California Apparel News

The national economy is recovering, consumers are still buying, and in Southern California, retail employment is on the rise.

That’s the good news.

On the downside, apparel employment in California continues to decline, and the costs of doing business in the state remain high. And with the November elections and the 2005 phaseout of quotas for goods imported by members of the World Trade Organization, there is enough uncertainty in coming months to keep companies proceeding cautiously.

Nationwide, the economy is continuing to grow, and California is poised to follow, according to the recently released report by the Los Angeles County Economic Development Corp.

Strong consumer spending has helped drive the recovery. Retail sales have continued to increase in the first half of the year, although June’s figures did not match the level of growth seen in earlier months.

The high-end sector, including retailers such as Dallas-based The Neiman Marcus Group Inc., continued to fare well, as did several specialty retailers, most notably Fort Myers, Fla.–based Chico FAS Inc. and the New York–based Ann Taylor Stores Corp.

The big surprise came from the department stores. Mid-tier stores, such as those under the Federated Department Stores Inc. umbrella, posted increases in June after years of decline. Federated reported a 3.4 percent increase in same-store sales in June, and The May Department Stores Co. reported a 2.2 percent increase in same-store sales during the same period.

“Department stores are trying to tweak the product mix to be more relevant because now they can’t compete with the Targets and the JCPenneys,” said LAEDC Chief Economist Jack Kyser. “Department stores are freshening their look to be a little more cutting edge.”

Marshal Cohen, chief industry analyst for The NPD Group Inc. of Port Washington, N.Y., echoed Kyser’s observation, noting that for more than three years, department stores had been looking very homogenous and saw sales suffer as a result.

“Department stores are finally initiating long-term plans for getting their personalities back,” Cohen said. “Product differentiation is finally paying off.”

Department stores have invested in their own brands and introduced new products to separate themselves from disposable fashion, Cohen said.

New growth in retail

As retail sales continued to rise, so did retail employment in California.

According to the June figures released by the California Employment Development Department, employment at apparel and accessories stores grew by 2.5 percent to 169,900 jobs statewide. In Los Angeles County, apparel and accessories stores saw employment grow by 2.1 percent to 47,800 jobs.

Part of the reason for the increase is simply new development, said Kyser, who pointed to several new entries in the California retail market, including the Menomonee Falls, Wis.–based Kohl’s Corp., which opened 28 stores in Southern California last year, and Wal-Mart Stores Inc., which opened its first California Supercenter in Riverside County in March. The Arkansas-based retail giant has been battling with city governments in Southern California, which argue that the 200,000-square-foot Supercenters essentially extinguish neighboring businesses that cannot compete with the retailer’s low prices and voluminous inventory.

“They are trying to staff all the new capacity that’s coming on line,” said LAEDC’s Kyser. “If you look at retail construction in L.A. County, last year, retail permits were down. This year, they are up 16.3 percent. In Orange County, they are up 48 percent.”

Cohen said new development—or more specifically, redevelopment—is partially fueling the increase in retail employment. Plenty of half-dark centers have been converted into lifestyle centers, he said.

Another factor is the shift to a reliance on part-time employees, according to Cohen. “[There are] not a lot of additional bodies in the stores—it’s more part-time bodies,” he said.

Apparel employment continues to lag

Despite strong retail sales and gains in retail employment, manufacturers and textile mills continued to struggle during the first half of 2004.

The apparel and textile industries’ losses in June ran counter to general employment trends. The nation added 112,000 jobs in June, according to the Bureau of Labor Statistics, and California boosted nonfarm employment by 12,300 jobs, according to the Economic Development Department.

Apparel employment in California continued to decline in June, dropping 1 percent from the previous month to 86,600 jobs. In Los Angeles County, apparel employment fell 0.4 percent to 66,800 jobs in June from 67,100 in May.

The year-to-year losses are more dramatic. Statewide, apparel employment fell 7.2 percent from 93,300 jobs in June 2003. In Los Angeles County, apparel employment fell 7 percent from 71,800 jobs in June 2003.

Textile employment climbed by 0.8 percent in June to 13,200 jobs statewide and remained flat at 9,900 jobs in Los Angeles County. But with the end of quotas on Chinesemade imports looming at the end of the year, it is unlikely that local mills will begin substantial hiring anytime soon.

Indeed, the LAEDC forecasts total losses of 4,900 apparel jobs and 500 textile jobs in Los Angeles County in 2004. The organization sees less drastic losses in nearby regions, projecting 700 jobs lost in the combined textile and apparel industries in Orange County and 100 jobs lost in the combined textile and apparel industries in Riverside County in 2004.

Still, the LAEDC report is optimistic about the opportunities for the industry to rebound. “The trick for the Los Angeles apparel industry will be to build on its design and marketing expertise in a world that has a growing interest in fashion, especially fashion from L.A.,” the report said.

Challenges and opportunities

There is also uncertainty on the horizon regarding interest rates, which have been rising after years of historic lows; the presidential election set for November; and a host of new initiatives on the California ballot. Many manufacturers are also unsure how the quota phaseout will impact their business in the long or short term (read related story here). And there remains a possibility for a truckers strike over rising gas prices, as well as a slowdown at Southern California ports caused by a shortage of longshoremen and equipment and workers at the railroads that service the ports.

The cost of doing business in the state also remains high as employers grapple with stillhigh workers’ compensation insurance rates and increasing unemployment premiums.

“There is a price to doing business in this state,” said Kyser, who pointed to a number of upcoming California initiatives that could affect local businesses. Among them is Senate Bill 2, which stipulates that companies with 50 or more employees must offer paid health care.

But even with the uncertainty, there are opportunities for growth.

“When interest rates rise, there always can be a dip in purchasing. It’s going to affect the cost to borrow and finance growth,” said Rob Greenspan, managing partner with Los Angeles accounting firm and business consultancy Moss Adams LLP.

Greenspan said rising interest rates are unlikely to affect business spending because many companies have been upgrading and adding equipment on an as-needed basis rather than waiting for the economy to rebound before making infrastructure upgrades.

Rising department store business can also provide an opportunity for manufacturers looking to break into a new distribution chain. But Greenspan cautions that manufacturers should prepare for charge-backs and markdowns, which have become expected business costs for those selling through the department store channel.

“For branded manufacturers, department stores are always looking for brands or names that can be turned into a brand,” Greenspan said. “It shouldn’t be a problem financing the goods if you can get them produced. There’s always money available for people who can afford it.”