Having followed Gap and Gap Inc. for 25 some years, I’m intrigued with the many growth opportunities the $16+ billion company still provides. As an analyst, I’ve long applied a portfolio approach to Gap Inc.; when one brand is humming another is flubbing— and basically that’s been the case. Gap Inc. is accessible: luxury (albeit boring) at Banana; value at Old Navy; and just-plainclothes- with-a-hint-of-attitude (mostly from good marketing, not so much design) at Gap. Recent acquisitions, along with new global opportunities and a changing industry, begged another look at this behemoth. And I like what I see! [Read more…]
“Let’s face it, the fashion business does not attract the nation’s best and brightest…”
As told to me by one of the titans of retail, the ex-CEO of a major American brand.
Doubts about my own personal career choice aside, he was right. With a few exceptions, fashion is still somewhat a backward business. What other industry has so little pure product innovation and relies solely on fickle, fleeting consumer desires to drive business? Unfortunately for us, there are no real trends anymore, but gradual evolutions in style due to the way information is constantly leaked and diffused. Sadly, Jorgen Andersson, formerly with H+M and now CMO of Uniqlo, agrees, calling fashion and consumer culture “generic.” [Read more…]
The Great Recession turned most US consumers into necessity-based shoppers, eliminating their need to spend a day or even an afternoon impulse shopping at the mall. But these changing demographics and shopping habits across the country have real estate developers getting creative – in some cases, by filling now-empty anchor stores with non-retail properties like fitness centers. Ironically, this emphasis on non-retail may be what woos consumers away from the convenience of online shopping and back to the mall.
Seventy-two percent of consumers say they prefer to buy separate apparel pieces at different stores, according to the Cotton Incorporated Lifestyle Monitor™ Survey, compared to the 28% who would prefer to purchase everything in one place.
“That number has really remained consistent over the last several years, indicating that the very nature of malls still holds strong appeal among consumers even as the traditional anchor store model has become outdated,” says Kim Kitchings, Vice President, Corporate Strategy & Program Metrics, Cotton Incorporated. [Read more…]
Consumer spending increased by 3.7% in June, the highest 12-month smoothed monthly increase in almost two years, according to data released last week by the Bureau of Economic Analysis.
This year, Americans will spend $12 trillion on stuff, slightly more than the $11.7 trillion they spent on stuff last year.
These gross numbers are pretty meaningless and hard to wrap one’s mind around, but if we look behind the big numbers at what we’re spending our money on, and how some of those expenditures are growing, it’s not only pretty interesting, but can also tell us about how optimistic we’re feeling, about our consumer preferences as a society, and where we might be headed.
When the government tracks consumer spending, it creates two major categories: goods, which are separated into durables like cars and washing machines, and nondurables like clothes and food; and services, such as private school tuition, cab fare, eating in restaurants, and going to the doctor.
What I’d like to do here, though, is to categorize them a little differently.
Abraham Maslow (remember him from Psychology 101?) created the theory of the hierarchy of needs; simply stated that self-actualization is not possible until our basic needs are met. So, using a pyramid as a model, shelter, food and clothing (physiological needs) are the most basic needs at the base.
Fast forward to the top, creativity and artistic pursuits, are defined as self-actualization, or achieving our full potential as human beings. I’m super-simplifying here, but you get the idea. So if we look at trends in consumer spending through a redefined prism of Maslow’s hierarchy, and taking a few liberties with the climb to the top, some interesting patterns emerge. We can start with non-discretionary (need) categories like food, clothing and shelter at the base, and discretionary purchases, (more wants than needs) like restaurant dinners and new cars at the top.
So how have Americans been spending their money? And what’s behind these spending trends?
Level 1: Food, Clothing, Shelter (Basic Needs)
For one thing, it looks like the American Dream is alive and well, and home is still where the heart is – at least the heart of non-discretionary spending. As the chart below illustrates, spending on housing, which totaled an annualized $2 trillion as of June 2014 data, has been growing much faster than groceries and apparel, the other two key need categories, whose totals were $900 billion and $367 billion, respectively. Much of this increase has been due to tightened supplies of rental properties and energy costs, which have driven up monthly housing and utility costs, causing people to dedicate a larger share of their wallet to housing costs. Despite rock-bottom interest rates, home purchases have been about as spotty as job market recovery, resulting in an increased demand for homes to rent.
Although food prices have risen for certain categories, like meat and dairy, large supermarket chains are in a tough race for market share, which has kept inflation to a minimum and allowed consumers to take advantage of loss-leader bargains. In both apparel and groceries, showrooming has enabled price transparency across competitive retailers. As the chart shows, although spending on housing rose by 4% last month, slightly ahead of the total spending increase of 3.7%, spending on groceries rose by less than 2% and apparel spending edged up by less than 1%. In other words, Americans are spending more on housing because they have to, and taking advantage of the promotional environment in apparel and food to because they can.
Level 2: Health and Wellbeing (Safety)
Next, let’s look at how we are spending on keeping ourselves healthy, the next level up on our redefined hierarchy of needs spending pyramid. Consumption of pharmaceuticals has skyrocketed in recent months as millions of formerly uninsured people got coverage under the Affordable Care Act and began to take medications for chronic illness and other conditions, causing windfalls for Big Pharma companies and the major drug store chains. However, spending on medical services and other forms of healthcare has grown by just over 3% as hospitals, clinics and physicians find their ability to bill patients is extremely limited under the new health care legislation. More people are going to doctors, according to CMS, the service that administers Medicare, but total spending is being offset by the declining average cost of a doctor treatment or visit. Maybe the Affordable Care Act is actually keeping health care affordable? Time will tell.
Level 3: Quality of Life Connections (Belonging)
Next, let’s take a look at some spending categories up a little higher on the hierarchy of values: feel-good “big ticket” items. The auto industry has benefitted greatly in the past year by the unleashing of pent-up demand. During the recession, car sales declined because people decided they would just make do with their old clunkers. Once the economy started to grow again and employment and income started to recover, millions went out en masse and purchased new cars. However, that growth started to slow considerably early last year, as shown by the chart below, and then picked up again starting in February of this year. Although new car sales are strong, at an annualized $98 billion in June, they’re not growing as much as they were in early 2013, though part of that is due to tougher comparisons— that is, they’re being compared to stronger months than they were in early 2013.
Another interesting category in this realm is communication ($276 billion), which includes mobile device (smart phone) contracts, where growth is an annualized 4%, but off from the higher levels seen last year, primarily because the tablet craze has quieted considerably.
And growth in furniture and appliance spending, representing a total of $287 billion, remains sluggish despite the improved stability in the housing market. The lack of consumer interest in the category has been a source of tremendous frustration for retailers in this space. Perhaps a good bit of the softness in spending is due to the extremely competitive and promotional marketplace – prices have been declining for these products, and consumers are taking advantage of the available deals to spend less.
Level 4: Having Fun (Esteem)
We’re approaching the top of the spending pyramid, where some of the most discretionary of the major consumer purchase categories reside, specifically entertainment. Key categories include recreational activities spending, at $450 billion, products like toys and sporting goods, at $367 billion, and spending on food outside the home, at $746 billion. Of the three, eating out is the only one with accelerating growth. In the hierarchy of needs, it reflects confidence and achievement that consumers have choice to reward themselves with a slightly more expensive option than cooking at home. And the fact that we’re spending moderately on recreation says that we’re having some fun.
Level 5: Self-Improvement (Self Actualization)
At the pinnacle of all these spending categories are the self-actualized pursuits of spending on education and financial planning. Amazingly, it looks like these areas are growing at above-average rates; we’re actually spending more to improve our ability to succeed in the future. Education spending, at $282 billion, is one of the fastest growing categories in consumer spending (after pharmaceuticals). And not all that surprisingly, given the volatility of the financial markets, spending on financial services is growing quickly as well, at an annualized $890 million according to June 2014 figures. This data would suggest that we are optimistic about the future, interested in self-improvement and searching for, and funding, solutions.
Despite what is happening in the economy or in Washington, people are living their lives and hanging on to their dreams.
The media at large has publicly exposed enough of the “dirty” part of this “jokester” that I don’t need to pile on more. Although it might be a more titillating read to add more dirt to the pile, I’ll just sign off on his disgusting behavior during his tenure as CEO of American Apparel by saying it’s equally disgusting to me that the board didn’t kick his butt out of there a long time ago. It never ceases to amaze me that too many boards are still weak on proper governance in protecting the shareholders from the egregious, deleterious behavior of miscreant CEO’s. And American Apparel’s board seems to be one of those.
But for the moment, let’s forget about Charney’s sexual proclivities, including allegations of abuse. Many top executives have been caught with their pants down, so to speak, albeit not all as flagrantly as Charney. Many were fired, yet many others have just had their dalliances swept under the rug.
Charney’s real dirty joke is that he is a business joke of the tallest order. [Read more…]
Michael Kors, the brand, is becoming ubiquitous, and that’s the kiss of death for trendy fashion brands, particularly those positioned in the up-market younger consumer sectors. Its distribution is racing towards ubiquity, wholesale and retail (online, its own stores, outlet stores and internationally). Even worse, a rocket-propelled accelerant to ubiquity is its expansion into multiple product categories and sub-brands, so they can compete at all price points. Some would argue all of those segments will simply end up competing with each other, thus cannibalizing the top end of the spectrum. [Read more…]
My closet is filled with a variety of on-sale purchased high-end designer clothing and shoes, nearly all black and suitable for almost every New York occasion, but not for the trip to Israel I was planning in March, 2014. I consulted my chicest, best-dressed friend, a long time fashion industry executive and insider who’d taken a similar trip a year earlier. “What clothes did you wear?” I asked, searching for wardrobe clues. “Chico’s, I think. Mostly black, matte jersey.” Chico’s!!! I couldn’t quite believe it. This is a woman who is a fashion icon, but clearly not a fashion snob. So, I followed her lead and headed to Chico’s in search of clothes that would be comfortable, suitable for multiple occasions, seasonless, packable and, dare I hope, fashionable.
What I found surprised me.
I heard good things about Joe Fresh from a friend a couple of years ago, so I visited the Madison Avenue store, which initially opened in October, 2011 as a pop-up. It was a bright, fun place in a convenient neighborhood location. I bought a cotton V-neck cardigan in orange, Joe Fresh’s signature color, for about $19. I returned several times to buy Christmas gifts that season. Joe Fresh seemed a good resource for low priced, colorful, clean looking, basics. A poorer woman’s JCrew, perhaps a bit younger, certainly much, much cheaper — decent enough quality for the price, with a teeny bit of a contemporary edge. Joe Fresh has a much narrower, more classic and basic-focused assortment than H&M, with equally low prices, and is a refreshing, lower priced alternative to the now muddy Gap.
In 2004, Loblaw’s, Canada’s largest retailer with 1000 corporate and franchised stores, serving 14 million customers weekly, reached out to Joe Mimram, the co-founder, of Club Monaco, to create a clothing line to be sold in Loblaw’s supermarkets. Loblaw’s had extensive and successful experience with private brands, including President’s Choice, the maker of the Decadent Chocolate Chip Cookie, the number-one selling cookie in Canada. But those cookies were not enough to meet the threat of Walmart’s ever expanding Canadian Supercenters. And so, a well priced, well designed clothing line for Loblaw’s made sense. Joe Fresh was launched with women’s apparel in 40 Loblaw stores in 2006 and exceeded sales expectations. Today, Joe Fresh is sold in 340 Loblaw’s stores and includes women, children and men’s clothing, shoes, accessories, cosmetics, bath and body. In 2010, Loblaw’s launched the first Joe Fresh stand-alone store in Vancouver, and there are now 16 in Canada. [Read more…]
‘Made in America’ is quite the hot topic right now, grabbing up headlines left and right; from the backlash about Ralph Lauren’s 2012 Olympic uniforms (the company quickly learned its lesson—the 2014 ones were made in the US) to retail beast Walmart’s declaration to increase its purchase of American-made goods by $50 billion during the next 10 years. It’s a hopeful story—fostering patriotism while supporting the return of jobs to US soil.
There are those who say that domestic manufacturing is simply not feasible at certain price points, while others have found a significant shortage of skilled workers as a blocking point. Despite these obstacles, will apparel manufacturing sprout again in the US?
Our take is yes.
Companies are manufacturing clothing in the US today and have been for a long time. Take Martin Greenfield Clothiers, for example. The menswear company offers fine, hand-crafted tailored clothing including made-to-measure suits and tuxedos, made 100 percent by hand in its Brooklyn, New York factory. The company’s customers aren’t too shabby either—Presidents, Ambassadors, major motion pictures, the list goes on.
You may be saying, well of course a company that produces such high-end garments can charge a premium and not worry about paying extra for production. And we agree. But many companies are finding success producing in the US at all different price points. In fact, according to a recent study by Boston Consulting Group on the shift in global manufacturing, China’s manufacturing cost advantage over the US has shrunk to less than five percent, while Mexico currently has lower manufacturing costs than China. This shift highlights how American companies can now consider their home turf as a viable manufacturing option, keeping production closer to the end consumer.
Brand names like Ralph Lauren, Club Monaco, Frye and Brooks Brothers are now producing a percentage of their pieces on home turf as well. Designers like Nanette Lepore are outspoken on the topic; she organizes Save the Garment Center rallies and is vocal with lawmakers in Washington to support the American fashion industry.
America’s Research Group found that approximately 75 percent of consumers would pay more for American-made goods, up from 50 percent in 2010. Thus, people are seeing this as a business opportunity, evident by the rise of startups dedicated to US manufacturing. Look at American Giant, a direct-to-consumer apparel company that makes high-quality, affordable basics, including hoodies, t-shirts and sweatpants. After a December 2012 Slate article declared the company’s best-selling sweatshirt as the “greatest hoodie ever made,” there was a months-long waiting list. American Giant pledges to never outsource jobs overseas.
An important element to consider is the fact that this ‘repatriation’ movement isn’t unique to the US. There is also a push for ‘Made in Britain.’ British companies were dealing with the same challenges—wage increases in China, higher transportation costs, hard to control supply chains; there was also a wave of patriotism following the Olympics and the Jubilee. Many companies have been able to spark an onshoring resurgence, with Mulberry, Marks & Spencer, Topshop, Christopher Nieper and John Smedley being just a few examples.
The moral of the story is: if other higher wage countries are successfully moving toward domestic production, there’s no reason the US can’t follow suit.
We may end up eating crow because of our stance on this topic as only time will tell.
Preference for Cotton Remains Paramount
Housing starts and existing home sales are not only good economic indicators, but they are also strong predicators of future growth in other areas like home textiles. As the turnaround in the housing market gains steam, the home textiles market benefits – but consumers are increasingly paying higher prices for lower quality and less cotton-rich items, and they are not satisfied.
Textile World recently reported that housing starts could increase by as much as 15 to 20% over the course of 2014, despite the harsh winter, leading to potentially brisk business for the home textiles sector. While January building permits were 5.4% below the December rate, they were still 2.4% above the January 2013 estimate, according to the Department of Commerce, hinting at an upswing in the industry that could carry over to home textiles.
Cotton remains the favored fiber for home textiles like bedding and sheets; more than eight in 10 (81%) consumers prefer their sheeting to be made from cotton and cotton blends, and 75% of consumers prefer their bedding to be made from cotton and cotton blends, according to the Cotton Incorporated Lifestyle Monitor™ Survey. But that’s not always evident at retail. [Read more…]
Not Just a Miracle – Not Just a Department Store
While JC Penney, Kohl’s and Target struggle to regain their “mojo,” or better put, to save their butts, Macy’s seems to be mojo-fueled and on a trajectory to be the last man standing. Or, are they simply stealing sales away from their befuddled competitors? The answer is a mixture of both.
The Macy’s on 34th Street today, is no miracle, nor are its recent positive (albeit aligned with a weak economy) financial results. It’s just the result of the strategic vision and methodical, complex tactical implementation of CEO Terry Lundgren and his five-star team. The store is a shopper’s delight, an audio-visual stimulating experience, one special event after another, “Black Friday,” and Christmas energy every day. Their many exclusive brands are showcased in a boutique-like shopping environment, and it’s obvious that Macy’s has evolved its brands and experience for the Millennial generation, soon to be the primary consumer segment. Over time, I expect Macy’s will spread the miracle across most of their roughly 800 doors.
Department Stores’ Last Man Standing or a Different Model?
If not “the last man standing” among department stores (an apt reference to Gary Cooper in the classic film, High Noon), Macy’s clearly created a differentiated national brand that they dominate. In a retail industry that I expect will struggle for growth between 2% to 3%, at best, for years to come, in which discounting is the weapon of necessity (Macy’s included), Macy’s is outpacing the pack with its “My Macy’s” localization strategy and ongoing pursuit of a seamlessly integrated omnichannel; plus “Magic Macy’s” elevated consumer service (including new augmented reality technology), as well as its continual focus on the “experience.”
In fact, I wish they would stop calling their business model a department store. I believe that sometime in the not too distant future the terms “wholesale” and “retail” will cease to exist as relics of the past, defining business models that are ceasing to exist. And, the classic “department store” definition will become irrelevant as well.
In the second edition, of our updated book, The New Rules of Retail, (due to be released in August), we redefine retailing into three sectors: “Omni-Brand to Consumer,” Commoditization,” and “Liquidation.” The Omni-Brand to Consumer sector is best positioned strategically for maximum competitive advantage and profitable growth.
The business models in this sector are destination brands, not nameplates. These brands are highly differentiated, including unique, mentally indelible experiences. Ultimately the brand is the creator of the largest percentage of all products and services sold (if not, they exercise dominant control). These brands will then control the distribution of its goods, including the experience, on all relevant distribution platforms, seamlessly integrated, from creation to consumption.
As Macy’s continues to evolve, in my opinion, they will begin to look like the poster child of this newly defined Omni-Brand to Consumer sector.
The Future is Now
I refer back to some quotes from an article I wrote for The Robin Report in 2011 to give context to Macy’s evolution. At the time, Lundgren commented that the massive $400 million expansion and restoration that Macy’s was undergoing, would create “a modern, customer-centric shopping experience” to reflect “how a new generation of customers prefers to shop.” His next statement was the one that really caught my attention. He said, “In many cases, product will be organized by lifestyle to help customers create looks and build wardrobes across categories.”
The significance of that last statement might have gone unnoticed by many. But Lundgren’s commitment to this lifestyle aspect of the shopping experience could well have been the first “shot across the bow” of the branded apparel specialty chains, most of which have used this same strategy to steal apparel share from department stores.
I have long speculated that if the big stores could begin to organize their products and services around lifestyle it could actually provide them a huge competitive advantage, because they already trump the branded specialists with the breadth of their selection. This merchandising reorganization speaks to an easier, more convenient shopping experience without having to traverse the maze of departments and floors.
Finally, I could not sign off in that article without offering up what could be the severest blow to the branded specialists, which would be department stores rolling out their private or exclusive brands as branded specialty chains. While Macy’s did so with their Aeropostale brand several years ago without great success, I believe it was simply ahead of its time.
How About Macy’s Mini-Mall?
So what might brand-Macy’s look like fully evolved? As I said back in 2011, Macy’s would resemble more of an enclosed mini-mall, full of go-to events, cafes, restaurants, and a collection of small, branded lifestyle shops that would be leased and run by the brand, which by the way, Mr. Lundgren was recently quoted in WWD declaring he’s “all in” and “I’m a believer” in the leased shop concept. Macy’s, the brand, would be the destination, with a mini-mall full of experiences so compelling that consumers would leave the Internet or any other store that just sells stuff.
One thing I am sure of is that even though many of Macy’s initiatives will result in echoes of its origins as a kind of a grand palace, the future is now for the department store sector. Macy’s is certainly providing a roadmap for transforming the department store into a more relevant 21st century model, defined by us as the Omni-Brand to Consumer model.
And, at the end of the day, they can call the model whatever they want, as long as consumers connect with it the moment they hear it.
How about, well … Macy’s?
A Brief History and Consumer Perspective
Women’s underwear, its euphemistic pseudonym ‘intimate apparel,’ or its more sophisticated sister, ‘lingerie,’ is difficult in so many ways. For all of us women consumers, it is a necessity; a purchase that must be made and replenished regularly. And, trust me, as a consumer who has been buying her own underwear for more years than I’d like to count, it is not always an easy, satisfying, fun, or self validating purchase.
Underwear is a category of apparel that gets us down to the bare bones of ourselves. Our bodies. Our comfort. Our sense of self. Our sex appeal. Our underpinning. The foundation for all of our clothes. Women’s underwear has been marketed to us for generations reflecting deep-seated emotions and attitudes about ourselves, our roles, and our history as women. From long before the time women discarded their bras in the late 1960s as a symbol of second-wave feminism, bras have had a history of women’s emancipation and independence. In 1873, writer and activist, Elizabeth Stuart Phelps, wrote: “Burn up the corsets! … No, nor do you save the whalebones; you will never need whalebones again. Make a bonfire of the cruel steels that have lorded it over your thorax and abdomens for so many years and heave a sigh of relief, for your emancipation I assure you, from this moment has begun…” [Read more…]