What Stumbling Blocks Are in Store This Year for Apparel Makers and Retailers?
The retail road last year was littered with bankruptcies, and the trend may continue.
No one doubts that consumers are shopping in ways never seen before, leading to tough times for clothing stores and malls now competing with online sites that offer free delivery on many goods.
Technology continues to evolve, leaving behind those who don’t adapt quickly enough to keep up with social media, online sales, omni-channel offerings and mobile devices.
The California Apparel News recently spoke with several finance-industry executives about what challenges and bumps in the road apparel manufacturers and retailers are facing this year now that the uncertainty of the presidential election is over, but another set of uncertainties have cropped up under a new administration.
Darrin Beer, Western Regional Sales and Portfolio Manager, CIT Commercial Services
Apparel companies will be facing some unique challenges this year. Their ability to quickly respond to them may determine their continued business growth.
One challenge some of our apparel clients face is a shrinking retail footprint. Several retailers including Sears and Macy’s have announced store closures while more are expected to do the same this year.
Closure of anchor stores such as Macy’s may have serious consequences for shopping malls, which may be challenged to find replacement tenants to maintain foot traffic and consumer interest. Additionally, some retailers may move to smaller locations as store leases mature.
A recent CIT study showed that more than seven in 10 retailers believe sales will increase from websites (75 percent) and mobile (72 percent) three years from now. As the retail landscape continues to evolve, retailers will likely focus more on technology development while using their physical stores to complement their digital channels. As such, apparel clients will need to adjust their business models to focus on other channels of sale such as online stores and develop their own e-commerce models.
Some apparel companies must also address the fast-fashion trend, as consumers continue to demand the latest products and styles. As such, our clients are being challenged to better understand customer needs and interests in order to identify new trends.
This year, a potential change in import tariffs on products shipped from certain countries may be yet another hurdle our clients face. Clients with domestic production capabilities or a diversified geographic supplier base could be in a better position to navigate this challenge.
Of course, with any change, there is also opportunity.
Mark Bienstock, Managing Director, Express Trade Capital
Within the last 60 to 90 days the retail landscape has undergone a significant transformation. Many retailers have reported very discouraging results as they have been drastically impacted by the transition to online shopping.
Significant order cancellations, increases in chargebacks and reevaluations of existing order programs have been experienced by many importers and manufacturers.
It is critical that any apparel manufacturer be able to support an ongoing inventory program from retailers going forward. The majority of business has now shifted to the dot-com/e-tailer model and the old bricks-and-mortar model is dying a slow death.
Mall-based retailers are disappearing at a pace that has not been seen before. It is critical that apparel manufacturers align themselves with a factor or financier that has an appetite for the new form of financing that is required to satisfy these requirements.
Sydnee Breuer, Executive Vice President, Rosenthal & Rosenthal
The uncertain political climate with respect to taxes, trade agreements, etc., could have an effect on our apparel clients.
Some may have a positive impact and some negative, but until there is more clarity surrounding those issues it will be difficult to gauge. The continued change in consumer spending habits away from soft goods is a continued pattern that our clients have faced and will need to stay the course with inventory controls to be sure they are not left with inventory at the end of the selling season.
The shift from bricks-and-mortar to online spending is challenging as the customer base is changing for our clients. But if they have the salespeople with the relationships with the online channels, it should just be a shift in sales, not lost sales.
All of these are speed bumps that owners/management will need to keep their eye on and be nimble and able to keep up with the changing landscape.
Ron Friedman, Partner, Marcum Inc.
With the Trump presidency, many questions will need to be addressed, and I am not sure we will have all the answers for some time. Will tax rates come down and by how much, and what will be the effective date?
This will impact our clients’ decisions for expansion or holding the line and not planning for any growth. If we see lower tax rates, hopefully that will trigger growth. With growth, the apparel industry can expand with new divisions, more acquisitions and a robust future.
What will Congress do about import taxes? The proposed border adjustment tax will increase the cost of apparel entering this country. Should our clients start hedging their bets and start looking for domestic production, just in case? If the border adjustment tax does take place, then more production will come home and then we may be faced with a shortage of domestic production capacity.
Retail is changing on a daily basis. Shoppers have many ways to find products other than at traditional bricks-and-mortar stores. Our clients need to work with this changing environment and plan for continued change. They will be facing the challenges of maintaining or expanding their own bricks and mortar while relying more heavily on social media to get products in front of consumers.
Millennials shop with their iPhones or tablets, and manufacturers need to make that available to this powerful group of buyers. Entertainment will be the attraction to get to the consumers’ pocketbook, both in store and online.
The apparel industry never was and still is not for the weak. Visionaries will lead the way and make the money.
Rob Greenspan, President and Chief Executive, Greenspan Consult
At Greenspan Consult we believe there could be speed bumps along the way in 2017, but, more importantly, there may be roadblocks as well.
First, the speed bumps: Lackluster retail sales will continue to be a problem for both manufacturers and retailers. Apparel manufacturers need to be careful about letting collections drag out past their due dates.
Manufacturers need to listen to their factor, credit managers or pay careful attention to their credit insurance policies if retail continues to struggle. Credit surcharges, order deferrals or even customer approvals could become a speed bump if not carefully managed.
While Chapter 11 filings are always issues, we could see more liquidations as opposed to workouts. Continued retail consolidations would be another speed bump to be mindful of. As we have just learned, retailers such as Macy’s, in addition to store closures, may be on the sales block. If large retailers are sold, ultimately with management changes, how will this affect your sales going forward?
Now the potential roadblocks: With the new administration continuing to talk about trade-deal renegotiations and possible tariffs, this could be a huge roadblock for manufacturers. If NAFTA (the North American Free Trade Agreement) is significantly changed, are you prepared for this? Do you have a secondary source of production? Are your contractors financially strong enough to survive a possible drop in their business? Do you have local contractors who are in a position to manufacture some of your products on short notice?
What are your plans if tariffs are increased by 20 percent? Have you thought through the process of pricing your products? Have you had any discussions with your retail partners about their position if something like this occurs?
This year could be a very interesting and challenging year. Be ready for any and all speed bumps and potential roadblocks.
Joshua Kapelman, Executive Vice President, Hilldun Corp.
The pressure on retailers today is putting pressure on vendors. If retailers continue to bleed, then small vendors and large vendors alike are going to have to find new avenues of distribution.
These avenues include specialty stores, e-commerce and their own retail. As the retail climate continues to change, it is imperative that companies not ship retailers without credit protection.
Sunnie Kim, President and Chief Executive, Hana Financial
Several key issues that impact the larger economy are surrounded by uncertainty in terms of how they will impact the apparel industry in 2017.
The new administration’s discussions concerning the imposition of tariffs on goods shipped into the U.S. from foreign countries, in an effort to spur domestic manufacturing, is of concern to our apparel clients.
Many manufacture overseas and/or purchase raw materials overseas. If tariffs are imposed, this will have a direct, negative impact on these clients’ ability to compete domestically. This could be offset, to an unknown extent, by lower corporate taxes that are being discussed in Washington.
From a financing perspective, the cost of funds that factors pass along to their clients is on the rise, with the U.S. prime rate having just been raised and the Federal Reserve recently reinforcing the notion that it cannot wait too long to raise rates from their historic lows, with the potential for possibly three more rate hikes in 2017.
These larger economic forces, in conjunction with the continuing softness in the retail sector, will combine to further impact factoring apparel clients by increasing already fierce competition, as there will be less opportunity, as retailers continue to decrease the number of locations while other retailers may fail completely. This will force manufacturers to remain as lean as possible, in terms of overhead, especially as it relates to maintaining proper levels of inventory.
Rob Meyers, Chief Commercial Officer, Republic Business Credit
Small- and medium-sized business owners regularly face obstacles throughout their lifecycle, and 2017 will be no different.
Fortunately, business owners are uniquely adaptable and flexible to changing environments. Challenges are faced both at an industry level—such as the ongoing distress facing traditional retailers—as well as on a business level such as stress caused by “just-in-time” delivery requirements.
The 2015 buzzword of “omni-channel” retailing is still setting in as brands deal with the ongoing strategy adjustments as retailers try to stay relevant in the growing e-commerce world. As retailers evolve, they strive to provide their customers with the same experience both online and in the store.
New unknown speed bumps will occur in 2017, feeding uncertainty that makes it difficult for small-business owners to plan for all of the potential tweets, “fake news” and pending legislation. Most of this uncertainty likely will not impact the apparel industry in 2017, but well-positioned companies stand to gain significant strategic advantages. The year ahead presents unique branding and go-to-market opportunities in response to possible government-policy changes. Those changes include personal tax cuts, business tax cuts, increased infrastructure spending and revisions to the Affordable Care Act. While infrastructure spending and the repeal of the Affordable Care Act would not impact 2017 financial results, there could be opportunity for small business owners to position themselves from a branding perspective.
We advise our apparel clients and prospective brands to make sure they are working with factoring credit programs in order to protect their business with the right mix of retailers and wholesalers.
News headlines constantly report anchor stores (such as Sears, Macy’s, etc.) closing in traditional malls, reducing square footage and discontinuing poorly performing brands. Republic suggests that clients make sure they sell to a diversified client base, increase their customer feedback loops and work to build a positive brand image by increasing their social-media presence in order to stay relevant in an ever-changing industry.
Don Nunnari, Executive Vice President/ Regional Manager, Merchant Factors
Non-recourse factors understand that it’s not going to be clear sailing for clients year after year.
It’s always something. That is why the factor should be able to respond in a very timely manner to issues that arise. Factors should be more flexible and respond quicker than a bank. Also, the main service of a non-recourse factor is to have the expertise to check the credit for the client and assume the credit risk. The factor will also have expertise in the payment history of the customers and experience with deductions and chargebacks.
There are lots of concerns these days about border taxes, import taxes and rising prices in China due to more environmentally dyed and finished fabrics. In addition, there are more-savvy consumers, shifting buying habits to online purchases, retail store closings, competition from major international retailers and potential bankruptcies, etc.
Our factored clients rely on us for protection in some of these areas. We hope that our factored clients are concentrating on their product and their service to their customers. It all begins with the product. If you have a very good product and you service your customers, you provide value. But you must run a profitable business. You must make hard choices and be flexible to change. This is not a business for the indecisive and the meek.
Dave Reza, Senior Vice President, Western Region, Milberg Factors
Apparel manufacturers/importers will continue to face headwinds in 2017. Among the challenges are political uncertainty, technology pressure and retailer volatility.
In the area of political uncertainty, the new administration in Washington has stated its intention to secure our borders and protect/promote American jobs. The tools they use will ultimately affect importers and local producers alike. Exiting the Trans-Pacific Partnership is one manifestation of the “new order” and will have an impact on our local apparel industry.
Restricted immigration, increased tariffs and/or “border taxes” will affect logistics, speed to market and costs. Local companies that have grown up under NAFTA may soon find out that cross-border commerce is a new game with new rules. Of course, changes in a comprehensive regulatory system may not be felt immediately but some near-term change has to be expected.
Companies need to understand the potential impact on their supply chain, product costs and regulatory compliance.
In the world of technology, changes in how product is sourced and delivered to the consumer are reducing the time to market. Even successful retailers are grappling with omni-channel distribution, e-commerce and digitization. Suppliers will have to keep in lockstep with technological enhancements being implemented by their customers or risk losing sales opportunities.
Changing consumer buying patterns, technology development, shifting demographics and sourcing challenges have taken their toll on many established retail outlets, resulting in retail volatility.
Ownership groups that are often not merchants but are private outside investors may not have a long-term strategy for fixing and/or the patience to fix problems. Hence, we will continue to see mergers, bankruptcies and liquidations.
Our clients need to pay attention to the financial results of their customers more than ever. Even a merger or consolidation may result in lost “doors” or a change in sell-through that can have serious consequences for a supplier.
Kevin Sullivan, Executive Vice President, Wells Fargo Capital Finance
The two primary challenges that clients are encountering right now are a continued shift in customer base along with a retail environment that remains very cautious.
We’ve seen a number of retail bankruptcies over the past 12 months, particularly among sporting-goods retailers and chains focused on juniors apparel. We’ve also had a number of clients report orders being pushed back from Q4 of 2016, sometimes into Q2 of 2017. Some of that has been weather related, while some has been due to changes in buying strategies as bricks-and-mortar retailers strive to better manage inventories.
We’ve had some clients identify e-commerce customers with whom they’ve developed strong relationships, which can help offset the loss of a bricks-and-mortar customer. Many are also much more actively involved in merchandising the floor for some of their largest customers, which creates a stronger relationship with key accounts.
We believe, in general, that borrowing needs will increase this year as apparel companies deal with larger inventories related to some of these trends. We also see a continued trend toward strategic mergers, allowing two companies with strong core competencies in different segments to better leverage overhead and infrastructure.
Lou Sulpizio, Senior Vice President, West Coast Marketing Manager, Capital Business Credit
This year will pose many challenges as there is a tremendous amount of political and economic uncertainty in the world today that undoubtedly will have a direct impact on the apparel industry.
New tariffs being discussed on China and Mexico could affect margins as well as an ever-changing retail landscape. This could cause stress among the wholesalers/retailers as they will have to rework their business models, and sourcing channels might also be affected. So clients will need to be flexible and act quickly to change.
There is also constant chatter from the U.S. Treasury about increased interest costs. If interest costs increase, income could be impacted as a result. Although modest, they have an adverse effect on consumer buying habits.
Clients need a finance company that can react quickly and in a timely fashion to meet the global finance challenges that exist today.
Ken Wengrod, President, FTC Commercial Corp.
There are three major bumps in the road that will be affecting the apparel industry this year: significant change of the bricks-and-mortar landscape (including fewer companies and stores), change in consumer buying habits and trade rhetoric.
One of the most significant bumps that will affect this market will be the change of the retail landscape, especially the bricks-and-mortar stores. This specific niche will continue to go through a further reduction in companies and their number of stores by attrition and by acquisition, for example, the potential acquisition of Macy’s by Hudson’s Bay as well as the closing of The Wet Seal and American Apparel.
We are also going to see online operations such as Amazon.com and Netflix flex their financial and data-mining capabilities. They may consider acquiring retail operations and/or search for strategic partners to leverage their subscriber base.
There are too many retailers selling the same merchandise nationally. Before all the acquisitions by Macy’s, we had merchandisers who understood and catered to their individual markets.
Today, with central buying, those retailers have lost the perspective of the tastes and demands of their markets. In the U.S., we have numerous specific market niches. In Europe, each country has different buying tastes, let alone the submarkets within each country. It seems that our major retailers overlooked those definitive markets in the U.S.
Therefore, it’s extremely important for the manufacturers to be cognizant of this issue and be very cautious about their projections of purchases and staffing. Companies need to expand their base and find new markets and stop playing safe with what they think they know.
For those manufacturers who design and use domestic manufacturing, they should focus on diversifying their customers by exporting. The California lifestyle is still much in demand in many parts of the world. Even with the strength of our dollar, people are willing to pay a premium for an authentic brand. There are numerous government agencies and groups set up to assist them with the process. They can even apply for financial export assistance. These current events should awaken the companies to the need for change and give them tremendous opportunities to explore ways to sell to local/foreign niches that are being underserved.
The other major bump is the change in consumer buying habits. Currently, consumers have found their identities and most brands have lost theirs, resulting in an identity problem. Consumers, especially with the impact of social media, know what they want and when they want it, which is now.
Consumers are demanding brands that are authentic. They want something they can trust and connect with their creativity. Today, consumers have been able to live with fewer apparel purchases, but they will spend more on authentic brands and not fake brands. Manufacturers need to understand this significant change in consumer buying and listen more to the input from their ultimate customer, not the retailer. Manufacturers will see negative impacts if they don’t switch their thinking, design and agility accordingly.
Lastly, apparel importers and domestic manufacturers are overly concerned about the heightened trade rhetoric. The Trump administration is fully committed to supporting international trade and exports, but it is taking a different approach by focusing on specific bilateral deals instead of trying to strike a deal with numerous countries under one umbrella.
I don’t believe there will be a negative impact on our imports/exports by new tariffs. There is too much emphasis on all the noise around the rhetoric. In the midst of these “alternative facts,” apparel manufacturers should focus on things they can change. As entrepreneurs, they need to adapt to the market conditions and block out the white noise around them.
Companies will overcome these slight bumps in the road this year if they are truly adaptable, managed by effective entrepreneurs and focus on agility. They will be able to turn any obstacles into profit for their company.
Paul Zaffaroni, Managing Director, Roth Capital Partners
The retail/apparel landscape will continue to be challenged in 2017. E-commerce is taking market share from department stores and specialty retailers as consumers are spending more time shopping at home or from their mobile devices.
Millennials are allocating more of their budgets to “experiences” such as travel, dining out and fitness. Restaurants and fitness concepts are moving into mall and lifestyle-center spaces that were previously occupied by apparel retailers.
Apparel brands that are attracting the most attention from private-equity investors have a targeted digital strategy that includes social media, e-commerce and use of brand “influencers.” These brands are using digital to help establish a direct relationship with their end consumer, which is sometimes complemented with their own branded retail stores or catalogs.
This doesn’t mean that traditional wholesale is dead, but brands need to have a diversified approach and be available to their end consumer wherever and whenever they are ready to transact.