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Changing Retail Market: Vendors Eye Discounters To Bolster Bottom Line

As major sportswear firms try to adapt to the changing retail landscape, there is a huge market to be tapped in the likes of Wal-Mart and Target.

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NEW YORK — Surveying a shifting retail landscape, sportswear vendors that already have big businesses across several channels are looking lower to a huge, largely untapped market: Wal-Mart and Target.

Now they just have to figure out how to do it.

The industry’s key sportswear vendors have their thinking caps on, but have yet to come up with a way to develop large, profitable businesses with the major discount chains. Soon they might have little choice.

With Wal-Mart’s apparel sales weighing in at $25 billion to $30 billion, and Target coming in at just less than $10 billion, according to analysts’ estimates, they are simply too large to overlook. Vendors have found it difficult to tap into that market, though, as the discounters’ emphasis on low costs often leave little left over to pad manufacturers’ bottom lines.

“We have had active discussions with [Wal-Mart] really over several years,” said Jones’ chief executive officer Peter Boneparth at the Banc of America Securities 2005 Consumer Conference here Tuesday.

“It’s been an economic model that’s been really hard for us to figure out,” he added. “Having said that, we are not unmindful that, I don’t know, 110 million people a week walk though that store. So it’s sort of a work in progress.”

The mass channel could become more attractive as the traditional department stores, where vendors such as Jones and Liz Claiborne Inc. cut their teeth and still have large businesses, might become harder and harder to work with as consolidation shakes the sector.

Federated and May are set to join forces later this year, forging a $30 billion retailer that will have even greater leverage over vendors. In addition, the combined retailer is expected to sharpen its focus on private label offerings in its combined 950 department stores in order to differentiate itself from the competition and gain better margins.

The discounters have some well-known names in apparel, such as Levi Strauss Signature. Wal-Mart also carries Faded Glory and Hanes, while Target’s fashions include Isaac Mizrahi, Mossimo and Cherokee.

Constantly searching for growth, vendors seem increasingly willing to take on the challenge of supplying the discounters, especially given the shifting dynamics of the apparel marketplace, said consultants.

Wall Street is also rabid when it comes to growth and already has had a hand in pushing vendors to expand into different price points and develop their own store bases. Jones, for instance, acquired luxe retailer Barneys New York for about $400 million in December, diversifying its product mix and strengthening its owned retail operations. Claiborne is keen to expand its Mexx chain as well as build retail operations for smaller businesses such as Juicy Couture.

Already, Jones has dipped a toe in the discount waters.

“We do some private label business with both of those customers now,” said Boneparth. Producing private label goods for Wal-Mart and Target isn’t the end goal, though.

“If we can create some brand equity at that level…there is a big opportunity, so we are working on it and I don’t think we can ignore [it] long term,” he said at the conference.

An industry source said discounters also have made overtures to Jones, but nothing has come to fruition, and no big new initiatives are in the works.

For now, Boneparth is focusing on organic growth after a flurry of acquisitions, with the company snatching up Maxwell Shoe and Kasper A.S.L. in just more than a year, in addition to Barneys.

While these deals built Jones’ stable and will contribute to its bottom line, the whirlwind of deals that have taken place throughout retail and manufacturing in the last 18 months might be slowing for Jones.

“The hurdle rate today is higher than it’s ever been for us given the changing retail landscape, meaning we’re obviously going to be very careful about making additional acquisitions into the wholesale channel, particularly until we see how the dust settles on the retail side,” said Boneparth. In addition to the Federated-May deal, Sears and Kmart also are slated to combine their forces soon.

Vendors might have to learn a few new tricks if they’re going to develop businesses with discounters.

With department stores such as Macy’s or lower-priced national chains such as Kohl’s, vendors are accustomed to ponying up some markdown money at the end of the season if a collection doesn’t sell as well as expected.

Rather, Wal-Mart has a tendency to demand a better price up front and just clear the merchandise if it doesn’t sell well. To a vendor, this offers a carrot and a stick — on the one hand, it gets guaranteed orders for months that enable it to plan its sourcing and production. But there is the danger that, if the goods don’t sell, Wal-Mart will significantly trim back the next season’s order, impacting the manufacturer’s bottom line.

Vendors in any transaction bring to the bargaining table brands and the ability to mange them. Boneparth repeatedly cites brands among Jones’ most important assets.

And he’s not alone in that. Throughout fashion, retailers have been clamoring for names that consumers recognize, be it J.C. Penney’s recent deal for sportswear under the Nicole Miller name or Target’s Mizrahi line.

Any move into the discount realm by vendors that have traditionally produced higher-end goods might well involve other familiar names, said consultants.

It is a time-honored fashion tradition, for apparel firms to break into lower-priced tiers of distribution by taking a mature brand or a subbrand downstream, where it would resonate with the consumer and drive more volume. Jones’ moderate division, for instance, includes Evan-Picone, which started out at higher price points, as well as A|line, which is a spin-off from Anne Klein. Elsewhere, Oscar de la Renta last year introduced moderately priced O Oscar, produced by Kellwood Co. under license. The looks sell for a fraction the price of the designer’s high-end line.

Shifting an existing brand to a lower price point is an attractive way for large vendors seeking growth to break into Wal-Mart, said Andrew Jassin, managing director of the Jassin-O’Rourke Group, a fashion consultancy here.

The most applicable example is Levi Strauss Signature, which is sold in Wal-Mart, Target and Kmart, while the higher-end Levi’s name is still distributed to department stores. Signature, which launched in 2003, pulled in $351.8 million in U.S. sales last year, while the Levi’s brand still pulled in $1.37 billion.

“Levi’s didn’t really lose a lot of traction in the other zones yet,” said Jassin. “It shows a brand that can live in more than one retail channel at the same time.”

National brands and private label programs ultimately can buttress each other, said Jassin.

“It’s really about a mixture,” he said. “Private label works best when it’s sitting next to a brand.”

This also might be a successful strategy for discounters and one that manufacturers could help with.

Those making a run at the famously demanding discount channel need to be at the top of their game, though.

“In order to really be an effective supplier to Wal-Mart, you really need to have great sourcing and raw material controls,” said Jassin.  “Because of the size of Wal-Mart and Target, Liz and Jones and Kellwood can’t avoid selling them [in the long run].”

Despite the occasional dip, Wal-Mart generally has provided very consistent growth, something any apparel vendor would want to tap into, said Susan Ng, an equity analyst with Sidoti & Co. who covers apparel firms such as Kellwood, which derived about 6 percent of its sales from Wal-Mart last year, but not through a powerhouse brand.

“They’re such a global powerhouse, everybody’s always going to want to have some sort of relationship with them,” she said.

If big vendors are going to grow big businesses with discounters, they also might have to further streamline their processes. Ng pointed to accessories firm Tandy Brands, which designs neckwear for Wal-Mart that is delivered to the retailer directly from the factory.

“That’s something I could see suppliers doing because they have the network, the relationships and they could still provide branded merchandise,” she said.

Other suppliers also have made their relationships with the discounters work.

“There are many loyal vendors who have been with Wal-Mart for a long time, who are making money, who have adjusted their whole operations to be very trim,” said consultant Walter Loeb. “Procter & Gamble and those people do make money with Wal-Mart. They’ve learned to have a sales representative right in Bentonville [close to Wal-Mart’s headquarters].”

Wal-Mart wants brands, said Loeb.

“They do like the name. They do like to be able to say they carry the Levi [Signature] brand or they carry the Wrangler brand because it gives credibility to their business,” he said.

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