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Indies weigh up the threat of Ashley’s Cruise missile

Few visitors to Berlin streetwear show Bread & Butter last week would have expected Sports Direct to be the name on everyone’s lips, but the sportswear retailer’s move on young fashion chain USC and premium indie mini-chain Cruise ensured it was front of mind for suppliers and rival indies alike.

The £7m combined acquisition of the two chains, coupled with speculation that Sports Direct is already eyeing a second indie mini-chain, Van Mildert, to add to its portfolio, has elicited a predictably nervous response from branded suppliers. With his reputation for stripping the value out of brands through unending promotional activity and heavy discounting, Sports Direct founder and deputy chairman Mike Ashley is not a name that fashion brands and indie retailers feel ready to welcome with open arms.

An unnamed source at a branded supplier explains this reluctance: “His [Ashley’s] reputation is such that it’s virtually impossible for him to do business with brands. If your business model up to this point has been to destroy brands, how can you come back from that? That was the vibe in Berlin.”

These concerns, or at least an awareness of them, are most likely the driver behind Sports Direct chief executive Dave Forsey’s assurances that the 38-strong USC chain and the 10 Cruise stores will remain independent – sitting in a separate premium division to the core Sports Direct chain – and that the deal will also see former owner Sir Tom Hunter remain a “significant investor” and chairman of the two businesses. However, it is the comments about Sports Direct bringing its “operational expertise” to the businesses that will be sending shivers down brands’ spines.

Jo Bohling, marketing consultant at young fashion brand Gio-Goi, explains that future brand support hangs on whether Sports Direct plans to retain USC and Cruise at their current positioning.

The investment that Ashley can pump into USC and Cruise is vital, says Peel Hunt retail analyst John Stevenson. The £7m price tag might look small but he adds: “We don’t know how much USC is losing. It has a high level of gearing and has been struggling for some time. Sports Direct will bring the funding and it will have to stabilise the business before it can begin developing it.”

In the current trading climate, stabilising two businesses with a history of cash-flow difficulties –both have been rescued from administration in recent years – will not be easy, and simply pouring cash into them may not be enough to heal and salve their wounds. The young fashion market is facing a tough time – high youth unemployment coupled with rising production costs has placed enormous strain on retailers in this sector. Many have been forced into early Sales and high street names, most famously womenswear chain Jane Norman, have collapsed into administration. Even last year’s City darling, SuperGroup, has been forced to court analysts to prove its strategy remains on track, after growth at the business slowed.

Speaking to Drapers back in March, retailers and brands spoke of their concern of a “silent recession” creeping into the sector, and recent figures show there has only been marginal growth to date.

The 12 to  24-year-old market saw slight growth over the 24 weeks to May 15, according to data from Kantar Worldpanel, with sales up just 1% to £3.6bn from £3.5bn for the same period last year. Growth improved slightly to 2%, up to £2.3bn, among 12 to 19-year-olds but, perhaps unsurprisingly, sales slipped to -1% among 20 to 24-year-olds. Accordingly, the latter age group has also recorded the largest fall in volume sales, down 5% to117 million units.

Hunter says: “In whichever demographic it is about how the consumer feels. In the boom times people feel wealthy – their jobs were secure and they had equity in their homes. Now these things look less certain and what people have got in their pocket has been squeezed. However, just as the good times don’t last forever, nor do the bad times.”

Women’s dresses, trousers, blouses and jumpers and cardigans continue to sell well, all showing growth within the age group over the same 24-week period; while men’s trainers, T-shirts, jeans and polo shirts have all declined. Men’s shirts have shown some growth while sales of men’s jumpers are flat.

Among 12 to 24-year-olds, branded clothing is showing very slight growth of 0.3% against sales of own-label product, which have fallen 0.2%, and, within the hard-pressed 20 to 24-year-old segment, branded product is showing growth of 0.4%, suggesting strong brands are actually still holding their own.

On paper that should be good news for young fashion indies but, according to the Kantar data, 2011 is shaping up to be a very challenging year.

Over the 24 weeks, indies catering to 12 to 24-year-old consumers saw spend drop by a massive 42% compared with a 4% rise among clothing multiples and a 17% rise at supermarkets. With the branded young fashion market already very competitive – Bank and Republic also occupy this space – news that USC will receive a cash injection that will, most likely, lead to store refurbs and overhaul of the brand mix, will increase the pressure on the independent market.

Stuart Gordon, owner of menswear indie Apache in Horsham, West Sussex, is candid in his view that the USC and Cruise deal is “quite frightening”. He adds: “It is very worrying when companies like Sports Direct and JD Sports Fashion keep mopping up the high street. It means we have to be fitter. We have to make sure our costs aren’t too high and that our buying is excellent.”

Hunter himself believes indies in this space can survive the tough times. He told Drapers last week: “They need to play to their strengths rather than try to take on a multi-branded chain. They need a niche in their own market and to use their [small] size as a strength. They are always going to be a bit nimbler than a chain.”

Analysts are broadly positive about Sports Direct’s move and point to JD Sports Fashions’ recent acquisition of mini-chain Cecil Gee and brands like Peter Werth. JD Sports Fashion has dominated this market to date, and proved that diverse brands can sit successfully in one company.

Stevenson says JD saw “about a decade ago” that its niche lay at the higher end of the sports market and it has since set about achieving that. “Sports Direct dominates the middle market but where can it grow now? Of course, varied brands can sit together but it depends how it is managed,” he says.

Pan Philippou, chief executive of Ben Sherman, believes Sports Direct has a great opportunity to refresh USC, which he says has become rather bland. “It’s been a great place to sell brands in the past; it was great in its heyday. I hope he [Ashley] goes on price premium instead of price.”

Gio-Goi’s Bohling agrees that Sports Direct should look at taking both USC and Cruise more upmarket, moving them above the congested mainstream young fashion sector.

With online naturally proving a strong channel with youth shoppers – the Kantar figures show online spend is up 25% over the period – investment in ecommerce will also be crucial in establishing USC and Cruise as renewed destinations in this market.

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