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Industry Surveys

  1. 1. Industry Surveys Apparel & Footwear March 4, 2004 CURRENT ENVIRONMENT..................................................................1 A $500 million opportunity in women’s better apparel Marie Driscoll, CFA More changes to follow Apparel Analyst The end of quotas and tariffs Summary of overall environment Consumer confidence on the rise Yogeesh Wagle Apparel sales decline eases Footwear Analyst In search of style Footwear sales step down Industry outlook brightens INDUSTRY PROFILE...............................................................................7 The industry that suits everyone Apparel Footwear INDUSTRY TRENDS .................................................................................8 Shorter cycles Technology changes the competitive landscape Price deflation Contacts: Offshore sourcing Diversifying to survive Media Sales channels proliferate John Piecuch Following the demographics 212.438.1102 HOW THE INDUSTRY OPERATES ..............................................................16 john_piecuch@ Components of the industries Intense competition Manufacturing dynamics Sales Vital role of technology 800.221.5277 Pivotal distribution channels roger_walsh@ Enhancing customer loyalty KEY INDUSTRY RATIOS AND STATISTICS ..................................................22 HOW TO ANALYZE AN APPAREL OR FOOTWEAR COMPANY ........................24 Qualitative factors Inquiries & Quantitative factors Client Support Earnings quality 800.523.4534 clientsupport@ GLOSSARY .............................................................................................30 INDUSTRY REFERENCES.....................................................................31 Replacement copies COMPARATIVE COMPANY ANALYSIS ..............................................34 800.852.1641 THIS ISSUE REPLACES THE ONE DATED JULY 3, 2003. THE NEXT UPDATE OF THIS SURVEY IS SCHEDULED FOR SEPTEMBER 2004.
  2. 2. Standard & Poor’s Industry Surveys Editor: Eileen M. Bossong-Martines Copy Editor: Carol A. Wood Production: GraphMedia Statistician: Sally Kathryn Nuttall Production Coordinator: Paulette Dixon Client Support: 1-800-523-4534 Copyright © 2004 by Standard & Poor’s All rights reserved. ISSN 0196-4666 USPS No. 517-780 Visit the Standard & Poor’s web site: STANDARD & POOR’S INDUSTRY SURVEYS is published weekly. Annual subscription: $10,500. Reproduction in whole or in part (including inputting into a computer) prohibited except by permission of Standard & Poor’s. Executive and Editorial Office: Standard & Poor’s, 55 Water Street, New York, NY 10041. Standard & Poor’s is a division of The McGraw-Hill Companies. Officers of The McGraw-Hill Companies, Inc.: Harold McGraw III, Chairman, President, and Chief Executive Officer; Kenneth M. Vittor, Executive Vice President and General Counsel; Robert J. Bahash, Executive Vice President and Chief Financial Officer; Frank D. Penglase, Senior Vice President, Treasury Operations. Periodicals postage paid at New York, NY 10004 and additional mailing offices. POSTMASTER: Send address changes to INDUSTRY SURVEYS, attention Mail Prep, Standard & Poor’s, 55 Water Street, New York, NY 10041. Information has been obtained by INDUSTRY SURVEYS from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, INDUSTRY SURVEYS, or others, INDUSTRY SURVEYS does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. VOLUME 172, NO. 10, SECTION 1 THIS ISSUE OF INDUSTRY SURVEYS INCLUDES 3 SECTIONS.
  3. 3. C URRENT E NVIRONMENT A $500 million opportunity in woman’s better apparel In early June 2003, after its attempts to salers that lead department store sales of negotiate a higher licensing fee failed, Polo women’s apparel. Ralph Lauren Corp. ended its six-year li- Meanwhile, Calvin Klein Inc. (a wholly censing agreement with Jones Apparel owned subsidiary of Phillips-Van Heusen Group Inc. for the Lauren line of better Corp., in a strategic licensing arrangement women’s sportswear and took its design and with Kellwood, which is responsible for pro- sourcing functions in-house. Many designers duction and sourcing), Tommy Hilfiger see this development as an opportunity to Corp., and Michael Kors LLC are readying wrangle more floor space for themselves. new lines in an attempt to capture a portion They figure that department stores will not of the better women’s sportswear market. commit the same amount of money to The department stores are responding to Lauren’s own production as they did to the split with their own plans, which, if suc- Jones’s, due to Lauren’s unproven ability to cessful, could help differentiate them from deliver quality goods on time. competitors and yield additional gross margin Design firms have thus rushed to claim dollars. For example, they are asking vendors the Lauren line’s stake in department stores for exclusivity — unique lines or items that and capture some of the sales presumably up competitors would not carry. Some are in- for grabs. At the wholesale level, the Lauren creasing their proprietary private labels; ex- line generated an estimated $475 million in amples include I.N.C. and Alfani at Federated 2003 and $550 million in 2002. We estimate Department Stores Inc., and Identity and Kate that this translates to about $665 million Hill at the May Department Stores Co. They and $770 million, respectively, at retail. are also introducing relatively unknown labels Jones Group deftly turned adversity into to inject newness onto the selling floor. opportunity by redirecting the factories it had The dissolution of the Polo/Jones venture devoted to Lauren to a new brand of moder- means that an estimated 20% to 30% of the ately priced “dressy casual” attire called floor space devoted to better sportswear Signature. To further beef up its better apparel could change hands by early 2006. However, offerings after the split with Lauren, Jones with department stores pursuing private label MARCH 4, 2004 / APPAREL & FOOTWEAR INDUSTRY SURVEY New York in December 2003 acquired Kasper strategies, it remains to be seen whether ven- A.S.L. Ltd., with its Anne Klein, Albert Nipon, dors will benefit from the overhaul. Kasper, and le Suit labels. Polo Ralph Lauren, for its part, immediately hired a seasoned ap- More changes to follow parel retail executive, Kim Roy (former presi- dent of the AnnTaylor Stores Corp.), as Vendors generally are taking steps to division president of Lauren brands to spear- stabilize their businesses. For example, head its in-house efforts. they are pulling lines (or parts of lines) Not to be outdone, Liz Claiborne Inc. from less productive retailers in an attempt sped up the launch of its new Realities line, to restore brand equity. They are also while pursuing exclusive opportunities at opening specialty stores in malls or in so- various retailers — part of a micromerchan- called lifestyle shopping centers where they dising strategy to sell parts of a line or an en- can better control their destiny. tire line to a single retailer. Along with Polo The changes come none too soon. The Ralph Lauren and Jones, Liz Claiborne is the department store channel has lost market third member of the troika of apparel whole- share over the past two decades as national 1
  4. 4. APPAREL STORE VS. DEPARTMENT STORE SALES The end of quotas and tariffs (In billions of dollars) 160 Discount Conventional and national It is estimated that quotas and tariffs department stores chain department stores 140 added as much as $80 billion to the retail cost Apparel stores 120 of clothing and shoes in 2002. According to 100 the US International Trade Commission (ITC), a quasi-judicial federal agency, the average 80 tariff for clothing, shoes, and textiles was 60 10% in 2002 — about 12 times higher 40 than that levied on other products — and 20 the combined effect of quotas and tariffs 0 raised average prices by 34%. 1992 93 94 95 96 97 98 99 00 01 02 2003 However, in accordance with rules pro- Source: US Department of Commerce. mulgated by the World Trade Organization, the quota system for clothing ends January 1, 2005, with an expected phase-out to last chains, such as Kohl’s Corp. and J.C. through the end of 2008. The implications Penney Co. Inc., increased competition for are multiple. For one thing, the practice moderately priced apparel, while discoun- of allowing firms to ship up to 8% of the ters began offering fashionable designer following year’s quota will end with quotas brands. Concurrently, service levels de- themselves. This will create a “quota clined at department stores, creating a crunch” beginning in late 2004. According price/value equation that other channels to the US Association of Importers of could easily improve upon. We believe the Textiles & Apparel, a trade group, the di- current success of such specialty apparel minishment of quotas could reduce apparel retailers as Banana Republic (part of Gap inventory at retail, causing clothing prices Inc.) and AnnTaylor is directly related to to rise in 2004. price and service issues at the better de- However, the ITC estimates that the net partment stores. national gain of abolishing quotas and tariffs Standard & Poor’s believes that depart- will be $13 billion in cost savings and the ment stores have run out of cost-cutting addition of 12,000 jobs. Domestic manufac- and productivity measures to increase prof- turers are likely to continue to benefit from itability, and that operators realize they their own competitive advantage — their must upgrade their store environments to proximity to the end user — and to produce once again make them preferred destina- for the high-fashion and specialized markets tions for shoppers. for which they are best suited. In 2004, a sense of newness on depart- Most industry observers agree that manu- ment store floors should create excitement facturers in China, and to a lesser extent in and drive traffic. After years of minimalist India, are likely to gain the most from the MARCH 4, 2004 / APPAREL & FOOTWEAR INDUSTRY SURVEY and casual trends, the return of color, tex- elimination of quotas, in the short term, due ture, and detail has given consumers reason to economies of scale. Retailers have estimat- to shop again. Tax rebates, along with higher ed that China’s apparel prices could drop by levels of consumer confidence, spending, and 40% to 57% with the phase-out of quotas. disposable income, have set the stage for de- However, in such a case, we wouldn’t expect partment stores and their vendors to enjoy a retailers to pass on the entire savings to con- cyclical rebound in 2004. sumers, as this would leave them fewer dol- Career apparel has been a key sales driver, lars to pay for fixed overhead. especially at the better department stores and The longer-term implications are that specialty apparel retailers, and a job recovery apparel costs are likely to drop significant- should accelerate its popularity. In the mod- ly and that apparel companies will shift erately priced apparel sector, trends are more their sourcing strategies. In the latter case, challenging. Falling prices for better brands, Standard & Poor’s expects that the compa- due to increased competition from mass mer- nies gaining the most will be those that can chants, is exerting pressure on the moderate shorten their production cycle while main- brands, leading to acute price deflation. taining or improving quality and value. We 2
  5. 5. also expect consolidation in the industry growth in 2004. Standard & Poor’s currently to intensify. expects that real gross domestic product (GDP), which increased 3.1% in 2003, will Summary of overall environment expand at a 4.5% pace in 2004. The US economy grew at an annualized Consumer confidence on the rise rate of 4.0% in the final quarter of 2003, down from 8.2% in the third quarter, but Consumer confidence, one of the founda- above the 3.1% of the second quarter. For tions of consumer spending and thus of great the year, real GDP increased 3.1%, up from importance to the apparel and footwear in- the 2.2% increase in 2002. The fourth quar- dustry, has gyrated considerably in the last ter of 2003 saw a 2.6% rate of growth for few quarters but appears to be on the rise. personal consumption expenditures (com- The University of Michigan’s consumer senti- pared with a 6.9% rate in the third quarter) ment survey jumped to 103.2 (preliminary) and an acceleration in imports and exports. in January 2004, from 92.6 in December. Equipment and software purchases and resi- January’s reading, the highest level in over dential fixed investment slowed and were three years, suggests that the economic recov- offset by an increase in inventory investment. ery is becoming tangible to US consumers. According to the US Department of Labor, Another sign of relative optimism could the December producer price index for finished be discerned in the consumer confidence in- goods increased 0.3%, on the heels of a 0.3% dex calculated by the Conference Board, a decline in November and a 0.8% advance in private research organization. Though that October. Concerns about a deflationary trap — index slipped modestly to 91.3 in December, falling prices and wages and eroding asset val- from 92.5 in November, the expectations in- ues — that were prevalent in early 2003 are dex rose, signaling healthy economic growth easing in light of recent pricing data as well as in 2004. Driving the slight decline in the the declining US dollar. The dollar’s drop overall index was consumers’ deteriorating should provide some pricing power as well as assessment of current labor markets. How- raising import prices. Economywide deflation, ever, their view of the future employment though an unlikely scenario, would pose a ma- outlook improved. jor threat to long-term prosperity and would Throughout most of 2002 and 2003, US hurt the apparel and footwear industry by personal consumption expenditures (PCE) held slowing consumer spending. up better than did other components of the Pivotal to a healthy domestic economy is economy. In the fourth quarter of 2003, PCE the employment picture, which as of early rose 2.6% to close out the year at a 3.1% February 2004 was puzzling though improv- growth rate. For 2004, Standard & Poor’s ing modestly. The recovering economy’s in- projects that personal consumption expendi- ability to generate new jobs is cause for tures will rise 3.4%, compared with a gain of concern to retailers and manufacturers, partic- 4.5% for the economy as a whole. MARCH 4, 2004 / APPAREL & FOOTWEAR INDUSTRY SURVEY ularly in the apparel and footwear industries, as it could restrict consumer spending. The un- Apparel sales decline eases employment rate stood at 5.7% in December 2003, down from 5.9% in November. But US apparel sales totaled $163 billion in rather than representing an increase in jobs, 2002, down 1.8% from $166 billion in that decline was caused by a 309,000-per- 2001, according to the NPD Group, a mar- son drop in the labor force, in which par- ket research firm. Although sales of men’s ticipation fell to a new cycle low of 66%. and women’s apparel fell 1.7% and 6.1%, Standard & Poor’s believes that the weak- respectively, children’s clothing sales grew ness in hiring at this point in the recovery 6.0%. These results were an improvement reflects a systemic change among larger over 2001, when sales slid 5.9% from $176 corporations, which are increasingly using billion in 2000. All sectors saw declines in contract workers in an attempt to avoid 2001, with sales down 7.0% in men’s, 6.7% employee benefit costs. in women’s, and 4.7% in children’s apparel. The good news is that the economy ap- Women’s clothing, with $84 billion in pears poised to maintain a higher level of 2002 sales, accounted for 51% of the year’s 3
  6. 6. total apparel sales, down from about 54% in d.e.m.o. (a division of Pacific Sunwear of 2001. The men’s segment rose slightly, to California Inc.). However, department stores $52 billion, accounting for 32% of the year’s and national apparel chains are starting to sales versus 31% in 2001. The children’s seg- carry this merchandise. The Sean John cloth- ment (including boys’, girls’, and infants’ and ing line, sold by hip-hop music producer toddlers’ clothing) climbed to $27 billion in Sean Combs’s Bad Boy Entertainment Inc., is sales, representing 17% of the total, up from fast approaching half a billion dollars in 16% a year earlier. Given its favorable de- sales. Other entrants in this field include Jay mographics, this latter category continues to Z and Damon Dash’s Rocawear Inc.; JLO, capture a greater share of the total market. by entertainer Jennifer Lopez and produced by Sweetface Fashion Co. LLC; and Shady In search of style Ltd., produced by Nesi Apparel Group LLC under license from rap musician Eminem. In the fashion world, the onset of the new Skateboarding and surfing styles contin- millennium was accompanied by a sense of ued to outperform the overall apparel mar- malaise — a lack of exciting fashion trends ket. Quiksilver Inc., which designs and that only sharp pricing could cure. Only re- makes youth-oriented casual wear, snow- cently have multiple fashion trends arisen to boardwear, and swimwear, grew sales by generate interest on the part of consumers. For 38% in fiscal 2003 (ended October 2003). instance, dressier apparel for both sexes is sup- plementing the extremely casual attire of the Consumers hooked on bargains last decade, driving sales of career suiting, oc- A huge problem for retailers is that con- casion wear, and accessories. (You need the sumers are addicted to promotional pricing. right accessories to match, for instance, your Indeed, for many apparel products, con- new bouclé knit suit.) Another growing trend is sumers will wait for price reductions before differentiated, individualized products with de- purchasing. While retailers traditionally tails such as embroidery, monogramming, and charged full price for new preseason mer- the like. chandise, today many resort to discounting Retailers usually rely on a few fashion from the start. What this often means, how- “hits” to drive traffic into their stores, ever, is that retailers have to make even larg- where customers may be enticed to buy oth- er end-of-season markdowns, as they attempt er items as well, including basics and acces- to move inventory out of the stores to make sories. Often, consumers are more willing room for new assortments. Shoppers, thus to pay full price for fashion items, helping accustomed to bargains, forgo purchasing retailers and producers maintain lower until the items they want go on sale. prices on commodity-type goods. Women’s apparel sales tend to be fashion- Lean inventories hold promise driven, so the absence of a fashion megatrend Through 2003, apparel retailers at- has cut into women’s apparel sales more than tempted to drive sales growth with fewer MARCH 4, 2004 / APPAREL & FOOTWEAR INDUSTRY SURVEY men’s. Thus, the new trends for women should promotions, increased full-price selling, provide a more noticeable lift going forward. and more productive inventory. In fact, AnnTaylor Stores, a women’s specialty clothing some retailers went too far in this direc- retailer, cited the strength of refined separates tion, ending up with low in-stock positions as the impetus behind its exceptional perfor- and losing sales. For apparel producers, mance in December 2003, when same-store these low inventory levels are good news, sales rose 26.2%. as they could lead to a substantial pickup in orders. For retailers, smaller, more fre- Streetwear is a bustling business quent merchandise flows can encourage One apparel segment that has made rapid shoppers to “buy now.” Additionally, the strides in recent years is streetwear: youth- new fashion trends should help retailers oriented, edgy, urban fashions inspired by wean some shoppers off bargains. hip-hop and rap music, surfing and skate- Since 1995, the industry’s inventory-to- boarding styles, and even military designs. sales ratio has declined steeply. According Streetwear is sold mostly through special- to the US Department of Commerce, the in- ty stores, such as Urban Outfitters Inc. and ventory-to-sales ratio for clothing and ac- 4
  7. 7. INVENTORY/SALES RATIO — RETAIL APPAREL vendor. Nike, in turn, announced that Foot Locker would no longer be the primary dis- 2.9 tribution point for its elite or statement 2.8 products. The dispute reflected the pressure on retailers to sell more affordable products 2.7 to their increasingly value-conscious cus- 2.6 tomers. In the fall of 2003, the two compa- 2.5 nies appeared to be moving towards a 2.4 rapprochement, which Standard & Poor’s be- lieves would give Nike better exposure for its 2.3 new product introductions in 2004. 2.2 Consumers spent $40.6 billion on footwear 1993 94 95 96 97 98 99 00 01 02 2003 in 2002 (latest available), down 5.0% from Source: US Department of Commerce. $42.6 billion in 2001, according to the US Department of Commerce. In 2003, the aver- age price of footwear continued to decline as cessory stores was 2.41 at the end of 2003, consumers sought price bargains and lower- level with 2001, but below 2.48 in 2002 priced casual shoes grabbed a greater share of and 2.58 in 2000. The 2.41 reading indi- the mix. The US Department of Labor’s con- cates that retailers were cautiously manag- sumer price index for footwear dipped to ing inventory levels. 119.6 in 2003 from 121.4 in 2002. In 2001 and 2000, the index stood at 123.0 and Footwear sales step down 123.8, respectively. Despite stiff competition and a price-con- Athletic footwear outperforms scious consumer, US footwear manufacturers According to SGMA International, a trade had a fairly positive year in 2003. Economic group for sporting goods companies, a strong growth and healthy consumer confidence lev- second half drove a 4.9% increase in unit sales els in the second half of 2003 helped stabilize of athletic footwear and a 4.5% rise in spend- the US footwear market. Large footwear ing in 2003. Standard & Poor’s estimates that manufacturers, like Nike Inc. and Reebok this works out to about 450 million pairs of International Ltd., continued to seek growth athletic shoes purchased by US consumers at a by expanding internationally and diversifying total cost of about $16.5 billion. further into apparel and sporting goods. The That spending rose slightly slower than dollar’s weakness vis-à-vis the euro boosted did unit sales points to continuing price de- results for US footwear makers with a signif- flation in this segment, which is nonetheless icant presence in Europe. moderating. In 2003, retro or classic styled According to Standard & Poor’s estimates, shoes, which had been the dominant fashion Nike Inc. remains by far the largest footwear for the previous several years, appeared to be MARCH 4, 2004 / APPAREL & FOOTWEAR INDUSTRY SURVEY manufacturer, with revenues likely to top losing their popularity. $11.2 billion in 2003. The runners-up are For 2002, the NPD Group, a market re- Adidas-Salomon AG and Reebok Inc., with search firm, reported that consumer spending estimated net sales of $8.0 billion and $3.4 for athletic footwear rose 2.5% to $15.7 bil- billion, respectively. Other major manufactur- lion, from $15.3 billion in 2001. Consumers ers include Fila USA Inc., the Timberland Co., purchased 428.6 million pairs of athletic K Swiss Inc., Wolverine World Wide Inc., shoes, up nearly 7.0% from 408.9 million in Sketchers USA Inc., and Steven Madden Ltd. 2001. However, the average price they paid Footwear retailers also fared better in the per pair dropped 4.2% to $36.61, from latter half of 2003. However, promotional $38.20 in 2001. pricing remained a concern, and a strained Spending for men’s athletic shoes rose relationship between Nike and Foot Locker 2.5% in 2002; women’s sales were essen- Inc., a major athletic footwear retailer, hung tially unchanged, while children’s sales rose over most of the year. In the fall of 2002, 7.0%. The trend toward retro or classic Foot Locker cut back sharply on purchases looks was pronounced, particularly in bas- of high-end products from Nike, its biggest ketball and running styles. Sales of retro 5
  8. 8. and classic footwear rose 11.4% in 2002, athletic footwear manufacturers to market whereas spending on nonretro styles fell their products. ■ about 2.0%. Running styles remained the biggest seg- ment, with 28.6% of the total market in 2002, though sales were flat, at $4.49 bil- lion. The basketball category, which was the most popular style until the late 1990s, surged anew, growing 17% in 2002 to $3.25 billion (or 20.7% of the total market). This trend has continued in 2003, according to SGMA, which reported that at mid-year 2003, basketball styles had captured 22% of the market. Tennis and skateboard styles achieved double-digit growth, reflecting the current trend toward casual looks. Industry outlook brightens With the economic recovery gaining traction, apparel and footwear sales should benefit from resurgent consumer spending. However, consumers remain focused on bargains, and deflationary pricing pressure is likely to continue. Hence, we expect branded apparel companies offering fash- ion-right products at attractive prices to outperform the overall industry in 2004. The best performances are likely to come from companies with strong brand recogni- tion, such as Quiksilver and Liz Claiborne. The footwear industry faces a highly com- petitive but improving environment. Standard & Poor’s anticipates that footwear sales should show modest gains in 2004, building on momentum gained in the second half of 2003. Economic growth, an improving job market, and a higher level of consumer confi- dence during the year could spur consumers to MARCH 4, 2004 / APPAREL & FOOTWEAR INDUSTRY SURVEY revamp their footwear collection. Footwear manufacturers and retailers will likely seek to attract customers through new product introductions and brand dif- ferentiation. Casual shoes should continue to gain market share at the expense of for- mal footwear. New, so-called hybrid shoes, such as casual shoes that incorporate sports technology, should gain further customer acceptance. Nike and Reebok are expected to see a slight pick up in domestic footwear sales, while sales continue growing rapidly abroad. Finally, the planned staging of the 2004 Summer Olympics in Athens, Greece, should enhance the opportunities for major 6
  9. 9. I NDUSTRY P ROFILE The industry that suits everyone In 2003, US consumers spent about $310.5 parel was imported into the United States billion on clothing and footwear, up 2.0% in 2002, essentially flat with 2001, but from $304.4 billion in 2002, according to down slightly from $69.3 billion in 2000. the US Department of Commerce. With an Exports of US-made clothing continued to estimated US population of 288 million, the fall, coming in at $4.4 billion in 2002, 2003 expenditures equaled roughly $1,130 compared with $5.3 billion in 2001 and per person. Standard & Poor’s estimates that $6.7 billion in 2000. Americans spent $1,125 per capita on cloth- US retail sales at clothing and clothing ing and footwear in 2002. accessories stores rose 4.0% to $178.7 bil- US employment levels in apparel and lion, according to the US Department of footwear manufacturing have fallen drastical- Commerce, after rising 2.8% in 2002 and ly. According to the US Department of Labor, declining 0.4% in 2001. In comparison, av- domestic apparel employment has fallen erage annual increases of 5.0% were seen in about 65% over the past three decades, to a the five years ended 2000. record low of 293,400 in December 2003. In The US apparel market can be divided 2003 alone, 43,800 apparel jobs were lost. into two tiers: national brands and other ap- Increased quotas, reduced tariffs, and a string parel. National brands, produced by about of free-trade and preferential trade agree- 20 sizable companies, currently account for ments have all contributed to the steady flow some 30% of all US wholesale apparel sales. of manufacturing jobs out of the United The other apparel category, accounting for States and into low-cost countries in Asia, about 70% of all apparel distributed, com- Latin America, Africa, and the Caribbean. prises small brands and private-label goods According to Labor Department data, appar- (store brands). el employment peaked in 1973 at 1.45 mil- Apparel is sold through a variety of retail lion; since then, the sector has shed almost a outlets. Based on data from the NPD Group million jobs. Domestic footwear employment Inc., a market research firm, discount stores has fallen as well, with 25,500 people em- accounted for 31% of apparel purchases by ployed in December 2002 (latest available), consumers in 2002, followed by specialty down 11.8% year over year — a 48% drop stores (25%), department stores (19%), and MARCH 4, 2004 / APPAREL & FOOTWEAR INDUSTRY SURVEY since 1997. U.S. APPAREL INDUSTRY EMPLOYMENT Apparel (Production workers, in millions) 1.4 With respect to both manufacturing and 1.2 retailing, the US apparel industry is large, 1.0 mature, and highly fragmented. Apparel sold in the United States is made both domestical- 0.8 ly and internationally. Some of the largest 0.6 US-based apparel wholesalers are listed in 0.4 the table, “Major Apparel Companies.” Domestic apparel production was worth 0.2 $27.8 billion in 2002 (latest available), ac- 0.0 cording to the US Department of Commerce, 1955 59 63 67 71 75 79 83 87 91 95 99 2003 down 17.1% from $33.5 billion in 2001. Source: Bureau of Labor Statistics. Approximately $68.2 billion worth of ap- 7
  10. 10. MAJOR APPAREL COMPANIES countries over several continents. A multina- tional strategy allows manufacturers facing a FISCAL YEAR SALES slow economy in one country to keep expand- COMPANY ENDING (BIL. $) ing revenues by focusing on selling in another Sara Lee† Jun.'03 6.4 country’s faster growing economy. V.F. Corp. Jan.'03 5.1 For instance, US-based companies such as Jones Apparel Dec.'02 4.3 Nike Inc. have countered the lack of growth Nike† May'03 3.1 domestically by growing sales through in- Polo Ralph Lauren Mar.'03 2.4 Kellwood Jan.'03 2.2 creased penetration in the well-developed Tommy Hilfiger Mar.'03 1.9 markets of Western Europe, including the Berkshire Hathaway† Dec.'02 1.6 United Kingdom, Germany, and France, and Russell Dec.'02 1.2 by entering new Eastern European markets Reebok International† Dec.'02 1.1 in such countries as Poland and the Czech Phillips-Van Heusen Jan.'03 1.0 Republic. In fiscal 2003 (ending May 2004), Oxford Industries May'03 0.8 Nike’s international footwear sales grew Nautica* Feb.'03 0.7 15%, year to year, while US footwear sales Guess? Dec.'02 0.6 declined 5.2%. Hartmarx Nov.'02 0.6 By the same token, Europe-based footwear †Apparel products only. *Acquired by VF Corp. in 2003. makers such as Adidas AG derive a significant Source: Company reports. portion of their revenues from the US market. Footwear companies, particularly manu- facturers of athletic footwear, have diversi- national chains (16%). “All other” retailers, fied into related apparel and sporting goods a category that includes direct mail, Internet categories as a way of extending their vendors, and factory outlets, accounted for brand’s reach and growing revenues. For the remaining 9%. example, Reebok Inc. has seen double-digit growth in Reebok-brand apparel sales in the Footwear United States over the past three years, compared with low single-digit growth do- Like the apparel business, the US footwear mestically of Reebok-brand footwear sales. industry is mature and fragmented, and its Nike’s sales of sports gear and equipment manufacturing base is declining. According to rose more than 25% in fiscal 2003, com- the US Department of Commerce, 59.1 million pared with 8.1% overall sales growth. pairs of shoes were produced domestically in 2002, versus 79.7 million pairs in 2001 and 86.6 million pairs in 2000. In 1978, domestic INDUSTRY TRENDS production stood at 418.9 million pairs — sev- en times 2002’s level. Most trends affecting apparel and footwear In contrast, US exports have held steady manufacturers today are driven by consumer MARCH 4, 2004 / APPAREL & FOOTWEAR INDUSTRY SURVEY and even increased a bit. About 30.0 million demand and relate to the size of the various pairs, or 51% of domestically produced demographic groups, their particular wants, shoes, were exported in 2002, compared shopping patterns, and spending power. with 28.4 million pairs in 2001 and 28.8 Changing styles in workplace and leisure million pairs in 2000. attire are also influencing retail and manu- Meanwhile, the nation imported about facturing operations. 1.9 billion pairs of shoes during 2002, up from 1.8 billion pairs in 2001. China contin- Shorter cycles ues to provide the lion’s share of those im- ports, accounting for 80.4% of shoes In the past, retail stores often carried ap- imported into the United States in 2002. parel and footwear months in advance of the season in which they would be worn. Times Internationalization and diversification have changed, however, and consumers Today, the footwear industry is truly global nowadays tend to buy closer to need — espe- in nature, with large manufacturers sourcing cially juniors (preteens to early 20s). To meet products from and selling products in different this demand, manufacturers have had to 8
  11. 11. shorten design, development, production, tomized or exclusive products can attract and distribution cycles. and retain customers who are willing to pay In response, companies are emphasizing for exclusivity — to the benefit of vendor market research in order to stay in tune and retailer alike. with consumer needs and trends. They are In another development, automatic re- also re-evaluating their manufacturing plenishment uses point-of-sale (POS) com- strategies. Moving to offshore production puter technology to record each sale, update lengthens the turnaround time for garment inventory, and share this information be- makers, making it harder for them to re- tween retailer and vendor. The system auto- spond to quick changes in domestic de- matically informs the vendor in real time of mand. Hence, apparel companies have had what items the retailer has sold each day and to maintain a certain level of domestic pro- orders replacement items. In this way, it im- duction to fulfill small orders and orders proves the retailer’s supply of popular mer- for seasonal or special items. chandise while giving vendors better control over their sell-through and profit margins. Technology changes However, the system is more effective for ba- the competitive landscape sic items and staples than for fashion items. This is because fashion items constantly Numerous technological developments — change, and each new fashion must be sold generally related to the Internet — are trans- individually to the vendor. Nonetheless, au- forming the manufacturing and retailing of ap- tomatic replenishment helps to improve fu- parel and footwear. By doing so, they are also ture retail assortments by store location to changing the relationship between suppliers reflect recent sales trends. and retailers — largely to the benefit of both. Information technology enables Liz For instance, new technologies are now Claiborne Inc. to look at retail sell-through available to customize products for specific of its brands in terms of size, color and loca- customers at affordable prices. For instance, tion/geography. The company’s supplier base on its Web site, Polo Ralph Lauren offered is integrated into the information flow, en- custom polo shirts in a choice of colors (for abling the company to better plan produc- both shirt and insignia) during the 2003 holi- tion and delivery. day season — a kind of exclusivity made Internet-based communications networks available to the masses. Levi’s and Lands’ can also enable manufacturers to share de- End have offered pants with a custom fit sign plans with vendors in order to deter- and/or features. mine which goods are most desirable and Such custom production is generally done which should be altered or discontinued. domestically due to the time and expense of The vendor uploads an entire schematic of finishing garments offshore. As such, it reduces which merchandise it is planning to make. the time to market as well as the risk that a As the sales season approaches, the vendor fashion will go out of style before the goods will edit or alter its designs and prices MARCH 4, 2004 / APPAREL & FOOTWEAR INDUSTRY SURVEY are sold. Moreover, custom production increas- based on expressions of interest from retail- es full-price sales and thus improves profitabili- ers (or the market). This practice of plan- ty in that supply is meeting specific demand in ning assortments on the part of the vendor terms of the size and color. Additionally, with and committing to orders from their retail fewer returns and greater customer satisfaction, trade partners is simplified with fewer er- custom production increases the long-term val- rors due to multiple manual data entry and ue of a customer. enables both parties to focus on product As this “mass customization” infiltrates opportunities. It replaces inefficient faxes the apparel industry, it may be the saving and emails, whose product information grace for domestic producers who can quick- may be inaccurate and obsolete, with a ly deliver the individualized goods. Such pro- shared interactive Web format that keeps ducers include those who have spent the last frequent product additions and deletions, decade fighting price deflation brought about alterations and price changes up to date. by retailers who have competed on price Retailers can more proactively shape the as- rather than by differentiating their goods and sortment and tailor it to the particular services. As an alternative to price wars, cus- needs of their shoppers. 9
  12. 12. 7thOnline is a Web-based merchandising APPAREL PRICE INDEXES and order placement system designed for ap- (1982–84=100) parel, accessory, and footwear vendors and 190 their retail partners. Detailed product images 180 and real-time product information facilitates CPI—Total 170 communication between retailer and apparel 160 manufacturer early in the assortment plan- 150 ning process. Men’s and boys’ apparel In 2003, Liz Claiborne and Federated 140 Footwear Department Stores launched LizPlanning, a 130 program using 7thOnline software. It is part 120 Women’s and girls’ apparel of Liz Claiborne’s larger micromerchandis- 110 ing strategy, designed to make sure that each 1993 94 95 96 97 98 99 00 01 02 2003 retail door has exactly the right merchandise Source: Bureau of Labor Statistics. assortment for its defined consumer base. Ultimately, LizPlanning is expected to im- prove productivity and efficiency for both lar downtrend. Contributing factors include parties as they endeavor to implement col- the continued influx of imports, retail pro- laborative forecasting, planning, and replen- motions, and market share gains by discoun- ishment (CFPR). ters. This pressure on prices has threatened While these new technologies are trans- margins at many apparel and footwear com- forming how apparel manufacturers and re- panies, spurring them to seek new ways to tailers operate, they are also altering their boost profitability. relationships with one another. Long viewed Although overall apparel and footwear as adversaries, both sides are beginning to sales have risen (in total dollars) since 1999, work together for their mutual good in de- average selling prices have declined, as indi- termining product, quantity, and prices. cated by the apparel consumer price index Notwithstanding their effectiveness, the (CPI) published by the Bureau of Labor new technologies are also expensive. Standard Statistics (BLS). According to BLS data, US & Poor’s believes that in a consolidating retail apparel prices fell five years in a row begin- industry, rising technology costs will prove ning in 1998. In 2003, the apparel CPI de- burdensome for smaller firms, while larger clined 2.1% to 119.0 (1982–84=100), from players will gain a competitive advantage by 121.5 in 2002. Infants’ and toddlers’ apparel their ability to meet them. prices declined by 4.9%, while men’s and boys’ were off 1.1% and women’s and girls’ Price deflation were down 1.9%. In 2003, the footwear CPI declined 1.8% to 118.5. Average selling prices for most apparel and footwear have been in a long-term secu- Offshore sourcing MARCH 4, 2004 / APPAREL & FOOTWEAR INDUSTRY SURVEY APPAREL & FOOTWEAR AS A SHARE OF TOTAL In the ongoing search to cut expenses, US PERSONAL CONSUMPTION EXPENDITURES apparel and footwear manufacturers have in- (In percent) creasingly moved their production facilities 8.0 to lower-cost regions outside of the United 7.5 States, notably Mexico, the Caribbean, 7.0 Central America, Asia, and sub-Saharan 6.5 Africa. However, as noted earlier, many man- 6.0 ufacturers have retained some facilities in the 5.5 United States to manufacture products that 5.0 require a fast turnaround time. 4.5 Asian facilities already produce a substan- 4.0 tial portion of the apparel and footwear sold 1973 1978 1983 1988 1993 1998 2003 in the United States. Following the 1995 im- Source: US Department of Commerce. plementation of the North American Free Trade Agreement (NAFTA) and the subse- 10
  13. 13. US IMPORTS AND EXPORTS OF APPAREL Organization (WTO) and the planned elimi- (In billions of dollars) nation of quotas between all 146 WTO 70 member countries in 2005. The quick turn- around time that Mexico and the Caribbean 60 Imports Exports make possible will ultimately prove less sig- 50 nificant than China’s lower costs. Indeed, be- 40 cause the Internet speeds communications 30 between an apparel company and its far- flung plants, providing faster cycle times, 20 such geographic proximity may become less 10 of a concern. 0 Another advantage for China is that its 1993 94 95 96 97 98 99 00 01 02 2003P factories employ highly skilled laborers capa- P-Preliminary. ble of producing complex garments. In con- Source: US Department of Commerce. trast, AGOA-eligible countries are unable to produce technical, fashionable, and high- quent lowering of tariffs, apparel manufac- quality garments, due to generally low levels turing in Mexico and the Caribbean has of technical expertise and literacy, underde- grown significantly. These countries’ proxim- veloped infrastructure, and dearth of capital. ity to the United States means that their facil- Corporations that set up and run plants in ities can offer significantly shorter shipping China are taxed by that government at a times compared with Asia, while also provid- lower rate than they are for operating in the ing low-cost production — factors that are United States. Moreover, by keeping their especially important for basic goods. sweetened profits in China, US-based apparel Recent legislation sustains the long-term makers can fund future growth. shift to offshore sourcing. In July 2002, the Trade Act of 2002 was approved by the US Diversifying to survive Congress and signed into law by President George W. Bush. This legislation contains the Relying on a single product line, market Trade Promotion Authority (TPA), which segment, or sales channel can lead to failure for grants the president the right to negotiate an apparel or footwear company. To survive, trade agreements and gives Congress the fi- they must come up with new designs, either as nal authority to approve or disapprove those product line extensions or as wholly new prod- agreements. It also contains the Andean uct lines. They can develop these new products Trade Preference Act (ATPA), which provides internally — a process that requires a great duty-free access to most apparel and virtually deal of investment in time, research and devel- all footwear from the Andean region opment, and marketing — or they may obtain (Bolivia, Colombia, Ecuador, and Peru). The them externally by signing licensing agreements new legislation made certain retroactive with or even acquiring another company. MARCH 4, 2004 / APPAREL & FOOTWEAR INDUSTRY SURVEY modifications to the May 2000 Caribbean Basin Trade Partnership Act (CBTPA) and Buying into new markets the African Growth and Opportunity Act Generally speaking, acquiring another com- (AGOA), both of which carry numerous pany is a way to eliminate current or potential breaks for footwear and apparel from coun- competitors while adding to the acquirer’s top tries in those regions. line and market share. In mature industries like Standard & Poor’s believes that while apparel and footwear, acquisitions can often tariff and quota preferences for apparel and be the purchaser’s only route to sales growth. footwear produced in the Caribbean basin They can also enable companies to combat and Andean region, and to a lesser extent pricing pressures by developing megabrands sub-Saharan Africa, have increased sourc- and maximizing operating efficiencies. ing from these regions temporarily, the Additionally, when brands with strong trend is not likely to last. Over time, we ex- consumer recognition are acquired, they pect China’s share of apparel and footwear provide new licensing opportunities as well. sourcing to increase dramatically, facilitated For instance, Jones Apparel Group expects by its recent entry into the World Trade its Anne Klein label to offer strong royalty 11
  14. 14. streams from licensing key accessories, such clothing in the United States through its own as watches, footwear, and eyewear. specialty retail stores. Also in 2002, Liz If an acquired firm’s product lines are simi- Claiborne added jewelry and accessories lar to its own, the acquiring company is usu- manufacturer Judith Jack to its stable of ally able to merge production lines, cutting brands in 2002. In 2003, it acquired urban overall expenses by sharing facilities. brand Enyce, expanding the demographic However, apparel and footwear makers are base that Liz Claiborne serves. just as apt to make acquisitions so as to diver- Even footwear maker Nike has gotten into sify their product mix. Offering other types of the acquisition act with its 2002 purchase of products allows apparel and footwear compa- surfwear manufacturer Hurley International. nies to balance their product portfolios, al- All of these diversification strategies have lowing a better performing product line to built volume and lessened the risks of being too offset a poorly performing line. focused on a particular segment of the market. For instance, Liz Claiborne and Jones However, acquisitions are not without their Apparel Group Inc. have utilized acquisition down sides, including the costs of borrowing strategies as well as licensing agreements to and of assuming the acquirees’ liabilities. Such broaden their brand portfolios. Traditionally costs must be reduced, and many synergies sellers of apparel and accessories in the better- achieved, before an acquisition can be accretive to-bridge categories, both companies have to earnings. Nonetheless, with pressure to in- sought to penetrate the broader moderate mar- crease top-line growth and intensifying compe- ket as well as distinct niche markets. tition among the megabrands, Standard & In 2001, Jones Apparel acquired Mc- Poor’s expects more acquisitions to occur over Naughton Apparel Inc., a leading manufactur- the next year. er and marketer of moderate priced apparel. In April 2002, the company acquired Gloria Licensing builds megabrands Vanderbilt Apparel Corp. to help build its Licensing — the process of leasing a share of the important moderate denim jeans trademarked or copyrighted entity (name, market. Jones’s latest acquisition, Kasper likeness, logo, graphic, saying, signature, or A.S.L., completed in December 2003, brings a character) — has become an increasing com- portfolio of women’s branded suits to Jones. mon practice among apparel and footwear Meanwhile, Liz Claiborne expanded its companies. Licensing is usually based on a con- moderate portfolio with the 2002 purchase tractual agreement between two business enti- of the Mexx Group BV, a privately held fash- ties: the licensor (the owner or agent of the ion apparel and accessories company based property) and the prospective licensee (usually in the Netherlands. Mexx distributes its a manufacturer), who agrees to pay the licen- sor royalties based on the product’s sales. U.S. POPULATION PROJECTIONS* These arrangements benefit both the licensor and the licensee: the former sees an extension 2004 2010 2015 of its brands and receives royalties, while the MARCH 4, 2004 / APPAREL & FOOTWEAR INDUSTRY SURVEY NUMBER % OF NUMBER % OF NUMBER % OF AGE GROUP (THOUS.) TOTAL (THOUS.) TOTAL (THOUS.) TOTAL latter gains a new revenue stream. Under 5 yrs. 19,098 6.7 20,099 6.7 21,179 6.8 More often than not, a manufacturing 5 to 14 yrs. 39,947 14.0 39,345 13.1 40,549 13.0 company will seek to acquire the license for 15 to 19 yrs. 20,631 7.2 21,668 7.2 20,892 6.7 a product or line for which it already has the 20 to 24 yrs. 20,019 7.0 21,151 7.1 21,748 7.0 production capacity. Licenses, like acquisi- 25 to 29 yrs. 17,915 6.3 19,849 6.6 20,765 6.6 tions, provide a source of revenues and cost 30 to 34 yrs. 18,967 6.6 19,002 6.3 20,484 6.6 savings in manufacturing and distribution. 35 to 39 yrs. 20,255 7.1 19,039 6.3 19,442 6.2 40 to 44 yrs. 22,914 8.0 20,404 6.8 19,346 6.2 Clothing and apparel makers currently in- 45 to 49 yrs. 21,899 7.7 22,227 7.4 20,057 6.4 volved in licensing arrangement include Perry 50 to 54 yrs. 19,122 6.7 21,934 7.3 21,929 7.0 Ellis International Inc., which holds swimwear 55 to 64 yrs. 28,513 10.0 35,429 11.8 39,919 12.8 licenses from Tommy Hilfiger Corp. and 65 yrs. & over 35,986 12.6 39,715 13.2 45,959 14.7 Nike. Reebok International Ltd. markets ap- All ages 285,266 100.0 299,862 100.0 312,268 100.0 parel and footwear under such licensed *Based on 1990 census. brands as Polo Sport, Ralph Lauren, Greg Source: U.S. Department of Commerce, Population Series P-25. Norman, National Football League, and National Basketball Association. 12
  15. 15. Some manufacturers do not sell goods un- manufacturers to showcase an entire line of der their own brand names at all — for ex- products, enhance brand awareness, test new ample, G-III Apparel Group Ltd., a maker of products, and directly collect customer feed- outerwear. G-III holds fashion licenses from back. (It also carries the risk of alienating re- Kenneth Cole Productions Inc., Cole Haan tailers who carry the same merchandise.) (owned by Nike), the Timberland Co., and Some manufacturers also have established Jones Apparel Group (including its Nine outlet stores to move older inventory. For in- West brand). It also has licensing agreements stance, at the end of October 2003, Liz with national sports leagues and more than Claiborne operated 227 specialty retail stores 20 universities. and 263 outlet stores. Often, companies with well-recognized brand names license the use of those names Following the demographics for products that they do not have the manu- facturing and/or marketing resources to han- Understanding target markets is a key to dle themselves. For example, Mossimo Inc. succeeding in the apparel and footwear busi- now operates as a licensor and contributor ness. Among the important demographic of designs for Target Corp. and no longer trends in the United States, baby boomers are distributes wholesale products. The arrange- outgrowing their focus on fashion, while the ment has been lucrative for the company, younger generations are an emerging, though which had profits of $13.7 million in 2002 elusive, source of demand. Another important and $9.0 million in 2001, versus a loss of market now being targeted by apparel makers more than $12.2 million in 2000. Accessory is the plus-size segment of the population. manufacturers have purchased the rights to use well-known apparel brand names on Boomers: down but not out watches (Adidas, Fendi, Hugo Boss, and In the United States, the baby boom gen- Gucci) and sunglasses (Anne Klein, Eddie eration comprises some 77 million individu- Bauer, Brooks Brothers, Timberland, and als born between 1946 and 1964. As they Fila). The Tommy Hilfiger and Liz Claiborne became adults and formed households, they brands are found on all sorts of items, from fueled much of the boom in retail sales in the jewelry to bed linens. 1970s and 1980s. However, despite their ris- ing spending power, the baby boomers’ atti- Sales channels proliferate tudes, priorities, and time obligations have changed over time, dampening their enthusi- Today, most companies distribute their asm for apparel shopping. Today, Americans products through a variety of channels, such in their 40s and 50s have shifted their priori- as wholesale, catalogue, and Internet sales, ties to tuition payments for children, saving and through their own retail stores. Within for retirement, and caring for elderly parents. the wholesale channel, manufacturers often Other needs and desires, such as healthcare try to sell to various types of retailers, in- and leisure activities, also compete for their MARCH 4, 2004 / APPAREL & FOOTWEAR INDUSTRY SURVEY cluding department stores, specialty stores, dollars. Although this age group continues to discount stores, and national chains. spend on furnishings and accessories for their For retailers, expanding their number of homes, fashion has been, and will continue stores is a way to diversify risk while also to be, an area that gets less of their attention. leveraging efficiencies across a greater number Although they spend a declining percent- of stores and products. While many apparel age of their disposable income on apparel and footwear retailers had a tough time in and footwear, baby boomers remain the 2002 and 2003, they continued to expand both biggest per capita purchasers of apparel. domestically and internationally. To increase According to NPD Group, the 50-plus mar- store traffic and the average ticket, retailers are ket spent about $27 billion in 2001 on remodeling or converting existing locations to women’s apparel. Manufacturers are slowly improve the shopping experience. realizing that this segment retains a lot of In the past decade, many manufacturers spending power, and as a result, many mod- have opened their own retail stores, which erate to better retailers and manufacturers reduces their dependence on retailers while are again targeting it. Tactics to win back potentially increasing sales. It also permits these customers include producing clothing 13