The boogeymen are out in fashion.
This story first appeared in the July 8, 2015 issue of WWD. Subscribe Today.
From rabid competition and omnichannel costs to the loss of a superstar player and even the rise of artificial intelligence, there’s plenty to keep fashion’s top executives up at night, tossing and turning and tearing up their pillows.
Companies tied to high-profile personalities, such as Ralph Lauren Corp., worry about “key man” risk and what happens if they lose the services of their central player. Wal-Mart Stores Inc., TJX Cos. Inc. and L Brands Inc. fret over the complexities of international expansion. Nordstrom Inc. and Target Corp. jealously guard their reputations from different ends of the price spectrum. And more and more are concerned hackers will break into their systems and abscond with customer data.
Few are willing to wear their troubles on their sleeves like Johann Rupert, chairman of Compagnie Financière Richemont, who last month talked about the risks presented by robots, artificial intelligence and the Internet of Things.
“How is society going to cope with shrinking employment?” he said. “I don’t know what kind of social pact we’ll have, but we better find one. Our clients will be targeted, hated. They’ll be despised. The people with money will not want to show it. That’s what keeps me up at night.”
That might rank as something of an exotic fear for the here-and-now world of fashion, but there is plenty of hand-wringing about broader technological change.
Most sheathe their fears in the banal rhetoric of the corporate executive, highlighting opportunities and spouting cautious optimism. But there is an instance when the guard grudgingly comes down: Publicly held companies in the U.S. are forced to lay bare their concerns in excruciating detail in their annual reports to investors.
Detailed under the rather boring heading of “Item 1A. Risk Factors,” the troubles are expressed in extreme legalese, but a close reading of the similarities and differences between the statements reveals perceived threats and key differences in how companies see the world.
Primarily, retailers are fretful over one another, universally feeling the threat of competition from other brands and stores, both online and off.
In its annual report, Macy’s Inc. notes that although it’s one of the nation’s largest retailers, it squares off in “highly competitive conditions” with everyone from full-price stores to outlets, online retailers and television shopping networks. And J.C. Penney Co. Inc. notes that, “Some competitors are larger than J.C. Penney, and/or have greater financial resources available to them.”
Size and resources, though, are not elixirs for risk. Wal-Mart Stores Inc., the world’s largest retailer, also pointed to the various players in the sector and said it “competes for customers, employees, store sites, products and services and in other important aspects of its business with many other local, regional, national and global retailers.”
Here are some of the other 1A items vexing fashion and retail:
RALPH LAUREN: “Our ability to maintain our brand image and leverage the goodwill associated with Mr. Lauren’s name may be damaged if we were to lose his services.”
NORDSTROM: “With the accelerated pace of change in the retail environment, we may not be able to meet our customers’ changing expectations in how they shop in stores or through e-commerce…. As we execute our plans and continue to evolve and transform our strategy, we may not adequately manage the related organizational changes.”
TARGET: “The long-term reputational impact of discontinuing our Canadian operations on our guests, team members, vendors and other constituencies is unknown.”
VICTORIA’S SECRET PARENT L BRANDS: “The risks associated with our expansion into international markets include difficulties in attracting customers due to a lack of customer familiarity with our brands, our lack of familiarity with local customer preferences and seasonal differences in the market.”
KOHL’S CORP.: “Our business has evolved from an in-store only shopping experience to a multichannel experience that includes in-store, online, mobile, social media and/or other interactions. Our omnichannel business currently generates a lower operating margin than we have historically reported when we were primarily a storeonly retailer.”
The move by Kohl’s and scores of others toward an omnichannel structure is an example of how change in general shopping habits can prompt big moves within retailers, adding complexity and multiplying costs along the way. Add in the threat of cybertheft, the competitive threat of fast fashion, the whims of the consumer and any other number of quickly developing issues and the equation only gets harder to manage.
Shyam Gidumal, leader of the consumer products and retail segment at Ernst & Young, said the internal risks facing companies are ultimately more threatening than the external shifts.
“These are generally trends that you can see coming at you, but they’re coming in places that the retailer traditionally hasn’t had strength and if they get caught up in their traditional model of, ‘This is how we make money,’ and they have a hard time moving off that, then they’re exposed,” he said.
“The bigger problem is the reaction because these aren’t trends that are happening in minutes or days or weeks, these are trends that are happening over years,” he added. “It’s the adjustment. What do people do when they’re scared? In general, they do more of what has historically got them success.”
Gidumal said that if that means a company focuses all the more on staying on trend and delivering good value to shoppers, then the model still works. Alternatively, he said if retailers that “take fashion that’s out there, bring it into your store display…advertise your store well and bring in traffic, that model is probably dying.”
It’s a matter of keeping up in a changing market.
“The risk is that companies get set too much in one way of doing things or one direction, in a way that does not [give] them enough flexibility to react to things as they emerge,” added Hana Ben-Shabat, a retail consultant at A.T. Kearney. “Things are changing every day. There are new technologies, things you can do with technologies, ways you can attract consumers. All these things are changing. Going forward, flexibility is really going to be the name of the game.”