Retail in an Age of Austerity

Brands and retailers see a relatively bright future ahead, although growth will come at a higher price than ever before.

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LONDON — Despite stock markets bouncing like a jet in a tropical storm, uncertainty over the future of the single currency, spiraling debt and low growth in the euro zone, brands and retailers see a relatively bright future ahead. Nothing like the pre-2008 days — but full of promise.

This story first appeared in the December 30, 2011 issue of WWD.  Subscribe Today.

Growth, though, will come at a higher price than ever before, which is why fashion and luxury firms and mass market retailers are on the offensive.

They’re tightening budgets and supply chain operations, aggressively renegotiating terms with suppliers and landlords, keeping a close eye on stock levels, and forging ahead with new investments aimed at driving demand in a patchy and ever competitive marketplace.

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“Half of Burberry’s business is done on replenishment styles, and we have a regular flow of products into stores. We’re cleansing inventory much more efficiently, with less going to outlets,” said Stacey Cartwright, chief financial officer of Burberry back in November.

“We’re in a much better place than three years ago, with new planning functions in place that allow us to manage inventory in a visible and transparent way.”

Burberry, which spent multimillions on its new SAP technology systems between 2007 and 2010, is just one example of how companies have been tightening their ships and investing in systems to help them grow.

The Milan-based online retailer Yoox saw an 19 percent spike in the first nine months of the current year — something that founder and chief executive officer Federico Marchetti attributes partly to an ongoing investment in specialized computer systems, and in particular to radio frequency ID technology.

“Even in a negative macroeconomic context as the one we are in, I believe that the best tool we have is to continue our investment in quality,” he said.

Italy’s La Rinascente department store — which has been undergoing renovations in stages — is also committed to forging ahead. Managing director Alberto Baldan said plans are going exactly as forecast: “We started revamping the sixth floor when the credit crunch hit, and we never stopped. These are expensive projects, we work with the brands, and we don’t slash investments in areas the customer can actually see. When the situation is not ideal, we’ll rationalize back office costs, for example.”

The latest department to be unveiled at La Rinascente was men’s wear, in the fall. Coming up is the redesign of the women’s floor, an expense of more than 3 million euros, or more than $4 million at current exchange, which will be completed in July.

Other companies are keeping an eye on inventories and ensuring their operations — and spending — are as lean as possible.

“We now manage inventory levels carefully,” said Escada’s chief operating officer Bruno Sälzer, adding that sales are up 6 to 7 percent this year. In addition, Escada’s recent turnaround plan has halved the collection’s complexity and size. “We now have a much more commercial approach, offering more basic products you can use everyday. This has all been a kind of preparation for times like these.”

In the U.K., footwear designer Rupert Sanderson — who operates a vertically integrated business — said uncertain times call for rapid responses.

“You have to be on all your existing operations — you should not be slipping back. You could be spending a fortune on your Internet marketing, but if it’s not really working, you need to know to cut it out. You have to be constantly reviewing what is going on, and what is working and planning for the areas where you can grow,” he said.

Many firms — especially mass market retailers — are taking that ethos to heart, reevaluating their deals with suppliers and landlords and renegotiating contracts.

In November, Sir Philip Green said he was prepared to close 250 to 260 stores in his Arcadia Group’s retail portfolio over the next three years if he fails to renegotiate expiring leases with more favorable terms. In the 2010-11 fiscal year, Arcadia closed 66 of its 2,500 retail units.

“In a doomsday scenario, over the next three years we could close 250 to 260 stores. As of now, we cannot be certain whether that will even happen — there is always a window to negotiate,” he said, in a clear signal to landlords across the U.K.

U.K. supermarkets, meanwhile, are becoming increasingly feisty in their relationships with suppliers.

In September, Marks & Spencer asked 60 of its top clothing and homeware suppliers to make a one-off contribution of 1.25 percent of their annual turnover with the group to help pay for future in-store refurbishments.

Ceo Marc Bolland had earlier unveiled an ambitious program of 600 million pounds, or $930 million at current exchange, on refurbishing M&S’ U.K. stores.

An M&S spokesman said: “This is an exciting time for M&S and its suppliers. We’ve set out a very clear strategy to grow our business over the next three years to our mutual benefit. We therefore believe it is right that our top suppliers are part of the journey from the start.”

The 1.25 percent contribution is retrospective, meaning it refers to the year’s turnover from August 2010. Suppliers were given 24 weeks to make the payment.

“I was shocked — obviously everyone was,” said one M&S supplier who declined to be named. “And it was retrospective, which was strange. We could not even plan it into our margins going forward. But I agreed to it. They are a good company, an ethical one, and they have promised to support us going forward.”

At the other end of the retail chain, brands have been increasingly turning to high-end outlets to sell off end-of-season stock.

They’ve been using private flash sales sites such as Gilt.com and Vente-Privee.com, businesses such as Yoox.com, The Outnet and Value Retail, which operates nine designer outlet villages across Europe, to extract better margins from their surplus stock.

“The brands are all running a much tighter ship, but no matter how tightly inventories are controlled, there will always be stock,” said Stephanie Phair, managing director of The Outnet, which belongs to Net-a-porter.com and which ships to 170 countries.

“We’re not just about excess stock, but about helping companies to plan through the entire season: We can help them top up minimum orders from their factories and give them the confidence to buy certain fabrics. If there is any excess fabric, for instance, they can actually create new stock for us. And when they’re faced with RTVs [returns to vendor], we are available for them.”

Scott Malkin, chairman and ceo of Value Retail, said he believes that with brands keeping a closer eye on inventories, the general availability of surplus stock will increasingly shrink away. But that doesn’t bother him.

“Today, our brands are anticipating their levels of surplus and programming us into their distribution plans,” he said. “They’re looking to move stock through outlets, and not via markdowns. Our job is to sell the merchandise at the highest price points to customers looking for value in relation to the brand.”

Although many retailers and brands may be increasingly savvy about how they navigate these tough times, there is still work to be done.

Elizabeth Sands of A.T. Kearney in London said the biggest challenges going forward will be running an agile organization, cost control and capitalizing on growth opportunities. She said companies will have to do this in an environment where raw material costs are likely to remain volatile, and amid continued uncertainty about the future of the euro.

“For the luxury companies in particular, maintaining brand positioning will be key — and that will take nerve. For the mass market, it will be about the ability to deliver distinctive products, newness and freshness in a competitive market,” she said.

Sands added that all companies need to “capture every single euro’s worth of value and make intelligent use of data. Retail is data rich, and companies cannot be flat-footed in their ability to assimilate that data and respond to it.”


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