Navigating the New Reality
By Jordan K. Speer
U.S. businesses are facing a permanent shift in consumer behavior. Companies that can reevaluate the changing mentality of the consumer, move flexibly, find new opportunity and adjust to the reality of doing business in a period of slower growth will emerge as the leaders of this new economy. That was the word from speakers at the 2009 Apparel Executive Forum held recently in Coral Gables, FL.
In short, speakers said, the seemingly unstoppable engine of U.S. growth that we've witnessed over the past decades has lost some steam. Future success will result from passion, innovation and smart strategy vs. "growth for growth's sake," said Marshal Cohen, chief industry analyst with The NPD Group.
"We've left behind an incredible spending period that was an abnormality," he said, emphasizing that apparel companies will now have to work harder to "earn those sales" as consumers guard their wallets more carefully and make purchases more selectively.
Monkeys may be looking for work
"Today, some realities have set in," said Omar Saad, equity research lead analyst, branded apparel & footwear, Credit Suisse. Namely, the "30-year tailwind for consumption," largely driven by mortgage equity withdrawals and easy access to credit, has let up, and along with it a period of abundance at retail in which "even a monkey could make money." (To wit: The S&P Retail saw a 13 percent CAGR over the period from 1981-2008, outpacing the 9 percent CAGR of the S&P 500 Index over the same period.) Now, with credit hard to come by, low savings rates nationally and increasing unemployment limiting the spending and the confidence of consumers, "the easy money has been made in U.S. retailing," he said.
In addition to its obvious effects on the economy, the drop-off in consumer spending has put a spotlight on the saturation of the U.S. retail marketplace. With 55 retail workers per 1,000 people and 20 feet to 33 feet of retail space per capita, there are simply more stores than the country can support, especially now, but maybe even in a booming economy.
Questioning the need for a coffee shop on every corner, scads of DIY stores, malls in every part of town and a closet full of clothes that resemble each other, Cohen cautioned companies against judging success based on store expansions and sales vs. actually making a profit by truly meeting a need or desire of consumers.
Capturing the consumer
Countering increasing reluctance to spend will require companies to "tap into the reasons why consumers need your product," says Cohen. In a period of recovery characterized by cautious spending, shorter shopping lists and an absence of credit, it is more important than ever to meet a specific need, but in a way that generates excitement for the consumer.
Consider myShape.com, which allows each woman to become her own merchandiser, creating a personal shop on the site that displays only the garments that satisfy her personal set of criteria, including size, fit and style. Mercedes De Luca, global customer experience & CIO, shared with Forum attendees that the site puts the customer in control, while offering a unique and engaging customer experience that is improving the company's conversion rates.
Uncovering such niches can put you in touch with the consumer and open up new market opportunities. Most importantly, says Cohen, "in challenging times, conservative doesn't cut it." If you wait for signs of recovery to come before you start innovating, it will be too late; it's time to take action now - in a specific but passionate way, he says. In other words, while you "cannot take your business down to the bare bones," you also cannot do it all and be everything to everyone.
Wrapping your product in the right message
To narrow but deepen the field, you need to know why customers are buying your product. So if you're selling workout wear, it would help to know why men exercise vs. why women exercise, for example. If men are exercising primarily to build muscle, and women are exercising primarily to lose weight, then the marketing message and the products may need to be different. It may be that your products already meet the needs of your consumer demographic, but that you're not capturing attention because you haven't put the right message around them.
When looking to tap into the passionate side of the consumer, Cohen says, it's also a good idea to take note of several shifts in apparel buying behavior.
Noting that "seasons are not what they used to be," he explains that transitions are now more about concept changes than true seasonal changes. At the same time, consumers are also far more driven by the desire for instant gratification. It's more about "buy now wear now," says Cohen, suggesting that the old model of making winter coats available in August no longer reflects the way people actually shop.
Cohen also encourages apparel executives to follow the "good, better, best" formula to help grow business, noting the importance of multi-tier pricing and products for capturing a wider consumer audience. While some companies may already be selling to retailers with this type of model in place, he says, it may be necessary to take a further step by making these differentiations "understandable to the consumer."
These distinctions are particularly important for the upper end of the market. Under greater pressure both from the weak economy, and from the increasingly trendy and stylish lower end of the market, it is crucial for the upper end to better communicate its message to the consumer. Said differently: let the consumer know what the "best" product offers that the "good" does not.
Finally, while you're working to communicate those messages, don't forget about the power of social media to work magic for you, said Cohen, a sentiment echoed by Bill Palmer, lead brand architect, Activate Media Group, who stressed that traditional outbound communications such as print ads and cold calling are less and less effective as consumers become more active in using online tools to seek out information.
Consumers are taking note of "influential bloggers in the front-row seats," he says. They are comparison shopping, reading peer-written product reviews, using search engines and sharing information with friends.
Rather than pushing your message out over traditional marketing channels, it's more important to make sure your company is easily found online, says Palmer. He advises companies to "find out where they stand" by using online sites and tools, such as socialmention.com, Google Trend Labs and seomoz.com to identify areas where the company's offerings rise to the top and others where they may not be in the game at all.
Additionally, Palmer encouraged apparel companies to update their web architecture to improve the consumer shopping experience and to increase mentions of their products online, noting that websites today are increasingly powerful and flexible but cheaper to improve and maintain.
He advises getting serious about your online presence, setting objectives and metrics, creating a team devoted to the project, and even reallocating current marketing budget to online development and ensuring that "your content is easy to share."
Growing through international brand expansion
While it's clear that online shopping will continue to take a larger chunk of market share, and that "frugal fatigue," as Cohen puts it, will drive some shoppers back to the stores, the overall size of the U.S. market is a "fixed pie," says Saad. Significant growth is more likely to come from international sales, especially those from emerging markets where growth is rapid and where consumers have "not yet discovered the joys of credit," he noted wryly.
For retailers, the move to overseas locations can be tricky, says Saad. U.S. retail, an exercise in successful local execution, "doesn't travel well," he said, requiring as it does a thorough knowledge of the language, the culture, labor laws, real estate laws and prime locations, how to open stores, and so forth.
By contrast, global expansion is a great growth vehicle for U.S. brands, which are highly desired by global consumers. Despite the demand, Saad notes, only a few U.S. brands, such as Nike and Ralph Lauren, have made significant inroads internationally. Most are just starting to focus their energies and capital expenditures on expanding abroad where, Saad says, there is plenty of room to grow - even in Europe, where American brands still make up just a tiny percentage of the overall apparel marketplace.
Without a crystal ball, it's impossible to know what 2010 will bring. The recent recession has shown the U.S. economy to be surprisingly resilient. Saad notes that import costs and inventories are lower, supply chains have consolidated, companies have trimmed down human resources and the "economy became pretty efficient, pretty quickly."
Still, U.S. unemployment remains high, and the predicted crash in the commercial real estate market could create another wave of bank failures and send the country back into a recession. However it plays out, there will be winners and losers. Cohen, describing the recent recession as "a cleansing period," predicts that 2010 will witness the "cream rising to the top," as innovative companies with fresh ideas take the reins. He stressed the importance of momentum, noting that "opportunities multiply as they are seized." And neglected ideas? Well, says Cohen, they just die.
Jordan K. Speer is editor in chief of Apparel. She can be reached at firstname.lastname@example.org.
Editor's Note: The 2010 Apparel Executive Forum will be held October 3-5. For an invitation or for sponsorship information, contact email@example.com.