NEW YORK — Midrange apparel no longer suffers from a “can’t get no respect” syndrome.
As retailers like Target and J.C. Penney are trading up with lines such as Isaac Mizrahi, Mossimo, Bisou Bisou and Parallel, and top name designers such as Calvin Klein, Ralph Lauren, Michael Kors and Tommy Hilfiger are trading down, the midtier market appears to be losing its “middle-child” complex.
“I do think when you look at what’s happened the last couple of years [economically], there’s a natural tendency to tighten up and trade down,” said Terry Lundgren, chief executive officer of Federated Department stores. “Now things appear to be stabilizing gradually and consumers are returning to their desire to be back into buying fashion again and the quality levels they’ve grown accustomed to. [Better vendors] are creating windows of opportunities for stores like ours.”
The retail landscape has shifted and stores find themselves competing for customers with not only their own channel of distribution, but also those higher and lower than them. Department store retailers, which have seen their market share slowly erode at the expense of national chains’ promotional activities, have reacted by offering their own frequent sale days and discounts. Additionally, an injection of fashion merchandise to the mass market and stores like Gap has spurred department stores to bring more style to their opening price ranges.
“What’s happened is the consumer has changed. She’s reacted very favorably to lower-priced fashions and lower-priced designers and brands,” said Marshal Cohen, chief industry analyst at Port Washington-based market research firm NPD Fashionworld. “The consumer doesn’t care if Mossimo is $100 or $20. They recognize the name.
“The pie has gotten smaller and cut up into more pieces,” said Cohen. “The upper-end market is trading down and competing with department stores, and mass stores are competing against department stores. They’re marketing upward. You have the squeeze in the middle. The same consumers shopping at moderate-price department stores are finding the same things at the chains and value stores for less.”
Cohen pointed out that in department stores, designer apparel accounts for 7 percent of the business; private label, 35 percent; national brands, 52 percent, and 6 percent, other.
“With fashion trends becoming less important, sameness has caused the retailer to compete up and down the channel. They have to get into a price war because the lower market has similar fashions. It may not be the same quality, but it has the same looks,” he said.
“There’s a new respectability for the middle market,” agreed R. Fulton McDonald, president of International Business Development Corp., a management consulting firm here. “Wal-Mart is the biggest company in the world. The high end of the market can’t scoff at the low end of the market. It’s respectable and everybody’s impressed. When the low end is highly respectable, then the middle is very attractive.”
McDonald said the consumer doesn’t even distinguish between price categories any longer.
“We’ve almost done away with price lines. The end user will shop at Wal-Mart at the same time she’ll shop at Saks. Historically, you were a Saks customer or a Macy’s or Target customer. Today you’ll shop at Target one day and Sears the next day and Saks the next,” he said.
“It used to be the high end of the business was where the excitement was. Now there’s too much duplication at the upper end of the market. It opened an opportunity for Kohl’s and Penney’s,” McDonald said. “The middle market has suddenly come alive in the last three to five years, mostly at the cost of department stores and the upper end of the market and low end of the market. You’ve got a quiet trading up.”
Perhaps the best example of the move to the middle can be exemplified by Isaac Mizrahi’s new line for Target, which is being distributed to 1,148 doors. In addition, Target opened a temporary outpost at Rockefeller Center this month, directly across the street from the Saks Fifth Avenue flagship. The Target store has been mobbed since it opened. The collection includes classics such as trenchcoats, denim skirts and turtleneck sweaters, priced from $9.99 to $69.99. Its TV ad campaign touts: “Luxury for Everyman, Everywhere.”
Among other developments are:
- Designers such as Ralph Lauren, Calvin Klein and Tommy Hilfiger are all offering new better lines for spring 2004 department store selling, and Michael Kors will develop a better line for fall 2004.
- Multibranded firms such as Jones Apparel Group and Liz Claiborne Inc. are launching new better lines, Jones Signature and Realities, respectively, for spring retailing.
- Department stores are aligning themselves with brands to give them exclusivity, such as Federated’s deal with American Rag, and beefing up their private label offerings, such as I.N.C. and Alfani at Macy’s, and Ideology and ie. at May Co., to increase sales productivity and margins.
- Mass merchandisers and chain stores, such as Target, Wal-Mart, Kohl’s and J.C. Penney, are trading up their merchandise mix with more nationally known moderate brands, chipping away at department stores’ moderate business. They continue to sign exclusive deals with brands and celebrities to differentiate their assortments from their competitors, such as Mossimo and Isaac Mizrahi for Target; Bisou Bisou and BCBG Group’s Parallel for Penney’s; Thalia for Kmart, and George, Faded Glory and Levi Strauss Signature brand for Wal-Mart.
- To keep their fingers in each of the channels, multibranded firms are expanding their moderate offerings, such as Liz Claiborne’s Crazy Horse, Villager and Axcess lines; Jones’ Gloria Vanderbilt, Evan Picone, Norton McNaughton and L.E.I. divisions, and Kellwood’s Sag Harbor line and licenses and its new Izod women’s division.
“There is a lot of competition for this better customer,” added Lundgren, acknowledging all the new entrants for spring. “I think it’s fantastic news. It allows our buyer to focus on the products and what’s right for the customer.” Lundgren said Federated plans to be very involved with all the new brands, which will “squeeze the moderate price points of apparel” at the company’s units.
“We know we’ll have more emphasis on the better sportswear category. How it spaces out depends on where we get sales productivity.” He said, “[The] only way to run the business successfully is [to maximize] sales and profitability per square foot. The price-value relationship has to be demonstrable. Customers will see that and respond to that.”
Most importantly, Lundgren said the key to these lines is that the product sells through at regular price and then at first markdown. “That’s what will keep this growing. My whole business with these new collections is that they’re priced to sell and clear at the first markdowns,” he said.
Lundgren said Hilfiger’s new H line will be sold exclusively at Federated’s headquarter stores such as Macy’s, Rich’s-Macy’s, Lazarus-Macy’s, Goldsmith-Macy’s and Bon-Macy’s. And he’s optimistic about the new Lauren by Ralph Lauren. “The Lauren customer is a very loyal customer. It’s still a very big business with us. We’ll continue to buy the Lauren product,” he said.
Lundgren said these new better lines are well timed. “They’re more aimed at the fashion-oriented consumer. Our consumer is definitely looking for emphasis on fashion and quality and will be truly ready to trade up,” he said. For example, he believes they will be willing to trade up 10 percent for a jacket.
Another area that will be growing at Federated is the store’s private label lines, such as Alfani, I.N.C. and Charter Club. “That is the success story of our better business,” he noted.
Lundgren said the designer business is what everyone loves and enjoys, but it caters to only 2 percent of the population. “There’s substantial business being done on the better level. It does 20 times more business than designer,” he said. Federated, which generates more than $15 billion in volume, does more than $13 billion with its Macy’s, Rich’s, Lazarus, Goldsmith’s and Bon-Ton divisions. Bloomingdale’s does about $2 billion in sales.
Exclusivity still remains a key goal for department store retailers.
Robert Jezowski, executive vice president and general merchandise manager of women’s ready-to-wear at Macy’s East, said the key is having something that not every other store in the mall has. “We don’t need three stores in the mall having the same line,” he said.
He said Lauren’s distribution will be more selective, and he saw the Calvin Klein Collection line “and it really looks good.” He also noted H looks terrific. All these introductions, said Jezowski, “are good for the better sportswear business. A lot of receipt dollars are up for grabs.”
He noted that some vendors could get squeezed out based on product and price-value relationships. “I want to be the most productive per square foot as we can possibly be. I want to trade up as best we can,” he said.
Reconfiguring the better floor “is going to be a challenge,” said Jezowski, adding Macy’s is planning an increase in better sportswear and noting some of the heavily distributed moderate brands will be vulnerable. He noted “lower” better merchandise could be moved to the moderate floors. “We have to continually look at dollars per square foot and see what’s most productive,” said Jezowski. “It’s my goal to trade up our better sportswear department and get as much higher average unit price out of the door.”
Another advantage to all the new better offerings is a larger selection.
“We have a lot more to choose from. We can be more discriminating and focus more on the product,” said Jezowski. In addition to Calvin Klein, H, Lauren and Jones Signature, “Ben Sherman, Perry Ellis and Anne Klein are all brands that could be expanded,” he said.
But it’s not only department stores moving toward the middle — mass retailers also are on the move, hiring design teams and bolstering in-house sourcing capabilities in order to make more sophisticated garments. According to industry analysts, it is part of a broader campaign to coax some of the mass channel’s more affluent customers — who can’t resist a bargain on gardening supplies or tennis balls — into the apparel department. As the thinking goes, those customers may respond to a slightly more expensive garment, made from real silk or leather and seasoned with a pinch of novelty, than a bare-bones, basic T-shirt.
A Target in Somerville, Mass., for example, recently put the theory into practice. Mossimo groupings on display there included an $89.99 caramel leather blazer, nudging the brand into Gap’s price territory for a casual jacket. Mizrahi’s line also had suede jackets and silk shirts, priced slightly higher than the Cherokee merchandise hung nearby.
Like their midtier competitors, Wal-Mart and Kmart employ a “good, better, best” philosophy, offering entry-level garments, a midrange and saving the most design-forward pieces for the top-priced “best” range.
In recent seasons, both Wal-Mart and Kmart have added to their “best” assortment. Kmart brought in the Thalia Sodi collection, which included pricier items such as a $44.99 denim-and-leather vest. It’s also expanding Joe Boxer, a premium-priced lifestyle assortment that has been the company’s most successful launch to date, according to a spokeswoman.
With great fanfare, Wal-Mart brought in Levi’s Strauss Signature brand. At $23 a pop for bottoms, the denim is a big-ticket item compared with Faded Glory, Wal-Mart’s long-running house brand which generally sells jeans at $9.99 to $12.99.
Which is not to say Wal-Mart is walking away from the $4.99 shirts that built its empire. Company executives have been vocal about their commitment to the entry-level price point, citing a significant proportion of their customers who live paycheck to paycheck.
Vendors acknowledge that each of the channels of distribution is getting a fashion overhaul.
Stephen Ruzow, president of women’s wear at Kellwood Co., observed, “What we’re seeing now is a lot more fashion at the mass level, be it George for Wal-Mart, Isaac Mizrahi for Target or Joe Boxer for Kmart.” This trend has been accompanied by a fashion boost at the national chains such as Penney’s, Sears and Kohl’s.
However, Ruzow said the department stores aren’t shirking away from the zone.
“The department stores are not sitting back and letting business go away,” he said. “There is a proliferation of fashion at the mass market, there’s an equal amount of new offerings in the department store.” By way of example, Ruzow pointed to Izod women’s wear, which will be launched in November at May Department Stores.
Angela Ahrendts, executive vice president of Liz Claiborne Inc., attributed much of the upheaval in the apparel world to “a lack of newness in the better sectors in the department stores and a tremendous amount of newness coming up underneath in the moderate chains. That is forcing change because the business has been lackluster,” she noted, adding stores need to have a point of differentiation to command higher prices for their goods.
Retailers last year began the call for differentiation in an effort to drive traffic, she said, noting some department stores will be trading up to combat the increased competitiveness of the national chain retailers.
Lynne Fish, president of Jones’ moderate sportswear, said, “The customer’s become smarter on what the fashion trends are right now.” Magazines, TV and, of course, the Internet have helped speed the flight of trends to consumers, pressuring retailers and vendors to be up to the minute.
“She’s buying newness and novelty that maybe is updating her existing wardrobe. She’s starting to understand in moderate things that she hasn’t necessarily understood before — wraps, double layers,” said Fish, about the moderate customer. “She’s highly demanding. She wants everything and she doesn’t want to pay for it.”
Susan Metzger, president of the Jones New York Signature brand, noted, “In terms of department stores there is an emphasis on better because of the competitive nature of the more moderate businesses. So they are looking to expand their better floor space because they feel that this is the opportunity to survive.
“We’re all very excited and energized by a lot of what’s happening in better,” she added. “That’s going to bring something back to the floor that hasn’t been there really since Lauren launched [initially in 1996].”
Some industry observers attribute the rush to the better market to the Jones-Polo Ralph Lauren dispute and the shake-out they anticipate. With Polo cutting back on some of its department distribution by weeding out the more promotional stores, manufacturers are maneuvering to take over some of that desirable real estate in the better departments.
“It was a little bit of a spark point,” said Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates, about the Polo-Jones dispute. But, he added, “It’s a zone where people want to shop. There’s a price-value-fashion equation that makes it a very compelling area for customers. That’s where stores want to be.”
As designer prices have escalated, and bridge became very expensive, better-price sportswear began looking very attractive again, he said. “The designer area got less popular because you couldn’t justify the prices. We’re in a deflationary mode and times are tough, so things squeeze down,” said Aronson. He also pointed out that companies have the ability to source more efficiently and economically in foreign places, so they’re able to give consumers “a bigger bang for the buck.”
But Aronson believes that brands would much rather sell in department stores than mass merchandisers. “Department stores have put more emphasis on better. They have a stranglehold on brands. Brands don’t want to go into Penney’s and Kohl’s. Jones has derivative lines in that channel,” he said.
“If you can afford department store prices — which are always on sale — you can find a better value and assortment than you can at the mass market,” said Aronson.
Andrew Jassin, managing director of the Jassin O’Rourke Group, believes the top designers have acknowledged that there’s a lot of money to be made in the better area. “The brand owners, Ralph Lauren, Marc Jacobs and Donna Karan, realize the biggest available market is still in the middle zones,” said Jassin. “Calvin Klein and Ralph Lauren make more money with broader distribution. It doesn’t pirate the designer part of the brand. I think at the end of the day, the old method of developing umbrella brands is a very expensive method to do business. You do create a brand franchise. It probably can occur in the better and bridge zone.”
So which lines will be squeezed out?
“The private label brands [will be squeezed out],” predicted Cohen. “In the market, the power of the brand is very important. A lot of the private label will be rethought. Some midlevel guys and less important companies will feel the brunt. Someone may be a Calvin brand store and another a Ralph brand store. Stores in the mall will have to differentiate. There may be some trimming down of all these businesses, but they’ll still be important.”