ANALYST TELLS VENDORS: BE ‘NAUGHTY’
Byline: Thomas J. Ryan
NEW YORK — Even major vendors can’t escape being bullied by department stores.
That was one of the bleak conclusions of a recent study by Morgan Stanley Dean Witter that analyzed the amount of shelf space major brands control on the department store selling floor — even breaking out brands by segment and product category.
The report, “Naughty or Nice? It Didn’t Matter Much Last Year,” lamented that apparel stocks significantly underperformed the broader stock market last year despite decent profit performances for most players.
The study challenged major vendors to act more “naughty” by even more aggressively consolidating to gain market share and combat the clout of department stores. Firms were urged to greatly expand through specialty stores, mass merchants and their own store and e-commerce operations, again to gain leverage by reducing reliance on one distribution channel.
The study found that for 1999, the top five apparel companies controlled about 25 percent of department store sales, led by Jones Apparel Group, 7.2 percent; Liz Claiborne, 6.5 percent; Tommy Hilfiger, 4.6 percent; Warnaco, 3.7 percent, and Polo Ralph Lauren, 2.6 percent. Although far ahead of the 1996 level of 16 percent, Morgan Stanley contended it’s still not enough leverage against the department store giants.
“Even premier brands are falling prey to retailers’ promotional activities, some warranted, others not,” Josie Esquivel, head apparel and textiles analyst at Morgan Stanley, surmised in the report. “The days of mutual brand building are over.”
Supplier reticence about antagonizing department stores by opening stores or launching e-commerce hasn’t paid off, she contended. “What will differentiate winners from losers is the ability to leverage their brands’ momentum and/or use their size and diversified portfolio to influence retailers,” Esquivel said.
Morgan Stanley believes that department stores are “here to stay,” but should continue to see “stagnant” growth as they lose ground to specialty stores, discounters and — more so in the future — cyber-stores. “As department stores lost their uniqueness — great merchandise and superior service — their time-constrained customers found other places to shop. And worse, they shifted spending to home products and away from clothing and shoes,” Esquivel wrote.
Over the past four years, department store sales have grown at a 3.3 percent compound rate annually while overall retail sales have grown at a nearly 6 percent clip, the report noted. What’s worse, suppliers are being forced to hire sales personnel, hold inventory longer, fund in-store shops and ads and guarantee markdowns.
“The only fee left to pay is for the day-to-day real estate and utility bills,” Esquivel wrote. And while vendors are anteing up a “significant part” of the retailers’ costs, “they have limited say as to how their ‘floor space’ is used,” she said.
Competition for department stores’ limited space will only intensify as suppliers battle for increased presence and take an ever-expanding role in merchandising stores themselves, she added. Long term, she expects apparel vendors to function as “essentially lease tenants” as cosmetics firms now do. Similar arrangements now are being set up in many European and Asian stores.
One clear way to gain leverage on department stores is consolidation.
“Consolidation today is certainly about growth, but it is also about becoming more dominant,” Esquivel wrote. She noted that Jones’s acquisitions of Polo Jeans and Nine West allowed it to grow in department stores, while VF’s acquisitions over the last 10 years helped it diversify across several channels. Acquisitions by Liz Claiborne, Warnaco and Tommy Hilfiger also boosted their leverage.
“We believe both of these strategies will continue over the next few years as consolidation will remain an inevitable answer to survival and growth prospects. Size matters more than ever, especially within the department store sector,” Esquivel stated. Esquivel said he believes that Polo Ralph Lauren “is at the forefront of channel diversification” with its focus on its own specialty retailing, both with Polo stores and its Club Monaco. Polo earlier this year bought Poloco, its European license.
By category, women’s apparel dominates the U.S. department store channel, generating wholesale sales last year of about $11 billion, or 31.8 percent of overall department store revenues, the report estimates. Men’s accounted for 18.8 percent; cosmetics, 11.3 percent; accessories, 10.3 percent; footwear, 10 percent, and home, 9 percent.
Morgan Stanley estimates that about 21 percent of all women’s apparel is bought in department stores. Specifically in women’s apparel, better accounts for 45.4 percent of sales, moderate, 25.9 percent; jeans, 10.5 percent; juniors, 9.8 percent; bridge, 5.6 percent, and designer 2.8 percent.