Where Next for Apparel Retailers in a Saturated Market?

Wednesday, November 23, 2016

It's a fact, Americans buy apparel as never before – nearly 20 billion garments a year, which comes out to 64 new garments purchased by every American on average.[i] 

Quite a business.

But here's another fact: Americans spend less on new clothing than they used to. Perhaps this isn't some new revelation; after all, retail apparel sales have been hit or miss for years.

Something has been going on. Take a look at these statistics:

I find these data shocking. Annual per capita consumer expenditures on apparel have steadily declined in value terms for many years now. It's disconcerting. Even worse, clothing makes up a declining share of overall consumer purchases. Apparel, it seems, has lost out to other products.

And there's more: aggregate American consumer consumption is stagnant, a casualty of economic recessions, changing demographics, and weak wage growth. So clothing retailers are competing for the attention of consumers who increasingly don't have the disposable income to spend like they used to. The result? The apparel business is slowly being squeezed.

No wonder there's Fast Fashion! How else are companies to compete in such an environment? The logical course is to cut prices and, if possible, offer consumers more variety. Indeed, today's consumers buy more units of clothing than they did in the past while paying less.

However, the economics of the consumer market, coupled with the industry's response to this challenge, has resulted in the commoditization of what people wear. Moreover, it has led to the dumbing-down of apparel retailing.

What makes shopping different and unique any more? For many chains, the answer is not much. For many consumers, the answer is: I'll buy it on the internet. For many others, the answer is: forget the new clothes, I'll buy the next hot gadget.

A Saturation Point.

There are times when I think portions of the traditional retail business are slowly rotting from the inside out. Indeed, traditional retailing is under assault. Sure, there are broad economic factors that externally affect the retail business, but increasingly I wonder if some of the problems afflicting retail are self-inflicted.

The industry has hit a saturation point; in reality, it hit a saturation point some years ago. I call it "peak apparel." It's a question of push versus pull; products offered for sale versus those sold. There's only so much product that can be stuffed into the supply chain, and if consumers don't buy, then the unsold products will further weigh on prices.

There is a limit to the effectiveness of low prices. The industry continues to labor within the confines of an ever-smaller portion of the consumer's attention. For many, the answer has been to continually slash prices and increase inventory churn to keep shoppers in the store.

It's useful to visualize the apparel supply chain as a funnel. Only so much product can be poured into the funnel of demand – and increasingly it seems that the funnel is getting smaller.

Don't get me wrong. Low prices can be a good thing, particularly for consumers on a limited budget. It's hard to argue when something costs less – unless the buyer doesn't have the money or desire to buy the product in the first place. Without customer demand, it doesn't matter how cheap a product gets; at some point, lower prices fail to stimulate demand and only undermines profitability.

There is a readily definable floor, the difference between black and red ink. And for some companies, to continue to offer their products at ever-lower prices creates a self-perpetuating trap of lower quality, less uniqueness from other competitors, and even less appeal for customers.

The Set-Up for Fast Fashion.

Going back to the 1970s, apparel consumption was anemic. Consumers just didn't reach into their wallets without a compelling reason. In part, this was due to high inflation. Every time a consumer turned around, the price of apparel and other products jumped.

Of course, this was also before globalization took hold. In fact, most imported apparel was subject to quotas, which also contributed to higher prices. Oil shortages didn't help either, let alone some questionable public policies.

But then everything changed. Inflation became such a problem that central banks around the world worked diligently to defeat the cycle of ever-higher prices. They aggressively raised interest rates. In time, higher interest rates translated into sharply lower inflation, but in parallel, two other factors also surfaced: globalization and political will.

Globalization was made possible by the advent of technology as well the natural evolution of mature economies away from basic manufacturing. At the same time, free market ideology took over in the halls of government. The thinking went: the best way to defeat inflation was to increase competition. And an efficient means of increasing competition was to open up global trade.

So, political will provided the mechanisms for liberalized international trade. Quotas were eliminated, tariffs were slashed, and new rules governing global trade were adopted. Global commerce took off. Many developing countries, eager to employ their people, rushed to fill the void. Suddenly, the price of clothing, as well as many other manufactured products, began to fall. Supply increased dramatically, as did variety.

For consumers, the 1990s became a time of incredible fortune. Store shelves bulged with a wider variety of products than ever. Instead of having just five styles of T-shirts, retailers could offer dozens more and at lower prices. Inflation? That became a historical relic and billions of garments were made around the world and sold to eager consumers ready to pay less for their clothing.

But this is where the seeds of the retail industry's current problems took root. In a rush to meet demand, apparel became disposable. Global supply chains became stuffed full of product and over time became larger and more intricate.

Retailers, along with branded apparel companies, increasingly turned to low-cost sources of manufacturing around the globe. Higher-cost domestic sources of supply eventually collapsed, unable to compete on price or variety. Consumer demand soared until about 2008, when the American and global economies plummeted into recession.

Growth in consumer demand has been weak ever since. So how do apparel retailers coax consumers to spend more on clothes? Well, they keep cutting prices until the quality of products suffers.

Today's Story: The Woes of Retailing.

And that brings us to where we are today. The traditional department store – the mainstay of retailing – is going the way of the Dodo. I read with consternation recently that Macy's, the venerable American retail chain, had decided to close 100 of its stores, about 15% of its full-line outlets.

They're not alone. Other big chains are suffering from an onslaught of new consumer attitudes and ever-improving technologies that make online purchasing more attractive to consumers than an in-store experience. It is hard to underestimate the effect of the internet on the traditional retail industry.

It's not that retailers don't know what they're doing, far from it. It's just that the market is in such rapid flux that many brick-and-mortar stores struggle to offer compelling reasons for many consumers to shop, especially when it's so much easier to just order from a website. The global supply chains supporting traditional department stores have increasingly been co-opted by online stores only too ready to sell what consumers demand.

Fast Fashion? Gosh, how about Fastest Fashion! For a large segment of the traditional retail business, Fast Fashion is only going to get faster with significant ramifications for the global textile and garment-making supply chain.

Is there some sudden crash looming on the horizon for brick and mortar retail? Probably not, but we can hear the sound of air leaking from the balloon. Change is afoot, and there will be casualties – led by traditional department stores. Many other varieties of physical retail may also suffer.

Even so, it seems that many brick and mortar stores have responded by ramping up the speed by which they source products, in so doing lowering their overhead costs while also reducing prices charged to their customers.

The Rise of Slow Fashion.

Nevertheless, in this rush to the bottom, quality may have been left behind in the ever-churning Fast Fashion market, to the consternation of some consumers. There's a backlash in portions of the market. It's not enough to just be cheap anymore; some shoppers are asking what happened to quality, and want to know how and where is a garment is made and by whom. Hence, the rise of "Slow Fashion," clothing made locally in small batches, tied in with a story of sustainability and transparent manufacturing.

For sure, Slow Fashion makes up a relatively small portion of the overall retail industry, but it has gained attention in recent years. The effort attracts support from a broad range of social, environmental and political advocates.

Shorter supply chains, Made-in-USA or Europe, sustainable production with higher labor standards appear to be attracting a following. The challenge, of course, is how large this could grow as a segment of the retail industry. After all, managing a story of sustainability and transparency, along with production in developed countries, comes with significant costs and higher prices for consumers.

And that's the rub: will consumers be willing to pay more and change their buying habits? Is that even possible when income growth remains weak in the United States and other developed countries?

So what's the bottom-line for retailers? Stores can go up-market or down, but the reality remains that consumer demand is finite. At some point, all of the sales and all of the promotions fail to entice customers into the stores. There's only so much apparel that can be sold and consumed and we've hit a level of peak consumption.

For some retailers, survival in this business environment necessitates the continued slashing of prices. For other retailers, it is essential to do the opposite by actually selling fewer units of clothing, albeit with better quality and at higher price points.

But for consumers, ultimately purchasing decisions will come down to what they've always been — a balance of variety, desirability, and money – and with that, the future of apparel retailing. 

[i] Elizabeth Cline. Overdressed: The Shockingly High Cost of Cheap Fashion. Portfolio Hardcover: New York, 2012.

Originally published on Just-Style.com, October 11, 2016.

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