in Kuwait City this spring, a Dolce & Gabbana this fall and a Pucci store for cruise 2004. He even has a Villa Moda Baghdad on the drawing board.

“We are very aggressive in expanding our brand portfolio as much as we can since we are seeing that department stores like Saks Fifth Avenue and Harvey Nichols are getting into the region in an aggressive way,” he said.

“The war on Iraq is a completely different case from the Gulf War, which was an invasion, whereas the Iraq war is [about] disarming Iraq. The mood in Kuwait, in particular, is very positive since we have started feeling that major food, construction, medical, appliances, electronics and other supply contracts have been signed during the last few weeks to start injecting these supplies into Iraq,” he added.

Even Western executives admitted that, in the end, there are only a few steps companies can take to prepare for war, and they mainly deal with sourcing and devising ways to cope with the growing uncertainty. “You cannot prepare in advance,” said Yves Carcelle, chief executive of Louis Vuitton and head of LVMH’s fashion and leather goods business group. “It’s impossible to forecast exactly what is going to happen. Our philosophy has always been business as usual.”

“It’s business-in-waiting until something more definitive happens,” said Dick Baker, president of Irvine, Calif.-based Ocean Pacific Apparel. “If something does happen, we’ll look at the supply chain, starting with the consumer at retail. If that’s affected, then you look at the wholesale business and the exposure of inventories and what will happen to margins.”

There are also those designers who project a more optimistic attitude and remain convinced that consumers won’t put away their pocketbooks just yet, as long as designs exude creativity and quality.

“In terms of making any preparations in anticipation of war, we certainly have some ideas, but there is little point in penalizing the business before the consumer does,” said Max Azria, founder and chairman of Vernon, Calif.-based BCBG Max Azria. He noted that same-store sales at the company’s retail units were up 30 percent in December compared with the year prior.

Alex Garfield, president and ceo of Sunnex, a New York manufacturer of the Go Silk and Bushwacker labels and private label product, worries that war might cause consumers to “stay home with their heads under pillows. War and fear affect the national mood.”

Garfield expressed as much concern about the impact a war with Iraq would have on global sourcing, particularly involving shipping lanes in the Mideast, where Sunnex has production. Most firms said they have not yet initiated contingency plans, believing they could switch production to other nations relatively easily.

“Retailers have been given enough time to think through and map around sourcing strategies,” said Peter McGrath, senior vice president of global sourcing at J.C. Penney, adding that the Mideast accounts for about 10 percent of Penney’s production. “Countries go through wars, revolutions, but the textile industry usually keeps plodding along. People want to work.”

But he admitted the war talk already has affected retailers and consumers, who all are taking a wait-and-see approach to some degree. “Discussion of war takes the wind out of the sails, in both consumer spending and capital spending,” he said. “The concept of war is not a warm and fuzzy one.”

With more than 50 countries set up as a sourcing base, San Francisco-based Gap Inc. is sufficiently diverse to weather political instabilities in varied regions in the world that might affect shipping to the chain’s 4,286 stores under the Gap, Banana Republic and Old Navy banners, according to a spokesman. “We certainly have sourcing in the Middle East and it would be something we would monitor, but we can easily reroute product or get product from other areas,” he said.

It might not even be necessary to change sourcing schedules, he added, noting past military actions in Afghanistan did not adversely affect the retailer’s sourcing from countries as close to the conflict as Pakistan. In addition, the 1991 Gulf War had little effect on shipping, executives said.

But another war with Iraq might force shipping companies to devise alternative routes for U.S. imports of apparel, particularly from countries in the region, like Egypt, Jordan and Turkey. Brian Moore, director of apparel sales for Madison, N.J.-based Maersk-Sealand Inc., said his company’s main contingency plan lies in backup routes.

“From just about every place, we have more than one option,” he said. “If war breaks out in the Middle East, then the Middle East itself will be a problem. The concern might be going through the Suez Canal, but then you would route something through Asia to get it to the U.S.”

A war would likely also raise the cost of shipping goods. Insurance companies typically levy war surcharges on ships passing through areas of conflict, which the carriers try to pass on to their customers. Anything that raised the already high price of oil would also affect the cost of shipping goods.

The likelihood of war with Iraq comes at a particularly tough time for the designer industries, as a sudden outbreak could likely disrupt shipments of samples and fabric, or, if an act of war should occur during any of the international fashion weeks, that development would obviously trump much of the coverage of the collections in the international press.

“What we saw during the Gulf War would be the same today,” said Paul Margolin, president of the eveningwear company Marc Bouwer. “There’s going to be a lot less coverage of fashion, and that’s what makes a difference in your business. If you’re spending a lot of money to get press on fashion shows, then it might be time to cut back on that.”

Depending on the timing, a war with Iraq also could have dire consequences for American attendance at the upcoming European fashion shows, as it did in 1991 when many stores and journalists canceled their trips abroad. Bloomingdale’s fashion director Kal Ruttenstein said that, although a decision to cancel buying trips abroad would not fall on his shoulders, “if it was up to me, I would attend the [European] shows like in ’91 because it’s my job to cover fashion.” He said no contingency plans had been discussed at present.

Bill Blass designer Lars Nilsson said the prospect of war “concerns me more than the collections right now.”

“It’s not an easy situation,” he said. “But we have to move forward. We have to continue with life. If you stop completely, that is the wrong thing, too.”

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