retail

Confronting the Apparel Industry’s ‘Going Out of Business Model’

“What made us successful yesterday may be the reason for our failure tomorrow,” said Edwin Keh of the Hong Kong Research Institute of Textiles and Apparel at the Sourcing Journal Summit: The New Fundamentals. Indeed, the rate of change in the apparel and footwear industries over the past decade will be mightily outpaced by the changes over the next decade.

Other speakers at the Summit offered variants of that theme. “If you started your company tomorrow would it look like it does today?” Jesus Vega asked. An “entrepreneurial agitator” who had been with Inditex’s Zara unit, he posed the question relative to the “Freddy Mercury-ization of retail: ‘I want it all and I want it now.’”

Outstanding in both content and execution, the mid-October Sourcing Journal Summit gave voice to six specific areas of concern:

  1. Sustainability — and the lack of clarity in what the term means.
  2. The need to align direct-to-consumer brands’ data-driven business model with the product orientation of traditional retailers.
  3. Uncertainty re tariffs, borders, and the regulatory climate.
  4. The prospects for moving production to less heavily tariffed territories.
  5. Inventory backups.
  6. Amazon.

Sustainability

Edward Hertzman, founder and president of Sourcing Journal Media, and host of the Summit: “There is twice as much organic cotton [labeled on] t-shirts as there is organic cotton. . . .If we asked everyone in this room [about 400 people] to write down what sustainability is, would any two have the same answer?” It was a rhetorical question, but McKinsey & Company’s Karl-Hendrik Magnus answered for all: “No.”

The need for “common language” regarding sustainability came up repeatedly, as did the need to differentiate between environmental and social responsibility. Cyrus Wadia, a former Nike executive now also with McKinsey: “Sustainability has to be on the same plane as other business factors — not an add-on. . . .Sustainability is moving from nice to have to must have — but mostly for 2025” and beyond. And Hertzman again: When a manufacturer promises you organic cotton, how do you know it is? “You don’t.”

“So much capital is locked up in inventory that you have to solve the inventory problem before you can embrace sustainability,” said Chainge Capital’s John Thorbeck. “We need a sustainable business model. This is a going-out-of-business model.”

Aligning Business Models

“Direct-to-consumer brands [DTCs] have tech strength but they’re not product people. Wholesalers’ and retailers’ strength is product but they don’t have data or don’t know what to do with the data they have, and they don’t have the ability to reach that digital consumer,” said Andrew Postal, Managing Partner at MMG Advisors, an investment banking firm. “Most traditional wholesalers and retailers stink at it,” he added.

That said, D2 Brands/Delta Galil’s Victoria Vandagriff, whose company does not have DTC brands, interestingly pointed out that direct is “how customers want to shop.”

DTC brands can manufacture 200 of each of 10 designs and know within days, at most, what sells, said Lever Style’s Stanley Szeto; Lever is a contract manufacturer for Theory, Hugo Boss, Stitch Fix, Bonobos, and others. That, he added, is very different than the two million pieces a Uniqlo will have to order without knowing how it will be received.

The small orders for DTC brands require “flexibility — you need a supplier that can deal with on-demand” production and delivery, said Taylor Shupe, of Future Stitch, a knit apparel manufacturer.

DTC brands’ digital expertise “allows you to acquire data about the final customer,” said Anthony Choe, founder of Provenance, a private equity firm. “Most DTCs don’t take advantage of that. But the right brand needs to be in multiple channels,” including both traditional retail and digital platforms. “Digital is under-distributed in the real world [meaning traditional retail],” Choe continued. “But the retail economics are starting to work for digital-native brands” to make the transition.

Uncertainty: Tariffs and More

The prevailing sentiment came down to:

  • Get used to tariffs. “There may be some respites, but it’s not going back to what it was,” said Michael Zakkour, a retail and digital commerce consultant.
  • Expect corresponding price increases. “Tariffs are real. It’s going to come from somewhere,” said Stephen Lamar of the American Apparel & Footwear Association (AAFA). “When you move to new contracts you’ll see those costs passed along the supply chain to retailers and consumers.” Similarly, while Postal of MMG noted that efforts to raise prices to date haven’t worked, part of the current difficulty is that “tariffs just happened. We didn’t have a chance to adjust the supply chain.”
  • Pressure to renegotiate licensing agreements is growing. Postal said that tariffs are accelerating demand by licensees to lower royalties. “Those manufacturers [large public companies] that have clout can to go to licensors and say, ‘Renegotiate or I’ll give you the brand back.’ Others can’t.” Still, with royalty rates of 7%-9% for brands and 13%-16% for entertainment properties, “the margins are not sustainable. They’ll have to either restructure minimum guarantees and royalties or go out of business,” Postal said of licensees.

Moving Production

With 69% of footwear, 41% of apparel, and 84% of accessories manufactured in China, moving production in response to sudden tariffs is impossible. For footwear, in particular, where the technology and piece work are both intensive, it’s not going to happen, all agreed.

“If Vietnam gets big enough and this guy stays in office you’ll see tariffs there too,” said MMG’s Postal. And, noted Nathan Serphos of Michael Kors, “Vietnam is not going to double its population over the next two years.”

As for Ethiopia, the Dominican Republic and other locales, “It’s been done before,” said Harold Grunfeld, a customs and international trade law specialist at Grunfeld, Desiderio, Lebowitz, Silverman & Kledstadt. “But who wants to kill themselves trying to get goods into this country? It’s not a short-term solution” to the new tariffs.

Grunfeld also alluded to classification and accounting practices that can sometimes be used to offset at least some of the tariffs.

Inventory Backlogs

“Excess inventory is a problem for 2020,” said Chainge Capital’s Thorbeck. “Too often people think it’s a seasonal issue, but this has been a problem for a long time. It’s not just a matter of selling through the existing inventory” and then re-ordering.

“As a wholesaler you produce what’s ordered; when you’re sitting on inventory, 90% of the time we don’t make that back,” said D2/Delta Galil’s Vandagriff. Added Teva/Deckers Brands’ Anders Bergstrom, “We don’t have short-term inventory. It’s 18 months to produce; my job is to keep Ross Stores from getting a great deal.” And: “Inventory = risk, and risk management is about managing data and having vertical synergy in the supply chain,” MMG’s Postal, noting that DSW had bought the Camuto Group [with Authentic Brands Group].

“Some [stores] are buying flat to down,” said Janine Stichter, a retail analyst at Jefferies, “but structural headwinds, e-commerce, and tariffs going forward” mean inventory problems are not going to diminish anytime soon.

“We need more emphasis on process innovation,” Thorbeck urged the audience. “Tariffs complicate the situation, and technology” isn’t the only solution. “Inditex changing delivery from the standard 6-9 months to 1-3 months — that’s a process enabled by technology but it’s an innovation in process.”

Amazon

The difficulty of working on Amazon’s terms — and the lack of an alternative to working on Amazon’s terms — was a universal given. But the bottom line, also a universal given, is that “everyone will have to learn to deal with them,” said MMG’s Postal. “Amazon is today’s Sears catalog.”

 

 

Creativity, Craftsmanship and a Sense of Humor = Standouts at NY Gift Shows

Suck It Up: Straws Are the ‘It’ Product at NY Now, National Stationery Show

NEW YORK, NY; August 13, 2019—How can you differentiate one reusable straw from other reusable straws? Let me count the ways based on eight among many on display at NY Now and the National Stationery Show at the Javits Center here this week.

Materials: Stainless steel, silicone, titanium, paper, glass.

Style: Floral/beach/animal motif, solid color, pattern, laser-etched images.

Type: Fixed, retractable, bendable, 2-piece (so you can separate for easier cleaning).

Utility: Lunch kit, home use, travel.

Accessories (yes, accessories for your reusable straw): Cleaning brush; carrying case; multiple diameters for sodas, shakes, and sip/stir; replacement parts (I haven’t figured that out yet).

Environmental link: At least two of the eight I examined donate a portion of proceeds to environmental and/or animal charities.

Even the sales rep for one of the manufacturers I spoke with sees humor in the notion that straws are a “hot product” this year. “Who would have thought?” she asked.

Background

Seattle, the state of California, Starbucks, Disney theme parks, Royal Caribbean cruise ships, Hyatt, Hilton, Marriott, American Airlines, McDonald’s in the UK, and others are banning single-use plastic straws. And while many are simply forgoing straws altogether — typically with exceptions for those with disabilities who need them — manufacturers are clearly counting on individuals rather than restaurants and other beverage purveyors to pick up the slack.

Exactly how long people will care let alone use their brushes to clean their straws, I don’t know. How diligent are most people about flossing? But I have my guesses. In the meantime, is there an opportunistic play for licensors with children’s properties?

Retail Radicals: Prescriptions from the Trenches for Revitalizing Physical and Online Selling (and Renting!)

NEW YORK, NY; August 8, 2019—The themes articulated through nine very different presentations at The Robin [Lewis] Report’s 10th annual Retail Radicals forum at Columbia University were consistent to a fault, with overlapping examples (often humorously so), and a common outlook despite the presenters coming from divergent sectors of the retail industry.

The themes:

  • Detrimental impact of reporting comp sales figures;
  • Pressure for unrealistic quarterly growth to satisfy The Street;
  • Reliance on spreadsheets rather than shopper realities;
  • Delivering “local wonder;”
  • Growing value of peronalization/customization;
  • Decline of the most basic customer service;
  • Integration of online-offline shopping;
  • “Experiential” shopping.

None of these are new, but in an environment (which no one needed to emphasize to this audience, and no one did!) where store closings compound hourly, the need for more-than-cosmetic change is accelerated, and the perspectives of the speakers, and how they supported their points of view, provided multiple lenses through which to build toward the future. And while The Robin Report, and this event, are focused primarily on apparel and accessories retailing, the insights of the day apply across all sectors.

A Dose of Desperation

Witness the success of online apparel rental companies, represented at the conference, in separate presentations, by CaaStle’s Christine Hunsicker and Rent the Runway’s Gabby Cohen. CaaStle provides subscription model apparel rental infrastructure for retailers including Ann Taylor, NY&Co, Vince, and others. Rent the Runway aggregates apparel and accessories through purchase or consignment from multiple sources and rents items on an occasion or subscription basis.

“With new business models you need a little desperation,” says CaaStle’s Hunsicker, in order to prod senior management at traditional retailers (or anywhere else) to take chances. Similarly, Paul Charron, former CEO of Liz Claiborne, speaks of the “challenge of disrupting without usurping the prerogative of the CEO.”

On the difference between bricks and mortar selling and online rental: “Everything rents; 6%-7% of your [rental] customer base will have your worst-selling garments in their closet,” says Hunsicker. “The most important consideration for the renter: ‘Do I like the photo enough to have it?’”

By Hunsicker’s count, CaaStle’s retailers will sell 2.4 items to the average customer a month — but the rental customer will go through 108 garments over 12 months.

“Customers are our mini-warehouses,” she adds. “If we’re doing our job right, only about 15% of our inventory is in our warehouse at any one time.”

To retain customers, a retailer’s online rental operation needs to add “at least 50 new SKUs a month.” Ann Taylor, she says, introduces 150 new SKUs to its stores and rental system a month. But she also distinguishes between an Ann Taylor, which uses rental to add new, younger customers to its client base, while a retailer such as NY&Co, at least initially, sought only to monetize existing inventory that hadn’t sold through in its physical stores.

The ultimate business question: How long it takes to earn back the cost of acquiring customers. The goal, for Hunsicker, was 12 months. Netflix, she says, takes 20 months. “For traditional transaction brands [going to rental] it’s been two months” for CaaStle clients (CaaStle is only about a year old).

Rent-to-Buy

What of rent-to-buy? “It’s price dependent; 25%-30% of revenue from consumers is buy. At Ann Taylor, where the base monthly rental fee is $95, buy is a 30% kicker.”

With CaaStle, the retailer retains ownership of the inventory while CaaStle warehouses and services (processes orders, dry cleans, etc.). This differs from Rent the Runway, which usually owns its inventory, but, as mentioned, sometimes works on a consignment basis.

CaaStle is adding its first men’s brand this month with Scotch & Soda. “Men are more open to new business models,” Hunsicker says, “but it’s one chance [the clothes need to fit/look good] or they’re out.” Two more men’s brands are in the offing.

At Rent the Runway, Cohen says the company is building a drop box network for returning items, which would speed turns. So far Rent has installed about 25 at WeWork locations and at seven Nordstrom stores. Earlier in the afternoon, Columbia University professor and past C-level retailing executive (Sears, Lord & Taylor, Gap, others) Mark Cohen derided the announcement that Kohl’s is installing Amazon returns centers in hopes of building foot traffic.

Rent is also adding offerings that people “don’t need to keep or store,” such as kids’ apparel (they outgrow quickly) and skis.

Integrating Retail Into Lifestyle

Successful physical fashion retailing is “not about racks and racks and racks of apparel,” says Kevin Roche, of retail design firm Woods Bagot and a nine-year veteran of design for LVMH.

Roche sees continued “integration of office, living, retail, entertainment, sports” in uniquely designed spaces, and a need to incorporate “tons of technology and touch screens” in bricks and mortar stores.

Luxury retailers, in particular, he says, should trim the number of their physical outlets. “There should be 5-8 Nieman-Marcuses,” he says, while large-scale redesigns should be more judicious. “You can spend $300 million to redesign a flagship like Macy’s, but that won’t impact your other 584 stores.” It’s different, he notes, if you’re Harrod’s and you have only one store.

Is Smaller Better?

What of smaller-footprint outlets ala Target and Nordstrom’s efforts? “Walmart closed 114 Express stores in 2018,” notes Columbia’s Cohen. “The customer may live in the neighborhood [and see it as a neighborhood store] but they still expect 200,000 square feet of merchandise,” says Columbia’s Cohen. Also from Cohen:

  • “The off-price growth streak is over.”
  • “Walmart has foolishly entered a race [with Amazon] that it cannot win. Amazon is a market place, not a store. Like it or not, Walmart is a store.”
  • “Acquisitions add to a company’s efforts [to grow] as ceramic tiles do to a mosaic.”

If you have the opportunity to hear Mark Cohen in person, do so. While he is very entertaining, his store-by-store critiques are uncompromising, and I can barely touch on his prepared remarks let alone the adlibbed asides. Ultimately asked by an audience member who does retail well, he didn’t miss a beat responding “Costco,” then adding, as he thought, Amazon, Zara, and “Feldman Housewares on the Upper East Side, near where I live. You go in and ask for what you need and the woman at the register tells you what aisle it’s in or that they don’t have it and you’re better off ordering online. Mom and pop hardware stores have an incredible array of merchandise and offer the best customer service anywhere.” To which everyone nodded in agreement.

Slides below are courtesy of Mark Cohen:

Alibaba’s Genie

The eye-opener for many, judging by the gasps as her slides went up, was Alibaba’s Candice Huang. Consider:

  • Alibaba’s Singles Day sales event on 11-11 (all “1’s” for a shopping day designed for singles) generated $30.8 billion in sales in one day compared to total U.S. online sales of $24.2 billion over the five-day Thanksgiving holiday (Thursday through Monday).
  • The platform boasts 700 million active monthly users who, if they stay with Alibaba for five years, place an average 23 orders across 132 categories and spend $1800 annually through the platform.
  • With all the focus on China’s growing middle class, Huang says Alibaba has 100,000 users spending $159,000 each annually, though no one asked if that includes small businesses that might be making bulk purchases (think of the dollies of food items purchased at Costco by small restaurants and food carts and trucks).
  • 59% of users are under 29. (Rent the Runway’s Cohen says median age for its customers is also 29.CaaStle’s Hunsicker says its sites’ core customers are 28-45.)
  • Among Alibaba’s sites, Huang describes Taobao as a “superapp” from which customers can do general retail shopping as well as book travel, live entertainment, and other services — analogous to the shift at malls to offering more entertainment options in addition to traditional shopping.

Quote of the day:

  • “’Focus group’ is a dirty word.” — Alexander Genov, head of consumer research for Zappos.

Note: Slide up top courtesy Christopher Timmins, Intel, which presented the The Robin Report conference along with sponsor SAP.

Tailor-Made for Licensing: Ira Mayer’s Three Must-See Products at NY Toy Fair

NEW YORK, NY; FEBRUARY 18, 2019—If it’s all about the elevator pitch, these three new products from three first-time exhibitors explain themselves instantly. As do licensed applications. All exemplify classic play value, each with a neat twist. Check them out in person before you leave Toy Fair, or online.

#1. The Door Fort, from Cortex Toys (booth #4245). Inventor Jesse Darr loved building forts as a kid — and now that he has his own child, remembers how his parents would be left with putting everything away once he went to bed. The Door Fort is his answer. Hangs on the door. Open the door, fold it out to three dimensions, Velcro to the door post. Voila!

One major license is already in the works. Easy to picture Darr’s generic Princess Castle as, say a Disney Princess castle, no? How about Thomas? Pretty much name your property. Contact: John Cowan, MD, CEO/Founder, Cortex.

#2. Cubcoats (booth #5974). It takes 13 seconds to demonstrate how a plush character pillow transforms into a machine-washable fleece hoodie — and back again (OK, back takes 16 seconds).

In addition to original designs, they have Mickey, Minnie, Minion, Marvel, and Troll versions, and they’ve just signed Nickelodeon. The product was exclusive to Nordstrom for fourth-quarter last year, but is now available for wider retail. This is beautifully executed. Contact: Brydie O’Neill, VP Product Development; Angela Michael, Business Development/Sales.

#3. VertiPlay Marble Run by Oribel (booth #4135). Yes, it’s another marble run, but with a literal twist: Base boards are wall-mounted and tracks posted on the base pieces. marble-run-vertical-photo.jpgIt’s even decorative, and  the tracks can be moved into different designs. This is so new it’s not on the website yet, but Singapore-based Oribel has offered other vertically-mounted toys for toddlers for several years. This is clearly for older kids in a bedroom or playroom. Contact: Smriti Modi, Growth Hacker (great title!).

Trend Surfing at February 2019 National Stationery, NY Now & Surtex Shows

Trending Up At NY Now Gift Show