AAFA/CFA Summit: Tough Economic Times Mean 'Think Harder, Smarter'

The economy will be treading water for quite a long time, which is why retailers and manufacturers will need to sharpen their skills in marketing, merchandising and brand building to survive.

The credit markets are practically frozen, unemployment nationwide is running at 6.1 percent and September’s retail sales declined nearly 6 percent if you factor in inflation at 4.9 percent.

“It looks like Halloween. It’s very scary,” said Eugenio Alemaacute;n, senior economist and vice president at Wells Fargo & Co.

Alemaacute;n was speaking at an Oct. 21 seminar organized by the California Fashion Association and the American Apparel & Footwear Association and sponsored by the California Apparel News, Wells Fargo and FedEx. The seminar attracted nearly 200 people to the City Club on Bunker Hill, located on the 54th floor of the Wells Fargo Center in downtown Los Angeles.

Alemaacute;n painted a grim picture of Humpty Dumpty balancing between depression and stagflation. He predicted the country won’t fall into a depression, as some have feared, but will enter into a period of stagflation, a combination of inflation and stagnant growth. The United States weathered through a stagflationary period under the Nixon administration in the 1970s when skyrocketing gas prices played havoc with the U.S. economy.

“The picture at the world level looks very, very bad, too, because the news in the last couple of months has not been good,” the economist said. “There are reports that Chinese growth is slowing, and everyone else who has bought into our financial mess is in trouble.”

Credit will remain tight, and interest rates for consumers and businesses will rise because the government will be siphoning off a big chunk of the cash out there in the loan market. “The government is taking all the money out of the system for their need to finance the current mess,” Alemaacute;n said.

The antidote

Countering this wave of sobering financial news was retail expert Marshal Cohen of The NPD Group in Port Washington, N.Y. Cohen crisscrosses the United States, scoping out the retail scene and interviewing thousands of consumers about their purchases and buying habits.

To weather the harsh monetary climate, Cohen advises that retailers and manufacturers smarten up and stay on top of what is happening in this country, both demographically and economically.

“It is all about understanding the future of retail and where the customer is coming from,” he said.

The retail analyst, who began his career in Bloomingdale’s training program, noted that by 2010, 12 percent of the teen population will be multiracial. “Yet we have an industry targeting specific markets by race. That doesn’t work anymore,” he said.

He also observed that shoppers between the ages of 18 and 24 account for 25 percent of the dollars spent at shopping malls, but 63 percent of stores are chasing after that customer. He likened that to a dog chasing its tail.

There are other segments of the population that merit attention. More men are shopping for their own clothes. Recently, there was a 4 percent growth in the number of single mothers out there, compared with a typical 1 percent annual increase.

In addition, retailers need to understand this country’s regional differences and how that affects purchases. “We had one regional department store go national, and they made a big deal about 96 percent of their merchandise was going to be the same. And they had to back-pedal on that. The Northeast is very different from the Southwest,” Cohen said. “Consumers no longer want coats in the middle of August in Southern California, and the consumer in Boston doesn’t want bathing suits in February. But retailers are still trying to stay on that calendar that doesn’t connect with the customer.”

The future for retailers and manufacturers is all about balance. Retailers will have to learn how to develop the right mix of inventory. Right now, product assortments are extremely lean, creating little excitement for shoppers.

For example, one of the hottest Back-to-School items for female teens was the classic black Converse sneaker. Cohen visited three stores, looking for a size 4 black Converse. While two stores merely said their shelf was bare, the third store said it could fetch it from its warehouse in 24 hours. “The fashion industry has been very remiss. We are going to have to figure out ways to get products to the consumers,” Cohen said.

Manufacturers, he said, can boost sales by developing multi-tiered products as well as goods that sell at different kinds of stores.

“We have brands that have figured out how to sell to high-end, middle-end and low-end retailers. Ralph Lauren has 13 different brands. Some designers are entering the low-end of the marketplace,” he observed.

Martha Stewart has managed to be able to sell household goods to Kmart as well as Macy’s.

Another tip for retailers was to differentiate themselves from their competitors. Cohen showed a photo taken at a regional mall. On the right was a Guess store. On the leftwas an Esprit store. The display windows looked identical, with similar mannequins and marketing material with similar blonde models. “If you were a consumer standing in front of these stores, you wouldn’t be able to tell the difference,” he said. “The market has to find ways to differentiate itself.”

Right now, it seems that every display window is papered with red “Sale” signs that are producing a numbing effect on consumers. But one store that was doing it right was H&M, the fast-fashion Swedish retailer that had a sale of a different sort: the sale of the day. The company’s rotating special had sweaters at a discount on one day, vests another day and denim a third day. The result was that shoppers kept returning to take advantage of the markdowns. “You need to incentivize consumers immediately to come back again soon,” he explained. “The other sales are basically noise.”

Scaring up investment money

A panel of experts from the banking, factoring, accounting and transportation industries noted that mergers and acquisitions will move at a glacial pace this year because investment money is drying up.

“Mergers-and-acquisitions activity was at a very accelerated pace up through the third and fourth quarter of last year,” said Richard Anderson, managing director of Moss-Adams Capital. “When we got to the fourth quarter of 2007, the leverage loan market was pretty much locked up. And that is where we are now.”

But there are still some companies and investors looking for apparel companies that have a strong brand, a good management team and a solid balance sheet. If those characteristics are missing, Anderson sees a wave of consolidations.