If you’ve been paying any attention to the retail environment, you know it isn’t pretty out there. The retailers that were once cornerstones of our beloved shopping malls back in their heyday are reporting dismal results, day after day. In April, Macy’s reported their profit was down 40%. In May, Nordstrom posted a profit of $46 million, down from $128 million a year earlier. Due to sales declines, Gap shares have tumbled 45% over the last year. Even fast fashion hasn’t escaped: Uniqlo advised that operating profit was down 46.4% for the 9-month period ending in May, Forever 21 is closing some of its larger locations, and H&M reported growth of just 5% despite having opened an additional 438 stores within the past year.
They’ve overextended their footprint and now they’re overexposed to a marketplace that’s giving them a very cold shoulder. How did this happen, and how is it that so many companies find themselves in the same boat? After reading a few articles about these disappointing results, the explanations offered for their performance start to sound vaguely familiar:
- Summer came late
- Now it’s too hot
- People are scared of Zika and Ebola
- General consumer uncertainty
Now I’m being slightly sarcastic here (emphasis on the slightly). In all honesty, between disease outbreaks, economic crises, and terrorist attacks, we are seeing a steep drop in tourist spending which, for this industry, is particularly painful. External environment aside, however, the malaise afflicting the fashion industry has retailers of all shapes and sizes adopting a similar formula in an attempt to cope. Ralph Lauren’s recently announced “Way Forward” plan offers a glimpse of the general framework retailers are using as their escape route:
“In an interview, [Stefan Larsson] said the company will refocus on its core Ralph Lauren, Polo and Lauren labels. Fifty stores, or roughly 10% of the company’s retail footprint, mainly high-end shops, will be closed. And shipments to department stores will be reduced in the hopes that scarcity will translate into more full-price sales. Mr. Larsson also wants to slash six months from production times and strip out three layers of management.” –WSJ
Do you see the formula here? Ralph Lauren is following in the wake of a trend that has rocked this industry in the past year; many other brands have had to travel the same road in order to cope with current sales trends. Retail is hurting – badly. So what do we do? Well, the first step is to offer promotions: extra 20% off, 30% off your purchase of $100 or more, 1-day sales that last all weekend long. Test the waters – what discount will draw consumers back in? How much does it take to entice them these days? Proceed with caution: this method has backfired on many brands.
“What did the fashion industry do? First, we lowered prices. Then we raised prices. Then we put the whole lot on sale. Low prices were not enough to galvanize consumers suffering from retail apathy. They failed because price is only an enticement to shop if customers coveted the item on sale in the first place. On the flip side, we trained the willing shopper to go where the promotion was, pushing the same consumer between the same retailers around and around and around…” –BoF
We’re smart, us consumers, and we’ve been exceptional students when it comes to shopping. We’ve learned to expect sales, to see them as a regular part of retail. We know if we wait a little longer, we’ll receive an email in our inbox that our favorite brand is offering yet another promotion – then we’ll spring for that new dress.
“Consumers may be sensitive about price, but no retailer, not even the lowest-priced retailer, can win on price forever.” –Paula Rosenblum
If promotions don’t turn things around, what’s next? Well now we have two problems to tackle: consumers aren’t buying our products at full-price, and our brand image is taking a hit from the increased promotional activity.
“Nothing can kill a brand faster than ill-conceived discounting…when you can no longer compete on convenience, product, service or customer experience, price becomes the final lever, and you pull that lever at your peril.”-Doug Stephens
This is the point where we start seeing an explosion in the number of outlet stores: Nordstrom Rack, Macy’s Backstage, J Crew Factory, etc. etc. The goal here is to differentiate product and cater to full-price and off-price customers separately. By providing a different location where they can expect to find steep discounts, the hope is consumers will be more inclined to pay full price at the mainline stores. Out of sight, out of mind, yes?
A number of legacy retailers in the US have been investing in outlets to escape this vicious cycle. Their hope is that by clearly delineating discount merchandise in one type of store while full-price merchandise stays separate in the mainline stores, retailers can serve a range of customers while maintaining brand value. –BoF
Expanding one’s retail footprint also helps the bottom line…for awhile at least. It serves to mask a sales slump and buy some time to stage a recovery, but it is far from a final solution. There comes a point when a company can’t ignore its predicament anymore, can’t cover up their continued misses, the margin erosion, the lack of profitable growth. Their hand has been forced; they have to come clean. Store openings are pushed back or cancelled altogether, job openings disappear from online hiring portals. Then the tides really start to turn: layoffs are announced, under-performing stores are closed, expenses are reduced to help offset losses. Brands may also clean up their wholesale distribution in order to regain control over the customer experience. Lately, it seems no one is immune: J Crew cut 157 jobs; Gap will lay off 250 corporate employees and shutter 175 stores; Macy’s is closing 36 stores leading to thousands of layoffs; Nordstrom will trim 400 jobs, looking for savings of about $60 million; Coach cut 300 jobs.
Returning to Ralph Lauren’s Way Forward, there is one more factor brands consider revising as financial distress looms overhead: time to market. RL wants to cut 6 months from their production timelines – did someone just release a new technology that made it possible to produce clothing at the speed of light? I must have missed that announcement. Yet in an environment where their competitors can deliver new items to stores every week, this is the reality they must contend with. This is why we’re seeing such utter confusion in the fashion show calendar – the idea is that if product is available immediately after a runway show, brands will have stronger full-price sales. Otherwise, by the time their goods hit the sales floor, consumers are already tired of them – they’ve been wearing knockoffs for months.
It’s interesting to note that we’ve touched on nearly all aspects of a fashion company except one: the product itself. With all of this attention on the number, size, and type of stores, the pricing structure, supply chain, and levels of management – we haven’t even looked at what those stores are stocking, or what consumers are buying. There is more focus on how to entice consumers to purchase (building a desirable brand image and creating the appearance of scarcity) than on figuring out what it is they actually want to buy. This is the formula, the new way we approach retail: it’s no longer what you sell but how you sell it, and more importantly, how much.
The formula has yet to prove itself: could it be time to accept the fact that we might need to make some adjustments? Are we ready to acknowledge that we should focus a little more on design and on what the customer wants, rather than what investors want?
It’s predictable and it appears to be the safest route (namely because it’s what everybody else is doing), but this formula isn’t working. I believe there is plenty of room for a new player to walk in and completely upset the system – it would have to be someone new: someone who doesn’t look at how much they stand to lose, but rather at how much they could gain should their gamble pay off. Someone who isn’t entirely risk-averse and is willing to try something that’s never been done before.
We haven’t arrived at a desirable solution to the current retail dilemma. One thing is certain: we’re never going to get there if we insist on using the wrong formula.