At last week’s World Retail Congress in Barcelona, US retailers discussed the market’s prospects post credit crunch.
A hard-pressed consumer, falling footfall and dropping like-for-like sales is a familiar story to retailers on both sides of the Atlantic, but what do US store bosses make of their prospects for 2008?
A panel of four retailers and commentators on the North American market got together to discuss the issues at the World Retail Congress in Barcelona last week. It was chaired by Dana Telsey, chief executive of retail consultants TAG. The panel consisted of Joe Gromek, president of Warnaco, which owns the licence for Calvin Klein Jeans and Calvin Klein underwear; Christopher Lee, president of US young fast-fashion phenomenon Forever 21; Richard Baker, chairman of the recently turned around department store group Lord & Taylor; and Matt Rubel, president and chief executive of the Collective Brands group, whose fascias include footwear giant Payless.
All the retailers felt that 2008 was set to be a challenging year and that US retailers were likely to realign their store portfolios to ensure their cost bases remained at their most efficient. Telsey said:
“It’s likely to be very difficult and as a result retailers are going to be looking at realigning their store base, focusing on maintaining margin and controlling their labour costs. There will be a big focus on margin optimisation systems and staff systems to get the best cost efficiencies. It’s going to be more important than ever to be clear about who you are and what you stand for as a brand to a consumer that is coming out to spend less often.”
Rubel said that although Payless was a value-led retailer he had observed that as times got tougher its customer was not driven by price alone. “They are going for fashion-led lines, and only if their purchase isn’t about fashion will it become about price. What we have found is that the fashion customer is staying the course but the budget customer has stopped spending.
“As a speciality store we are seeing our costs go up and have to deal with that. We are having to be aggressive about staffing levels. We have to continue to innovate and keep our capital expenditure very tight while driving through supply chain initiatives to improve margin. At the premium end of our business the customer is emotionally constrained about spending, but they still have a wallet and if you can deal with them emotionally and make a connection through great stores and product they will spend with you.”
In the past eight years, young fashion chain Forever 21 has grown from 85 stores to more than 400 stores. It expanded by 1 million sq ft last year and plans to do the same in 2008. Lee said: “We are still doing extremely well and experienced double-digit comps in the first quarter of this year. We bring new products into our store every day. We do not do a lot of advertising and we bring that value straight to our customers.”
Baker said that in a difficult market retailers with great locations and a great brand would trade better than others. “It’s footfall in the stores that is going to make the difference and in this kind of market you have got to be doing something new to be good,” he added. “This is a great time for new brands and retailers to move into the US because with other retailers offloading stores there are some real opportunities to enter the market.”
The US market was still difficult to crack, he added, and advised international entrants that they might be better to attack it from the back door via Canada. “This way you can get an understanding of the market and iron out some of your kinks before attacking the US head on.” Forever 21’s Lee said that he welcomed outside competition in the fast-fashion market and that retailers such as Zara and H&M created more traffic for his business when they go into the same malls. Lee added that he felt Sir Philip Green’s Topshop would do well in New York when it opened in October. “I think the 40,000sq ft strategy in large cities is the right way to go,” he said.
Gromek agreed that the upheaval in the US retail market did mean opportunities for new brands. He said: “With the department store market realigning after consolidation and businesses such as Sears in flux, it presents a great opportunity for the vertical retailers to pick up market share.”
The panel was clear that as entrants eyed their market, US retailers needed to look beyond their own shores for growth. Rubel said: “We are the number one footwear retailer in central America where like-for-like sales are 21% up. It’s phenomenal. Our acquisition of the Stride Right business has given us a number of brands we believe we can build into a wholesale division that we can take into Europe, and we have opened an office in Holland to grow that business. Ultimately, all US retail companies must find a way to grow beyond their region.”
Gromek agreed, pointing to the fact that his business was forecasting growth of just 2% to 3% in the US this year, but grew its sales in Europe in the last year by 42%.
Rubel forecast that in the next five to seven years, a phalanx of US retailers would have successfully entered overseas markets, and that market conditions at home would focus their minds on growing business via overseas expansion. “In the past it has been something US retailers generally have not focused on or been particularly good at,” he said. “It’s a skill set we just didn’t have. But you will see certain groups of us who really understand branding going at it aggressively over the next five to seven years. And watch out, because it is a skill set that we will have gained by then.”
Gromek said that US retailers needed to realise that the path to success in a new market was via hiring locals to run your business with plenty of autonomy. He said: “Hiring locals makes a real difference. They understand what is achievable and how to achieve it. When we gave our sales plan to our manager in China he just screwed it up and started again. He told me he could have done our plan in his sleep.
“If you want your people to succeed for you, understand what the locals believe in and give them the authority to execute it, that’s what really makes a difference.”
Looking East for growth
At the World Retail Congress last week, Mohammed Alshaya, executive chairman of franchising king Alshaya, told delegates that 25 years ago he would not have dreamed of his firm being international.
Today, it operates 1,500 franchise stores representing more than 50 international brands in 16 countries. And, according to Alshaya, low trading confidence in the West and high confidence in the East means there are still growth opportunities for retail brands.
He pointed towards sub 3% gross domestic product (GDP), retail saturation and the oversupply of brands in the West as the critical hurdles facing retailers. In comparison, emerging markets all enjoy GDP above 6%, with Russia at 7.4%, India at 8.5% and China at 11.4%.
But he urged delegates considering expanding from West to East to consider the geography and whether the brand is fit for each social, cultural and business landscape, and to ensure the brand is replicated consistently.
Ivan Barbera, Inditex’s Asia Pacific international director, also pointed to GDP per capita as a key influencer when considering potential new markets. Other factors informing Inditex’s expansion decisions include market size, attitudes towards fashion in the proposed market and future real estate developments.
According to Barbera: “The factors for success in a new market are having the right real estate, the right product at the right price and the best management expertise. The correct approach can be done by us or by a third party supported and controlled by us. We would never do anything through a franchise that we wouldn’t do ourselves.”