News & Comment—Atlas

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Comment: The Year Ahead

OK so that was 2008. One of the toughest retail years in history.

After 15 years of solid retail growth, we were reminded of that classic principle—what goes up must come down.

Although 2009 is going to be painful, at least we no longer have the uncertainty that has dogged the market for most of 2008. We now know what we’re dealing with. It’s a recession, and a severe one at that.

At Atlas, all of our consultants have over 15 years of direct retail experience and have lived and worked through at least one recession, and in some cases up to three.

Here are some of our thoughts on what lies in store for fashion retail in the year ahead in 2009.

Back to Basics

While the last few years have been all about expanding product ranges, building the brand and enhancing the customer experience, we believe the next few years are going to be all about efficiency, control and customer service.

Once the initial wave of business failures and redundancies recedes, the retailers that have survived will need to re-evaluate their business and determine how to make money in a market with negative growth.

This is more than “recession proofing”—it’s about building a business that sells products which customers want in the way that they want to buy them—and, most importantly, doing it in a way that makes a profit.

This is far more than just cost cutting, it is a complete re-appraisal of the business structure, the product offering, and the business processes that are required to run it efficiently.

Forget about Falling Prices (well, in the UK at least)

If there’s one thing that retailers have learned over the past year, it is that economists and the Bank of England can get it spectacularly wrong.

A current example of this is the widely held view that price deflation is going to be one of the biggest risks for the economy in 2009.

How can an economy that runs a huge trade deficit experience a currency devaluation of over 30% and not expect prices to go up? Once the extended period of de-stocking has petered out in the spring, all new stock brought into the UK will be significantly more expensive to source. In an industry where buyers would sell their grannies for an extra point of margin, we feel that there is no way that these cost increases can be absorbed.

There is little point in selling a product unless you can make a profit on it, and in an increasingly price sensitive market the forced price increases may exacerbate the reduction in demand even further.

We fear that that dreaded phrase from the 70s may rear it’s ugly head again and well begin to hear about Stagflation—a prolonged period of falling GDP and rapidly rising prices.

We believe that retailers will need to become used to planning for negative growth until late 2010 at the earliest.

We’ll discuss the best ways to do this, the tools that are available and the best processes to use in a future article.

Slowing down Fast Fashion

Since first being used almost 10 years ago, the phrase “Fast Fashion” has meant many things to many people. In the industry it originally described adding a limited number of high fashion, short lead time options to a range to add interest and excitement. As the decade has progressed the phrase has evolved to mean a retailer changing their full ranges and collections with increased frequency. To the consumer it often has a completely different meaning. For them it describes the concept of disposable fashion. Low value, low quality garments that are worn a few times then thrown away.

As the consumers cut back their spending we expect that retailers will need to respond by reducing the number of options they offer throughout a season. The rule that for every option you add to a range, the lower your overall margin will become appears to have been forgotten by the industry.

We believe that careful management of Assortments and the Margin they will generate has never been more vital if a retailer or brand is going to survive the next couple of years.

We have lots to say on this topic and we’ll go into the mechanics of it in a future article.

Online Slowdown

One of the few bright spots on the retail horizon in 2008 was that of online retail. However as with so much that’s happened in the past few years everything is not as it seems. Those healthy growth numbers look impressive on their own, but we’re dealing with the volatility of small numbers here. When numbers are small it’s easy to show significant growth—growing from 2 million to 3 million is a 50% increase. Overall the market for online sales in the fashion sector is expected to peak at about 15% of the total market.

Where online is only one component of a multi channel retailers portfolio, they need to ask themselves if the costs and management time associated with the development of the online offering are justified, given the potential returns. When even the leaders in online retailing are still struggling to make a significant profit, businesses need to ask themselves if the channel is purely commercial or is it only justified for its marketing potential.

A few final thoughts