Econ 101’s first lesson in supply and demand is playing out on Seventh Avenue: As demand decreases, prices also drop.
This story first appeared in the February 25, 2009 issue of WWD. Subscribe Today.
Mainstream designers are taking several paths to cut prices and offer greater — everyone’s favorite buzzwords — perceived value: complying with retailer requested discounts, offering lower-priced capsule collections, passing on reduced factory costs, self-editing out expensive pieces and reducing their own margins. The result is many privately held vendors are dropping their wholesale prices by up to 25 percent.
The first reason behind the reductions is on retailer request, or even ultimatum. Jamie Gorman, president of moderate knit vendor Only Nine, said she recently received a letter from the chief executive officer of a prominent retailer asking its key vendors to reduce their prices by 8 percent on all on orders through May 15.
“In good faith and based on a 10-plus-year relationship with this account, I signed the letter to show a true partnership through good and bad times, and hope when their business does turn around that this concession will lead to long-term loyalty,” said Gorman, adding she consulted her lawyer and debated the issue first.
Rather than across-the-board discounting to help retail partners, a second trend among vendors is offering selective discounting on capsule collections.
For example, Donna Morgan, which projects it will do $40 million at wholesale this year on its better-priced Donna Morgan dress line and contemporary line Ali Ro, added lower priced capsule collections to help stores grow their margins. For Donna Morgan, that means dresses that wholesale from $39 to $44, compared with the typical $59 to $79 price range, and for Ali Ro, the capsule ranges from $79 to $89, down from $98 to $150. Those products’ out-the-door prices for the ultimate consumer is meant to be in the same range of the rest of the line, allowing stores to create higher margins, said Kathleen McFeeters, president and chief executive officer of Donna Morgan.
The company has done well by aiming its prices below competitors so far, and the collections have benefitted from the flood of media about affordable clothing, McFeeters said. “The reason we opened Ali Ro was to fall below the contemporary price structure, and we think that business will continue to grow as women start really questioning the contemporary price points,” she said. “We’re giving that contemporary girl something under $200.”
Similarly, niche better knit firm Ava added select 100 percent cashmere items for fall, which wholesale for up to $140. That’s higher than Ava’s traditional $48 to $124 wholesale price range but, on the cashmere pieces, Ava cut its margin to keep wholesale prices down so stores could take additional mark up. “We wanted to give something back to our retail customers,” said Ava president Jonathan Ozdemir.
Vendors are also reducing prices to incentivize behavior, particularly to encourage accounts to order earlier. Rattled by uncertainty, retailers are waiting longer to place orders, which makes it harder for vendors to plan. To encourage retailers to place orders earlier, luxury knit designer Christopher Fischer is discounting early orders by 5 to 10 percent, and he reported that many accounts have taken advantage of the discount.
As Chinese factories lose work, they have become more willing to negotiate prices, and many designers are passing along those savings to retailers.
For example, Vittadini, which relaunched for fall 2008, is dropping its bridge prices for fall 2009 to about $70 to $270 at wholesale. “Initially the product retailed for as high as $1,000, and there was resistance,” said Adrienne Vittadini president Mary Gleason. “Of course we relaunched during the worst recession in 50 years. We’re very cognizant of what retailers want now, which is lower prices.”
Gleason said the company can manage lower prices by passing on savings from factories (“which need the work”) and the brand’s increased negotiating power. The bridge Vittadini line is carried in about 50 doors, including Lord & Taylor and Dillard’s, and Gleason expects that number to double for fall, partially due to the more reasonable price points.
There is also the very basic recognition that everyone should expect to make a little less this year as consumer spending shrinks, and vendors voluntarily reduce their margins. Contemporary vendor KAS has reduced margins by double digits to accommodate consumers’ heightened price sensitivity, helping bring wholesale prices down about 20 percent from last spring to an average of $44 for summer items.
KAS founder and designer Kirat Anand said he is also benefitting from a change he made to accommodate the surge in immediate orders. The company previously only cut to order, but because Anand wanted to recoup business by having inventory for immediate orders, the firm started to project orders, manufacturing extras of items he predicts will be bestsellers, like printed tunics and maxidresses for spring. By producing everything at once, rather than cutting to order, KAS has benefitted from economies of scale, helping bring down prices — though, of course, inventory is a deadly mistress these days.
“We could see at the fall show there was hesitation from buyers in buying too far out,” Anand said, adding he is projecting spring business to be up 20 percent from last year. “It’s ended up helping me, because at the January shows I could book January deliveries when stores had open-to-buys for immediates.”
Another round of cuts has come from vendors’ self-editing and skittishness of high price tags in this new economy. Better brand WD-NY is reducing its retail prices, to $12 to $49 in spring 2009 from $14 to $69 in spring 2008, by reducing margins and staying away from pieces that require more elevated material or production costs. “I don’t want to put a dress out there for $128 today,” said WD-NY president Warren Donner. “It’s all about price, because going forward people will be more price sensitive than ever before. But it’s still about product first. The product has to look good enough for the customer to come over to check the tag to see what a good deal it is.”
But not everyone is jumping on the price-cutting train. With most companies projecting flat sales at best for spring and having just given a big chunk of their margins up during markdown negotiations, many vendors said they simply can’t afford to take a further hit of reducing their prices or margins.
“We cannot afford to lower our prices,” said Victor Rousso, ceo of Rousso Apparel Group, which is maintaining wholesale prices of $8 to $30. “Worldwide costs are down slightly, but it’s too small a change to impact prices.”
As for requests from retailers for an across-the-board price reduction, better knit manufacturer August Silk would “never accept such conversations” with retailers, said August Silk ceo Don Horning. August Silk, part of High Fashion International Ltd., a public China-based company, is maintaining prices on its line, which wholesales from $19.50 to $24. “We are not going to lessen our quality, but we do realize there’s price compression,” Horning said. “So as certain prices come down, such as energy and natural fibers, we try to add extra value.”