Growth as retailers and brands have known it is likely gone forever.
New dynamics have taken over the market and consumer spending and the changes don’t seem temporary. With experiences taking more consumer dollars and e-commerce growing exponentially — largely at the expense of brick-and-mortar — brands face a tough task when looking to rev up revenue.
Companies from established players such as Ralph Lauren Corp., Michael Kors Holdings Ltd. and J. Crew Group to department stores like Macy’s Inc., J.C. Penney Co. Inc. and Dillard’s Inc. and specialty retailers such as Gap Inc., Abercrombie & Fitch Co. and The Limited — could once depend on store and product expansion as a surefire path to revenue increases.
But no longer.
“Everyone got drunk on growth,” said Ike Boruchow, a managing director with Wells Fargo Securities. “They sold wherever they could and they over-expanded into a retail market that’s shrinking — share of wallet is shrinking, there’s more competition in pricing and then online is growing. And a lot of companies expanded into a situation that, they’d probably say, has rapidly devolved.”
Using Ralph Lauren as an example of the challenges many brands are facing, Boruchow pointed out the brand’s sizable wholesale exposure with struggling department stores and noted the company’s web site was allowed to lag behind for too long.
Ralph Lauren’s short-lived chief executive officer Stefan Larsson laid out a restructuring plan last year that included some plans for an improved online experience, but Boruchow said the company didn’t appreciate the depth of its digital challenges. In April, Ralph Lauren said it would overhaul its digital platform, alluding to a need for a “more cost-effective, flexible e-commerce platform.” It also closed its New York Polo brand flagship on Fifth Avenue in an effort to further cut costs.
But an even bigger problem for Ralph Lauren than e-commerce is the customer-facing side of its business, according to Boruchow, who admitted issues like inconsistent pricing and brand marketing are issues without clear solutions.
“How do you reengage shoppers to come back to the brand? How do you modernize the assortment?” Boruchow asked. [Ralph Lauren] is really a brand that seems to have aged with its customer base [and] I don’t think those aspects are as well defined for the company as the tactical part right now.”
These are questions facing many retailers fighting for market share in a sector that is rapidly consolidating, with many lacking clear plans to entice shoppers back.
J. Crew, for example, is closing stores and laying off staffers in the face of significant debt while pinning future hopes on a new ceo, Jim Brett. The same essential story, with slight variations, can describe retailers such as J.C. Penney’s and Macy’s.
Struggles for these retailers are a far cry from the high-single to double-digit revenue growth they saw post-recession, and naturally the issues facing each company are unique in some ways, but Boruchow succinctly summed it up by saying “everyone, relative to themselves is doing worse.”
But worse isn’t really acceptable to investors, who all but outright demand constant growth.
These retailers aren’t going anywhere, at least not yet, but top-line and bottom-line growth is not expected to return until waves of store closures are completed and companies are stabilized, a time that is still a few years off.
And even when the cuts subside and retail again stabilizes, stores won’t return to the growth they knew during the go-go days when new malls were cropping up everywhere.
“Traditional retail is unlikely to return to traditional growth,” said David Schick, a director and analyst with Consumer Edge Research.
Traditional in this case also includes growth strategies generally focused on more — more square footage to reach more customers and tally more sales — a notion of success that should probably be forgotten, according to Schick.
“Category proliferation is a hidden danger [for retailers]” he added. “More sku’s and categories help sales but complicate the brand.”
Certain successful companies have long seen the payoff of focusing only on what they do best. Alpha Industries has been making nothing but bomber jackets for decades, and Moncler, which does offer some sportswear, still keeps its down jackets at the core of its brand.
But new categories plus square footage has for years been the simple growth equation for bigger brands and retailers, which are now in dire need of a new idea that defines success a little differently.
“Growth isn’t everything,” said Paula Rosenblum, managing partner of Retail Systems Research. “Making money is everything.”
But that’s a tough trick to pull off and its one the fashion industry hasn’t quite figured out yet, although there are examples, particularly the large European luxe players such as LVMH Moët Hennessy Louis Vuitton and Kering that have managed to grow businesses profitably by focusing intensely on brand and quality and incorporating more-modest store expansion plans.
Rosenblum went on to say that brands and retailers that successfully consolidate their operations after what she characterized as a “stunning” rate of over-expansion in the last 30 years will find their way back to “a different kind of gro1wth” that’s focused on sales and profits, not size.
“If you can make more money as a $10 billion business than as a $15 billion business, why wouldn’t you?” she added.
Given the financial market’s insatiable appetite for simplistic growth, Rosenblum said she could understand why a relatively stable retailer like Nordstrom Inc. would be exploring taking its company private after 46 years of being subject to the whims of shareholders.
“Since the recession, the market is very moody,” Rosenblum remarked. “I don’t know that I’d want to be involved in that environment either. The Street is happy when square footage is expanding, sales are growing and earning are expanding, but it generally seems to be unclear on the concept that there’s not an infinite growth market.”
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