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The Golden State has lost its economic luster, triggering serious consequences for retailers and vendors.
This story first appeared in the May 6, 2008 issue of WWD. Subscribe Today.
California, the most populous state, the biggest U.S. market and a bellwether for the nation, is being especially hard hit by the implosion in housing, soaring gasoline and food prices, job cuts and tight credit.
Retail sales are down, some stores are scaling back expansion and vendors said customers are late with payments. Even a linchpin $3 billion downtown Los Angeles mixed-use development is being delayed because of financing difficulties.
The number of homes going into default in the state doubled in the first quarter, and the 6.2 percent unemployment rate in March was the third highest in the U.S.
“We’re working hard for every dollar we get in the store today,” said John Martens, vice president and general manager of Neiman Marcus’ Beverly Hills store. “It’s not business as usual; times have changed. It’s a very challenging time for us and for most retailers.”
Nordstrom Inc.’s fourth-quarter conference call in late February exposed the rough road ahead for the chain in California. “In the short term we face challenges in our business, particularly in women’s apparel and regionally in California,” the company said.
“Overall it’s a much tougher retail environment out there so we are focused on the elements we can control — the merchandise in stores and service we can offer customers,” Nordstrom spokesman Michael Boyd said last week.
Neiman Marcus and Nordstrom, however, said the situation hasn’t altered their plans for expansion in the state. Nordstrom is to open in September at The Oaks in Thousand Oaks, Calif., and at Newport Beach’s Fashion Island mall in 2010. Neiman Marcus is launching a store in September at Westfield Topanga mall in the Los Angeles suburbs, and another in 2011 at Northern California’s Walnut Creek.
The plans are in contrast with those of Gottschalks Inc., the Fresno, Calif.-based moderate-priced regional department store that operates 59 locations, 39 in California. Amid same-store sales that fell 12.9 percent in March, Gottschalks is putting off opening two new concept stores in California — scaled-down versions of its 100,000-plus-square-foot models.
“Weak housing trends and high gas prices are particularly affecting the Western states in which we operate,” said Jim Famalette, chief executive officer. “The question became, do we really want to be opening stores right now in this environment? This is a year not to charge ahead quite as dramatically. It’s not the end of the world, but we need to let the economy catch its breath.”
Gottschalks is moving forward with a new concept store in Bend, Ore. “California is going through an even more difficult time than the rest of the country,” Famalette said.
Designers and manufacturers said specialty retail customers are delaying their payments as much as 45 days after goods are shipped. Stores try to arrange selling merchandise on consignment. Other merchants don’t have enough to pay for cash-on-delivery orders, and some have maxed-out on credit cards.
“Credit cards are getting declined like crazy,” said Michelle Kim, president of a Los Angeles-based company that produces the young contemporary label 213 Industry and contemporary knits line MK2K. “We’re scared of producing 100 percent of the orders because they’ll cancel before shipment.”
With $6 million in annual wholesale sales for both brands, domestic specialty stores make up as much as 70 percent of 213 Industry’s business and 40 percent of MK2K’s. Although Kim hasn’t laid off employees, she trimmed her number of styles by 20 percent. She’s also focusing on designing more tops than dresses, partly because tops cost a quarter to a third less than dresses to make.
“If [retailers] have to choose between a $50 top or an $80 dress, they’ll take a $50 top to fill up their shop,” she said.
Amy Stephenson, designer and founder of a year-old, Los Angeles-based premium denim label called Stephenson Denim Finery, said she declines to ship orders paid with credit cards or COD unless the store has established a good credit history with her. She also added 30 days to her budget planning on receivables. “I need that protection,” Stephenson said.
After generating $500,000 in wholesale sales for the spring season, Stephenson expects this fall’s sales to be slightly lower. Though all her current stores are placing orders, they are buying more carefully and a little less, she said.
Valerie Mamone, owner of Blush Boutique in Sacramento, Calif., which sells designer ready-to-wear, said sales are off about 20 percent compared with a year ago.
“Our top-end customers are not buying as much because they are probably trying to budget their luxuries,” Mamone said. “Before, that didn’t come into play.”
To meet shoppers halfway, Mamone said she’s looking to stock a few tops in the low-$200 price range, instead of just in the $300 range. And to keep customers engaged, Mamone recently had a postcard campaign she called “Essential Fiscal Fashion,” in which she offered 15 percent discounts on sales of up to $499 and 25 percent off beyond that.
James Shimizu, chief marketing officer of Ontario, Calif.-based Anchor Blue stores, said for value-oriented retail chains large enough to withstand the market downturn, there is opportunity to grab market share.
“There’s clearly a difference in people’s spending patterns,” Shimizu said. “People aren’t staying home and spending nothing — they are being more choosy. It just has to have value and has to be an item they have to have….We have definitely heard from market suppliers who are struggling, their orders are being cut. Business is not getting better.”
The domestic doldrums encourage California-based companies to turn an eye overseas, where the weak dollar also makes their prices more attractive to shoppers. For instance, Guess Inc. is bolstering operations in Europe and South Korea, while American Apparel is rolling out stores this month in Shanghai, Beijing and Suzhou to coincide with the Summer Olympics in China’s capital.
As countries such as China, Vietnam and Malaysia continue to rise in manufacturing and textile prominence, almost all the goods shipped by boat or plane must use California as a U.S. entry point.
However, trans-Pacific trade also has been dealt a blow by a souring demand for goods. Paul Bingham, a principal in the trade and transportation practice of Global Insight Inc., an economic and financial forecasting company based in Waltham, Mass., said the firm estimates that import container volume at the ports of Los Angeles and Long Beach will be down 2.9 percent the first half of this year. For the nation, the estimate is a 2.7 percent decline.
Across the U.S., falling home prices have reduced the home equity of consumers and many now have mortgages that exceed the value of their houses. That trend is particularly evident in California, the birthplace of premium denim and home to trendsetters in contemporary clothing and specialty retailing.
The median price of a single-family detached home in the state in March fell 29 percent to $413,980, compared with $582,931 in the same year-ago period, according to the California Association of Realtors.
The nosedive in home values has fueled mortgage defaults, which are often a prelude to foreclosures. Real estate research firm DataQuick Information Systems said the number of homes going into default in the state doubled in the first quarter, reaching the highest level in 15 years. During the January-to-March period, 113,676 default notices were sent to California homeowners, up 143 percent from the previous year.
Los Angeles County led the state with 20,339 defaults in the first quarter, a 130 percent jump from last year.
In the 12 months ended in February, the Case-Shiller home price index, which measures the value of single-family homes and was released last week, found that in 20 cities, home values decreased 12.7 percent. The declines in Los Angeles, 19.4 percent; San Diego, 19.2 percent, and San Francisco, 17.2 percent, ranked among the largest.
To be sure, the diversity of California’s economy — including sectors such as high tech, health, hospitality, biotech, agriculture and entertainment — are seen as strengths in weathering the storm.
Two sectors — education and health — are doing fine, said Esmael Adibi, director of Chapman University’s A. Gary Anderson Center for Economic Research. “All other sectors, [including] construction, manufacturing and the mortgage industry, are either flat or down,” he added. “We don’t see a quick turnaround in these sectors to lead to overall job growth.”
Sara Johnson at Global Insight said she expects California to be hit harder than other states because home prices are declining more sharply and the state’s job growth is lagging the national pace.
California is near the bottom in job growth, ranking 42nd among the 50 states with a 0.1 percent decrease in jobs over the 12 months through March. And in March, California’s unemployment rate was the third highest at 6.2 percent, behind Michigan’s 7.2 percent and Alaska’s 6.7 percent. Joblessness was higher in Southern California, 7.1 percent in the greater Los Angeles area, compared with 5.5 percent in San Jose, including the Silicon Valley, in the northern part of the state.
In California’s apparel industry, 75,500 workers were employed in March, down 1.8 percent from March 2007, but up 2.2 percent against February. State textile mills in March employed 11,000 workers, down 7.6 percent from the year before, but up 1.9 percent versus February, on a seasonally unadjusted basis.
Retail vacancy rates in the state are expected to worsen, according to research firm NAI Global.
“It’s definitely getting ugly out there,” said David Solomon, president of NAI ReStore, referring to the vacancy rates. “Though there are national differences. California is not getting spared. California is probably among some of the worst, in particular areas of the state like the Inland Empire.”
Los Angeles had a downtown retail vacancy rate of 9.5 percent last year, the most recent data available, compared with 3.3 percent in Chicago. Developments known as “power centers” (those with big-box retailers such as Best Buy, Kohl’s and Target) had a 6 percent vacancy rate in Los Angeles compared with a 7.5 percent vacancy rate in Chicago.
Development in downtown Los Angeles, however, has been set back by several financing-related delays in the Grand Avenue project designed by Frank Gehry, which includes shops, condominiums, a hotel and a park. The development was initially scheduled to break ground last fall, but the start date has been pushed back to February 2009 because of difficulty in obtaining construction loans, Related Cos. said.
With a weakened economy, Gov. Arnold Schwarzenegger said he expected the budget deficit to reach $20 billion this year.
Fuel prices are a key indicator of California’s economic hardship because of the state’s dependence on automobiles. A gallon of regular gas has hit an average of $3.92 in the state — with a high of $4.17 in Santa Barbara — at least a 60-cent or so bump from the same time last year, according to the Automobile Association of America. Truckers paid $4.23 a gallon for diesel, compared with an average of just under $4.18 for all of the West Coast, said Julie Sauls, vice president of external affairs of the 2,400-member California Trucking Association.
“We are starting to see some of those who can’t pass on the costs,” she said of independent truckers. ” They are simply leaving the business.”
When might the state begin to rebound? Traditionally, California has been slow to pull out of recessions because the source of success — such as the dot-com growth of the Nineties — is the factor that implodes. This time, it is the housing market.
“California disproportionately enjoyed [in the Nineties] from high tech and recently from the construction and mortgage industry and is disproportionately hit harder because of that,” said Chapman University’s Adibi. “Unfortunately, it is going to take us longer to come out of it because of that heavy dependency.”