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Fashion Game: Advantage Retailers

As retailers grow larger through consolidation, buying power is concentrated and the store's power over vendors gets stronger.

NEW YORK — Maybe it’s a good thing for fashion week that shows have turned into a platform focused more on the media, celebrities and buzz than an outright presentation of the latest looks to buyers.

If shows were completely focused on buyers, designers would be presenting collections to an ever-dwindling audience. There are fewer buyers than ever in the front row of shows in the tents.

As retailers grow larger through consolidation, buying power is being concentrated into the hands of a few stores that analysts and executives say already hold significant sway over the vendor base.

Large vendors repeatedly refer to their top accounts as partners. That doesn’t mean they are equal.

“There are no true 50-50 partnerships,” said Hal Upbin, chairman and chief executive officer of Kellwood Co. “Somebody at the end of the day has the upper hand.”

In the case of apparel vendors and retailers, the retailers have an edge of 51 percent, he said.

“I am not [so] naïve to believe that at any point we really have a 51 percent vote,” he said.

Given the consolidation on the retail front so far, Upbin said continued contraction would create incremental changes in the vendor-retailer relationship rather than seismic shifts.

“If you could beat me before you bulked up at the gym, you can still beat me,” he said.

As minority stakeholder in the partnership, vendors look to keep the ball rolling with superior branding, value, quality and an efficient supply chain.

“All the good stuff that makes us ‘indispensable’ to the matrix,” Upbin said. “You need to have a reason to be.”

Unless department stores somehow take the as-of-yet unimaginable route of going totally vertical, à la the Gap or Victoria’s Secret, they will continue to need vendors, analysts said.

The two groups have a “symbiotic relationship,” said Philip Zahn, a debt analyst at Fitch Ratings.

“They need each other,” he said. “You can’t easily just walk away from one of your key vendors. It takes time to develop new vendors.”

Still, vendors often cite private label programs, such as INC or Alfani at Federated Department Stores, as one of their largest and toughest competitors.

“Little by little, the department store chains are developing their own capacity to design and source directly from the factory,” Zahn said.

As the capacity grows, he noted, retailers would strengthen their hand further and be better positioned “to play hardball with some of their vendors.”

Private label programs, though important, are not the be-all and end-all, said Smith Barney equity analyst Deborah Weinswig.

“Everyone looks at private label as the holy grail,” she said, cautioning that brands created by stores don’t always compel customers to head to the register with credit card in hand.

Still, she said, it’s the retailers who are on top.

“It is the retailers who have the power to ask for markdowns,” she said, referring to the money that vendors often give stores at the end of the season when collections don’t sell well. “Wouldn’t that tell you the power is in your direction?”

There will always be room for brands with a consumer following, though, no matter who makes them.

“There’s certainly a customer who flocks to brands and lifestyle,” Weinswig said.

That is a sentiment shared by Donna Karan International ceo Jeffry Aronsson.

“If you’re good, you’re strong, no matter what,” said Aronsson, via cell phone on his way to the DKNY presentation Monday. “If you have something that people want, then you’re always going to be able to perform. You’re always going to be able to sell.”

Andrew Jassin, managing director of the Jassin-O’Rourke Group, a fashion consultancy, said, for the most part, vendors “have to work within the framework of the rules that are set by the retailers.”

“Only when you have a trademark of value can you come up and have some sort of challenge to the system that exists,” he said. “The more consolidation that occurs at retail, the more pressure that’s put upon vendors.”

This point is brought home for many vendors by the speculation over a possible merger between Federated and May Department Store Co., creating a giant that would control 1,000 traditional department stores with $30 billion in sales.

The other major players in the area are Dillard’s Inc., which is perennially seen as a takeover candidate, and the Saks Inc. department store division, which might someday be separated again from the tony chain that gives it its name.

Should May-Federated not come to fruition, it’s possible that May, which recently parted ways with ceo Gene Kahn and has been underperforming Federated, would combine with one of these other department store players.

A merger between any of these companies would put further pressure on vendors.

May’s $3.24 billion purchase of Marshall Field’s last year offers an example of the effects of retail consolidation on manufacturers. With its relatively upscale posture and penetration into the Midwest, Field’s, as the only game in town, was in a good position to extract sweet deals from vendors wanting to add volume.

“All of a sudden, every deal with Marshall Field’s is in [May’s] computer now,” said one vendor executive, who spoke on the condition of anonymity.

May stores with similar product offerings, such as Lord & Taylor, now want the deals vendors used to only give to Field’s, and they’re in a better position to press the issue.

“Clearly, the retailers have the dominant force in this whole process,” said the executive. “However much power the retailers have today, if there’s this merger of May and Federated they’re going to have more power, there’s no question about that.”

This scenario plays out again with every step in retail consolidation.

Still, the Federal Trade Commission stipulates that no matter how big a retailer gets, it cannot get preferential treatment from vendors, said retail consultant Walter Loeb.

“However, if you are a company that is $30 billion in size, you certainly get the attention of any vendor,” he said. “You’re likely however to make it difficult for small vendors to have access to you.”

Larger and larger retailers, though, will also have to focus more on keeping their assortments fresh.

“The challenge will be to bring in innovation and new merchandising, and it will be a challenge to the retailer to maintain an innovative attitude,” Loeb said.

The consultant is not looking for the vendors to wilt in the face of larger stores.

“There will be major vendors who will partner with the retailers in an effective way,” he said. “I am not sure that vendors will allow themselves to be kicked around. I don’t think so. That is not going to be the relationship.”

Larger manufacturers such as Liz Claiborne Inc. or Jones Apparel Group are working increasingly closer with their behemoth customers, offering exclusive versions of major lines and developing sophisticated ordering and tracking systems to make market weeks more efficient and increase full price sales to the consumer.

There is also some possible upside in retail consolidation for the industry’s dominant  vendors.

Peter Boneparth, ceo of Jones Apparel Group, said on a conference call last month a May-Federated merger would overall be good for business if it yielded a better retailer.

“We need partners who want to invest in the store experience and certainly to date, Federated has done a better job at that,” he noted. “Anything that makes it easier to shop, anything that makes our brand more presentable in the store, is going to be a win for us.”

However, these vendors are also branching out and outgrowing their initial roles as suppliers to the department store channel.

Jones last year snatched up Barneys New York, adding a luxe company to its retail presence, which had previously consisted of Nine West shoe stores and company outlet stores. Liz Claiborne also broadened its distribution, acquiring Mexx, which has its own European stores and brought the concept to the U.S.

Those most effected by the continued consolidation of department stores will be the midsized vendors, said Kathy Bradley-Riley, senior vice president of merchandising at The Doneger Group, a buying and consulting firm here.

“The big continue to get bigger through growth and acquisition,” she said. “The other extreme end of the market, the smaller vendors that are just catering to specialty, niche kind of retailers have their businesses, and they’ve been very good.”

Midsized vendors have to merge with larger companies to thrive or even survive. 

In fact, on Monday, Donnkenny Inc., with annual sales of about $90 million, filed for bankruptcy after costs to ramp up new lines strained its finances. Also, Marisa Christina Inc., with $21 million in sales, ceased to trade its stock on the Nasdaq exchange in December and has put up a “For Sale” sign.

Vendors that supply department store aren’t the only ones looking over their shoulders at their own customers.

The next round of consolidation is already under way one rung down the price ladder with the proposed Sears-Kmart merger, which is expected to be completed in March.