The 2009 Outlook: Focusing on The Brand, Value, Will Help Your Apparel Company Weather the Storm
In surveying the financial debris of the past year, the author, a consumer investment banker, cites success stories and lessons learned in offering some sound advice for both manufacturers and retailers.
Financial turmoil has left few industries unscathed, and the branded apparel industry is obviously no exception. Tightening credit and a dramatic drop in consumer spending have combined to make 2008 one of the more challenging years in recent memory.
A number of seemingly strong brands have been forced to restructure or liquidate. Others teeter on the brink.
Unfortunately, more is yet to come. Exact details of how the industry will look in six, nine or 12 months is unclear -- but certain trends, patterns and signs that are slowly emerging that provide us with pieces of the picture.
Focus on your core brand, consumers
Recently, several apparel companies have elected to divest themselves of certain brands in order to focus on their core brands and core consumers.
Case in point: In November, Quiksilver Inc. sold its Rossignol ski gear business to Chartreuse & Mont Blanc.
Quiksilver paid about $320 million for Rossignol in 2005, but due to the current financial turmoil and rapidly falling valuations the company will only receive a fraction -- $50 million or about 15 percent of the original price -- for what it paid for Rossignol three years ago.
While there were several factors that led to the Rossignol sale, the deal illustrates the hazards of wandering too far from core competencies.
Other retailers are learning the same lesson. Talbots Inc. announced that it is looking to sell its J. Jill brand it acquired in 2006 in order to focus on its core Talbots brand. The company recently exited its children's and men's apparel businesses with 78 store closures across the United States. By contrast, other brands are realizing tremendous scale and efficiencies to service their customers through recent acquisitions.
For example, the 2007 sale of Puma to French luxury brand holding company Pinault-Printemps-Redoute (PPR) demonstrates how some acquisitions are achieving real synergies by leveraging core competencies.
Puma had sufficiently positioned itself as a "luxury brand," much like PPR's other brands: Gucci, Balenciaga and Stella McCartney, among others.
By bringing the Puma under the PPR umbrella, the parent company was able to diversify its holdings with a more casual brand, and Puma was able to access the retailing expertise that several of the PPR brands had to offer.
Navigating a bifurcated market: luxury and value
In addition to focusing on core brand and consumers, maintaining -or even strengthening -the perceived value of a brand will be vital in the current environment.
A bifurcated market has developed low-price, value-oriented merchants on one end and purveyors of luxury and performance goods on the other.
At the value end of the spectrum, the clear winners have been the big box stores such as Wal-Mart, Family Dollar and privately held Smart & Final. Vendors serving this end of the market should continue to do well, though they are unlikely to escape unscathed.
Merchant relationships will remain under pressure, as retailers look for ways to rationalize their store base, simplify the supply chain and squeeze out costs. For apparel vendors, relevant brands and products, as well as economies of scale, will be critical to making the short list of supplier reduction.
At the luxury end of the market, consumers with the means will still spend discretionary income on luxury goods, though they will be increasingly cautious with their purchase decisions.
In particular, consumers whose purchases are linked to their lifestyle -outdoor gear for sports enthusiasts or high-end jeans for those with a penchant for designer denim -will continue to buy select brands regardless of the economy's performance.
Ultimately, the companies that maintain authentic brands, provide exceptional customer services and effectively control costs will be the ones that survive this rough patch -and possibly emerge even stronger.
Brands that properly position products at both ends of the market, without damaging the brand's perceived value, will gain a huge strategic advantage over their competitors.
VF Corp. has done this successfully with its Seven for All Mankind jeans by making the brand available to two different markets -luxury and value.
High-end stores such as Saks Fifth Avenue and Bloomingdales carry Seven's newest designs, while Kohl's Corp., known as a value retailer, also carries specific styles of Seven jeans at a much lower price.
VF's Vans brand also has realized some success pursuing this strategy. Vans' shoes are sold by a variety of retailers, but are still universally respected as the "go-to" skater and hipster brand.
North Face, another VF brand, also offers an abundance of high- and low-end price points to appeal to larger consumer base.
(Drumroll please): The 2009 outlook
The industry has not seen the full impact of the current economic environment. Keeping cash flow positive will be vital for manufacturers' and retailers' ability to handle the challenging terrain as sales fall and many costs stay fixed.
Retailers will continue to reduce prices and work with only the most credit-worthy suppliers, and manufacturers will continue to look for ways achieve scale and pare down to what is most essential.
In the near term, deal activity in the sector will remain sluggish. Even companies with healthy balance sheets that are in a position to take advantage of falling multiples will remain cautious and conservative.
Fit will be imperative and only the most highly strategic deals involving the highest quality assets will happen. But as previous cycles have shown, companies that pursue highly strategic acquisitions at the bottom of the cycle generally achieve above average value creation for those investments.
Tremendous shifts in market share will likely alter the industry's landscape. The strong players who guarded balance sheets, pursued only the most wise acquisitions and relentlessly maintained the authenticity of their brand(s) will gain market share while their competitors falter or even disappear.
These shifts in market share -coupled with the smaller number of transactions for the year -will likely set the stage for 2010.
Thus, 2009 will be a critical year for companies to hold (or grow) their position vis-a-vis their competitors if they want to compete in the long run.
Joe Pellegrini is a Managing Director in Baird's Consumer Investment Banking group.
Financial turmoil has left few industries unscathed, and the branded apparel industry is obviously no exception. Tightening credit and a dramatic drop in consumer spending have combined to make 2008 one of the more challenging years in recent memory.
A number of seemingly strong brands have been forced to restructure or liquidate. Others teeter on the brink.
Unfortunately, more is yet to come. Exact details of how the industry will look in six, nine or 12 months is unclear -- but certain trends, patterns and signs that are slowly emerging that provide us with pieces of the picture.
Focus on your core brand, consumers
Recently, several apparel companies have elected to divest themselves of certain brands in order to focus on their core brands and core consumers.
Case in point: In November, Quiksilver Inc. sold its Rossignol ski gear business to Chartreuse & Mont Blanc.
Quiksilver paid about $320 million for Rossignol in 2005, but due to the current financial turmoil and rapidly falling valuations the company will only receive a fraction -- $50 million or about 15 percent of the original price -- for what it paid for Rossignol three years ago.
While there were several factors that led to the Rossignol sale, the deal illustrates the hazards of wandering too far from core competencies.
Other retailers are learning the same lesson. Talbots Inc. announced that it is looking to sell its J. Jill brand it acquired in 2006 in order to focus on its core Talbots brand. The company recently exited its children's and men's apparel businesses with 78 store closures across the United States. By contrast, other brands are realizing tremendous scale and efficiencies to service their customers through recent acquisitions.
For example, the 2007 sale of Puma to French luxury brand holding company Pinault-Printemps-Redoute (PPR) demonstrates how some acquisitions are achieving real synergies by leveraging core competencies.
Puma had sufficiently positioned itself as a "luxury brand," much like PPR's other brands: Gucci, Balenciaga and Stella McCartney, among others.
By bringing the Puma under the PPR umbrella, the parent company was able to diversify its holdings with a more casual brand, and Puma was able to access the retailing expertise that several of the PPR brands had to offer.
Navigating a bifurcated market: luxury and value
In addition to focusing on core brand and consumers, maintaining -or even strengthening -the perceived value of a brand will be vital in the current environment.
A bifurcated market has developed low-price, value-oriented merchants on one end and purveyors of luxury and performance goods on the other.
At the value end of the spectrum, the clear winners have been the big box stores such as Wal-Mart, Family Dollar and privately held Smart & Final. Vendors serving this end of the market should continue to do well, though they are unlikely to escape unscathed.
Merchant relationships will remain under pressure, as retailers look for ways to rationalize their store base, simplify the supply chain and squeeze out costs. For apparel vendors, relevant brands and products, as well as economies of scale, will be critical to making the short list of supplier reduction.
At the luxury end of the market, consumers with the means will still spend discretionary income on luxury goods, though they will be increasingly cautious with their purchase decisions.
In particular, consumers whose purchases are linked to their lifestyle -outdoor gear for sports enthusiasts or high-end jeans for those with a penchant for designer denim -will continue to buy select brands regardless of the economy's performance.
Ultimately, the companies that maintain authentic brands, provide exceptional customer services and effectively control costs will be the ones that survive this rough patch -and possibly emerge even stronger.
Brands that properly position products at both ends of the market, without damaging the brand's perceived value, will gain a huge strategic advantage over their competitors.
VF Corp. has done this successfully with its Seven for All Mankind jeans by making the brand available to two different markets -luxury and value.
High-end stores such as Saks Fifth Avenue and Bloomingdales carry Seven's newest designs, while Kohl's Corp., known as a value retailer, also carries specific styles of Seven jeans at a much lower price.
VF's Vans brand also has realized some success pursuing this strategy. Vans' shoes are sold by a variety of retailers, but are still universally respected as the "go-to" skater and hipster brand.
North Face, another VF brand, also offers an abundance of high- and low-end price points to appeal to larger consumer base.
(Drumroll please): The 2009 outlook
The industry has not seen the full impact of the current economic environment. Keeping cash flow positive will be vital for manufacturers' and retailers' ability to handle the challenging terrain as sales fall and many costs stay fixed.
Retailers will continue to reduce prices and work with only the most credit-worthy suppliers, and manufacturers will continue to look for ways achieve scale and pare down to what is most essential.
In the near term, deal activity in the sector will remain sluggish. Even companies with healthy balance sheets that are in a position to take advantage of falling multiples will remain cautious and conservative.
Fit will be imperative and only the most highly strategic deals involving the highest quality assets will happen. But as previous cycles have shown, companies that pursue highly strategic acquisitions at the bottom of the cycle generally achieve above average value creation for those investments.
Tremendous shifts in market share will likely alter the industry's landscape. The strong players who guarded balance sheets, pursued only the most wise acquisitions and relentlessly maintained the authenticity of their brand(s) will gain market share while their competitors falter or even disappear.
These shifts in market share -coupled with the smaller number of transactions for the year -will likely set the stage for 2010.
Thus, 2009 will be a critical year for companies to hold (or grow) their position vis-a-vis their competitors if they want to compete in the long run.
Joe Pellegrini is a Managing Director in Baird's Consumer Investment Banking group.
