The 'retail apocalypse' is an apparel apocalypse
Author: Daphne Howland
Source: Retail Dive
Ralph Lauren once said, "I don't design clothes, I design dreams," according to GQ magazine. But at retail, clothes have become the stuff of nightmares.
"According to the U.S. Bureau of Labor Statistics, from 1977 U.S. Households spent 6.2% on apparel and in 2017 that declined to 3.1% spending on apparel in U.S. Households," Shawn Grain Carter, professor of fashion business management at the Fashion Institute of Technology, told Retail Dive in an email. "That is a 50% drop over four decades."
And it's taking a toll.
So far this year, 10 of the 16 major retail bankruptcies were filed by companies that mostly or exclusively sell apparel and/or footwear: Forever 21, Avenue, A'gaci, Barneys New York, Charming Charlie, Diesel USA, Payless ShoeSource, FullBeauty Brands, Charlotte Russe and Gymboree. Another, Shopko, was a discount department store with an assortment that included clothes.
Things are not likely to end there. In its latest analysis of CreditRiskMonitor data, Retail Dive found 28 retailers that could go bankrupt in the next year — and half sell apparel. In the worse-off list, which includes businesses with a 9.99% to 50% chance of filing for bankruptcy (a FRISK score of 1) — three are specialty apparel retailers: Christopher & Banks, Destination Maternity and J. Crew. A fourth, Ascena, is a conglomerate running five apparel brands after recently dumping two. It's reportedly contemplating also dropping its plus-size brands. Executives there recently assured analysts that bankruptcy is not a consideration, however.
In addition to those retailers, department stores J.C. Penney and Neiman Marcus also make the list. A seventh, Bluestem, is also a conglomerate with a portfolio of e-commerce brands somewhat less dominated by apparel.
Seven more apparel retailers have a 4% to 9.99% chance of filing for bankruptcy (a FRISK score of 2). They include RTW Retailwinds (a portfolio of brands formerly known as New York & Co), Tailored Brands (which runs Men's Wearhouse and JoS. A. Bank), Express, Francesca's and J. Jill, plus department stores Hudson's Bay Co. and Stein Mart.
The situation is at once stark and logical, considering the state of the market. Globally, the top dozen apparel retailers, on average, saw earnings downgrades of nearly 40% since 2016, according to a note from Morgan Stanley Friday, where analysts said the "online channel shift is clearly unhelpful, but it doesn't fully explain the malaise." For two decades, falling apparel prices were offset by growing volumes, but those "now seem to have peaked and prices are likely to keep falling, so clothing markets would appear to be going into structural decline."
Apparel retail, which has to keep up with the fickleness of consumer taste, has long been a tough business, according to GlobalData Retail Managing Director Neil Saunders. But that's just the beginning.
"It is unsurprising that apparel stores are one of the most distressed parts of retail. This sector is saturated with supply and is arguably over-stored," he told Retail Dive in an email. "Online has been unhelpful too as it has eroded margins somewhat and has also contributed to the issues of over-supply. On the periphery there are a number of emerging trends which are adding pressure, including the rise of rental and resale – both of which are mostly focused on clothing. Put all of this together and it's a recipe for a difficult sector."
In other words: Apparel retail is under siege on multiple fronts.
New consumer priorities
Financial roadbumps stymying consumers outside of top-tier incomes are forcing some to prioritize, and that's pushing apparel far down on many lists. Average spending on women and girls' apparel has especially declined for lower-income earners, with the "only bright spot" in footwear, where share in apparel expenditure has risen across income levels, according to a Deloitte report last year. More recently, rising consumer debt, including record levels of student loans shouldered by younger consumers, is chipping away at discretionary spending.
But apparel spending declines are broad-based as priorities shift, according to Carter and others. "Apparel has lost market share to higher spending on experiences," she said, including a diverse set of activities like fitness, self-care like spas and manicures, sports (both participation and entertainment), other entertainment including streaming services of all types, restaurants, travel and electronics.
"The Boomers characteristically consume less apparel as they get older and their offspring are burdened with crushing student loan debt, generally rising prices in the consumer space and a very glaring lack of new and interesting apparel and accessory products."
Retail Studies Professor, Columbia University Business School
Mark Cohen, Columbia University Business School retail studies professor, likewise believes that "consumer electronics and the services that go with them with regard to ever more consuming technology continues to eat up the consumer's available disposable income," but notes other forces at play.
"The Boomers characteristically consume less apparel as they get older and their offspring are burdened with crushing student loan debt, generally rising prices in the consumer space and a very glaring lack of new and interesting apparel and accessory products to draw their attention," he told Retail Dive in an email. "Some appear to be gob smacked with the opportunity to 'rent' things rather than buy them — though this trend may very well turn out to be short lived just like the ubiquitous Gilt Flash Sale."
For younger shoppers, as they choose which apparel brands do get their attention, sustainability and other cultural issues are often at the forefront, according to Carter. Forever 21, for one, in contrast to at least nominal efforts by rival H&M, ignored that, to its peril, Carter said.
No fashion heroes
The "glaring lack" of newness noticed by Cohen could be a reflection of a new fashion reality — that consumers themselves are dictating what to wear, gleaning clues from social media and seeking advice from influencers there who include their own friends.
"The tastemakers of fashion used to be the designer, fashion editor, fashion buyer and celebrity," said FIT's Carter. "Today, however, social media influencers, peers, and stylists have replaced the role of fashion sages for consumers to purchase apparel, footwear, and accessories. Instagram, YouTube and other social media platforms dictate how one should dress for Gen Z and Millennials. Besides, they don't shop in a mall or socialize in retail stores as did previous generations of youth."
"To be a merchant right now in apparel, that's a hard job. To work at The RealReal is so much easier than turning around J. Crew."
EVP, Thought Leadership & Marketing, WD Partners
That grassroots approach to fashion is making it difficult for merchandisers, at least those building seasonal lines from scratch, according to Lee Peterson, executive vice president of thought leadership and marketing at WD Partners. Resale businesses like ThredUp and The RealReal are better positioned than traditional retailers because of the way consumers mix and match styles, brands and price points, he said in an interview.
"You can't merchandise the way the customers buy now. I feel sorry for anyone working for Ascena and those guys putting together a line," he said. "To be a merchant right now in apparel, that's a hard job. To work at The RealReal is so much easier than turning around J. Crew. And to be a buyer there is easier, too, because you're treasure hunting for all your treasure-hunting customers."
Another reality pressuring sales is that nobody needs as many clothes as they once did, say Carter and Peterson. Peterson noted that, even as an executive, he was wearing a flannel shirt and Vans on a Thursday.
"No 'career wear' or business wardrobe is necessary anymore since the beginning of the 1990s era of 'Friday Casual' morphed into everyday 'Business Casual' at the majority of companies, schools, service industries and banks in America," Carter said. "One need only trace the rise of wearing sneakers to one's office, college, opera house, theater, church or temple to see that consumers see no value in 'dressing for work' vs. dressing for leisure. Even Goldman Sachs has suspended the Tie and Suit rule once and for all!"
Too much supply
So, consumers can't spend as much on apparel as they once did, would rather buy other things and don't need as many clothes. Yet there's a glut of apparel for sale, and, increasingly, for rent.
"Thirty years ago the apparel and related accessories business were booming. The department stores couldn't wait to jettison lesser margin businesses like housewares, home and electronics so as to devote more selling space to soft lines," Columbia's Cohen said. "But apparel and accessories like most individual consumer segments are cyclical in the way they perform. What was the ever rising tide is no longer."
It doesn't help that the traditional mall, which functioned well for suburban Americans for decades, is now a fairly inconvenient way to shop in an era when most households need two wage-earners, both pressed for time, and when so many things can be bought online. That's leading retailers as diverse as Gap and GNC to leave those locations to set up shop in strip malls and invest in e-commerce instead.
"Now the remaining department stores have too many physical stores in the face of the explosion of commerce and too much square footage devoted to off-trend apparel and accessories," said Cohen, who has decades of experience at retailers like Sears and Target. "Some of us balked at this short-sighted thinking of the past but we lost the argument and now the chickens have come home to roost. There obviously was a ridiculous over-investment in apparel and accessory specialty retail, largely based upon an increasingly large number of now superfluous malls."
Macy's is exhibit one, as a retailer that has scrambled in recent years to unwind its massive brick-and-mortar expansion of more than a decade ago, but it's not just a department store problem. Forever 21 also over-built its fleet, too often in sub-standard centers, and now plans to close 178 stores in the U.S. alone.
A giant retreat
While it's easy to see how e-commerce undercuts store traffic and sales, the apparel over-supply extends online. In fact, Walmart's recent loss of appetite for running its newly acquired pure-players could have something to do with the fact that they are apparel businesses. In a stunning retreat, the retail giant sold its ModCloth apparel brand and is reportedly shrinking the Bonobos menswear operation, not long after buying them.
"Against this backdrop, Walmart will be cautious about getting too deeply into apparel. At heart, Walmart isn't a fashion focused player; their primary business model is a volume play based on everyday products sold at low prices," Saunders said. "As such, the company has determined that ModCloth, and possibly Bonobos, are not a good long-term fit. This is especially so given the challenge of bringing these divisions into strong profitable territory."
Walmart in recent years grabbed those businesses, along with outdoor apparel retailer Moosejaw, to glean knowledge and is likely now ready to graduate, according to Saunders.
"Having extracted what they needed, Walmart is changing tack and is focusing more on their core e-commerce business via Walmart.com," he said. "Walmart sees its future in fashion as improving its own offer via stores and online, doing selective things in specialist areas like plus size, and partnering with other brands via its marketplace. That makes sense as it allows Walmart.com to widen its fashion appeal without Walmart taking on too much of the risk. It's a nimbler and likely more profitable model."
More nimble and more profitable: suitable, if difficult, goals for the entire apparel industry at the moment.