CHARTING THE CYCLES: PREDICTABLE PATTERNS MEET CHAOS THEORY
Byline: David Moin, Sharon Edelson and Mark Tosh
NEW YORK — Whatever happened to business cycles?
Are they out of whack, or does consumer spending still swing predictably between hard goods and soft goods every few years?
From Calvin Klein to Leslie Wexner, Michael Gould to Arthur Martinez — no one answers those questions in quite the same way.
After a prolonged hibernation, apparel sales are beginning to show some life this season and some economists and industry leaders are predicting a real rebound on the near horizon, possibly this spring.
Some are basing their forecasts on the economic convention that says business will get better because it’s due to get better.
Other analysts and trend watchers say it’s time to throw out the old assumptions that consumer behavior can be predicted at all.
New trends, such as casual dressing, an increase in working women, constant innovation and increased spending on home products, computers and electronics, excessive retail space and overproduction in apparel have upset historical business patterns.
But if the cyclists are correct, then the overdue swing back to soft goods could, in theory, lead to a vigorous revival in apparel.
Carl Steidtmann, chief economist for Management Horizons, said that since 1948, apparel has gone through 18-to-24-month expansion periods, with six-to-12-month contractions in between.
August 1995 marked the end of the last expansion, Steidtmann said, adding that there are currently signs of a pickup. “Summer at the latest should mark a return to pretty good apparel sales,” he said.
Leslie H. Wexner, chairman and chief executive officer of The Limited Inc. also believes in cycles, but longer ones. He said apparel sales run hot and cold in three-to-five year intervals, but like Steidtmann, sees a rebound coming. Strength in such items as push-up bras and tapered pants, “symbols of new silhouettes and the trend to body consciousness,” have kindled his optimism.
There’s anything but consensus on the subject.
Arthur Martinez, chairman and ceo of Sears, Roebuck & Co., said, “There’s a lot of economic evidence that durable sales run cyclical. I’m less convinced that there is an apparel cycle.”
The pace of apparel, Martinez said, “has got more to do with how people feel about the health of the economy and job security. I don’t buy into the pent-up demand theory.”
Then again, Barry Bryant, a retail analyst with Rodman & Renshaw, suggested, “Fashion goes in cycles. Hard goods are fundamentally different. Fashion creates peaks and valleys in an otherwise flat demand curve. Hard goods are satisfying wants and needs that people didn’t know they had 10 years ago.”
“I would think that there is a cycle, but maybe we are finding the cycle lengthening and maybe it’s the beginning of a whole new approach,” said Ellen Gabriel, a partner in Deloitte Touche.
Maureen McGrath, who follows hard line retailers for Smith Barney, said she doesn’t think that business runs in six-month or yearly cycles. “Hard lines have been selling better than soft lines really since 1993,” she said. “A pendulum to me has to have more of a tick-tock type action.”
Calvin Klein, who launched a home collection in September, said, “I don’t sense any shift, but rather a renewed and increased interest in the home, entertaining and lifestyle. Consumers are still interested in apparel and the way they dress, but are devoting a lot of attention to their environment and luxury products for the home, since more time is being spent there,” Klein said. “Life in the Nineties allows people to spend more time at home. Fax machines and computers have changed the world.”
At a time when consumers are questioning the high price of fashion, Klein’s home collection was a shrewd business decision. The designer said it has allowed him to broaden his customer base.
“Now people will be able to own a piece of the Calvin Klein aesthetic by purchasing a silverplated frame or cotton blanket without having to spend as much as they would on a collection suit,” Klein said.
Michael Gould, chairman and ceo of Bloomingdale’s, said consumers have become more aware of their surroundings and are spending more time furnishing their homes.
“I think what’s happened is that fashion has basically come to the home,” Gould said. “People are putting more value on the home and family in general. It used to be that when you made the bed, you used a bedspread. Today, you have incredible sheets, a duvet, all sorts of pillows and neck rolls. The bed has been dressed as though it’s a beautiful woman.”
Gould pointed out that Bloomingdale’s home business has grown, but not at the expense of apparel.
“I don’t see that we have this colossal swing, and home is up, and ready-to-wear is down,” he said. “Ready-to-wear has more ups and downs. The customer understands more about the home and is comfortable about what’s working in the home. But customers will spend money when you give them a good reason. Our customer wants fashion first that’s different than competition.”
Rick Church, an analyst at Smith Barney, believes in the cycle theory, noting, “I just don’t think that it’s any mere coincidence that over the last couple of years we have had a lot of strong sales trends in the computer and home areas and at the same time we saw nothing but deflation in apparel for two consecutive years,” he said. “The apparel industry had to promote very aggressively to reach the consumer.”
He added, “Now that’s starting to change and we’re starting to see a little bit more inflation come back into apparel.”
But Herb Douglas, president and ceo of Houston-based Weiner’s Stores, said he “doesn’t buy” the theory that retailing shifts between apparel and home.
“In the discount stores, they were having trouble in both areas last year and, at the same time, department stores were doing well in both,” said Douglas, former president and ceo of Jamesway Corp., which was liquidated.
Steidtmann of Management Horizons noted that retailers, since they must plan inventories, “have got to make some kind of bet on the future.”
The problem is, it’s getting more difficult to do that.
Arnold Aronson, of Levy, Kerson, Aronson & Associates, said one reason why retailers must change their outlook is because business and fashion cycles are flattening out, showing fewer peaks and valleys.
“The trend to casual dressing and the desire on the part of the huge baby-boom generation for form, fit and function over cutting-edge fashion is creating a fashion democratization,” Aronson said.
“Most senior retail executives would certainly make themselves aware of historical business cycles,” Aronson added, “but in planning their businesses for the next season or year would more likely be driven by factors like last year’s performance, competitors’ performance, current merchandise trends, assessments of customers needs and wants and category planning to maximize margins.”
Others have even suggested that women are simply losing interest in clothes and are buying more on a replacement basis, rather than on emotion or impulse.
“There is a lack of interest, but that doesn’t mean women aren’t buying clothes. They still are, and even last year, during the period of contraction, there was still real sales growth,” Steidtmann noted.
According to Wexner, “Anybody who says women are no longer interested in fashion is ignoring the history of mankind.”
Clothing, he said, is “the armor” that women put on everyday to face the world.
That belief hasn’t stopped growth-hungry designers and retailers from jumping into the fray with new products and retail concepts devoted to products for the home.
Over the past two years, Calvin Klein and Gianni Versace launched a collection of linens and tabletop products, Guess introduced a line of home furnishings sold in a new store called Guess Home, Eddie Bauer has a new home store, and Banana Republic is expanding into soft home furnishings.
The Limited’s Bath & Body Works division is testing a prototype called Bath & Body Works at Home. The units sell items for the living room, kitchen and bedroom, including handcrafted pottery and scented candles.
In response to a growing interest in nesting, Saks Fifth Avenue launched its first home catalog in the fall.
“There are a lot of seismic forces in the world today, like the whole issue of security and going out at night,” said Sheri Wilson-Gray, Saks Fifth Avenue’s senior vice president of marketing. “People are staying home more and entertaining more at home, versus the Eighties, when people were out in restaurants.”
As a result, Saks has seen an increased demand for at-home apparel or a category of merchandise the store calls “comfort clothes,” Wilson-Gray said.
“Caftans were a fashion trend on the runways this past season,” Wilson-Gray noted. “If you’re entertaining at home, the clothing you wear is very different than what you’d wear to go to clubs. Those are all things we feel as retailers we should be very sensitive to because they can impact our business.”
Several years ago, malls noticed strong sales gains from chains specializing in home furnishings, tabletop and cookware, and weaker results from apparel specialty retailers, and began allocating their space accordingly.
In the past year, Crate & Barrel, The Metropolitan Museum Store and Barnes & Noble were considered hot retail tenants. As these so-called “lifestyle” concepts were growing, space devoted to apparel specialty chains was shrinking. Retail experts estimated that one million square feet of apparel space disappeared from malls last year and more is expected to be lost in 1996, with more bankruptcies and downsizings expected.
The fashion industry has been waiting for consumers to show some enthusiasm for apparel for four years, blaming everything from the economy to lackluster styles.
While the industry has acknowledged consumer apathy towards fashion, some say it has missed the larger point: Consumers are getting older and their priorities are shifting. The result is a major cultural change that places less emphasis on outward displays of wealth and more importance on creature comforts.
At the same time, there has been relatively little innovation in fashion compared with the tremendous breakthroughs in the design of hard goods, which compete with fashion for the shopper’s dollar. Steidtmann maintains that computer firms and auto firms are marketing better to create a need for their products, such as Windows 95.
The decline of soft goods relative to hard goods began in 1992 and resulted almost entirely from computers, analyst Bryant said. “It isn’t that people are bored with apparel. It’s that they want other things instead because the other things are new.”
“People are still buying the same amount of units of apparel, but due to overstoring and too much merchandise sameness, there is constant price competition and markdowns have eroded margins,” Bryant said, referring to apparel’s ongoing price deflation. “Also, people are spending more on other things.”
And it’s not just consumers at lower income levels who are reevaluating their spending patterns and choosing between apparel and other purchases.
Ron Frasch, president of Escada U.S., said that even though luxury labels are hot right now, the company, which caters to the affluent, is competing with home furnishings and other product and service categories for consumer dollars.
“The challenge to retailers and manufacturers today is the disposable income of our customer base,” Frasch said. “We’re competing with every other option for their disposable income. Those options range from fashion to other components of their life that are important. I don’t think the Escada customer has a problem with disposable income, it’s just a question of where they want to spend it. This trend has become more pronounced in the last few years.
“The whole travel and cruise industry is exploding,” Frasch said. “I hear wonderful stories about the tabletop and decorative home businesses. There is a resurgence of investment in art. It’s all part of the disposable income pool that exists. We have to make sure our product is a much more important spend option than the others.”
Besides the competition from other merchandise categories, apparel retailers must now deal with the democratization of fashion. The scope of what is appropriate to wear to the office has relaxed as consumers realize they can dress down to work. The outlets where they can buy clothing has opened up too. Shoppers now realize they can purchase basics at Kmart and The Gap and layer on fashion elements at pricier specialty stores.
The aging population also raises concerns for the fashion industry. Middle-aged baby boomers have heavy financial commitments like mortgages and college tuitions. Their expanding midriffs also make them less inclined to jump on each new fashion trend.
Dougal M. Casey, senior director of investment strategy at Jones Lang Wootton Realty Advisors, said he believes the retail business is not driven by apparel cycles, but rather life cycle stages, and that peoples’ behavior is predictable by age group.
“Part of the reason stores like The Limited did so well 20 years ago was that we had a wave of baby boomers moving into their 20s,” he said. “That’s why they were buying that junior stuff.”
Now that same population group is moving into middle age and focusing more on furnishing their homes. This trend will continue, he said, as the percentage of Americans owning their own homes rises. He estimated that 66 percent of Americans will own their home by 2000, compared with 64.5 percent today.
“This is a pretty good shift,” Casey said. “It is because of that shift that I believe home improvement stores, furniture, furnishings and home accessories stores are going to do well over the longer term.”
However, Casey said he sees the apparel business picking up at the end of the decade when the number of people ages 14 to 24 starts rising again.
“Things may never go back to where they were,” he said, “but at least the tides will be going the right way.”