Recessions get a bad rap

Advertising Age had an article last week about the big increases being seen in private label, “Don't Blame Private-Label Gains on the Recession”.

Not only have private label brands been gaining share for the past decade, experts say these gains are the single-biggest problem facing branded packaged goods players. House brands, once a staple of lower-income households, now enjoy roughly equal penetration among demographic segments. Improvements in quality and packaging have helped removed the stigma attached to buying a no-name product.

The recession has accelerated the growth of private label, but it is a long term trend that was happening before the recession and will (presumably) continue, though at perhaps a reduced rate, when the recession is over. The increasing concentration of retail, and the increasing power of the surviving retailers, virtually ensures it.

That’s an interesting thing about recessions – they speed up trends that already exist, especially speeding up the effects of secular decline. Besides private label, we see similar effects from the recession in media and retail. (I did a similar post on this point almost exactly a year ago).

Some of the biggest (or at least most publicized) hits in this recession have been felt by the big media, especially newspapers. But media watchers have been warning about the effects of media fragmentation for the past few years (I did a presentation on its effects on trade promo at a TPMA meeting three or four years ago – and I wasn’t first), and newspapers have been in decline even longer. The recession has merely exacerbated existing problems.

In retail, department stores are hurting, and several chains (including Linens ‘n Things and Circuit City) have liquidated. But the consolidation of channels has been killing off the also-rans in each channel for years now, and department stores’ market share has been dropping for decades. Again, the recession has just sped up processes that were already in action.

It’s convenient to blame recessions for business problems. But often the recession merely exposed the problem, it didn’t create it.

Some brand marketers may want to believe that the recovery will solve their problems with private label, and media people and retailers may have similar dreams, but the recovery will solve nothing if the underlying problems are not addressed.

S&P downgrades Macy's and JCP to junk

Standard & Poor's has lowered the ratings on pretty much the whole retail sector, it appears, with Macy's and J.C. Penney taking the biggest hits.

"The rating actions reflect Standard & Poor's deepening concern about the impact of the U.S. recession on the increasingly troubled department store sector," Standard & Poor's credit analyst Diane Shand writes in her reports, "which has felt the full brunt of the declining U.S. economy and weakening consumer confidence in 2008. We believe lower consumer spending and declining mall traffic will affect the sales and profits of the department store operators this year," Shand writes, "and that recovery will be slow."

I'm not a market analyst (as a glance at my portfolio would quickly prove), but I certainly agree that "recovery will be slow" for the department store sector, since their problems pre-date the recession and will continue after the recession is over.

Designers want to control their brands

We've posted before about the havoc wrought by department stores, especially Saks, in taking panicky markdowns last fall, which many designers feel caused serious damage to their brand names.

Now some of the designers, according to this Wall Street Journal article, are seeking to regain control over their brands, and specifically over the pricing of their products. One tactics is to demand to be left out of "storewide" sales:

These days, many fashion brands are effecting their own pushback, demanding to be left out of department stores' sales. "All our brands are taking great care to ensure that what happened in November will not happen again," says Paola Milani, a spokeswoman for Gucci Group, which owns Bottega Veneta, Yves Saint Laurent, Gucci and other brands. "The idea is to maintain pricing coherence in the regions in which our products are sold regardless of channel of distribution." [ ... ]

Saks, which was a leader in last fall's discounting, declined to comment. But this week, notices for Saks's 25% off "Friends and Family" sale exclude, in the teensy fine print, more than 40 top luxury brands, including Gucci, Cartier, Chanel, Loro Piana, Oscar de la Renta, Zegna and Christian Louboutin.

One wonders if that will be legal if the Leegin decision is repealed, as Senator Kohl is demanding.

Other tactics include opening new stores, in order to reduce dependence on the department store channel:

Her company depends on department stores for 70% of its revenue, which was $273 million in 2008. But she would like to whittle that share down to 50%.

To that end, Eileen Fisher will open six new stores of its own this year in the U.S. -- slightly accelerated from an average of five new stores per year -- and is launching a costly new technology platform for Internet sales that will offer greater flexibility, allowing online customers to pick up items in stores, for instance.

Probably not a bad idea anyway, considering the current state of department stores. Another variation is opening leased departments within the d-stores.

A new type of store for Macy's

Macy's has opened a new store in Phoenix's East Valley that is the first of a new format:

For starters, the store is only one level and 122,000 square feet - smaller than a typical store - making it easier to shop, she said.

It's also designed with four entryways and extra-large dressing rooms featuring waiting areas with televisions. The store also features price-checking stations where customers can scan merchandise.

In terms of size and the single-story layout, Macy's seems to be taking a cue from Kohl's. Additional stores of this type are coming soon to Texas, Idaho, and Montana.

I'm not bullish on the department store channel, but it's good to see them still trying to find something that works.

Saks will stop deep price cuts

Saks, which took a lot of heat from fashion designers and other retailers for their deep discounting in Q4, said they won't continue the practice, but they are expecting to reduce prices overall, with the help of their suppliers:

Saks said it was expecting its vendors to provide products at price points more in line with the current climate.

The Q4 price cuts, as much as 70%, caused Saks' margins to drop from 37% to 20%, at the same time sales were dropping 15%, Lower margins on lower sales is a nasty combo.

The decline of dedpartment stores, chapter 50 (or so)

The Dallas Morning News has an interesting article, "Shoppers departing department stores - and may not be back" hitting on a theme I've posted on often -- the terminal decline of what was once America's principal shopping channel.

There are a few good statistics in the article, one being that there are now ten chains in the category doing $3bil or more; collectively they do $110bil, which is about one-fourth Walmart's sales. How the mighty have fallen.

The most interesting line from the article is this one:

The new mantra for one of America's oldest retail categories: When the economy rebounds, everything will go back to the way it was.

It's probably true. For those chains that survive the recession, things will return to normal. "Normal" for this channel, however, is a long, slow decline. In the almost forty years I've been observing department stores (my first job in this business was in the advertising department of Goldwaters in Phoenix) I have watched them go through several economic cycles. In each recession, they hit a bottom that was a bit lower than the last time; in each recovery they reach a top that was a bit lower.

Meanwhile, brands that have for decades been sold exclusively through department stores are looking for other ways to reach their consumers. An example cited in the article is Estee Lauder, which is now sold on-line. If my brand were heavily dependent on department stores for distribution, I'd certainly be seeking alternatives.

Chaos in the luxury market

Wall Street Journal reports on the fallout from Saks's deep discounts on top fashion lines.

When Saks Fifth Avenue slashed prices by 70% on designer clothes before the holiday season even began, shoppers stampeded. "It was like the running of the bulls," says Kathryn Finney, who says she was knocked to the floor in New York's flagship store by someone lunging for a pair of $535 Manolo Blahnik shoes going for $160.

Saks' deep, mid-November markdowns were the first tug on a thread that's now unraveling long-established rules of the luxury-goods industry. The changes are bankrupting some firms, toppling longstanding agreements on pricing and distribution, and destroying the very air of exclusivity that designers are trying to sell.

Other high-end retailers followed suit, as did many of the designers who have their own retail outlets. But will consumers who grow accustomed to designer shoes at $160 be willing to pay $535 again when the recovery comes?

Besides creating a suspicion of high prices among consumers, Saks's actions broke the unwritten law under which designers and retailers operated: "Leave the goods at full price at least two months, and don't do markdowns until the very end of the season."

Some designers now are looking for ways to protect themselves in the future. Among the options being considered: Giving department stores only a limited assortment of goods, retaining the top items for their own outlets; or, operating leased departments with department stores.

... New York design house Derek Lam, which is known for cocktail dresses that sell from $1,200 to $3,500, is opening its own New York store next month. To protect itself against other retailers' discounts, it's thinking about creating "special editions" of its lines that wouldn't be sold in Saks and other retailers.

In hindsight, Saks admits that it may have over-reacted.

"We didn't need to do what we did in accessories," Mr. Frasch says. High-end shoes and handbags would probably have sold out, even at higher prices, because shoppers see them as more practical wardrobe updates than another new outfit.

The retailer is still not out of the woods. Saks shares were recently trading at $2.72, down from $22 in December 2007. In mid-January, it laid off 1,100 people, or 9% of its work force, and could close some stores.

This year, Saks is spending about 20% less on merchandise to keep inventories lower, but Mr. Frasch acknowledges the number is only a guess. The luxury-goods business is "absolutely flying blind," he says.

His boss, Mr. Sadove, agrees. "One of the big questions that people are asking," he says, is: "Will people ever buy at full price again?"

I'll be interested to see if the Saks approach or the Abercrombie & Fitch approach (refusing to cut price) is more successful.

Macy's changes course (or do they?)

Macy's is announcing that they will be doing more localization, both in merchandise and marketing.

The retailer will eliminate its current structure -- a relic of its May Co. acquisition that had stand-alone divisions such as Macy's Central and Macy's Florida -- and streamline functions into two corporate offices. Marketing, merchandise planning, buying and stores' senior management will be located in New York, while finance, human resources, legal and real estate will be housed in Cincinnati.

That's cool. But this is just an extension of a change they announced a year ago, and that I commented on last April. They don't exactly turn on a dime, do they?

The real concern is the one I expressed last April (though I was no doubt too harsh -- I must have been feeling really crabby that day): The raison d'etre of the merger that created Macy's was nationalization (national advertising, national merchandising, economies of scale). Now they are abandoning that, and going back to having 69 regional marketing/merchandising plans. Macy's is the bellwether of the department store channel and they are demonstrating that they really have no vision or direction for the channel.

A guaranteed argument-starter

If you want to get a heated argument (or at least a spirited discussion) going, just put together a list and title it "Best of ______". Whether it's the Top 100 Movies of All Time or the Best Books Ever Written or the 10 Best Quarterbacks, you're certain to leave a name off the list that many people believe should be near the top.

Interbrand has been putting out lists of the top brand name for a long time now, but this year for the first time they have compiled a list of the Most Valuable U.S. Retail Brands.

Numero Uno isn't going to surprise anybody, with Walmart's $129.8bil brand value being rated roughly six times that of runners-up Best Buy's $22.0bil and Home Depot's $20.8bil. Target and CVS follow.

But two of the top ten "retail" brand names are brands I would think of first as products -- #6 Dell and #10 Coach. Besides Dell, two other on-line retailers are in the top fifteen -- #11 Ebay and #14 Amazon. (Is Ebay a retailer at all? They sell nothing, others sell through them. They are really more like a mall, aren't they?)

See how quickly we can get an argument started?

There were a number of other interesting points. I was surprised to see Sherwin-Williams, with their mostly small outlets located in strip malls, ranked at #23. I was equally surprised to see American Girl, with only three or four outlets, on the list. But on reflection, both companies, however different, have done a good job of establishing thyemselves as brands, and maintaining their brand identity.

Where's Macy's?

The most interesting thing about such lists, though, is not who's on them, but who isn't. The #1 department store chain in the country, Macy's, is conspicuous by its absence, as is the former #1 retailer in the world, Sears.

Three department stores made the list -- Nordstrom (13), Kohl's (22), and JCPenney (24). Interbrand states, though, that department stores as a group have become "commodity chains without real difference." But they add a hopeful note:

... Macy's, Saks Fifth Avenue, Dillards and Sears have considerable brand strength, though they didn't make the list. All have the opportunity to capitalize on their brand to improve their financials.

But the most glaring omission was ...

No Supermarkets?!?!

Not a single traditional supermarket made the list. The only food retailer was Whole Foods at #47. Kroger? SuperValu? Didn't make the cut.

Traditional grocery earned the weakest customer loyalty scores. Over-reliance on discounts, rewards and promotions undermines any move toward a meaningful proposition and results in low brand strength.

If customer loyalty is a key measure of brand strength (and most would agree it is) then it's hard to argue that supermarkets have strong brands. Interbrand notes that further undermining the brand names of the leading chains is their multiple banners (Kroger includes Ralph's, Fry's, etc). And they also mention how excessive reliance on promotional funding can undercut branding:

The grocery sector also often misses out on opportunities for product differentiation, since small entrepreneurial manufacturers can’t afford to supply supermarkets due to the cost of supporting their promotions and the payment of slotting fees. In the U.S., there are a trillion dollars moving from the manufacturer to the grocer every year. As long as their vendors continue to pay for play, supermarkets may see no need to understand and serve the shoppers in their stores.

That last sentence sounds a bit harsh (and that's the first time I've heard that trade promo equals a trillion (!) a year in the supermarket channel alone), but I do agree that supermarkets harm themselves by locking out smaller suppliers, who could help them create a brand difference. Unfortunately, they're now hooked on trade promo, which is the difference between profit and loss, and kicking the habit (or even cutting back substantially) might be too tough a challenge.

I don't agree with all the rankings, but I found the exercise interesting and thought-provoking. Give it a read, and enjoy arguing with Interbrand (or with me).

Who pays for all the markdowns?

The practice of guaranteed margins, common in the department store channel, is being questioned by suppliers who are staggering under the weight of all those huge markdowns we're seeing.

Clothing makers, balking at the deep holiday discounts offered by retailers such as Macy’s Inc., may force department stores to eat more of the markdowns.

Liz Claiborne Inc., HMS Productions Inc. and a raft of apparel companies plan to push back at the retailers who have slashed some prices by 70 percent amid what’s shaping up as the worst holiday shopping season in four decades.

Some analysts are saying that stores used to guarantees of 40% may have to settle for 35%, and that mid-range stores like Penney may see their guarantees cut from 35% to 30%. The cuts could save suppliers a billion or more. There may be some interesting conversations at the NRF meeting next month.

Department stores increasing marketing, price cuts

A number of department and specialty stores are planning to increase both the amount of marketing and the level of price cuts during the holiday season.

• "Kohl's, a mid-priced retailer of clothing and home goods, said it would substantially increase its marketing and cut prices to attract bargain-hunters on Black Friday, the day after Thanksgiving."
• "J.C. Penney Co Inc and other department store chains plan similar increases in holiday promotions and marketing ..."
• "Limited Brands, whose main chains are Victoria's Secret and Bath and Body Works, also expects to be more promotional than previously planned, the retailer said Thursday on a call with investors."

I don't think a lot of retailers and suppliers in those sectors have very sophisticated pricing optimization tools. Too bad -- they'd be a big help. It's good to see, though, that they are looking at more than price cuts, and that they are planning to also market their way through the storm.

Saks will kill Libby Lu

Saks Inc. is going to discontinue its Club Libby Lu operation. Club Libby Lu was a "concept" operation, intended to appeal to girls of about 6-12.

There were 98 units in the group, 78 stand-alone stores and twenty store-within-a-store units operating in department stores (such as Carson Pirie) that used to be part of Saks' department store groups. Saks has sold off the mid-range department stores, reducing the company to its upscale Saks Fifth Avenue core, with which Libby Lu didn't make a good fit..

The Club Libby Lu business generated $60 million in sales last year. Saks will take an after-tax charge of $11 million in the third quarter and after-tax charges of $18 million to $27 million in the fourth quarter for the closing.

Saks has been selling off its non-core holdings. It sold its northern department store group, including Carson’s, to Bon-Ton Stores for $1.2 billion in March 2006, and sold its Proffitt’s/McRae’s business to Belk for $622 million in May 2005.

Boscov's bought back by family

I've posted a few times about Boscov's bankruptcy and the efforts to save it, most recently mentioning here that the Boscov family was trying to buy the chain.

Apparently, it has happened:

Has retail patriarch and larger-than-life Reading philanthropist Albert R. Boscov pulled off the miracle that saves his father's legacy - and the nation's oldest family-owned department store chain?

The irrepressible Boscov, 79, has orchestrated a deal, announced today, that may rescue his family's company from the clutches of bankruptcy.

Boscov signed an agreement to buy back most of the assets of Boscov's Department Store L.L.C. despite the credit and consumer crises that have brought much deal-making to a standstill in the last two months.

There are still hoops to be jumped through, most importantly court approval, but the bid is supported by the creditors and the only competitive bid has been withdrawn, so it seems likely to go through.

The chain will emerge from Chapter 11 with 39 stores that generate about a billion in revenue. Ten stores have been closed.

I am, to put it mildly, skeptical about the department store channel. I think it is dying. But nonetheless, I wish the Boscovs and their employees and vendors the best in proving me wrong. Perhaps they will be the ones, after many false claims, who will truly "reinvent" the channel.

Goody's out of bankruptcy

A slimmed-down version of Goody's Family Clothing has emerged from Chapter 11:

During the Chapter 11 bankruptcy, Goody's streamlined and reorganized its operations to improve the business model, significantly reduced operating costs, and maximized the value of core assets. This included the closure and liquidation of 69 underperforming retail locations in 18 states, the closing of a distribution center in Arkansas and a corporate office in New York, and the elimination of excessive corporate spending. In addition, Goody's eliminated the Company's e-commerce business, as well as an associated distribution center in Tennessee.

Paul White, Goody's Chief Executive Officer, stated, "We believe we have significantly strengthened both our business and capital structure and this will allow Goody's to continue to build on its 55-year heritage. Our Plan has enabled us to eliminate considerable costs from our business and we now have a profitable store base that is more efficient and productive. Importantly, this was all done while continuing to manage our stores without interruption and successfully serve our customers.

The chain still has 287 stores in twenty states, mostly in the southeast and midwest.

Update on Mervyn's

Mervyn's is expected to announce today that it will liquidate:

Department store chain Mervyns LLC will announce Friday that it is filing for chapter 7 bankruptcy protection — which means the Hayward-based retailer must shut its doors and liquidate its inventory, sources told CBS 5.

Over the summer, Mervyns had filed for chapter 11 protection from its creditors in U.S. bankruptcy court for the District of Delaware. The company said at the time that it planned to continue business as usual while it reorganized.

Update on Boscov's

I mentioned a few weeks ago a rumor that the Boscov family is interested in buying the chain out of bankruptcy; apparently that has been confirmed.

Members of the family that founded and ran the Boscov's department store chain for 97 years before it landed in bankruptcy in August reportedly have submitted a bid to buy back the business.

Albert R. Boscov and his brother-in-law Edwin A. Lakin are among the group that put in an offer for Boscov's Department Store L.L.C. in a bankruptcy auction that culminates next week with the selection of a winning bidder, Boscov said in a report published today.

The question now would seem to be the financing, a pretty big question these days:

A successful buyer would also have to be able to produce financing to satisfy the banks holding sizable loans to Boscov's and that have considerable sway over bankruptcy proceedings.

If the Boscov family can come up with the financing needed to pass muster with the company's biggest banks, "this could be a tremendous deal for them," said Pittsburgh lawyer John C. Rodney, who specializes in bankruptcy buyouts with Thorp, Reed & Armstrong L.L.P.

Creditors are hoping for competing bids, both because the family would like to keep the chain going rather than liquidating it, and because the only current bid would pay them about twelve cents on the dollar for existing debts.

The latest rumor is Bon-Ton

This one was fairly predictable: Bon-Ton is facing rumors that vendors may cut back shipments. Predictable, because Bon Ton is facing almost exactly the same circumstances that recently put Boscov's in Chapter 11. Both are mid-sized department store chains that expanded dramatically in the past few years -- Boscov's by buying a bunch of May Company locations from Macy's, Bon-Ton by buying Saks' midwestern stores. When the economy went wrong, they were left with slowing cash flow and a lot of debt.

But Bon-Ton says that their cash situation is good and that the rumors are false:

"We have plenty of cash on hand to get us through the holiday season without any issues," Bon-Ton spokeswoman Mary Kerr said, noting the retailer had $241 million available on a revolving credit line on Sept. 30.

Still, sources said big clothing manufacturers, including Liz Claiborne and Jones Apparel, have tightened terms on shipments to York, Pa.-based Bon-Ton, demanding quicker payment as the uncertainty mounts.

Unless the financial crisis takes an unexpectedly drastic turn, those larger firms are expected to keep merchandise flowing to stores through Christmas. Last week, Bon-Ton reported better-than-expected September sales, although they still declined.

But in recent weeks, some smaller suppliers to Bon-Ton have said credit they need to make deliveries is drying up. So-called "factoring" companies, including the giant commercial lenders CIT and GMAC, have all but stopped extending credit for deliveries during November and December, the suppliers have said.

Update: I was just looking something up, and the very first post on this blog, almost three years ago, was about Bon-Ton buying the Saks stores in the midwest, and (if I do say so myself) I pretty much nailed it:

Saks sold its midwestern department stores, as expected, to Bon-Ton yesterday, for $1.1 billion, reported here by the Chicago Tribune. You have to admire Bon-Ton's courage, if not their brains. If I had a billion lying around, I sure wouldn't spend it on department stores.

This is clearly a dying (if not dead) channel. I suppose there may be a little cash still to be squeezed out of this old cow, but how long will it take Bon-Ton to generate a billion in incremental profits to offset this purchase? They'd do better to put the money in a savings account. Heck, they'd probably do better stuffing it in a mattress.

Another Update: Bon-Ton made a strong statement yesterday refuting the rumors:

Bergren added that 281-unit Bon-Ton Stores is “financially strong. When you look at the facts of our balance sheet, we have an appropriate debt structure that was put in place in March ’06. Then only covenant we have on a revolver is $75 million of excess capacity and we currently have about $241 million in excess capacity. We’ve consistently paid down our debt, which is $80 million less than it was last year at this time.”

In addition, he said, Bon-Ton’s inventory is running 10% below last year, “which is appropriate for this environment. And we’re happy that our inventory is very much under control.”

Admittedly, Bon-Ton’s sales are down year-to-date, but Bergren said these sales trends are “right with all of our competitors, too, so it’s not that we are losing market share.”

Meanwhile ... Van Maur is expanding

Are you tired of reading bad news? I am, and I'm certainly tired of writing it, so it's good to come across news of retailers expanding. Van Maur, a midwestern department store chain, is moving into the Kansas City market:

The upscale department store chain is entering the market in November with a 142,000-square-foot, two-level store in Overland Park.

The company, which is based in Davenport, Iowa, is carefully expanding in the Midwest, backed by a variety of goods at different price points and a 136-year history of customer service that it says will make the stores a success, even in today’s tough climate.

Live long and prosper.

Forever 21 wants to buy Mervyn's stores

Forever 21, the Los Angeles based retailer of low-priced fashion merchandise wants to buy 150 Mervyn's stores and convert them into larger versions of their format. Current Forever 21 stores are in the 20,000 square foot range, most Mervyn's are at least four times that.

"Our vision has always been to get a bigger box," said Christopher Lee, senior vice president of Forever 21. "We've been looking at these assets for many years."

I have read that Forever 21 tried to buy Mervyn's when Target put it up for sale a few years ago.

Buying when the economy is in the pits can look like genius if it works out, so I wish them well, but you have to wonder if there is a bit of Steve & Barry-ism involved when you read this line:

Lee said the company hadn't decided yet what it would do with the stores if its offer is accepted, but it would probably convert many of them to the Forever 21 brand and close the rest.

Seems like having a plan might be a good idea.

Boscov family may bid for firm

The Boscov's department store chain, which entered Chapter 11 in August has a potential buyer, Versa Capital Management, a Philadelphia investment firm. Versa offered $11 million in cash, plus assumption of $175 million in debts. The plan would include closing ten of the chain's 49 locations.

Word emerged this week that a second bidder has expressed interest, and the rumor is that the new contender is the Boscov family, according to the Philadelphia Inquirer:

"We've heard that the family's very interested in maintaining control," said Warren C. Gerber Jr., financial-services manager for New York-based Phillips-Van Heusen Corp., the Inquirer reported.

Creditors are pleased, of course, at the possibility of a bidding war, since it increases their chances of getting paid.