Apparel sales are driven by economic conditions, demographic trends, and pricing. Fashion, while important for an individual company, plays a limited role in overall market demand. Sales of apparel at the retail level rose approximately 4.7% in 1998, according to NPD Group, Inc., a market research firm located in Port Washington, New York.
In 1998, Americans purchased approximately $215 billion of apparel and footwear. According to NPD Group Inc., approximately $177 billion was spent on clothing in 1998. The remaining $38 billion was used to purchase more than 1.1 billion pairs of shoes, based on data from Footwear Market Insights (FMI), a market research firm based in Nashville, TN. With the U.S. population at 270 million, this works out to roughly $800 a year per capita spent on apparel and footwear.
The apparel and footwear industries are highly competitive, and both have attempted to lower manufacturing costs by moving production to such places as Mexico, Central America, and Asia. As a result, employment levels for U.S. manufacturing industry employees fell to 713,000 in February 1999, according to the Department of Labor. This was down 10% from the year-earlier level and 52% from 1970. The number of domestic non-rubber footwear employees declined 15%, year to year, in 1998, and 86% since 1968, according to the Footwear Industries of America, an industry trade group based in Washington, D.C.
The Apparel Industry
The U.S. apparel industry is large, mature, and highly fragmented. Apparel sold in the United States is produced both domestically and in foreign locations. According to estimates from the American Apparel Manufacturers Association (AAMA), an industry trade group based in Arlington, Virginia, the dollar value of domestic apparel production was $39 billion at the wholesale level in 1997 (latest available), which was less than the $46 billion (U.S. wholesale value) of goods imported into the United States. In addition, $15 billion of goods were produced in both the United States and other countries.
The U.S. apparel market can be divided into two tiers: national brands and other apparel. National brands are produced by approximately 20 sizable companies and currently account for some 30% of all U.S. wholesale apparel sales. The second tier, accounting for 70% of all apparel distributed, comprises small brands and store (or private-label) goods.
Apparel is sold at a variety of retail outlets. Based on data from NPD Group, discount stores, off-price retailers, and factory outlets accounted for 30% of 1998 apparel sales, while specialty stores and department stores accounted for 22% and 18%, respectively. Another 17% were sold at major chains, and direct mail/catalogs accounted for 6%. The remaining 7% of apparel sales occurred through other means of distribution.
The company plans to target males between the ages of 20 and 40 with a combined household income of more than $40,000. Within this group, there are no color barriers, and customers have diverse backgrounds. The New Look customer is a versatile man who can fit into any environment and is willing to pay a high price for quality clothing.
The company's target group is seen as having enough disposable income to spend on high priced quality clothing. From 1984 to 1991, for example, disposable personal income grew at a healthy average annual of 7.0%. Apparel and footwear expenditures increased at a strong .2% annual rate during the same period. In the 1990s, however, growth in personal income slowed somewhat and so did apparel expenditures. From 1991 to 1998, disposable personal income rose at an average annual rate of 4.7%, while apparel and footwear expenditures grew 4.5% per year.
According to S&P's, in the men's apparel segment, much of the growth in spending is being driven by consumers with annual household incomes of more than $60,000. Spending in this segment increased by approximately 13% in 1998. Apparel purchases by men from households with incomes between $40,000 and $59,999 grew by 7% in 1998. Men's apparel sales at department stores and off-price retailers grew at double-digit rates in 1998.
As growth slows in the mature U.S. apparel and footwear markets, companies are increasingly looking overseas for growth opportunities. American brands translate well internationally, and many expanding economies overseas are interested in buying U.S. products. International business has therefore become a focus of some U.S. companies.
Many apparel and footwear manufacturers see Europe, with a population of 350 million, as an attractive market. Tommy Hilfiger and Polo Ralph Lauren recently opened flagship stores in London in an effort to build up their brands in Europe. Expansion in Asia, however, has been sidelined by economic troubles. In other parts of the world, footwear company Payless ShoeSource Inc., has been performing well in Canada and South America.
New Look plans to use a direct sales force, retailers, and the Internet to reach its markets. These channels are most appropriate because of time to market, reduced capital requirements, and fast access to established distribution channels. The manufacture of denim is expected to take place in Mexico. Sweaters will be manufactured locally at first, and will later take place in Italy and Hong Kong. Upon arrival, the clothing will be placed in a warehouse. Initially, the company plans to use a consolidated warehouse before acquiring a warehouse of its own.
As companies in these mature industries continually look for ways to compete effectively, U.S. apparel and footwear manufacturers have increasingly moved their production facilities to lower-cost locations outside of the United States. Although some manufacturers have moved operations completely offshore, others are retaining a few production facilities in the United States to manufacture products requiring a quick turnaround time.
While manufacturing in Asia remains substantial, the growth of apparel manufacturing in Mexico and the Caribbean has been significant due to the North American Free Trade Agreement (NAFTA) and the lowering of tariffs. Apparel assembled in Mexico and the Caribbean nations from fabric formed and cut in the United States accounted for 27% of all apparel imports in 1998, up from 9% in 1990.
With an improved economic outlook, Asian currencies have strengthened against the U.S. dollar over the past year. For example, the Thai bhat and Korean won appreciated 13% and 20%, respectively, from June 1998 to June 1999. While this has benefited U.S. exports somewhat, it has put pricing pressures on imported Asian goods. For the vast amount of goods manufactured in China, however, no such benefit is currently expected, as this country's currency has remained fixed in value versus the U.S. dollar.
Leaner inventories, but continued pricing pressures
After several years of inventory build-ups, the apparel industry's inventory-to-sales ratio declined steeply in 1996, and through 1998 it remained near its lowest levels in 16 years. According to the U.S. Department of Commerce, the inventory-to-sales ratio was 1.49 as of May 1999, significantly below the 1.74 of a year earlier.
After several difficult years and many bankruptcies in the early 1990s, the apparel industry is relatively healthier overall, and its lower inventory levels are a sign of that. Despite the lean inventories, however, prices of women's apparel declined in the first 6 months of 1999, compared with year-earlier levels, after rising slightly in 1998. S&P's still expects some degree of apparel pricing pressure to persist in the near future. Intensifying competition doesn't bode well for apparel manufacturers' ability to raise prices. Companies are continually searching around the globe for cheaper sourcing and are looking for ways to cut operating costs. Consumers are also very value conscious-they want quality merchandise at the lowest possible price. This trend is evident in the successful growth of off-price retail stores.
Modest growth in '99
As with most mature industries, the apparel and footwear industries are experiencing intense competition and pricing pressures, while facing the need for constant product innovation. However, these industries are enjoying a great economic cycle, with low interest rates, low unemployment, strong consumer confidence, and a low savings rate. Consumers are continuing to spend at a healthy clip. As a result, S&Ps expects sales for the apparel industry to rise about 4% in 1999. We believe that maker's with strong brand recognition and those that are closely in tune with consumers' needs will enjoy average growth. The footwear industry faces a tougher environment, however, considering the still-high inventory levels and low-margin price points.
Apparel outlook still positive
Although S&P's doesn't expect the economy and consumer spending to sustain growth forever, we expect the overall apparel industry to continue to post-modest gains through 1999. Among apparel makers, we expect the best performances to come from companies with strong brand recognition, such as Tommy Hilfiger Inc., Gap, Abercrombie & Fitch, and Jones Apparel Group Inc. As more and more companies have adopted casual attire in the workplace, the trend toward casual dressing continues. This has sustained the need for men and women to establish new wardrobes or alter their existing ones. S&P's believes this has had more of an effect in the men's segment, as evidenced by the higher growth rate in sales of that segment in the past year. Eventually, the casual trend will slow to a level of demand that satisfies basic replenishment needs, but for now we expect heightened consumer confidence to encourage spending beyond basic needs. Current career offerings have less structured looks, and consumers have favorably received these.
S&P's expects the branded apparel companies that sell to the department store channel of distribution to grow somewhat faster than the overall industry. In addition to favorable demographic trends, this segment is benefiting from its strength in design and marketing, which has led to a high consumer awareness of and demand for branded apparel. Nonetheless, because there's little pent-up demand for apparel, the need for freshness is still a vital part of keeping customers interested.
In response to a challenging and saturated domestic market with slower growth prospects, S&P's expects that companies with strong brands will increasingly turn to international markets for growth. Companies are hoping that the international consumer's interest in the U.S. lifestyle will translate into sales of brands that represent that lifestyle. Many companies as a significant growth area see Europe, and Asia appears to be recovering from the economic turmoil experienced in the past couple of years.
Apparel companies have been quick to recognize the importance of the youth market and have started to establish product lines to target this group. Generation Y--those individuals between four and 21 years of age--is a large demographic group with considerable spending power. This group is also significant in setting styles and trends that influence the styles for older consumers.
The current environment of abundant supply, consolidation, and intense competition has forced companies to maximize profits, not only for growth but for survival as well. Companies are constantly searching for ways to maximize efficiencies, cut costs, and increase sales. S&P's believes this improved condition of apparel companies has positioned the successful ones for a greater degree of growth and should serve to develop a healthier industry.
Buy now, wear now
In the past, consumers purchased apparel and footwear for the upcoming season when retail stores decided it was best to carry the merchandise, usually months in advance. Times are changing, however, consumers are buying apparel and footwear closer to or during the season. The industry has had to adjust to this trend, or risk losing sales and carrying unwanted inventory. Companies have had to shorten design, development, production, and distribution cycles.
In order to stay in tune with consumer needs and trends and to aid in product planning, companies have established internal teams or have hired firms to gather feedback from relevant consumer groups. For example, Tommy Hilfiger recently established what it calls Quick Response Capsules (QRC), teams of designers and production staff to work in collaboration with retail stores to bring out fresh, new fashions within a month. When Nike recently reorganized its apparel division, it created a strategic response division to monitor consumer trends. Other companies are doing this as well.
S&P's believes that the abbreviated production cycles brought about by this "buy now, wear now" phenomenon has caused companies to re-evaluate their manufacturing processes. With more and more production taking place offshore, the turnaround time for garments can be lengthy. Shortened cycles call for production sites in closer proximity to distribution points.
At the moment, a few apparel companies are using domestic plants to fulfill small orders for fresh products. Although indications now are that most merchandise will continue to be sources offshore, some seasonal/special items may need to be produced domestically. If such demand increases, there may be some benefit to the rapidly shrinking domestic production industry. This buy now, wear now trend is a manifestation of the power that consumers now have in the mature apparel and footwear industries. Consumers dictate price, location, styles, and time of purchase more, something we don't see changing anytime soon.
What's in a name?
In a market where consumers are barraged by advertising and marketing campaigns delivering an onslaught of lifestyle and fashion messages, a brand name is a powerful weapon. Brands have become an increasingly significant factor in apparel and footwear. Many consumers have less time to shop an are spending their disposable income more carefully. Established brand names, with their quality image, make the shopping experience easier and faster for many consumers. For manufacturers, brands build consumer loyalty, which translates into repeat business.
Many established brand manufacturers, such as Tommy Hilfiger, Polo Ralph Lauren Corp., Jones Apparel, Liz Claiborne Inc., and Nautica Enterprises Inc., are leveraging their existing brand names by adding various accessory lines, such as sunglasses, watches, fragrances, wallets, and footwear. Jones Apparel's recent acquisition of shoe retailer Nine West Group Inc. was a strategic move aimed at broadening the company's product lines and creating opportunities to cross-sell products between the two brands. However, most companies choose to extend their product lines through licensing. Most recently, Tommy Hilfiger announced new licensing deals to market jewelry, hosiery and, most notably, watches through Movado.
A company with an impressive brand name must exercise caution when entering into licensing agreements. If a new product line doesn't live up to the quality standards that consumers have come to expect from the brand name, the brand's image can be tarnished. It remains to be seen how consumers will react to this onslaught of new brand name product introductions. To date consumers have embraced the extended product lines.