March 31, 2016 | By Nick A. Egelanian
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For retail analysts and consumers alike, what’s going on in the apparel sector is fascinating and, in fact, confounding. While the root causes may not seem exactly crystal clear, the implications will be clear and unambiguous.
The numbers are telling us a great amount about what is happening, some of which may appear counterintuitive. At a time when a number of weak reports in apparel sales have come out, we are still seeing massive expansion in most sectors of the apparel business.
Discount and budget apparel is growing much faster than the rate of overall sales. We are also seeing what might be fairly characterized as a “race to the bottom” on price, although whether that dynamic is a driving force behind the discount growth, or is simply the inevitable result of that growth and competition remains to be seen.
Consider that the “big four” discounters on the commodity side — T.J. Maxx, Marshalls, Nordstrom Rack and Ross Stores — are currently opening a total of more than 250 stores annually. Ross Stores announced this week that it is on pace to open 90 stores in 2016. While this is going on throughout the commodity side, apparel expansion on the specialty side is being led by continuing and, in fact, accelerating expansion by names like H&M, Zara, Forever 21 (which is primarily expanding through its new deep discount concept, F21 red) and new entrant, Primark. Outlet center expansion, generally consisting almost exclusively of apparel, is adding even more discount apparel to the mix.
Regardless of whether the downward pressure on price is the chicken or the egg in the current apparel environment, what is clear is that there are very definite winners and losers. With both commodity and specialty discount apparel brands are taking huge chunks of market share, middle market, full price apparel and department store retailers are taking the biggest hits. This is leading established apparel giants like J Crew and Gap Stores to focus their attention on off-price concepts for virtually all of their new store expansion opportunities.
Another wrench in the works of the apparel marketplace is the fact that between 25 and 30 percent of apparel sales are conducted online, a number that is dramatically higher than the 7-8 percent for online and mobile sales across the entire retail industry. The question of why that number is so high for apparel specifically likely has something to do with the shopping dynamics for clothing: the specific size and color preferences and willingness to hunt for discounts that lends itself well to an omnichannel model. Most of us know someone who is perfectly happy to try an article of clothing on in a brick-and-mortar store and then go online to find the best price or the right size and complete the sale. While that is by no means exclusive to apparel, the flexibility that it affords is a good fit for a shopping experience that has always been about finding something personal and very specific.
For traditional apparel retailers, this competitive pressure from virtual storefronts is yet another factor to be reckoned with at a time when discount brands are already changing the contours of the competitive landscape.
Where it gets trickier is trying to interpret what these developments might mean for apparel (and perhaps even retail as a whole) going forward. It is evident at this point that this is a fundamental shift and not merely a short-term trend. While Nordstrom Rack is often touted as a successful example of a department store brand leveraging a discount model, lackluster recent performance from both Nordstrom and Nordstrom Rack reinforces the notion that it might be tougher for even the healthy department stores to respond than more agile brands/formats from traditional apparel retailers like J. Crew and Gap Inc. The fact that outlets are such a strong growth area for the industry as a whole (we have seen literally millions of square feet of discount and outlet apparel expansion in the last year, numbers that represent a disproportionate chunk of overall apparel growth) is another sign that the forces driving this trend might be profound — and might even be part of larger social and economic trends.
In the near term, brands like Aéropostale, Abercrombie & Fitch and Gap Inc. will likely remain stagnant, and may in fact contract further in size and market share, while department stores, particularly, the former “full line” variety led by Macy’s and J.C. Penney, will likely see even worse results as a nearly 30 year pattern of market share declines. Declines in so-called B and C malls that are already struggling will almost certainly accelerate, and even some A malls will likely see declines, including some Nordstrom anchored malls like those recently sold by Taubman to Starwood.
These changes will inevitably create opportunities and new winners in an industry that has always been defined by change. One early winner, Federal Realty’s Assembly Row, near downtown Boston, has redefined the price retail venue, by combining entertainment, abundant food offerings and outlet style apparel, in a mixed-use shopping venue otherwise indistinguishable from its other “row” concepts in California and Maryland.
But, losers will be poorly impacted and the damage to many retail concepts and shopping centers will likely be unrecoverable as perhaps hundreds of additional department stores, full-price apparel retailer outlets and regional malls close in the coming years. Ultimately, of course, it’s about adapting to the new realities of twenty-first century retailing, the roots of which go back thirty years to the creation of big-box discount concepts from categories once exclusive to department stores. Those retailers and shopping center owners that adapt most effectively to this latest round of change will be positioned for success going forward while those that miss will likely be rendered extinct.
Nick A. Egelanian is president of Siteworks, a strategic retail real estate consulting firm providing highly targeted retail and mixed-use development consulting services to retailers, developers, owners and municipalities. The firm applies its knowledge of specialty and commodity retail shopping centers throughout the United States and internationally — along with leading research, development, and leasing capabilities — to provide real-world solutions to the ever-changing issues facing today's increasingly global, post-department store era retail industry. To learn more, visit siteworksretail.com or connect with Nick at negelanian@siteworksretail.com.
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