CONSULTANTS CRITIQUE STRATEGIC ALLIANCES
RETAILERS AND VENDORS OFTEN TURN TO INDUSTRY ADVISERS TO HELP THEM CRAFT THEIR PARTNERSHIPS.
Byline: Arthur Friedman
NEW YORK — The consolidation of the apparel industry in the past 10 years, coupled with an increasingly discriminate consumer, has culminated in an evolution in the traditional relationships between wholesalers and retailers.
The concept and strategy behind strategic alliances isn’t new, but it has grown in intensity and scope. As the apparel business grappled with consumers — particularly baby boomers with family-based purchasing priorities — spending less of their disposable income on clothes, the need for increased efficiencies in inventory control, forecasting, supply-chain management and merchandising strategies became more vital to achieve profitability.
The firms most capable of dealing with these necessary improvements were those with the financial wherewithal to invest in technology and consumer market research. Add to this the power of brand advertising and in-store promotional support, and the need of publicly owned retailers to minimize the risk of new ventures, and the result has been a joining of forces between the power-broker retailers and the big-player manufacturers.
These vendors and merchants often turn to industry consultants to help forge the alliance. The consultants not only have the ability to act as a neutral third party in advising both partners, they also have the analytical and research skills to add a different perspective to the vendor-merchant relationship.
The Importance Of Strategic Alliances
“The consumer is the new ceo, creating the push and pull of market dynamics,” said Kathy Yohalem, chief executive officer, C-Source Communications – a Coopers & Lybrand LLP Co. “In order to respond and understand consumer needs, the strategic alliance has been born. This was necessary to be able to respond with speed to an ‘infocentric’ and ‘data-centric’ world and industry.”
Yohalem said by working in tandem, retailers and vendors have been able to increase sales and improve inventory levels and controls, resulting in a better bottom line. This has been accomplished in such key strategic alliances as Calvin Klein with Bloomingdale’s, Liz Claiborne with Federated, and Wrangler and Kellwood’s Kathie Lee Collection with Wal-Mart.
These relationships involve dedicated space in the stores to market the brand, agreed-upon stock and inventory levels, coordinated logistics and pipeline methods and harmonized merchandising themes. The goal is profitability and maximized market share of a particular brand.
“These firms have generated a consumer franchise, and the retailers dare not withhold them or the consumer will seek another store in which to buy them,” said Emanuel Weintraub, principal in Emanuel Weintraub Associates. “Arrangements between firms having strong consumer franchises and their retail partners are a partnership of equals.”
Weintraub agreed that the arrangements that have worked best “center on the marketing side.”
“One recent example is the Kathie Lee/Kellwood arrangement with Wal-Mart,” Weintraub said. “This was a calculated strategy to offer Wal-Mart an emerging brand which had been sold to the department stores under the Kathie Lee for Plaza South label, a licensed division of Halmode Apparel, before it was acquired by Kellwood. This has been an outstandingly successful arrangement.”
Weintraub noted other successful arrangements are the in-store shop and matrix buying of the high-profile brands.
“That type of strategic alliance starts with the marketing component and eventually works its way into the logistics,” Weintraub said.
A negative aspect of the emergence of strategic alliances is that “it doesn’t allow everyone to be on an even playing field,” Yohalem said.
“But even medium-sized companies, if they are smart, will figure out a way to bring technology and information systems into their way of doing business,” Yohalem said. “Having the proper merchandising strategies and systems in place is equally important in order to make the right decisions.”
Weintraub said strategic alliances don’t work well “when a firm is providing unbranded product to a store and under the canopy of a partnership.”
“The strength is with the retailer and when problems occur, as they do, if they’re serious enough, divorce takes place, leaving the vendor out in the cold,” he said.
“Strategic alliances don’t work when both sides are strapped financially and get together because they think they can cut costs and combine financially,” said Andrew Jassin, a partner in Marketing Management Group. “However, two negatives don’t make a positive. Unless these companies have something fundamentally unique to offer the partnership, they tend to continue to have the same problems they had before, just on a larger scale.”
R. Fulton Macdonald, president of International Business Development Corp., said while the consumer has benefited from greater stock availability, strategic alliances have led to merchandise being more focused on classics and fashion basics.
“Program buying based in part on strategic alliances tilts toward big manufacturers with core stock offerings,” Macdonald said. “Risk taking and fashion leadership tend to be lessened.”
All agree that to be a player in the apparel world today, and thus be involved in integral partnerships, vendors and merchants must have a high level of technological capability.
Matthew Benjamin, audit partner-in-charge, apparel and textile services division of Deloitte Touche Tohmatsu International, said, “Critical to the success of the members of the supply chain are accurate, timely and useful communications. Whether it is from point of sale to apparel manufacturer or manufacturer to piece goods supplier or contractor, the sharing of information through the use of technology is growing in importance.”
Weintraub said logistics have become an important component of the relationship between retailer and manufacturer.
“The ability of a vendor to deliver what was ordered on time with excellent quality and provide the computer systems support goes to the heart of what is taking place,” Weintraub said. “The retailers are wedded to the idea, with the intent of reducing inventories and getting the product to the store so that it can spend more time selling at full price before it is marked down.”
Jassin echoed those thoughts, stating, “Apparel firms today are so dependent on their retail partners, and it has become increasingly important for the vendors to have logistical and computer systems available.”
Jassin also noted that many manufacturers are also using new technologies in design and production which are “all value-added components of lowering the cost of making something.”
Inevitably linked to this is the financial ability needed to be a strategic partner.
“In today’s business environment, credit is king, not cash,” Jassin said. “It is critical to have strong credit availability. You have to be able to operate through the seasonal peaks and valleys, and to finance your business through the long lead times of buying raw materials before the finished product is paid for.”
Yohalem said companies must have the proper financing in place to support the partnership and create the proper corporate environment to utilize information systems.
“In order for both the retailer and the manufacturer to have a proper strategic alliance, they have to data-mine — analyze the information on consumer buying habits and needs — to enable them to respond better and faster,” Yohalem said. “It allows manufacturers and retailers to increase the frequency of consumer purchases and expand the potential of attaining new customers.”
“Strategic partners are interested in working with firms that they can count on,” Benjamin said. “As retailers look to consolidate their buying to fewer sources, the depth of human and financial resources of their partners takes on increased importance.”
Weintraub said it’s becoming increasingly difficult for small firms to have a major relationship or alliance with big retailers because they are not able to support the partnership financially.
“Vendors must have the financial ability to meet product demand for a hot item, where the retailer needs millions of dollars of product in short order,” Weintraub said. “Technology and well-organized distribution centers also call for capital investments, which most intermediate-sized firms are trying to avoid.”
Macdonald said if one of the key partners is financially vulnerable, “it can upset the apple cart, slowing down key raw material purchases or actual production.” In addition, financial weakness hurts the credibility of the relationship, which is based on trust, he said.
Know the Consumer
Having a cohesive merchandising strategy that includes tracking consumer needs and analyzing the take-out data is vital and must be well defined in the partnership agreement.
“The problem for the future between the partners — the mega-retailers and the mega-apparel producers such as VF, Levi’s, Sara Lee and Liz Claiborne — is the issue of product sameness,” Weintraub said. “It is difficult for mega-retailers to offer small batches of innovative product in order to differentiate their store from every other store because in the drive to push overhead down, buying is more centralized. Product innovation is costly because it increases the development and design cost on the producer’s side and the cost of buying at the retailer side.”
Macdonald said companies must keep their finger on the pulse of the consumer at all times. He said this can be accomplished scientifically through consumer research, but that nothing substitutes for “getting out and talking to the consumer, looking at what they’re wearing and following trends in popular culture.”
Jassin said it’s important that both parties have a mutual understanding of their responsibilities in merchandising a product.
“There has to be a system of checks and balances integrating the capabilities of each partner, with a common goal of determining what the consumer wants,” Jassin said. “This can be determined either through direct survey work or testing product at retail.”
Companies need to have a strategy that examines target consumers and have fast-turn capabilities that allow for product testing and inventory replenishment, Yohalem noted. In addition, it prepares them for global expansion and for marketing and selling on the Internet.
Benjamin noted that consumers now have less free time and more to do in that period, so they have less time to shop than in the past.
“Therefore, it is more important than ever for manufacturers and retailers to gain an in-depth understanding of their customers’ needs,” Benjamin said. “Manufacturers need to take more responsibility to insure that their merchandise is well presented and that retail salespeople are knowledgeable about their products.”
The Competitive Factor
The bottom-line question of whether strategic alliances have led to a less or more competitive environment remains open to debate.
“Retailers are competing against one another more intensely than ever before, with the small mom-and-pops fighting for their own survival,” Weintraub said. “On the other hand, a new class of localized boutiques offering differentiated product is reemerging where consumers have gotten tired of product sameness. Meanwhile, manufacturers are competing to retain the strategic alliances and are attempting to be as creative as they can within the context of selling to mega-retailers.”
“Strategic alliances have become the need; you can’t function today unless you have an ability to deliver product on a timely basis,” Jassin said. “Strategic alliances have led to retailers and manufacturers becoming more competitive. It allows retailers to be sharper on pricing and inventory control, and it allows design firms to be less reliant on producing for inventory.”
On the downside, Jassin said, are the smaller vendors, those with volumes under $20 million. These companies just can’t meet the requirements of being a strategic partner with a major retailer, and unless they are a high-end minimal player, they will likely become an extinct breed in the not-too-distant future.
Benjamin said, “Strategic alliances have led to a less-competitive environment by virtue of fewer suppliers qualifying to do business with the newly consolidated and larger retailers.”
On the plus side, Benjamin said the consumer has benefited from strategic alliances through better value and lower prices.
What Does The Future Hold?
Yohalem said technology will be “the enabler” in a reengineering of the traditional ways of doing business. Marketing and advertising have become just as important as sales and production, with the “marketplace being replaced by the market space.”
The apparel industry has been slow to understand and implement technology and the consumer tracking systems it allows, while other consumer products firms such as Procter & Gamble have embraced this methodology.
On the one hand, Jassin sees strategic alliances growing among top vendors and merchants. On the other hand, he also sees more stores looking at direct manufacturing like is done by Gap, cutting out the middleman manufacturer and thus increasing profits. In that same regard, he also sees more branded companies opening their own stores to get out from under the hand of the retailer and to better control their own destiny.