APPAREL PRICE PLUNGE: UNSETTLING SYMPTON OF SATURATED MARKET
Byline: Joanna Ramey
WASHINGTON — Deflation became a stunner of a headache for women’s apparel retailing last year. And analysts say it isn’t going to go away soon.
Women’s apparel prices during 1994 took a record nosedive, plummeting 4.4 percent against 1993, the Labor Department reported Wednesday.
While pressure on prices can be blamed on many factors, economists say one in particular continues to plague retailers’ pricing decisions: Consumers remain uninspired by fashion, and when they do buy clothes, they’re savvy shoppers and will play one store off against another to find the lowest price.
Perhaps most importantly, observers say, the whole situation is symptomatic of an overstored, oversupplied marketplace that will eventually need thinning out.
“Apparel retailers can find one of the sources of deflation by looking in their distribution centers and on their selling floors,” says Carl Steidtmann, director of research, Management Horizons, a consulting division of Price Waterhouse, in a new study dissecting deflation. “In both places, they will find an abundance of inventory.
“Apparel inventories are up 3 percent at specialty stores over last year and 8 percent in department stores at a time when demand has risen just 2 percent.
“The channel is literally choking on too much product.” says Steidtmann.
Moreover, added a Labor Department analyst who follows retail apparel prices, “The consumer has become ever more fickle. If they see any kind of price increase, or they think the sale prices aren’t good enough, they go someplace else.”
As a result, the notion of a sale is now practically meaningless to consumers, say industry observers. Promotional pricing has become ubiquitous particularly at department stores, where merchants no longer have sales just to move merchandise at the end of a season.
“The department stores, which stopped the [financial] bleeding of two years ago, last year came toe-to-toe with the discounters and said, ‘I’m going to compete with these guys even if I lose money,” said Donald Ratajczak, director of the Economic Forecasting Center at Georgia State University, Atlanta.
“Department stores found they can sell merchandise as well as Wal-Mart by cutting prices.”
According to Management Horizons’ Steidtmann, the gross profit margins for apparel as a percentage of sales haves fallen since 1989 by 2.1 percentage points in department stores, 2.4 points in discount stores and more than 3 points in apparel specialty stores.
“What is awful about deflation is that it is difficult for even the best merchant to make any kind of money in a period of falling prices,” says Steidtmann, who concludes, “Apparel deflation is not a passing phenomenon.”
“The effects of deflation have a negative effect on both the balance sheet and the income statement,” he said. “Even the apparel industry’s best and most seasoned executives have no past experience upon which to make decisions today when it comes to deflation.”
Ira Silver, economist, J.C. Penney, said a large part of the apparel price declines in 1994 can be pinned to large inventories and demand that was weaker than expected.
“I think retailers this year will be more conservative on inventories, which will help in reducing markdowns,” he said, noting that some of the larger retailers with heavy apparel markdowns had strong profit results because they were able to keep their costs in check.
Nevertheless, in addition to shrinking margin, Steidtmann lists a whole series of adverse effects of deflation:
Deflation reduces the asset value of inventory and increases “the bite of debt.”
Heavily leveraged companies suffer in deflationary times as they are paying back their debt in dollars that have more value as well as the interest they owe.
Deflation, furthermore, slows down consumer buying. “It rewards the consumer for waiting, discourages the use of credit and rewards consumer savings…impulse shopping goes out the window.”
Last year, women’s apparel prices posted eight months of declines. The downward spiral occurred mostly during the second half, where every month brought price declines, except October when prices were unchanged.
Tempering the 1.9 percent decline in prices for all apparel in 1994 was men’s apparel, down 1.2 percent for the year, and girls’ apparel, down 1.9 percent.
The 4.4 percent drop in women’s apparel prices against 1993 is the largest decline ever for the category and stands in sharp contrast to the 2.7 percent increase in the Consumer Price Index, an increase which itself is considered an indicator of low inflation.
The previous year-over-year decline in women’s apparel prices occurred in 1986 when they edged down 0.6 percent, a drop that was attributed to deeper discounting during traditional end-of-season sales and lower seasonal introductory prices. Before that, the last decline in women’s apparel prices was recorded in 1952. That year, when girls’ apparel was also included in the tally, women’s apparel prices declined 0.5 percent.
Steidtmann says since the pricing picture isn’t likely to change, retailers will have to make wholesale changes to their accounting methods, financial structure, merchandising and other areas to cope.
He cites several pressures that are now coming to bear on prices. Among them are the increased apparel offerings with an upscale image at discounters that compete with Wal-Mart, a strategy designed to distinguish themselves from the retailing behemoth.
“The result has been a sharp increase in store and merchandise sameness, an overall lack of fashion innovation or direction and a greater need to rely on price to move the merchandise,” Steidtmann says.
This sameness, though, according to some observers, further heightens the need for retailers to develop their own niches with value and a close relationship to their target customers, as evidenced at such chains at Talbots and Ann Taylor.
Meanwhile, the persistent low inflation levels continue to perplex businesses in their planning, given that unemployment levels are at a five-year low and gross domestic product is moving at a 10-year high.
“Economic theory says you can’t have full employment and have inflation in balance like we have right now,” the Labor apparel price analyst said. But because there is no inflation, wages aren’t going up like they did in the Seventies and Eighties, which might be one reason consumers aren’t willing to let go of their cost-conscious mindset, he said.
“We are at a different place than we were 15 to 20 years ago,” he said.
While deflation in apparel pricing is expected to continue this year, several feel it could be lessened somewhat, as consumers become more attracted to apparel purchases after a year-long buying binge for houses, computers, appliances, cars and other big-ticket items.
“The consumers now have pent-up demand for clothing,” Ratajczak said.”After three years of not buying anything, some of their wardrobe must be threadbare. At some point, we ought to see some replacement demand for apparel. You usually don’t say that for apparel, but the period of slow activity has been so long it is bound to happen.”
But should consumers become more interested in shopping for apparel, they may not find what they want, and price may continue to be the major factor, as it is now, said Irwin Cohen, chairman, Deloit & Touche’s trade, retail and distribution group. There isn’t a fashion trend that is bringing shoppers into stores, he said.
“Something has got to be done to cause the consumer to shop again,” Cohen said, noting that the fashion industry hasn’t earnestly tapped into the trend toward casual dressing and the tastes of the country’s aging population. — Fairchild News Service