IT’S TIME TO PAY UP: MARKDOWN SQUEEZE TO PINCH BOTTOM LINE
Byline: Scott Malone / With contributions from David Grant Caplan / Shirliey Fung / Melanie Kletter / Leonard McCants, New York / Kristi Ellis, Los Angeles
NEW YORK — The industry demon — markdowns — reared its ugly head to new heights this holiday season and vendors have felt its sting.
The questions that remains to be answered is whether stores panicked this holiday season and gave away more stuff than Santa or aggressively managed their economy. Exactly how big a bite the markdowns took out of retail margins — and ultimately out of vendors’ hides — won’t be clear until next month, when major publicly traded retailers begin to release their results for the fiscal year that for many stores ends next week.
But vendors and industry observers agree that the markdowns came fast and furious this holiday and post-holiday season, as did the demands for markdown money. With the stock market sagging and then-President-elect George W. Bush warning that a downturn was on the horizon, retailers seemed anxious to pull traffic into the stores before Christmas and to get rid of their remaining fall and winter merchandise in early January.
Executives at top apparel firms said they were hit pretty hard, though they were divided as to how necessary the drastic promotional measures were.
“It’s horrible out there,” proclaimed Lonnie Kane, president of the contemporary resource Karen Kane. “The [markdown] requests were heavy.”
Certainly, consumers’ apparent apathy for apparel wasn’t equal across all categories. Winter weather came early to many regions, giving outerwear a much-needed sales boost after a weak season last year. The jeans business also kept up its strong fall momentum and sweater sales blossomed.
However, sales of woven separates entered the season seeming to need a kick, which retailers provided through 30-percent-off signs. The dress business also continued to stagnate, leaving stores to mark down prices on holiday styles in hopes of keeping dress department sales reports in-line with 1999, when they were boosted by premillennial hoopla.
But some vendor executives complained that, as the holiday season headed into high gear, retailers started to mark down across all categories — boosting the sales of slow-moving merchandise, but also denting margins of products where promotions weren’t as needed.
“Unfortunately, what happened was that stores did collective markdowns rather than classifications,” contended Marc Abramson, vice president of the New York-based moderate sportswear resources Requirements. “They wanted to make sure they didn’t lose a customer to another store, so they collectively promoted the entire store.”
One result of that strategy, he said, was pulling down margins in strong-selling categories like sweaters.
Most vendors said that markdown activity varied by price tier. Moderate vendors, in a category where high sales volumes are a key to having a strong business, found themselves facing greater margin pressures than their upmarket brethren.
Moderate vendors also get more warning about their margin erosion. Department stores tend to negotiate lower prices up front for lower-priced merchandise, while they wait longer to slash prices on status and luxury-priced goods, then come back again for allowances after the sales have started.
“If you are a budget or moderate manufacturer, you get killed up front with ridiculous decreases in price,” said Kane. “If you are a better manufacturer, you get murdered on the back end with higher requests for markdown money.”
Still, while the markdowns were heavy, not all executives said that they were unwarranted. With the economy cooling, some said that the industry is better off not having to nurse a holiday-inventory hangover.
John Pomerantz, chairman of The Leslie Fay Co., New York, said: “They had to mark down,” he said. “The retail figures weren’t great.”
As the spring selling season draws near, he added: “Stores are going in with less in inventory and that means [the merchandise] will be more current.”
Similarly, at the New York-based contemporary resource Betsey Johnson, executive vice president of sales and distribution Kim Hingliey said the price slashing was a necessary move in tough times.
“I think every single retailer took markdowns a lot earlier than they have in the past. It was a difficult season, and a lot of buyers had a bad holiday,” she said. “From what I heard from buyers, it was necessary and it did drive business.”
Other executives were less forgiving.
Sean Knight, vice president and merchandiser at B. Clothing Co., the Los Angeles-based junior division of Bisou-Bisou, said retailers simply overpromoted.
“They were going automatically to 50 percent off,” he said. “It was way more promotional than I have ever seen. It was very premature — last year, they didn’t take them so early. I think upper management panicked and didn’t want to get stuck with inventory.”
Similarly, Lisa Engelman, national sales manager for Los Angeles-based moderate junior jeans brand Paris Blues, said she thought the markdowns came too quickly and often without warrant.
“There were premature markdowns and panicking, and I think they trained the customer to know that it’s not about after-Christmas anymore, but it’s about after-Thanksgiving through Christmas,” she said. “The markdowns start post-Thanksgiving, so there is never a chance that any new product that’s hitting the floor sells full price.”
The proliferation of markdowns — and the fact that retailers often hold their vendors responsible for the margins lost as a result of them — is one of the most contentious issues the apparel industry faces today.
“Markdowns have been tremendous,” said Oded Nachmani, president of Coolwear, a New York-based junior apparel firm. “They have become a profit center for retailers. Even stores where it used to be taboo are coming to us for chargebacks at the end of the season to make up for margins.
“With most stores today, you have to guarantee a 40 percent markup for the business you give them. It is very hard for us as a company to say no to retailers because you want to keep your relationship with everyone, but many retailers don’t take responsibility for their buys.”
“They are not buyers,” he charged. “They are more like number crunchers.”
Markdowns are something that vendors have become inured to over the years. Dress firms weren’t overwhelmingly surprised by the heavy seasonal price cuts, given that they were facing comparisons with a strong 1999 selling season.
“I don’t think it was more than usual, but it was a lot,” said Andrea Scoli, vice president of dress sales at Laundry by Shelli Segal, a division of Liz Claiborne. “The markdown percentage went up because [retailers] didn’t get the sales.”
Day dresses continued to be a “challenging” segment, Scoli said, and evening separates did not perform as well this year.
Levi Strauss & Co. officials acknowledged that they saw heavy markdowns through the holiday season. But compared with what the company saw in 1999, when the San Francisco-based jeans giant shipped its fall Dry Goods line weeks behind plan, the cuts weren’t that steep, said president and chief executive officer Phil Marineau.
“I’ve spent a lot of time at retail recently and yeah, you do see a lot of markdowns,” Marineau said. “That is where we were last year, with a lot of closeout merchandise, like our Dry Goods line. This year, we haven’t had that. Our first-quality sales continue to improve. Sell-through at retail trends are consistent with sell-in trends. We are actually underinventoried at retail, rather than overinventoried.”
While Levi’s executives took holiday markdowns in stride, other jeans resources were less sanguine. With their category one of the few sportswear areas running into fall on a good head of steam, vendors contended that retailers overbought jeans for the holiday season, and as a result made markdowns necessary.
“They misplanned and they had to clear the inventory and clear up the cash for the next go-around,” said Dick Gilbert, president of New York-based Mudd Inc.
Steve Miska, president of Seattle-based Sergio Valente Jeans, echoed that opinion: “I think there was a bit of panic associated with it, but I do also think the retailers were very concerned about inventory levels, which were quite high.”
One apparel category that didn’t see anywhere near the normally heavy level of markdowns of previous years was outerwear. That sector had one of its best seasons in years.
“The markdowns were virtually nonexistent,” said Donald Levy, president of the Levy Group, New York, which produces Liz Claiborne Coats under license, its own Donnybrooke and Braetan labels, and private label outerwear. “There was very little pain.”
Because of this season’s success, coat makers are aiming aggressively at spring, which is not usually a strong coat season.
“We’re planning big increases” in sales, said Richard Kay, co-president of Herman Kay Bromley, New York, which makes licensed coats for Anne Klein, Anne Klein 2 and Albert Nipon, plus proprietary outerwear under the Jason Cole and Bromley labels. “Our initial orders are 20 percent ahead of where we were last year.”
Even outside of the coat boom, executives said they’re fairly confident about spring business. Heavy markdowns did allow retailers to clear out their shelves and the feeling of nervousness that picked up during the holiday season left buyers more conservative in their spring planning.
While neither stores nor vendors are expecting soaring sales in spring, conservative buying can help preserve bottom lines, executives said.
Requirements’ Abramson said spring has gotten off to a good start because of the low inventory levels.
“The conservative stance stores took on inventory allowed a lot of stores to go into spring a lot more cleanly,” he said. “I think there is the possibility of both volume and margins increasing for spring. This spring, the stores are more focused on the customer, whereas stores in spring 2000 were more focused on fashion and the customer wasn’t in a fashion cycle.”
Similarly, F.G. Gozashti, owner of Blanc Noir, a junior sportswear company based in Novato, Calif., said buyers have ordered “conservatively” for spring.
However, he pointed out that conservative ordering raises its own set of problems, as it reduces the amount of time vendors have to produce the goods.
“They are waiting until the last possible second to pull the trigger,” he said. “That makes it tough on manufacturers.”
He added that retailers are looking at each category on a case-by-case basis and revising orders accordingly.
Jack Gross, president of Gloria Vanderbilt Apparel Corp., said he expects business for his moderate sportswear and jeans firm to pick up for spring, when shoppers have a larger selection of fashion items.
“I do feel that spring and summer, from our perspective, are a little bit easier because there is far more jeanswear business,” he said. “With capris being very strong and shorts and skirts being very important, there are more classifications to motivate the consumer than in the fall.”
At Self Esteem, a junior sportswear manufacturer based in Los Angeles, president Richard Clareman said spring bookings are ahead of last year. He predicted that volume will be up 10 to 20 percent for spring in 90 percent of the stores that carry his product.
“Early checkouts will be wonderful, if stores don’t get overly greedy and limit reorders to newness and freshness,” he said. “We can’t let inventory levels get too high, can’t be too aggressive on piece-goods buys and we have to chase the business.”