Industry Analysis

INDUSTRY RESEARCH: SPECIALTY RETAIL 1

Industry Research: Specialty Retail, Apparel

Student Name

Ohio Dominican University

INDUSTRY RESEARCH: SPECIALTY RETAIL 2

Industry Research: Specialty Retail

Specialty retail in its current form arose in the 1970s and 1980s with the proliferation of

indoor shopping malls (Souers, 2013). Prior, the most popular store format was the department

store. The appearance of discount stores in the 1960s led to the rise of specialty retail as a cost

effective way to compete with discount stores through specialization (Souers, 2013). Today,

apparel is the second largest segment of specialty retail, second only to the automotive industry;

globally, apparel comprising 16.2% of the entire specialty retail industry in terms of annual

revenue (Datamonitor, 2011). The industry is highlycompetitive.

External factors facing the specialty retail apparel industry include regulatory/ legal,

customer spending, social, and technological trends. The apparel industry faces stringent safety

requirements, especially for children’s apparel. The Consumer Product Safety Improvement Act

of 2008 (CPSIA) details the testing requirements for apparel and other direct to consumer goods

(Hopkins, 2012). Consumer spending has remained depressed since the 2009 recession (Souers,

2013). Trend concious teenage consumers, however, keep products moving through stores

(Katz, “Increased promotional activity,” 2013). The utilization of new textile technologies,

manufacturing processes, and advertising media such as mobile and internet shopping have

allowed for the diversification of product portfolios (Souers, 2013). These combined forces

make the apparel industry still moderately accessible to new entrants.

L Brands, Inc. exemplies competitive trends in the industry. Rising commodity costs from

suppliers cannot be passed down to consumers in apparel because consumers will instead move

to another retailer (Katz, “The corporate initiative,” 2013). Competitive trends within the

industry have led to diversification into different types of apparel by retailers, such as

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athleticwear, and accessories (Souers, 2013). L Brands spunoff many of its apparel segements in

the mid-nineties to form new corporations such as Express and Abercrombie; L Brands now

focuses on its lingerie and fragrances (Katz, “Geographic expansion,” 2013). The market is

competitive, but healthy overall, led by a competitive few forced on higher margin lines.

Branding is the main strategy used by apparel retailers to establish entry barriers, keep

prices stable, and maintain consumer loyalty. Apparel retailers seek to make a sensory

experience within their stores that is consistent withtheir brand. For example, Urban Outfitters

give its store managers the freedom to customize the sales floor to appeal to the local market

(Krippendorff, 2013); this strategic difference makes Urban Outfitters appeal to a different

customer base than its competition. Loyalty programs and children’s clothing lines are

additional methods used to establish branding (Pasquarelli, 2012). Eventhough business models

for specailty retailers are fairly consistent on the consumer end, management of suppliers varies.

For example, American Eagle has one foreign buying agent, and this supplier only provides for

American Eagle (Katz, “Increased promotional activity,” 2013). This one buyer has substantial

power. Conversely, Abercrombie has approximately 170 foreign suppliers and a primarily

centralized disbursing system (Marketline, 2013). The individual suppliers have limited power

over Abercrombie’s business as individual units. Backward and forward integration of the

supply chain are also present.

Contributing to the level of competition, apparel retails are moving toward the trend of

creating luxury and discount lines. Rivalry is expected to increase among existing firms

(Driscoll & Souers, 2011). Luxury brands such as Ralph Lauren and Coach are most likely to

have two distinictly segregated lines: premium and outlet quality (Driscoll & Souers, 2011). The

outlook for these luxury brands is strongly positive because consumers perceive them as

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universally valuable, regardless of their brand hierarchy. According to Standard and Poor’s

analysts, the top 20% of earners contribute 50% of discretionary spending, which includes

apparel spending (Driscoll & Souers, 2011). Other brands which do not focus on projecting

luxury have been participating in market consolidation; these brands are considered less

established and more subject to shifts in trends and economic factors. For example, Chico’s has

taken market share from both Coldwater Creek and Talbots through additional services such as

fittings and customer service (Driscoll & Souers, 2011). However, large conglomerants Gap,

Inc. and L Brands, Inc. and their subsidaries consistently lead revenue accrual. Trailing twelve

month revenue for Gap is $16.2 billion, and trailing twelve month revenue for L Brands is $10.7

billion (Yahoo Finance, 2013). Market share is variable in the apparel industry.

The market is changing for specialty retail, and the finances of major industry participants

reflect these changes. New markets are also key to competition; these new markets include

foreign consumers reached in stores, as well as consumers shopping through online media

(Souers, 2013). Apparel has made a slow but accelerating entry into foreign markets. For

example, 74.8% of Abercrombie & Fitch’s revenues were generated in domestic markets in

fiscal year 2012, but foreign revenues increased 74.0% that same year (Marketline, 2013).

Consumer expenditures have reached $665 billion, up from $637 billion in FY2011, on apparel;

however, sales are focused in the United States (Souers, 2013). Projected growth in consumer

expenditures is a modest 2.5% domestically (Souers, 2013). Controlling costs is key in the

current economic environment.

In conclusion, the apparel industry is a competive segment of specialty retail with

considerable market fragmentation. Sales are substantial, but margins are substantially lower

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because costs cannot necessarily be passed on to consumers. The industry isexpected to recover

from the 2009 recession along side other retail segments.

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References

Datamonitor. (2011, July). Global Specialty Retail. Industry Profile, pp. 1-38.

Driscoll, M., & Souers, M. (2011, September 5). Organic Growth Trends in Specialty Retail. The

Wall Street Transcript.

Hopkins, R. (2012, December 21). New Safety Test Requirements For Children's Products

Become Effective In February 2013. Mondaq Business Briefing.

Katz, J. (2013, August 22). Geographic expansion and improved merchandise margins offer

promise for earnings growth. Morningstar Investment Research Center.

Katz, J. (2013, August 21). Increased promotional activity weighs on American Eagle's near-

term earnings potential. Morningstar Investment Research Center.

Katz, J. (2013, August 22). The corporate initiative to evaluate A&F's business strategy could

help profitablility. Morningstar Investment Research Center.

Krippendorff, K. (2013, February 5). How to Beat Your Competition by Innovating in Ways They

Can't Copy. Retrieved from Forbes: http://www.forbes.com/

Marketline. (2013, June). Abercrombie & Fitch Co. Marketline Industry Report.

Pasquarelli, A. (2012, May 28). Kids wear out retailers; High costs, low margins force many

chains to rethink their plans. Business Insights: Essentials. Crain's New York Business.

Souers, M. (2013, March). Retailing: Specialty. Standard & Poor's Industry Surveys, pp. 1-46.

Yahoo Finance. (2013, September 8). Industry Center - Apparel Stores. Retrieved from Yahoo

Finance: www.yahoo.com