THE STATUS BRANDS: AS CONSUMERS COOL, RETAILERS REEVALUATE
Byline: Anne D’Innocenzio
New York — Status casual: Who needs it?
That’s a question many department store executives are asking themselves as consumer interest in the category seems to be waning, evidenced by a difficult holiday season marked by rampant promotions and missed sales targets.
Clearly, status brands — most notably, Tommy Hilfiger — are taking steps to reverse their fortunes, but their current crisis is different from the sweet, lingering honeymoon they experienced just a few years ago.
Backed by a designer image, attractive prices, fashionable styles and marketing hype, labels such as Tommy Hilfiger, DKNY Jeans and Active, as well as Polo Jeans and Sport, joined longtime player CK Calvin Klein in creating what the trade called “status casual.” Such better-priced brands quickly became a welcome relief to department stores struggling with boring basics, and retailers pursued the business relentlessly, clearing out huge floor space for the brands’ monumental shops. But now, some stores, in the midst of budgeting and buying for fall, have started to turn a bit cool to the sector.
Nordstrom is taking a hard look at the segment for fall and is expected to focus more on specialty-store-oriented brands like Big Star Jeans and Red Line by Derek Andrews, according to store officials. Dillard’s, which no longer carries CK Calvin Klein Underwear, said it will not be carrying CK Jeans men’s wear at some of its divisions for fall. As for CK Jeans for women, the business is expected to be cut back. According to sources, the moves were instigated by CK Underwear’s decision to sell to J.C. Penney and CK’s aggressive strategies to promote its jeans-wear at department stores.
In the past 12 months, Jacobson’s, the 24-store chain based in Jackson, Mich., has dropped Polo Sport, Polo Jeans and Tommy Hilfiger in men’s and women’s wear, citing overexposure in mass distribution channels. The store is keeping DKNY Jeans and Active.
Then there are retailers like Macy’s East, Bloomingdale’s and Bealls Department Stores, a 55-store chain in Bradenton, Fla. All three reported a difficult status business for holiday and are in the midst of evaluating these areas.
According to retailers, a tough spot has been Tommy Hilfiger, which is seeing weaker sales in its 10-year-old men’s business and some rough patches in its three-year old women’s casual lines. Wall Street analysts predict profits for the fiscal year ending March 31 will be only 8 percent higher than those of the year-ago period. That follows annual sales and profits that have been up nearly 50 percent for the past five years. As reported, however, Hilfiger is closing in on a deal to acquire Calvin Klein, a move that should jump-start its growth and improve the outlook on Wall Street.
The CK Jeans business has become increasingly promotional, and its merchandise more prevalent in wholesale clubs, according to sources, and retailers pointed out that DKNY Jeans, DKNY Active and Polo Jeans needed to be more aggressive with fashion items, though both brands made major improvements for spring selling. Nautica, which shelved its women’s sportswear business two years ago and is returning with a women’s jeanswear collection for fall, has seen sales of its men’s wear slow down, according to David Chu, designer and chief executive officer.
What’s happening? Observers believe some of the brands might be victims of their own success, hurt by oversaturation on department stores’ selling floors and overexposure in discount channels like Costco. They also bemoan that there isn’t a clear delineation among the lines.
Most importantly, these status names are finding themselves stuck between ultra-expensive, designer-priced logo looks from Fendi and Gucci, which have been all the rage, and mass brands like Old Navy and Target, which have been quicker than the megabrands to respond to key trends, like nylon parachute pants, said Wendy Leibmann, president of WSL Strategic Retail, a retail consulting firm.
“Everything [the status casual brands] are doing is not cheap enough to be good basics, and they are not designed well enough to be worth the money,” said Leibmann.
For example, the average retail price for better-price status jeans is $48, compared with Old Navy’s denim jeans, which sell in the mid-$20s.
“Three years ago, status brands were a hot concept,” said one department store executive, who asked not to be named. “Now consumers are more discriminating. In addition to having status, you also have to have the right product. A lot of [the status brands] have just gotten too sloppy.”
“The retail community has created a monster called ‘status brands’ — they aren’t really status brands, and haven’t been for a while,” said Harry Bernard, partner at Colton-Bernard, an apparel consulting firm. “They are designer-image driven and they have totally clogged the pipeline for several reasons: These brands are no longer presenting a unique product, and consumers are losing interest, because most of the [looks] are being replicated by Old Navy.”
To be sure, these megabrands aren’t going away, but most industry followers agreed they were at a crossroads, struggling to figure out how to grow in a changing retail environment.
In the 12-month period ended in November, a group of status brands — Nautica, DKNY, Polo Sport and Polo Jeans, Guess, Tommy Hilfiger and Calvin Klein — accounted for 7.5 percent of the women’s bottoms business, which includes jeans, slacks and shorts, according to the NPD Group. In department stores’ jeans business, that figure is 20.9 percent — a sizable chunk of real estate.
The competition for market share is only expected to get more cutthroat this fall.
CK Jeans and Tommy Hilfiger are losing some real estate and store dollars to Guess, which is in the midst of a comeback.
Guess, whose sales have been catapulted by stretch denim and new finishes, recently reported its earnings doubled for the year and quintupled for the fourth quarter. Kenneth Cole is expanding into women’s sportswear for fall under a license with Liz Claiborne, a move that should intensify the competition. Add to the mix Nautica women’s jeanswear, which company officials say will set itself apart from the pack with a new variety of denim washes and finishes.
“In this status business, one of the biggest challenges is being able to differentiate yourself,” said Maurice Marciano, co-chairman and co-chief executive officer at Guess. “There are quite a few brands, especially in status denim. They’ve basically become a commodity business, and I think that is where we are making a big difference. We are creating excitement. We are reinventing basics.”
Timing is critical. Many of these brands have begun pitching their fall collections to status-weary buyers, who are figuring out the logistics of store real estate.
Issuing perhaps one of the harshest indictments against status brands was Beverly Rice, senior vice president of fashion and merchandise strategy at Jacobson’s.
“Status [brands] have gotten greedy,” said Rice, explaining the reason for dropping Polo Sport, Polo Jeans and Tommy Hilfiger. “They are selling now to mass merchants, and we are not going to play that game. Anybody who doesn’t control what happens is going to suffer.”
Rice said she hadn’t had a problem replacing the three labels, adding, “There isn’t a lack of good merchandise out there.”
Plenty of other buyers are not ready to throw in the towel, but they did say they are taking a more cautious approach to the status business.
Kathy Bufano, executive vice president of merchandising at Macy’s East, said the retailer cut back on CK Calvin Klein last year and does not plan to increase Tommy Hilfiger’s business, which she said remains “difficult.”
But she said that status still holds “viable opportunities,” particularly with Polo Jeans and DKNY, whose businesses have gotten stronger.
After having some delivery problems in the third quarter with Polo Jeans and DKNY Active and Jeanswear, Bufano reported that sales of both brands had improved and she planned to increase them this year.
Bufano is taking a wait-and-see approach to Nautica Jeans and is only putting the collection in three doors as a test.
Ruth Hartman, executive vice president and general merchandise manager of women’s wear at Macy’s West, noted the retailer had “the best status business” of all the Federated Stores. According to sources, it was because the retailer did not carry as deep an assortment of Tommy Hilfiger as the other Federated divisions.
“There are still lots of opportunities in status, but the growth rate will be smaller,” she admitted.
Conrad Szymanski, president of Bealls Department Stores, said, “Overall, I think that the businesses all kind of enjoyed a honeymoon period. There was a rapid growth cycle, but since Christmas they’ve reached a more mature stage, as opposed to a growth cycle.” The chain did not heavily promote the labels, but it wasn’t chasing the business either, as it did last year, according to Szymanski.
He added that some of the brands got a little lazy when it came to chasing trends. For example, they didn’t capitalize on cotton and nylon, and they stuck to the carpenter silhouette, which has become too tired-looking for the consumer.
“There will be some shakeout of these things, but future sales will be driven by fashion and style,” he said. “Name alone will not drive the business.”
Department stores’ declining market share is proving a challenge to these designer names. In fact, discounters surpassed department stores in total market share of all apparel in 1995 and have been widening their lead ever since, according to the NPD Group.
“There’s been a huge decline in market share in department stores, while at the same time a major increase in share in the discount channels,” said a spokeswoman at the International Mass Retailers Association. “These big warehouse clubs are now selling a lot of designer apparel.”
For example, a recent visit to Costco in Union, N.J., revealed a generous offering of CK Calvin Klein Jeans and Polo Jeans for men and women. Women’s shortalls went for $26.99, reduced from $68 under CK Calvin Klein, and men’s Polo Jeans were $22.99, marked down from $52.
CK officials declined to comment, but executives from Polo Jeans said they keep a clean distribution. They acknowledged, however, that it can be tricky. Costco and other warehouse clubs will often purchase the goods in regular-price channels, then sell them at their clubs, they said.
Nevertheless, such overexposure, according to Michael Wood, vice president of Teenage Research Unlimited, is one of the main reasons these brands are moving down his “cool barometer,” which rates brands according to consumer popularity.
“They are everywhere,” Wood said, adding that it was the specialty stores like Abercrombie & Fitch and Old Navy that continue to be hot with the young crowd, not the megabrands, which he believes are running “behind.”
He added, “A couple of years ago, teenagers wanted to wear status designer brands, head to toe. Now the kids are mixing it up, with something from Target or Old Navy.” Tommy Hilfiger is still ranked high — third — on Teenage Research’s cool barometer. But just six months ago, while also in third place, it sat higher on the scale, with more ratings points. Guess, ranked second five years ago, is now off the list. And CK Calvin Klein, the brand that defined edgy advertising, peaked at number two in the spring of 1997. It has also dropped off the list, Wood said.
The problem now, he added, is that “everyone is doing edgy advertising, and it’s hard to stay innovative and fresh.”
What status brands need to do to maintain their edge, Wood observed, is create exclusive channels, such as on the Internet, for their customers and aggressively develop their own stores. They also need to pursue global expansion.
So what are the big brands doing to remedy the situation?
Polo Ralph Lauren’s latest expansion move, announced last month, is to align with NBC, forming a new joint-venture company, Ralph Lauren Media, with the network and two of its affiliates — the home-shopping network Value Vision International and NBC Internet. Polo.com will be the core property of the new partnership.
The Web site, which NBC and Lauren vow will take Lauren’s lifestyle concept and imagery into new media frontiers, is slated to go live in the fourth quarter, selling an array of women’s, men’s and children’s clothing and gifts.
The company is also pursuing global opportunities. Last September it reached an agreement to take direct control of its European operations by acquiring Poloco SA, based in Paris, and certain affiliates. The company characterizes the purchase as its biggest growth initiative since pulling its women’s wear license from Bidermann USA in 1995.
Hilfiger is undertaking some cost-cutting measures, including temporarily shelving its better-priced women’s career collection, which had been slated for fall selling, to concentrate on its Tommy Hilfiger better collection; its junior business, Tommy by Tommy Hilfiger, which was unveiled at retail this spring, and its Tommy Jeans collection. Is in-store budgets are expected to be radically slashed for fall.
The company has also tapped downtown designer Daryl Kerrigan as creative consultant, in an attempt to restore some of the edge to its women’s products and accessories.
And Hilfiger is taking to the Internet, though he doesn’t seem to be in a rush to develop an e-commerce component. In an earlier interview with WWD, Hilfiger said he would like to figure out a way to “include department stores instead of excluding them.”
The company launched the marketing-driven Tommy.com last December, and last month the designer unveiled his own teen soap opera on the site, “Houseparty.” The program will act as the launch vehicle for Hilfiger’s new junior sportswear collection, Tommy by Tommy Hilfiger.
This is somewhat reminiscent of Calvin Klein’s CK One campaign, launched last year, that invited users to log on and follow a running story.
On the retail front, Hilfiger is closing his two money-losing flagships — one in Los Angeles, the other in London — and instead is creating “profit centers” as part of a new specialty-store strategy. The company is looking to add specialty stores in Miami’s supertrendy South Beach, in London and in Manhattan, as reported.
Wall Street pressures are forcing these brands to look outside their own labels for growth. Witness Polo Ralph Lauren’s acquisition of Canadian retailer Club Monaco, which is expected to expand from 13 to 300 stores in the U.S. in the next couple of years, or the impending Hilfiger-Calvin Klein deal.
That is not to say there is no future with department stores. It’s just that the growth expectations need to be altered.
Denise Seegal, president of Liz Claiborne, which holds the DKNY license to produce jeans, activewear, juniors and career, said there was a lot of growth potential in department stores. The DKNY Jeans line was launched in spring 1998 and its Active collection was unveiled in spring 1999.
The women’s and men’s DKNY jeans and active businesses generated a combined $120 million in 1999, a 40 percent increase from the prior year.
Jeans and activewear are currently in 1,200 doors; last fall they were in 900 doors. DKNY Juniors is making its debut this spring in 250 doors. Seegal said she was still working out details for expansion for fall selling.
Company officials expect the unnamed, new DKNY lifestyle, better-priced career and casual collection, which will launch in spring 2001, to reach $200 million in sales in its first five years.
Seegal said she had been pleased with the DKNY activewear and jeans business, though she acknowledged they could have done a few things differently. For one, more replenishment styles should have been added. In the jeans area, Polarfleece and cotton sweaters were strong for holiday, but dark-rinsed denim was a weak spot, she said. In active, DKNY did well with tops and nylon pants, but there wasn’t enough color.
While she believes that the status area is strong, Seegal acknowledged that there was “a problem with too much duplication.”
“In order to energize the status denim business, each needs to be true to the spirit of the brand,” she said.
In the case of DKNY, Seegal believes the trademark looks “sexy, modern and urban.”
“We just need to edit the product assortment,” she said.
According to Mindy Grossman, president and ceo of Polo Jeans Co., the growth strategy is now focusing on “maximizing the business at department stores.”
Along those lines, Grossman said the company had made several merchandising changes to help define the collection. They include reducing its stockkeeping units by 125 styles, adding more items and capitalizing on denim’s new fashion status.
“We want to dress the woman in head-to-toe denim,” she said.
Polo Jeans, launched in 1996, is now in 1,700 doors in women’s and 2000 doors in men’s. The Polo Jeans women’s business ended the year with 400,000 square feet in department stores, a 91 percent increase over the year-ago period, but Grossman is not expecting such a huge increase for fall.
“We are constantly in the process of revisiting square footage,” said Grossman, “but it is going to be jockeying for market share.”
“It is a matter of making it more productive,” she added, “and not just to keep adding and adding more space.”