Women’s Wear Daily
04.24.2014
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retail-features

Midsize Vendors Feel the Squeeze

As retailers consolidate into multibillion-dollar giants and manufacturers become Goliaths, smaller independent vendors are feeling the pinch.

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An ECI sportswear look

An ECI sportswear look.

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As retailers consolidate into multibillion-dollar giants and manufacturers become Goliaths, smaller independent vendors are feeling the pinch.

Small, moderate and better vendors boast they are more agile and can react to trends faster than their mammoth competitors, but admit that getting access to retailers is a challenge. Increasingly, retail demands — from margin guarantees to software compliance — hit them harder than they do the likes of VF Corp. or Jones Apparel Group.

"Retailers are much more demanding than ever, because there are fewer of them and they have a captive audience," said Warren Donner, president of the better line WD-NY. "The demands, in terms of margins and markdown money, are the same, but they are harder on a smaller company because we are smaller."

Adding that "Federated is one of the only games in town," Donner said retailers require margins upward of 40 percent and call in markdown money when that number is not met. Vendors equated that margin guarantee with buying real estate in stores.

"The reason so much of their floor space is occupied by their own private label and the Lizes and Joneses is that they can guarantee margins," said Lynn Ritchie, president of her eponymous label. "If our performance isn't as good as the department store would like it to be, we don't have a big kitty to come back to."

Ritchie, whose 16-year-old better label does $10 million in wholesale volume, sells to catalogues such as Neiman Marcus and Bloomingdale's, but has struggled to get floor space in either location.

"We put so much time and energy into our catalogue and mailing pieces to get corporate interest to try to get buyers in the showroom," Ritchie said. "They are very busy and they take care of their priorities first."

Access to retail executives is the biggest difference between the giant manufacturers and independent vendors, according to consultant Emanuel Weintraub. "Small companies just do not have the resources and access to the corner office," Weintraub said. "A multibillion-dollar company has access to the chief executive of every major retailer."

Cracking the so-called Federated matrix is harder in the more staid moderate or better department than it is for the booming contemporary area, most industry consultants agree.

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"The contemporary zone is a lot easier to be in at the moment in the fact that there are stores that buy pilot programs," said Andrew Jassin, managing director of the Jassin O'Rourke Group, a consulting firm in New York. "Specialty stores are constantly seeking a way to distinguish themselves, and they are looking for contemporary products."

Likewise, the better world is easier than the moderate world, where private labels and exclusive lines have eaten into the few remaining moderate departments. Still, the better world faces threats from exclusive Macy's lines, such as T Tahari and O Oscar.

"Slowly over time, we are culling out vendors that are widely distributed. But we want partners who are sophisticated and have the systems to deal with the size of our business," said Thomas Cole, vice chairman of Federated Department Stores. "It's admittedly a paradox. There is a conflict between the goal of having more exclusive product and sophisticated manufacturers.

"But in order to be important to Macy's, you have to be able to make enough product to sell company-wide. If you can make six of the greatest things in the world, it doesn't make much of a difference to us, if you can't produce 600,000."

Brands that either cannot crack the Federated wall — or choose not to because of the requirements involved — sell to specialty stores. Lynn Ritchie, which does 80 percent of its business through boutiques, calls this a "safer" route.

Alex Garfield, who founded the GarfieldMarks label in the Nineties and has recently launched the better line Panticular, said he has no desire to play the department store game. "Department store people sneer at people like us," Garfield said. "They were busy with these big-name brands."

Panticular, which Garfield predicts will be an $8 million business by its second year, ships to about 100 specialty stores now, where it does margins upward of 60 percent, according to Garfield.

"Specialty stores let us make a margin that is healthy for us and they make a margin that is healthy for them," Garfield said. "They just require the right product and stay loyal to a fault, whereas in department stores, the loyalty is to the stock holders — it's run by the financial community today. It's the difference between sailing a 30- or 40-foot sailboat and sailing the Titanic. You can't maneuver the Titanic."

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Specialty store partnerships can be a good option for better lines, but few cater to moderate resources, analysts noted. And, as most traditional department stores exit the moderate business, lower-priced lines are left with few partnerships, most notably Kohl's, which does an increasing amount of private label and exclusive products.

"When the stores are going private label, we have to go private label," said Jamie Gorman, president of the moderate resource Only Nine, half of whose business is now in private label, up from about 30 percent only last year. "You can't put all your eggs in one basket."

Across the board, vendors are serving as a private label resource, gaining accounts they may have filled with branded products in a former life.

"We secure retail partners by giving them design development that is different from what they are developing on their own brands, product they can't do themselves," said Joel Ratner, president of Spex Clothing Co. Inc., which manufacturers the moderate line Lemon Grass. "As a small company, we really study what they do in their own private label brands and supplement that."

But moderate manufacturing opportunities even in private label may soon be a memory, according to Allan Ellinger, senior managing director at Marketing Management Group.

"Vendors have to become less dependent on their private label businesses and develop branded businesses where possible, because eventually all retailers will cut out as many vendors as possible," Ellinger said. "A lot of vendors are one phone call away from a disaster. If a vendor has a large concentration with a retailer, and if a client decides to go direct, how does that vendor make up for that loss?"

Ellinger recommends trading today's version of diversification — between branded and private label offerings — with diversity in marketing offerings and distribution channels. For companies with moderate brands, he recommends developing or acquiring a higher-end branded business.

Rousso Apparel Group has followed that playbook. The $200 million, predominately moderate firm recently launched Naturally Organic World, a better-priced sportswear collection that fills what Rousso sees as a high-demand, underserved niche.

"One of our biggest single focuses is we keep our business diverse," said Amy Taub Kahn, president of Rousso Apparel Group. "Private label has become a real focus for us, and we are building upon our branded business with better lines that now make up 22 percent of our sales and give us better margins. Diversity gives us the ability to become much more of a well-rounded partner for retailers and to be beholden to nobody."

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Having a multibranded portfolio, even if it's in the millions rather than billions, helps in dealing with retail partners, said Lou Breuning, president of HMS Productions, a $100 million firm that has the moderate Spencer Jeremy sportswear and dress lines, Cable & Gauge moderate knitwear and the newly launched contemporary resource Cupio.

"When you are talking to principals [at retail companies], you talk about total company, with the back-office support," said Breuning. "When talking to buyers, you talk about your brands and each stands on its own."

Creating that back-office support should be a priority for smaller firms, according to Jassin, who said a vendor should be doing at least $50 million in wholesale to compete.

"My advice is to marry your noncompeting neighbor and combine your entities to save money on the administrative and sourcing costs," Jassin said. "Or find an offshore company to become an investor. This is the only solution for the moderate zone."

For example, moderate knit brand Ralsey is backed by huge parent Li & Fung, and its competitor August Silk is owned by Chinese manufacturing giant High Fashion International Ltd. According to Jassin, moderate vendors should look to offshore manufacturers as buyers rather than their domestic counterparts, which are more interested in destination brands worth $100 million-plus.

"Small manufacturers don't have the economies of scale, bench strength and global resources, and they are being squeezed harder and harder in terms of quality and performance, as the retailer is becoming more demanding," said Catherine Sadler, president of New York marketing firm Catherine Sadler Group. "Acquisition is something that small and midtier brands look at as a solution to the consolidation."

But as analysts criticise manufacturing giants for being too big to respond agilely to fashion trends, some smaller competitors revel in their size.

"I feel it's an advantage that we aren't a big company, because we offer them flexibility and a more innovative product," said Steven Feinstein, president of the firm that produces the ECI better sportswear line. "We can work closer to the trends and seasonal needs. A lot of the bigger companies are such big machines that they can't move as flexibly."

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Ellinger agrees that smaller vendors may enjoy a slight speed advantage — but adds that no manufacturer is winning today's game.

"Every vendor in our industry is in the same boat," Ellinger said. "The only difference between big companies and small companies is the number of zeros after their problems."

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