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In post-nineties, post 9/11 apparel retailings, only the nimblest and most focused can expect to gain.
This story first appeared in the November 25, 2002 issue of WWD. Subscribe Today.
There’s a tendency to idealize the late Nineties, when apparel sales were growing at a solid clip and stores seemed able to profitably fund endless expansion. Resources and retailers look back to that time and wonder when the current slump will end and the high growth days return.
In reality, the Nineties were The Great Interruption in what’s been a decades-long slide for apparel as it’s dealt with excessive storage, consolidation, deflation and the emergence of numerous technologies and the myriad of consumer products they’ve spawned.
Things should and soon may get better, but there’s no boom on the horizon. With very few exceptions, companies are going to have to continue to manage operations, rather than explosive growth, if they are to build on their bottom lines.
Jeffrey Stein, a managing director at McDonald Investments, said apparel may make a bit of a comeback after interest rates end their long slide and big-ticket items such as zero-percent-financed cars and real estate start to wane. “The federal rate cuts hurt apparel,” he said.
But Stein doesn’t consider the problem short term. According to Bureau of Labor Statistics data, apparel accounted for 6 cents of every dollar spent just 10 years ago. Today, that number is down to 5 cents.
“Apparel is one of the clear losers,” Stein said.
Over the long term, Stein said he is looking for apparel to generate very modest growth — a couple of percentage points — per year. “It is a mature business and I view it as a zero-sum game where the days of huge retail growth are over,” he said, asserting that an increase in one area is a decrease in another.
Emanuel Weintraub, head of the Fort Lee, N.J.-based apparel consulting firm that bears his name, sees the myriad of choices facing consumers as good for general economic growth, although not necessarily the apparel markets.
“We were raised on food, clothing and shelter, but now we have additional new expenses like insurance and college payments,” he said, noting that food and shelter are less discretionary in nature than clothing. “The economic picture we have now is more or less what we will see for the next four to five years.”
It’s not that the American love of the mall or the acquisitive nature of the citizenry has changed appreciably, only that a smaller share of income is going towards apparel, and much of the apparel it’s going to is lower in price and available at discounters or off-price stores. That deflation is expected to continue.
“Consumers have not left retail,” Weintraub noted. “I do not hear that the mall parking lots are half empty, but that there is a parking shortage.”
Ladenburg, Thalmann & Co. analyst Eric Beder agreed, noting that it’s not just economic sluggishness that’s holding back apparel’s performance but a combination of financial stress and lack of fashion inspiration.
“Most customers do not need apparel, but buy out of want,” he said. “There is never a period when everyone is doing poorly. People will flock to you if you have something different and have some value.”
He said that, month after month, he’s noted that it’s the retailers with the greatest amount of newness in merchandise and excitement in the stores that generate the best comparable-store sales results. Recent examples in the hard-pressed teen market include Pacific Sunwear of California and Hot Topic.
Few developments reduce stress in the clothing business as quickly as a new fashion trend, and the lack of one has exacted a hefty toll in women’s wear for a year and in men’s wear for longer than that. It’s never a good sign when the hot items of the season come down to “sweaters” and “jeans.” The promotional climate also reduces incentives to buy — why rush to the stores if procrastinating about doing so might save you another 10 percent on that jacket or pair of slacks you’ve been looking at?
“Retailers have created this environment,” Cohen said. “This is a consumer’s market, not a retailer’s. This is not a market where people say they have to buy right now and that is the problem. They can buy any jeans, any sweater, it does not matter. They can go to any store and whatever the best price is, that is what they are going to purchase.”
“People do not want to see the same product over and over again,” argued Marshal Cohen, co-president of NPDFashionworld, the Port Washington, N.Y.-based national consumer tracking firm. “It creates little incentive to buy or at best it creates a competitive price environment.”
And a competitive price environment is exactly what stores have faced, and consumers have taken advantage of, as duplication of lines besets department stores and duplication of looks cuts into the figures at specialty stores.
“The stores are trying to be everything for everyone when they really need to be something for someone,” Cohen said. “It used to be the stores had their own image, taste level and lifestyle, and you would pick stores that matched yours. Stores need to go back to what made them successful even though it is more expensive. You cannot survive with price wars.”
Sounding what could be described as the mantra of retailing in the new century, he added, “The way to fix it is to create differentiated products that separate you from the pack and entice customers to buy.”
Angela Selden, North American managing partner for Accenture’s retail industry group, goes further. “If you can’t be differentiated in consumers’ minds, if you are not the number-one or -two choice where they go shopping, it is really going to be tough to survive.”
Selden thinks the current environment is perfect for retailers to arm themselves for the opportunities to be afforded by the next expansion.
“Now is the time for retailers to make those innovations so when the market does turn, they have already done the research and market testing and they can hit the upswing in the economy,” she said. “Those that invest in those technological capacities will see their businesses improve above the competition.”
Selden cited Nordstrom’s perpetual inventory system, which will allow the stores to locate any item through the entire fleet of specialty stores. That bolsters the service-oriented focus Nordstrom’s has had throughout its 100 years.
John Lonski, an economist with Moody’s Investors Service, said he expects apparel sales to improve with employment. He noted that, following employment trends, apparel sales peaked in 1999, when sales grew 6.7 percent, but the growth rate fell to 4.8 percent in 2000 and further deteriorated to 1.6 percent in 2001.
There’s even some hope that the worst may be over in apparel as year-to-date sales are up 2.6 percent and October sales improved 3.6 percent. Lonski sees mid-single digit growth for apparel again by the middle of the decade: Sales could expand 5 or 6 percent again by 2004 or 2005.
James Glassman, an economist with JP Morgan Chase & Co., said the retailers cannot blame consumers, who are buying more stuff than ever, for the current funk. “For consumers, I do not know if it can get better. We would need a rip-roaring economy when everyone is on board.”
Still, he doesn’t believe the nation is going to get an economic boom. “There is a lot of gas helping the consumer. We had tax cuts after the stock market boom died. We now need an old-fashioned economic pickup — new hires — before we can expect consumer spending to pick up.”
He said he is anticipating job growth to increase in the next one to two years.
Arnold Aronson, the former retailer who’s managing director of retail strategies at Kurt Salmon Associates, said the slower pace of business now will make increases easier to find in future seasons. “If you can anniversary a couple of years of flat-to-negative growth and world conditions become more favorable to the retail consumer, there will be growth,” he said.
Aronson called the current business cycle “complicated,” with extraordinary developments on the world stage occurring against a background of a difficult economy “after many years of boom times for retail.” He noted that, in apparel and throughout the retail landscape, stores fitting the consumer’s new criteria for value have grown and will likely ride their emphasis on assortments, space, service and convenience to permanent market share gains, not to be relinquished when the economy picks up.
Certainly, shopping for value was already in fashion before 2000, and economic conditions and efforts by stores to upgrade the shopping experience have only added to that. Retailers like Target, Wal-Mart, Kohl’s, TJX and Ross Stores have all worked to disprove the notion that fashion and value cannot coexist. Additionally, the monopoly that “upstairs” stores had on designer names and other brands has been broken as Target has introduced designer brands such as Mossimo and Todd Oldham in its stores, and Wal-Mart now is planning to introduce the new Levi Strauss Signature label.
Ladenburg, Thalmann’s Beder said he expects the middle players to be squeezed out as consumers will either move to the discounters or shop for high fashion goods.
“That core segment will continue to shine for those that do not want fashion or designer merchandise while those that shop for high fashion items that fit their needs will also do well,” Beder said. “Value and fashion will take share from the middle-tier department stores who do not have the resources to be cutting edge and they are trapped being in a higher price format and cannot compete on price.”
Hurting the department stores, McDonald’s Stein said, is their migration in the past decade from a moderate service and price business to a low-level service and moderate-price business. This has opened a mile-wide opportunity for midtier departments stores, including Kohl’s and Penney’s; high-end discounters, like Target, and upgraded off pricers like TJX and Ross.
Although specialty stores have cooled off as a group since the economy softened, the ones most focused on a particular customer segment have done best. Recently, that’s included PacSun and Hot Topic among the teen stores, Chico’s FAS and Talbots for mature women, and Jos. A. Bank in men’s wear. Stores caught in the middle, in terms of price or focus, include Gap and Ann Taylor, although both show signs of strengthening as they sharpen their focus.
“I believe in the aggregate that these businesses, in a tough environment, have done a fairly decent job of managing through a tough top-line environment through maintaining lean inventories, selling more goods at regular prices and expense control,” Stein said.
But to ensure a turnaround, he continued, these clothing retailers should be forced to take inventory and fashion risks. “If you plan your business flat or down, it will probably be worse than you think,” he said.
He suggested that it would be spring 2003 before the retail apparel industry started to come out of the gloom as companies anniversary this strategy of maintaining lean inventories and expenses.
As he assesses the outlook, two questions occur to him: “Is there going to be anything else for spring after the bohemian look? And what kind of inventory risk will the industry bear for spring in order to show positive earnings and sales growth in the first quarter?” he asked.
In weaker economies, typically, consumers are more willing to try lower-tier stores and may find they’re not so bad. Often, these discounters are in customer-gathering modes, and tend to win new customers during the downturn and hold on to them coming out of the downturn.
NPDFashionworld’s Cohen said even if the economy reverses itself, value shopping will continue to be a trend. “The change in the environment today is here to stay,” he said.
The trend is similar to the success of Japanese cars, which were first brought to this country as quality products at a cheaper price, and now are offering luxury models. “Once consumers get educated about value and transitioning qualities, it is really hard to sway them back the other way.”
Another trend in modern-day retailing is what might be called faux prestige, or bogus luxury. Cohen noted that merchants in the mass channel have devised their own luxurious-sounding brands and used them to add at least the perception of designer validity to private labels.
“They have made up names to look like a designer brand and that wave has grown into an American phenomenon,” Cohen said. “Since consumers can now get fashion looks at these value prices, they question why they would ever have to spend the big bucks.”
In keeping with the speed-to-market imperative, mass merchants and off-pricers who’d previously lagged behind the “upstairs” brands are now employing or retaining trend and color forecasters to make sure that they’re fashion right. While George redefines fashion for Wal-Mart, Zara and Hennes & Mauritz are able to bring moderately priced fashion goods to market with blinding speed.
The move towards recovery will come at different paces for different segments of the market. Teens began coming back to the stores in October after a brief hiatus. Conventional wisdom suggests that look and image are so important to this customer they will keep spending much of their available time and money on their clothes.
Meanwhile, there are 70 million Generation Y consumers to be addresses, the second largest block after the massive and aging Baby Boomers.
Cohen doesn’t foresee as quick a recovery in the luxury market as travel and buying plans have been cut, along with stock portfolios. Similarly, there’s concern that, with new credit card debt and mortgages on their plates, the baby boomers will be slow to return to the stores. Besides, many of them may be focused on rebuilding their savings.
Looking at the industry through price segment, Bill Smith, president of Financo Inc., said he is still cautious on the apparel luxury channel and expects the group to recover slower, although their uniqueness will help them preserve margins and profits.
“On the other hand, contrary to luxury sales, the lower end of retailing will be fine because you have more need and the stores offer a lot more,” Smith said. “When people need another pair of jeans or socks, they will buy. That group will continue to do well.”
Smith also said he believes the high-end customer who migrated to the lower-tier stores could continue to do so when the economy takes a turn for the better. “They will go there for the convenience and knowing they are getting a good value on basic items,” he said.
Kenneth Goldstein, an economist with The Conference Board, which published a monthly survey of consumer attitudes towards the business climate, says nothing in the clothing business has changed: “It has been down since before the collapse of the market.”
Indicating that sales are slowly on the mend, Todd Slater, a retail analyst with Lazard Freres, scoffed at the notion of a retail environment that is on the edge of collapse. “Of course there is room for growth,” he said. “We just need a strong economic cycle.”
Still, he warned that the maximum growth potential cannot be realized until there is a better balance between the overall square footage and supply while demand is dwindling.