The old financial tricks and merchandising sleights of hand aren’t going to work anymore.
This story first appeared in the April 13, 2009 issue of WWD. Subscribe Today.
Fashion companies were quick enough to cut expenditures, pare store openings and lean on suppliers to survive the first year of the recession and the start of the credit crisis. But shifting consumer values and brutal economic realities are forcing both the weak and strong to reconsider their reason for being and how they do business.
The paradigm in fashion is shifting. Well-established consumer segments are all changing independently and the industry is scrambling to keep up. The proof is everywhere, from First Lady Michelle Obama’s penchant for J. Crew to Jil Sander’s transformation into fast-fashion maven and luxury’s nosedive.
The global playing field is also in flux with financial pressures bearing down on economies of all shapes and sizes.
“What’s going on is unprecedented, at least in my experience,” said Allen Questrom, former chief executive officer of J.C. Penney Co. Inc., Federated, Barneys New York and Neiman Marcus Inc. “This is the deepest consumer retrenchment I have ever witnessed. It’s like someone turned out the lights and the world changed.”
The advice from retail’s Mr. Fixit?
“Get rid of nonproductive stores. Cut back expectations — cut back the business empire from 10 to 20 percent depending on type of product — the whole business,” Questrom suggested. “It’s about cutting operating expenses, the number of physical facilities, sales, profits, the whole world. It could be four years, five years, or it could be we are in for a 10-year decline.”
Smaller is just a part of the new world order experts and industry veterans see coming.
The next couple of decades will see the coexistence of several “contradictory” distribution strategies, according to Gildas Minvielle, an economist at the French Fashion Institute. Slow and fast-fashion concepts will operate side-by-side and smaller retail formats will return to repopulate town centers.
“[Consumers are] coming back to basics and are less willing to be swayed by marketing campaigns,” Minvielle said. “But nothing’s sure. We could find at the end of 2010 a period of strong growth, and things could completely change.”
Shoppers who for years have subsidized mediocre collections and chains via credit-fueled purchases are reasserting themselves and forcing brands to produce goods that meet the demands of their lifestyles. Simply selling the same old, same old for 20 percent less will not be enough.
The whole economy is coming off of a period of excess, a gilded age of cash flow that covered Wall Street’s sins and filled holes in questionable business plans. Many see the quick growth and flameout of collegiate retailer Steve and Barry’s as just one example of the overabundance allowed to take root in the marketplace.
“What we now have will be a fundamental economic reset,” said Steve Ballmer, ceo of Microsoft Corp., at a House Democratic caucus retreat earlier this year. “The economy is going to have to re-establish itself at a lower level of spending that reflects the real value of underlying assets before we can all start growing again at a healthy rate.”
That’s trouble for high-end fashion.
“The pie is smaller and fewer people have access to it,” said Concetta Lanciaux, principle of Switzerland-based Strategy Luxury Advisors.
Lanciaux said designer labels are unlikely to grow as consumers trade down to brands that offer good design and quality for the price.
That Obama has embraced more “entry-level” brands like J. Crew, and “simple” versus flashy designers is emblematic of the direction. “The consumer can now really discern value for money,” she said. “People perceive what’s fake. Now we want the truth.”
Lower spending means a new world order for the business of fashion, and so far the central theme appears to be a back-to-basics emphasis on the consumer. The problem is nobody’s sure just what the consumer wants now or what they’ll be looking for in the next decade.
“This thing comes at the Bermuda Triangle of the culture,” said futurist Faith Popcorn, founder of Faith Popcorn’s BrainReserve. “Ethics, the environment and the economy are all failing at the same time.”
People want to live the good life — and that life doesn’t necessarily mean shopping, especially for expensive clothes, she said.
And for companies looking for a way forward, the end of easy money only increases the risks. Businesses still find it hard to renegotiate bank loans and tap capital markets, just as consumers can no longer draw on second mortgages or burgeoning stock portfolios for purchases.
“You can really get scorched in a world where the consumer has a lot less money to spend,” said William McComb, ceo of Liz Claiborne Inc. “Ultimately, to become profitable again as an industry and to have sustainable margins, you’ve got to have some real level of scarcity.”
Fashion got caught up in extraordinary consumer growth, expanding store bases and supply chains to meet shoppers’ ever-increasing demand for more and more, risking a loss of market share if they didn’t hit the accelerator.
“We’re going to have fewer outlets over the next year, and it’s going to happen much more quickly than if the business cycle hadn’t screeched to a halt so fast,” said Nancy Koehn, a retail historian and professor at the Harvard Business School.
As painful as that sounds, there could be a payoff at the end for consumers.
“The drama of this moment will force savvy retailers to figure out how to be more distinctive and more targeted,” Koehn said. “We’re going to end up with a more distinctive, and in some sense, more compelling shopping landscape.”
She pointed to the fast-fashion model used so effectively by Hennes & Mauritz and Zara and said it could be re-engineered to suit a higher-end customer.
“This moment is a kind of great trumpet blowing for taking that idea, that rough concept and trying to add some [social] responsibility, some durability or lastingness to it,” Koehn said. “People are looking for purchases that are going to last. It needs to be a few zippy things that people can actually think about acquiring.”
Higher-end fast fashion based on a few key pieces? Just one possibility for fashion’s future. Certainly others have heard the rallying call to quick-turn styles, including the designer Jil Sander, who, after sitting on fashion’s sidelines for several years, recently inked a deal to oversee men’s and women’s apparel for Japanese retailer Uniqlo, owned by Fast Retailing Co. Ltd.
Fast fashion has caught on, in part, because of its clear usability for consumers. It’s a business model that offers shoppers an accessible way to stay current. If consumers once again reign as kings and queens, this is the type of focused business model expected to take root.
From fewer stores to a renewed focus on what consumers are demanding, it is a scary and exciting time in fashion. Even if the industry’s woes don’t rise to the doomsday scenarios facing the financial sector and U.S. automakers, by most accounts, fashion is headed for a significant reinvention as consumers find their footing and the business adapts to structural changes.
The New, Pushier Consumer
Every aspect of retailing, from the number of stores to the looks they carry and the marketing they use to draw customers, could be permanently reordered as shoppers throw their weight around.
“Consumers are getting out of the habit of buying,” said Popcorn, the futurist. “We’re calling the consumers ‘citizens’ and a citizen wants to play deeply in the purchase cycle. They want to say, ‘I want it this way or I want it that way. I want to put my logo on it. I want an Adidas logo on top of a Nike logo.’”
People are angry with their leaders, losing faith in big companies and scared about the economy, said Popcorn, noting that value brands are “no longer a sacrifice, just smart.”
Last month, Stefano Sassi, Valentino’s ceo, said consumers were beginning to take a “punitive” or “moral” approach to buying, meaning that price had to be relative to quality more than ever.
This is a challenge to the predominant mode of thinking that so often equates growth with success.
“If you’re going to truly focus on your core customer, you are going to have to relook at your business and how big your business can be,” said Andrew Sacks, president of marketing and intelligence firm Agencysacks. “The focus should be on being profitable and building a more consistent brand.”
Sacks said the first step is acknowledging the business is changing and might be smaller and focused on a different range of products.
“If anyone’s thinking about it already, then they’re already ahead of the game,” he said. “It’s also about taking a view. If you’re in the middle of the road, you know what happens. You’re going to get run over.”
Thinking smaller would be a clean break with much of the industry’s recent past.
Brands will have to do more than edge out the competition — they will have to satisfy important needs of shoppers, said Paul Charron, former ceo and chairman of Liz Claiborne Inc., who is set to become chairman of Campbell Soup Co. in August.
“When I look at some of the things I did as a ceo, I think I did them for largely competitive reasons and they probably served me well,” Charron said. “But I’m not sure that that’s going to be sufficient going forward. The things that need to be done are going to have to work from a consumer point of view and they’re going to have to enhance your stature with the consumer on a metric other than convenience, which is more accessibility, which is more stores.”
Charron said each consumer segment would react in its own way to the economic tides.
“You’ve got about seven or eight consumer revolutions under way, and no trend observer or researcher or consumer behaviorist has a clue as to what the world will be like on the other side,” he said.
The type of goods that go into stores and how they are presented to shoppers are also changing, and concepts such as “aspirational” are proving to be a moving target.
“The aspirational consumer is going to continue and maybe consumers will become even more aspirational,” said Mackey McDonald, former chairman and ceo of VF Corp., who is no longer affiliated with the company. “What they will buy will be the things that will be important to their image and the statement they want to make about who they are.”
Reaching the consumer will require more targeted marketing.
“I don’t think it’s a time when you can stop communicating,” said McDonald. “I just think you need to be communicating with a high-powered rifle rather than a shotgun.”
Already changes are happening throughout the industry.
A sign of the times: For his fall 2009 runway show, designer Graeme Black switched up his front-row lineup. He invited personal shoppers from stores such as Browns in London so they could see the collection firsthand. “The only way we’re going to move forward is to connect directly with the customer,” said Jonathan Reed, Black’s business partner.
The Price-Value Game
Price is a function of how much shoppers are willing to pay for something, while value is a gauge of something’s intrinsic worth.
It’s a distinction that sometimes gets forgotten.
For example, Gap Inc.’s Old Navy unit faltered after focusing on relatively inexpensive basics without much fashion, said Christine Chen, principal, equity research specialty retail, apparel analyst.
And the stakes are higher than ever.
“In this environment, we are going to continue to see a bigger separation between those who are doing well and those who are not doing well,” Chen said. “But everyone is going to suffer.”
This puts designer and discounter in the same boat.
“As money becomes a critical issue, clients will become more cynical with regard to how they spend it,” said Inacio Ribeiro, co-designer of ready-to-wear label Clements Ribeiro.
“The consumer is so well-informed today, they don’t want to be told how to buy and they feel conned and manipulated by big flagship stores, and by the disproportionate margins the brands are making,” Ribeiro said. “However, the consumer will welcome suggestions, and that is the way forward.”
Fashion’s reliance on ever-lower prices failed last fall, as sale signs shouting 60, 70 and 80 percent off attested. Value is making a comeback across the price spectrum.
“In all of our businesses at every single level, we have been focusing on value,” said Tom Murry, president and ceo of Calvin Klein Inc. “The consumer is responding to great product, but it has to represent good intrinsic value. Even at our designer level, we have men’s suits now at $1,095, and it used to open at around $1,600. Those suits are selling well at full price.”
Last fall’s price drops were so severe that suppliers from every corner of the industry are hoping retailers can hold their prices, even if they start at a lower level.
But that doesn’t mean brands are trimming their price tags simply for the benefit of retail bottom lines.
Stores tried to extract sharper pricing from designers after the fall runway shows in Paris and Milan, but major houses such as Chanel, Prada and Versace were holding the line.
Prices could be heading down for some time.
“Deflation is here to stay,” said William Fung, global managing director of Li & Fung Ltd. The sourcing giant is budgeting for a flat 2009 as its customers are predicting 10 to 20 percent decreases in sales. However appealing the notion of deflation might be for consumers, it’s bad for business. Profit margins are squeezed between fewer dollars flowing into the till on one hand, and the cost to make and market goods on the other hand.
Offering more value seems to be a way through.
“We have to get back to creating innovative product, concepts and merchandising ideas to stimulate and energize the customer,” said Andrew Rosen, president and co-founder of Theory. “You just can’t get away with making clothes and expecting them to sell. You have to be good at what you do. Clothing is not just a status symbol anymore. There has to be a sense of relevancy to it.”
The New Society
Kenneth Cole, who has long linked his brand to awareness of social issues, might find his marketing niche filled with more voices.
The fashion crowd, already in tune with myriad social concerns from women’s issues to advocacy for AIDS research, might become even active as the culture pays more attention to causes.
Donna Karan, for example, is trying to convey a sense of social consciousness through her Urban Zen concept.
“What does it mean to buy something?” Karan said. “I think that buying something will no longer just be for yourself. It’s buying something with a conscience, how it affects the seamstresses, the fabric people, the manufacturers, the world at-large. I think we were in an economy where it was all about ‘what I want,’ but with every purchase, there is a business and how you can make a difference in somebody else’s life. If that shift happens, it will all of a sudden awaken the consumer to why they’re actually buying something.”
Luxury titan Bernard Arnault, chairman and ceo of LVMH Moët Hennessy Louis Vuitton, might also be getting into the eco game.
LVMH is said to have its eye on Edun, the eco-luxury label founded in 2005 by U2 rocker Bono and his wife Ali Hewson. The brand is an attempt to drive sustainable employment in developing economies through the production of organic fashions.
Last month, Arnault demurred when asked about his company’s interest in Eden. “It’s top secret,” he said.
Fifty-five percent of consumers buy organic products, up from 49 percent a year ago, according to survey by WSL Strategic Retail. An increasing number of venues are offing consumers their organic fix. Among the latest: Target’s new Loomstate brand is made from certified organic cotton, and Anthropologie celebrated Earth Day this year with organic chefs and gardening events.
The Global Order
The financial crisis that began with risky mortgages in the U.S. has whipped around the world, making it even harder for retailers and brands to navigate international waters, where consumers and businesses have a rhythm of their own.
The headlong rush to open in developing countries has slowed along with the prospects for growth, said Antony Karabus, ceo of Karabus Management. “The growth rates are nowhere near available as they were a year or two ago,” he said. “It’s not to say there are no opportunities. But it’s not as obvious and it’s not as slam dunk as it used to be.”
Karabus said it has also become harder to tap into the necessary capital to expand and that retailers would become more selective, going after a smaller number of big opportunities. “The execution is much harder in tough times,” he said.
Michael Jeffries, chairman and ceo of Abercrombie & Fitch Co., told Wall Street analysts the retailer would continue its overseas expansion.
Abercrombie will cut the ribbon on flagships in Milan and Tokyo, this year. Copenhagen will have to wait until next year. The firm also sees opportunity to add more Hollister mall stores in the U.K. “We will continue to approach our international expansion with the discipline that the current environment requires and will proceed at a pace with which we feel comfortable,” Jeffries said.
Tiffany & Co. cut its store openings to 13 this year, down from 22 in 2008. But the expansion still has an international flavor. The luxe jeweler has stores planned in Canada and Mexico, as well as seven in the Asia-Pacific area and one in Europe.
An A.T. Kearney study last year singled out the 10 most attractive emerging markets for investment. Brazil, China and India topped the list, which also included the United Arab Emirates as the 10th most attractive market. The global downturn might well force changes to that list, as fortunes rise and fall. Witness Dubai and Russia, which both seemed unstoppable just a few months ago but have since faltered dramatically.
Russia’s gross domestic product is expected contract by 4.5 percent this year, down from growth of 5.6 percent last year, according to the World Bank. The UAE has also been hit hard, with its GDP is slated to grow by just 2 percent this year, down from about 7.8 percent in 2008, according to the Dubai Chamber of Commerce and Industry.
The future of fashion might still lie with global players, but international expansion could be just a dream for some.
The New Austerity
Doing more with less is becoming a way of life in the often high-flying fashion industry.
The austerity can be seen far beyond the end, at least temporarily, of Marc Jacobs’ post-runway party, a twice-annual highlight on the social calendar of many fashionistas. Designers are looking at the economy and dramatically changing how they operate.
“The situation is very serious all over the world,” said Domenico Dolce, ceo of Dolce & Gabbana. “You either waste time commenting on the negatives, or you do the positive thing and do something constructive.” The company’s sales were down in their stores and showrooms and clients delayed their pre-fall buying from November to January and asked to postdate payments.
“Instead of making a certain number of models, you make less,” explained Stefano Gabbana, chairman of the design house. “But this has nothing to do with creativity….You have to do a bit of editing before instead of after. Instead of 1,000 items, you produce 500. Anyway, you send out 50 for the runway….The crisis is there, but we continue to make the collections as we did before — actually better [than before] to sustain all this.”
Empty fashion hype is another casualty of the financial crisis, said Jean-Jacques Picart, a Paris-based industry consultant. “The big trend of ‘fashion for fashion’ is dead,” he said. “Consumers are looking for honesty, respect and value.”
In the past, creativity was channeled in service of the image and desirability of fashion brands, whereas in the future, “creativity will serve the product,” he explained. “Passion and reason will be the two important elements for fashion in the future.”
The nips and tucks are happening everywhere.
“As a company, we’ll be more attentive to our investments, which will need to have a faster turnaround,” said Guido Damiani, chairman and ceo of Damiani SpA, the Italian jeweler. “If in the past we would invest in a new store knowing that we would lose money in the first three years and start making a profit after five, now the break-even target has to be shorter otherwise we’ll hold back.”
Damiani said consumers would eventually get used to the situation and start buying again, but the rebound would be uneven.
“It will take the more mature markets a longer time — maybe even 10 years — to forget the slap of this crisis while the emerging ones will turn out new richness faster,” he said.
The Nuts and Bolts
Making all this happen will require fashion companies to be as flexible and innovative as they’ve claimed to be all along, or more so.
For years, the industry’s been filled with chatter about market research, making products with both creative and commercial appeal and tweaking supply chains so design decisions could be made later, but the tangible results were often never seen.
“It’s the execution of these things, not just the wishful thinking of them,” said John Karonis, newly minted president of Kurt Salmon Associates’ retail and consumer products group. “Our economic environment has really instilled a sense of urgency in many people.”
A study by Kurt Salmon described this new, more efficient way of operating as “acting vertical,” and said firms such as Target Corp., Coach Inc. and Aéropostale Inc. were already doing it.
Coach is one company that, while heralded as a success and an accessible fashion darling, is also adjusting its approach, offering more bags at lower price points.
“Growth, if it’s not profitable, isn’t growth at all — it’s just expanding a problem,” Karonis said. “Wall Street has valued growth and put that up as kind of the key measure of a viable, vibrant company in the past. I just don’t think they’re going to place nearly as much value on that in the future. You have to earn the right to grow.”
That goes for brands across the price spectrum.
“While Bulgari’s objective regarding retail used to be maximizing the prestige, the image, the visibility — and therefore we were opening a lot of new large stores — now it has changed and become efficiency in the distribution network,” said Francesco Trapani, ceo of Italian jeweler Bulgari SpA. Bulgari will apply this new standard to new stores and existing doors, some of which will be closed.
All the action could change the geography of fashion. “Fashion markets in advanced countries will not see much business expansion because the society is aging, but developing countries will see an increase,” said Kana Sasaki, an analyst at Tokyo-based Mitsubishi UFJ Securities. “To survive for another couple of decades, big luxury brands like Chanel should protect the equity of brands while expanding merchandise variation.”
An emphasis on smaller chains and quick-turn fashions might also prompt some sourcing patterns to change, even bringing overseas production back to the U.S. market.
“As the dollar inevitably falls, the cost of manufacturing is going to become too great,” said Peter Schiff, president of Euro Pacific Capital. “A lot of the U.S. fashion industry manufactures in China and Mexico. That whole process is becoming increasingly more expensive due to shipping costs and the anticipated dwindling foreign currency exchange rates. We can’t just be a giant distribution center where we sell everyone else’s goods by credit.”
None of this means companies will outright abandon the strategies and methods that helped them get started in the first place. The future of fashion, however different, seems likely to be based mostly on its present.
Massimo Ferretti, executive chairman at Aeffe SpA, said his firm was sticking with its growth strategy focused on complementary brands and would try to make the most of the downturn. “Mindful that a crisis does not have to be seen as a negative, we are looking to be particularly flexible and to revise our guidelines based on the contingencies of the market,” Ferretti said. “We are seeking to focus on the core business, streamline costs and improve overall efficiency.”
Aeffe’s efforts include a rationalization of manufacturing processes and working closer with major retailers. The company is also holding on to its sense of what it means to create, sell and own a luxury good. “We do not forget that, even in a period of economic crisis, luxury products cannot afford to leave out ingredients like dreams, desires and aesthetic gratification, which end up representing one’s very essence,” Ferretti said. “Creativity remains the key to recovery.”
Amid the crisis, there might be opportunity for the nascent fashion industry in China, the world’s largest apparel producer.
Though the country is losing millions of manufacturing jobs with the downturn, Shen Liuxin, a Shanghai-based professor of international fashion and art, said declines elsewhere could help China’s creative industry.
“We should seize this time when the European fashion industry is entering a recession to promote our own brands to an international level,” said Shen. “We should develop our own brands, combining our traditional culture and style.”
The pieces in the global fashion game are moving, and there’s no telling at this point what the final picture will look like.