EMPLOYEES AT FOREFRONT OF SLUMPING INDUSTRY’S COST-CUTTING
Byline: Evan Clark
NEW YORK — The cycle of layoffs pounding the apparel sector — from fabric mills to status brands — is far from running its course.
Industry experts are looking for the workforce reductions, resulting from the economic downturn and overall weakness in soft goods, to ease off by late spring or summer 2002, but not before exacting a heavy personal price on workers forced back into a bearish job market and contributing further to the economy’s woes.
Mirroring the fiscal strength of a company or sector, retail layoffs are expected to hit the ailing department stores the hardest, followed by specialty stores and then discounters, inoculated somewhat by lower prices and broad assortments.
Nationwide, unemployment rose 0.3 percent to 5.7 percent in November, according to the Department of Labor, its highest level since August 1995, as reported. During the period, combined employment at apparel and textile manufacturers slid by 17,000 jobs.
Department store employment plunged a seasonally adjusted 15,000 jobs in November — despite the holiday season, which is traditionally a peak hiring period. Combined with Labor’s revised numbers from October, department stores have lost a total of 45,000 jobs in the past two months.
Vendors are taking their pains, as well, facing not only staffing reductions driven by lagging retail sales and chargebacks, but the continued shift to foreign sourcing.
In the luxury sector, Donna Karan International laid off 140 employees on Monday as part of a restructuring effort, following Gucci Group’s dismissal of 130 staffers in its U.S. operation last month, representing 14 percent of its workforce here. The firm’s corporate offices were scaled back, as well as staff at its 27 stores.
Likewise, Giorgio Armani SpA reduced its U.S. retail, communications and merchandising divisions by 28 positions. An Armani spokesman noted, “The decision coincides with the economic situation in the U.S.”
Times have changed from the early Nineties, however, when Wall Street rewarded firms making job cuts with significant jumps in market capitalization. Staff levels are generally considered more reasonable as of late and layoffs won’t necessarily give a company’s stock price a shot in the arm.
For firms forced into a session of corporate belt tightening, though, a decrease in employment is one of its most powerful expense-cutting tools.
“Payroll is, in general, about one-third of a retailer’s expenses,” said William Blair & Co. equity analyst Ellen Schlossberg. “It’s a huge chunk [of expenses] and retailers need to monitor their payroll activity in response to sales activity. Stores are the front lines for adjusting labor.”
Small steps, such as scaling back hours and eliminating overtime, are usually taken first and lead in the extreme to employee layoffs.
If weak sales trends continue into the historically lower-volume months following the holidays, Schlossberg said, “We could see more cutting back of hours,” in stores.
Firms will closely manage labor costs until the economy turns, she said, noting it’s something retailers should do, but sometimes neglect when times are good.
“The expense [of unneeded payroll] doesn’t make sense when comps are positive either,” she added.
During the holiday season, though, retailers need staff on hand to not only ring up sales, but execute promotions and handle inventory. Still, seasonal holiday help has been scaled back this year to help offset sagging sales.
Consultant Emanuel Weintraub said, “Retailers, at the store level, seem to be holding their own” and are avoiding widespread layoffs.
“If you go into a store you would say there never was enough sales help and there still isn’t,” he said. “On the operations side, in the back office, retailers are doing everything they can,” to cut back.
By way of example, Nordstrom Inc. in recent months has scaled back on the front and back ends of its business. In early October, the department store reported it had laid off 1,600 employees nationwide, or 3.6 percent of its total workforce of 45,000, since early September. About 1,350 of the reductions came from its stores, while the balance was in the firm’s corporate offices.
At the time, a spokeswoman said the move was a reaction to slumping sales and noted: “The amount of salespeople we have on the floor is in proportion to the amount of business we’re doing.”
Likewise, Kenneth Cole Productions, as part of a cost-cutting program, reduced an unidentified number of positions, which “represent 10 percent of the corporate staff in New York and New Jersey,” according to chief financial officer Stanley Mayer. KCP was being squeezed by September comparable-store sales, which declined 9 percent before the terrorist attacks and 32 percent afterward.
James Glassman, an economist with J.P. Morgan Chase, said retail layoffs have probably bottomed out, but said employment conditions won’t really improve until spring or summer.
“It takes a lot to get retailers to have enough courage to hire again,” he said.
General merchandise employment, which includes retailing, peaked at 2.9 million employees on payroll in April 2000 and has sunk by about 90,000 since then, syncing with consumer spending trends, said Glassman, citing Labor Department statistics.
“From the mid-Nineties on, consumer spending was so strong that retailers staffed up, thinking it was the trend,” he said, but the wealth effect petered out while the stock market and retailing began to tank.
“Prior to the terrorist attacks, you could argue that things were starting to stabilize,” said Glassman, who now expects consumer spending to grow next year, but at a more moderate pace than in the past.
Ken Goldstein, an economist at The Conference Board, said firms are “clearly concerned.”
“Not only are they losing some of the people that they’re going to need down the road, but the cash squeeze is so severe that they can’t afford not to go ahead” and lay off employees, said Goldstein.
To stay healthy, a company needs to pay careful attention to its best employees, especially during economic down cycles.
Elaine Hughes, president of executive search firm E.A. Hughes & Co., said, “In good times and bad, you have to hug these people and keep them close. If business continues to go down, if the consumer doesn’t buy, in order to cut overhead companies are going to close down unprofitable divisions, marginal divisions. That’s where there’s going to be layoffs.”
Large and small, the employment scene in apparel manufacturing has been constantly tough, with margins slimming as the sector plays on the world stage and competition became intense.
VF Corp. in November illustrated this by laying out plans to slash 13,000 jobs worldwide and close 30 to 35 of its 150 plants. Most of the facilities set to be closed are located in Alabama and Virginia. By the middle of 2002, VF will have reduced its workforce by 18 percent.
A day later, on Nov. 15, the once stalwart Burlington Industries filed for Chapter 11 protection. Struggling to reinvent itself in the face of a changing textile world, the firm was unable to manage its $1.05 billion in debt. The company has cut approximately 4,500 positions over the last five years and shuttered several unprofitable operations, many in the apparel fabrics area.
Industrywide layoffs related to global sourcing have been going on for at least five years and can be tied, in part, to the advent of NAFTA, said Catherine Guinee, vice president and senior credit officer at Moody’s Investors Service.
She also cited the flood of prepackaged imports from Asia and the consumer trend toward lower price points as layoff drivers. Manufacturers need to be offshore to be price competitive and have also had to close plants and consolidate, often improving technology to eliminate payroll costs.
On top of these ongoing reductions are the layoffs related to weakening retail conditions. Guinee predicted positions surrendered to the suffering economy wouldn’t return for another year or so.
“More importantly, there may be more layoffs coming in the next year,” especially in the first quarter, she said, following a weak Christmas selling season.