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The fashion industry has suddenly gone on a serious diet.
This story first appeared in the November 24, 2008 issue of WWD. Subscribe Today.
Plunging stock markets, a recession and a complete conk-out of the consumer spending engine that fueled the growth in the U.S. economy for more than a decade have fashion retailers and manufacturers taking a hard look at their organizations and cutting back wherever they can. With few signs of economic hope until at least late 2009, if not 2010, firms are moving to batten down the hatches and prepare for the worst.
As a result, fashion companies are looking at every expense they can to determine whether it’s justified. Town cars? Out. First-class air travel? Out. Expensive hotels in luxe foreign lands? Out. Staff Christmas parties? In most cases, out.
“Anything we thought was noncritical for brand-building that could be pushed back to the second half of the year  or put on hold, we have looked at,” said Glenn McMahon, chief executive officer of St. John, echoing a view held throughout the industry, from Nicole Miller and Saks Fifth Avenue to Rafaella and Perry Ellis International. “The ‘nice to haves’ (such as renovating the New York showroom) we’ve held off on; the ‘need to haves,’ we are not holding off.”
Where possible, firms are making the easy cuts first — such as the company Christmas party. Beyond that, though, the poor economy is forcing fashion companies to take a long, hard look at the way they do business. In an industry that once thought nothing of sending dozens of people to Europe or Asia via business-class travel to stay at five-star hotels for weeks is eliminating nonessential trips, asking employees to go coach and, if possible, videoconferencing instead of getting on a plane at all.
Other areas being put under the microscope include marketing and promotion expenses, rents, inventories and staffing.
Vendors particularly have little choice but to prepare for the worst, given what’s expected to be a dismal holiday season at retail, already widespread steep markdowns and stores warning they plan to reduce spring receipts by 15 percent and reevaluate all brands, in some cases dropping several.
Some of the latest cost-cutting developments on the wholesale side include:
• Warnaco Group Inc. plans to cut 7 percent of its corporate staff, reduce capital expenditures by 20 percent and decrease selling, general and administrative spending by $40 million in 2009.
• Hanesbrands Inc. said it would eliminate 8,000 workers worldwide in the coming year.
• Elie Tahari said it would cut 35 positions in the company’s New Jersey and New York headquarters.
• Marc Jacobs broke with his annual holiday tradition by canceling his over-the-top holiday bash and the Estée Lauder Cos. did the same.
• In lieu of shooting a spring campaign, Donna Karan is using images from her spring runway for her advertising layouts.
“Like every company operating in these challenging times, we are looking at every aspect of the business where we might be able to cut costs and streamline in order to be even more efficient,” Tahari said.
“We wanted to get our message across in a creative way but with a conscience,” Karan said about using runway images rather than a costly photo shoot.
But even as they cut on the one hand, executives stress companies need to be careful not to trim too much. Apparel companies surveyed by WWD said they’re still going ahead with planned store openings and fashion shows, whether in their showrooms or on the runways (see accompanying sidebar) and are taking required business trips to Asia — just with fewer people in tow. With so much uncertainty in the air, executives believe now is the time to be financially prudent, but not to stop investing in their brands.
“It’s about being more strategic and prioritizing,” Behnaz Sarafpour said. “If all of a sudden you say, ‘I am not doing trunk shows or a runway show,’ then all of a sudden you are not there. It’s not a good idea to reduce your visibility.”
Nevertheless, Sarafpour said the days of money being no object to luxury shoppers are over, at least for the moment. To that end, she has expanded her price range to offer more options for customers to choose from. Sarafpour said while the economy is having its impact, the dollar’s more favorable exchange rate to the euro is already making a difference in pricing.
She’s also keeping a close eye on expenses elsewhere. “Our biggest expense each season is the runway show and, sometimes, we have been fortunate in securing corporate sponsors who paid for a portion, but that is not something we are guaranteed each season,” she said. “We have never been really extravagant unless we had a corporate sponsor partnering. We are still going to have a runway show as we normally do, but will it be our most expensive one? Probably not.”
Sarafpour is also looking at hiring freelancers when needed rather than bringing in more full-time employees. “When it comes to the market weeks, we bring in more freelance sales people as opposed to having a whole sales team sitting here year-round,” she said.
Despite the economy, St. John went ahead with the launch of its contemporary line SoCa and is opening a shop-in-shop at Harrods on Dec. 4, both of which McMahon said fit into the must-do category. SoCa, he said, “was critical and will position us well on the other side once the economy turns around.”
The flip side of the coin is that the company is cutting inventories wherever possible. “We manufacture to order, so we keep a tight rein on the raw materials we order. Maintaining inventory is key,” McMahon said.
Liz Claiborne Inc. has cut $15 million in capital expenditures in 2008 and is reducing the total spend in 2009 by 50 percent. This includes cutting back on the number of store openings for next year. Over the last two years, Claiborne has also cut about 1,500 positions.
“As part of our efforts to control the controllables, we are taking steps to bring down expenses,” said a Liz Claiborne spokeswoman. For example, since midsummer, Claiborne has imposed restrictions on flights and hotels, such as coach class travel on all domestic, intra-European and intra-Asian flights and stays only in corporately approved hotels.
“Everything that doesn’t affect the actual product is being cut,” said Bud Konheim, president and ceo of Nicole Miller. “We don’t have a problem, but we know it’s coming. You can’t face all these layoffs and not have one.”
Using town cars has been eliminated, and his 86 staffers are being encouraged to take the subway more frequently or taxis if need be. In regard to out-of-town travel, employees are encouraged to find cheaper flights and less expensive accommodations, said Konheim, adding, “We’re Red Roofing it,” referring to the low-budget hotels. A major initiative for 2009 is to eliminate printing to cut costs and protect the environment and use the firm’s Web site more for look books and brochures.
But Nicole Miller is going forward with a pre-fall show Dec. 11 in the Seventh Avenue showroom, which has been in the works for months, Konheim said. The holiday party has been canceled, but bonuses will still be doled out, since the company “has had a really good year,” Konheim said. “We’re going to tell them, ‘Go party on your own,’ which, by the way, they will probably prefer.”
Lacoste also has canceled its holiday party and consolidated it with the company’s January sales meeting, said Robert Skinner Jr., the company’s new ceo. “Given the environment, we felt it wasn’t appropriate to do it in 2008. It’s not that [canceling the party] saves such a significant amount of money, but it’s symbolic and sends the right message in difficult times,” he added.
Lacoste’s fall fashion show in February is still on, and Skinner said the company hasn’t instilled a hiring freeze or had widespread layoffs. However, it has consolidated a few positions.
As for opening more stores, he said, “We’re evaluating all of our plans for 2009 to make sure our financial assumptions are still appropriate. But where they make sense we will still open new stores (likely five to 10).”
While most companies are reacting to the current economic environment, there are those who have been preparing for the downturn for a while. Doug Wood, president and chief operating officer of Tommy Bahama Group Inc., said, “With Tommy Bahama, this didn’t just hit in September. We’ve been watching the economy for a while because we have a concentration of retail stores in areas like Florida, Arizona and California, so we have been pulling back for the last 12 to 18 months, and we are a little bit ahead on people.”
Wood isn’t planning any pay cuts, but he has laid off some people. “We pulled back staff across the board to keep labor in line with sales across the last 12 months,” he said. He also reduced corporate head count. As far as opening more stores, Wood said the company is evaluating the situation.
“Any stores we were obligated to do, we went forward to open. But we are being careful about signing any new leases. Over the next 12 to 18 months, we think there will be fallout, so whatever the landlords are asking for today, we predict it will be more flexible in the future,” said Wood.
Furthermore, he said there have been no cutbacks in marketing dollars to date. “Going forward, we are looking to pull back marketing to a degree. But at the same time, this is not the time to be short-sighting your brand,” said Wood.
And even while they are being prudent, there are still companies pressing ahead as planned.
“We view the current economic environment as a time of opportunity,” said Jill Granoff, ceo of Kenneth Cole Productions Inc., which is proceeding with its holiday party and has no changes planned in business travel, marketing or ad spending. But the company is exploring ways to tighten its supply chain, improve inventory management and rationalize real estate.
“We are not instilling hiring freezes or pay cuts, although we are redeploying resources to align with our strategic growth initiatives,” Granoff said. “We are also moving forward with our current business plans, including targeted store openings and marketing investments, to take advantage of our positioning as an affordable designer brand with a strong price-value equation. While we are certainly planning our business conservatively for 2009, our focus is on the long-term potential of the Kenneth Cole brand.”
Steven Feinstein, president of ICE Apparel, is another executive pushing ahead with overseas travel. “We are not slowing down travel at all, as we feel we have to do a better job right now in terms of design and servicing our customers,” he said. “At a tremendous cost, a production team, including myself, is traveling in December to Asia with one of our fit models to expedite our fit process in the factories to ensure on-time deliveries before the Chinese New Year. Without being irresponsible, we cannot let the tough economy stop us from doing a better job of servicing our customers.
“During very difficult times, such as this economic downturn, we are forced to look at things in our business that are ignored during ordinary times. Necessary changes and very hard decisions are made that would otherwise be overlooked during normal times. These changes ultimately create a stronger business over time,” he said.