Has the Apparel Retail Bubble Burst?

Bubbles of “irrational exuberance” have occurred before in such retail segments as computers, music, video, electronics and sporting goods, the most recent. The next one, unfortunately, is apparel. This assessment is based on evidence from store closures, bankruptcies, Amazon's growing market share in apparel, and data from an unreleased Gartner/RIS study. Apparel retailing is not going away, but that sound you hear in the distance is the popping of bubbles for many iconic brands.

Alan Greenspan, the former Federal Reserve chair, made “irrational exuberance” famous in 1996 while describing the negative effects of “unduly escalated values,” which referred to such things as stocks, real estate, expansion strategies, investment plans  and overestimation of projected revenue .

These factors have an impact on the struggling apparel segment as well as does the convergence of other powerful market forces. These include:

  • Amazon is expected to surpass Macy’s to become the biggest apparel seller in the U.S. this year, according to a well-publicized report by Cowen & Co. Amazon’s clothing and accessory sales, which are eating into sales of every apparel retailer, are expected to grow nearly 30% in 2017 to $28 billion. This will surpass Macy’s estimated $22 billion. As a side note, Walmart is also expected to pass Macy’s in apparel sales in 2017.
  • Millennials, ages 18 to 34, prefer to shop online for apparel at Amazon (17% market share) compared to second-place Nordstrom (8%). The Millennial shift away from traditional retailers is significant because it will have a multi-decade impact. As the nation’s largest generation, Millennials will dominate the marketplace for many years and their shopping preferences will have  profound impact on success or failure in the marketplace. (Data source: Slice Intelligence.)
  • Shoppers visit stores less. The industry is flooded with studies showing foot traffic is in a multi-year decline in shopping malls and brick-and-mortar stores in general. The good news is that conversions are up. The bad news is they are not up enough to increase comparable store sales, which show a multi-year decline that parallels the decline in foot traffic. For a detailed look at the impact of falling foot traffic read Death of the Mall as We Know it.
  • Stores are expensive assets. Most of the struggling apparel retailers who have liquidated recently, declared bankruptcy protection, or are piling up debt have brick-and-mortar stores. Physical assets such as these carry high fixed operating costs, labor costs, and leasing fees or property taxes. If foot traffic and comp-store sales are decreasing while fixed costs remain the same or increase, which is typically the case, the result is a growing sea of red ink.
  • Overstored America. The U.S. has 48 square feet of retail space per man, woman and child compared to 16 square feet in Europe. This disturbing fact of retail life has been well known for at least five years and yet most apparel retailers have been steadily expanding and opening new stores during this time. Opening new stores creates the illusion of year-over-year growth while simultaneously hiding margin erosion. This is not a sustainable business model and apparel retailers are feeling the consequences. Now that the store growth bubble has burst are closures the latest fashion trend?

The factors cited above are not confined to apparel retailers. In fact, all retailers are feeling the effects, but apparel seems hardest hit. Large apparel retailers that have announced store closings of at least 100 locations include JCPenney, Macy’s, Aeropostale, Finish Line, and American Eagle.

Apparel retailers that have announced they will close all their stores include The Limited, American Apparel, Nasty Gal, Wet Seal, and Gordman’s, a 100-year-old department store in the Midwest that is liquidating.

And, finally, the list of retailers that have recently turned in poor financial results is long and includes Ralph Lauren, Dillard’s, Abercrombie & Fitch, Victoria’s Secret, The Buckle, The Gap, J.Crew, Gymboree, Kenneth Cole, Michael Kors, and BCBG Max Azria, which recently declared Chapter 11 bankruptcy and has shuttered more than 100 stores.

Exclusive Insight from the RIS/Gartner Retail Technology Study

The annual RIS/Gartner Retail Technology Study, which has not yet been released, finds that retailer IT budgets on average will increase by 3.5% year-over-year, which is in line with figures tracked over previous years.

However, when apparel retailers are singled out the study finds that on average the apparel group has no plans to increase its year-over-year IT budget. That means zero, nada, zip, nothing in 2017. Of all the retail segments measured in the study apparel is the only one that plans to decrease IT budgets and investments.

A shocking 27% of apparel retailers say they will actually decrease their IT budgets year-over-year. This figure is more than double the percentage of retailers as a whole in the study. One in six say the decrease in IT budget will be significant -- more than 10%.

Clearly, apparel retailers are struggling against a perfect storm of powerful headwinds. The suffering is likely to continue as many choose a path of cost cutting, closing stores and eliminating the kind of investments in innovation that could help them pull out of a downward spiral.

The year 2017 has started with a flurry of store closings and bankruptcies and the winnowing process will continue for apparel retailers too slow to change.

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