Top 10 Issues 2004

Apparel & Footwear

Industry
Audit . Tax . Consulting . Financial Advisory.
Consumer Business
As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP. 1
Introduction
Challenges faced by the U.S. apparel and footwear industry would be difficult to overstate. Not only is the industry subject
to slow growth, but wholesalers and retailers are reviewing many of the most basic considerations of how they do business.
These critical issues include where to manufacture or source, properly defining a customer base, and, for some, deciding
how to be both more global and more market-specific all at the same time.
Several factors are driving the need to rethink many of the
strategies in selling apparel and footwear.
Today, about 50% of apparel sold in the U.S. is made
abroad, and footwear imports were up 3% in 2003 to 2
billion pairs. These are products made by both foreign
apparel and footwear contractors and foreign plants of U.S.
manufacturers. As a result of lower costs abroad, U.S.
apparel production continues to decline. Use of global
suppliers undoubtedly will increase even more beginning in
2005 as a result of the U.S. and Europe agreeing to begin
phasing out quotas on clothing and textiles as part of the
deal that created the World Trade Organization (WTO) ten
years ago. By January 1, 2005, all such quotas for WTO
countries are set to be eliminated.
Supplier dependence on larger retailers, particularly
companies such as Wal-Mart, Costco and Target, is
reshaping almost every aspect of the apparel and footwear
business model. These retailers combined efforts at
holding down costs (and subsequently consumer prices)
have contributed to more overseas production as well as
pressure on labor costs in the U.S. And the efficiency of
these large companies in supply chain and product lifecycle
management is giving more power to both consumers and
retailers that ultimately is changing how companies create,
produce and deliver goods.
Rapidly changing business regulations and tax laws, both
domestic and international, make it important for
companies to stay on top of how these developments affect
supply and licensing agreements, manufacturing and
distribution decisions, and financing needs for receivables,
inventory and capital. In addition, risk management has
taken on a much larger role in company operations,
touching everything from employment practices to product
safety and even marketing techniques.
The changing tastes and expectations of consumers are also
having a major impact on wholesalers and retailers. This is
a more on-demand world in which consumers have grown
accustomed to having their rapidly changing needs and
desires met with ease of accessibility.
Deloitte & Touche LLP (Deloitte & Touche) has identified ten
issues that we believe are important to apparel and footwear
companies today. The issues are presented in no particular
order. The major segments of the apparel and footwear
industry wholesalers and retailers will likely prioritize these
issues differently. The bottom line, however, is that those
companies who respond quickly and well to all the challenges
and opportunities of these issues will be better positioned for
growth in the years ahead.
As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP. 2
Summary of Issues
1. Growth & Innovation in a Mature Industry
Few companies are able to sustain profitable growth in
difficult and uncertain economic times. This presents a tough
challenge for all industries, but it can be especially trying for
participants in apparel and footwearone of the worlds
oldest business sectors. Apparel companies must deal with
the realities of todays marketplaceits size, scope and the
changing requirements of its consumer baseby identifying
and developing opportunities that will match up todays needs
with their companys location, capabilities and mission.
Continued investment in innovation, though difficult, is
essential.
2. Channel Strategy & Channel Conflict
Consumers are seeking more variety in both styling and price
points. Market pressures are requiring close attention to both
pricing policies and cost containment. The combination of
the two is leading many companies to explore newand
sometimes riskychannel strategies. From warehouse clubs
to vertical retail approaches, there clearly is a comprehensive
focus on innovative channel options.
3. Cost Reduction
Successful cost reduction efforts are dependent on how well
important steps are coordinated on an enterprise-wide basis
realigning staffing models and performance metrics as
needed, executing project plans and exploring and applying
best practicesoften including the elimination or reduction of
low value-added activities and non-merchandise-related
expenses. Top management buy-in and strong project
leadership are viewed to be critical success factors throughout
the process.
4. Brand Management & Brand Extension
Branding is one of the most important differentiators in the
marketplace. Research shows that brand factors heavily into
market credibility and can enhance or hurt perceptions of
shareholder value. Today, companies are focusing more on
their brands than ever before to help produce better business
results, using creative marketing practices, enhanced customer
research, new line extensions, and innovative identity and in-
store promotion programs.
5. Risk Management
In a market environment characterized by heightened
stakeholder scrutiny and regulatory and tax activity, apparel
and footwear companies face risks in virtually every aspect of
their businesses. Doing business on a broader global scale,
for example, gives rise to a wide set of employment and trade
challengesfrom labor laws to multi-jurisdictional tax
regulations and even security matters posed by post-
September 11 concerns. Industry players should look to
pursue the appropriate global solutions to risk management
issues.
6. Global Sourcing & Trade Management
The quest for competitive pricing continues to drive the search
for low-cost labor markets. China is an attractive source of
goods, and it is likely to continue in a dominant role after
WTO countries eliminate quotas on textiles and clothing on
January 1, 2005. But many companies are also seeking other
solutions, such as a broader, more international customer
base. Both of these avenues require careful management of
optionssupply sources, shipping routes, and varying tax and
legal environments.
7. Revenue Collaboration & Market Integration
The old adversarial role between wholesalers and retailers has
given way to new efforts at collaborating, or partnering, to
achieve mutual competitive advantage. Together, wholesalers
and retailers are exploring new and promising strategies to
apply technology and cooperative organization design in the
quest for improved performance and competitiveness.
8. The Wal-Mart Factor
Wal-Mart, the worlds largest retailer, will likely continue to
dominate all of the channels in which it operates for the
foreseeable future as it brings cost efficiencies to the retail
supply chain and passes a large part of those savings on to
customers. The company affects the strategies and decisions
of virtually all of its suppliers and retail competitors. Many of
Wal-Marts competitors seek to duplicate its pioneering efforts
in building stronger relationships with suppliers, controlling
more aspects of the supply chain and finding new ways to
keep the lid on prices.
9. RFID (Radio Frequency Identification)
New and evolving scanning technologies are impacting all
points on the supply chain to increase information flow and
save time and money. Wholesalers and retailers are working
more closely with technology products and techniques that
help them collect, analyze and use timely data to improve
steps all along the supply chain, as well as to better
understand their consumers.
10. Product Lifecycle Management
Financial success in the apparel and footwear industry requires
effective asset management. Increasingly, industry leaders are
taking a closer look at all the steps in the idea-to-product-
revenue process in order to identify opportunities for
collapsing cycle times. The industry average time to market is
26 weeks, but some companies are experiencing a 25-30%
reduction in that time by practicing a unified system of
product lifecycle management.
As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP. 3
Across all sectors, only about one in 10 companies at best is
able to sustain profitable growth. So the question that arises
for the very mature apparel and footwear industry is how to
achieve any significant level of growth at this life stage, given
the large number of challenges. The answer may lie in
pursuing one or more of several growth and innovation
strategies that are gaining relevance for the apparel industry:
ConsolidationMany wholesalers have stepped up
acquisition activity. In fact, 2003 was the busiest year in a
decade for mergers and acquisitions in the apparel industry.
Total disclosed value of deals in the U.S. and abroad
reportedly rose nearly 60% to more than $3.5 billion, while
the number of combinations grew nearly 90% to 132. Liz
Claiborne, Jones Apparel, Kellwood and VF have all acquired
smaller niche businesses that expand their product offerings,
demographic appeal and pricing.
OutsourcingIncreasing numbers of companies use foreign
or domestic contractors to design and assemble goods. But
the arrangements for these outsourcing arrangements are
vastly different than in the past, with many companies
maintaining control in key decisionsfrom response to trends
to quality controls. Coach, Jones Apparel and Polo Ralph
Lauren are also demonstrating a more vertically integrated
approach to design, sourcing and marketing so that they are
more in control of their products lifecycles from start to finish
and less dependent on other retailers.
1. Growth and Innovation in a Mature Industry
Technology InvestmentFor companies in industrialized,
developed countries, the combination of higher labor costs
and consumer demand for fast fashions is driving greater
interest in technology investments, even among retailers
where such spending has historically been very limited. In
those companies, technology investments are being used to
improve customer service and knowledge, streamline
operations, automate formerly manual processes, and enable
imaginative new ways of producing and assembling garments
to lower costs and speed up distribution. Still other out of
the box innovations sparking interest are the use of digital
printing and color management in textile manufacturing and
the use of fabric gluing techniques to make automation
easier.
This definitely is a time for companies to pursue growth and
innovation options. Companies in the apparel and footwear
industry who become proactive about performance
improvements, consolidation or acquisition activity, new
technology investments, and new methods of manufacturing
(i.e., fast fashions) or retailing (i.e., line diversification or
expansion) stand to benefit from exploring the many
possibilities available to them. Not only can they achieve
greater appeal among new target markets, they stand a better
chance of keeping existing customers and winning new ones.
U.S. Apparel Production: A Difficult Decade
Source: U.S. Department of Labor, Federal Reserve
1000
1992
800
200
0
105
100
80
70
65
Employment
(left scale)
Production
(right scale)
600
400
Employment, 000
95
90
60
85
75
93 94 95 96 97 98 99 00 01 02 03
Production Index, 1997 = 100
As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP. 4
Changing lifestyles, shifts in purchasers demographics and
unabated competition in apparel and footwear are leading
many companies to experiment with new channel strategies.
As a result, there is channel proliferation more sales
channels than ever before at which customers can shop.
Today, apparel and footwear can be purchased at such diverse
formats as supermarkets, warehouse clubs and on the Web.
There are benefits to channel proliferation. The convenience
of multi-format shopping makes products more accessible to
consumers. Companies, however, should understand the
different characteristics of selling in each channel, and
leverage these options to minimize or prevent cannibalization
of sales.
Multi-channel companies often need technology solutions to
help them present a single face to their customers across all
touch points. Having a consistent returns management
process, for example, can be a competitive advantage for
retailers. Also, companies can create different brands and
sub-brands to fit the appropriate channel.
Stepped up Internet and catalog sales continue to be a
channel growth strategy. Polo, J. Crew and Eddie Bauer are
among many companies offering a realistic shopping
experience on websitesallowing the customer to shop not
only by type of clothing or footwear, but also by color, fit,
pattern or size. Additionally, it has been shown that
consumers who research products online at a companys
website frequently spend more in the stores.
Developing a well integrated multi-channel strategy is not
easy. Extended supply chain requirements and cross-channel
management present real challenges to multi-channel industry
players. Pricing and promotion decisions can be particularly
complex, as can the process of centralizing customer data
from the various channels.
2. Channel Strategy and Channel Conflict
For some, selling on the Internet can require a different skill
set than selling in brick-and-mortar stores. The amount of
information that online customers require generally is quite
large. One benefit, however, is that e-commerce sites provide
a source of personalized one-on-one marketing.
The power of the multi-channel retail strategy can improve a
companys bottom line. Delivering a superior, customer-
friendly shopping experience through multiple store formats,
catalogs, call centers and websites enhances customer reach
and improves consumer satisfaction and loyalty.
If managed properly, a change in channel strategy can inspire
new growth or resurrect a failing company. But, if poorly
managed, a company runs the risk of developing conflicting
perceptions about who it is and what it does. It is critical that
companies pursuing new channel strategies analyze and
rationalize their choices carefully to maximize multi-channel
retail performance and ensure that their brands are benefiting
from the experience.
Long-Term Trends in Consumer Expenditures on Apparel and
Footwear
Source: Bureau of Economic Analysis
$350
$100
1983
Total consumer spending on apparel/footwear at all retail formats,
including department stores, specialty stores and other
$300
$200
$150
$250
Current $
Constant $
85 87 89 91 93 95 97 99 01 03
CAGR, 1983-1993
Current $: 5.8%
Constant $: 4.2%
CAGR, 1993-2003
Current $: 3.1%
Constant $: 4.9%
CAGR: Compound Annual Growth Rate
$Bil.
Apparel Speciality Stores Are Capturing a Larger Share of Total
Apparel/Footwear Expenditures
Source: U.S. Census Bureau, Bureau of Economic Analysis
42%
36%
35%
41%
38%
97 98 03
Apparel Specialty Store sales as % of total consumer spending
on apparel/footwear
39%
96 95 94 93 1992
40%
37%
99
Note: Total consumer spending includes apparel/footwear spending at all types of
retail formats
02 00 01
Footwear Specialty Stores Are Losing Share
Source: U.S. Census Bureau, Bureau of Economic Analysis
9%
6%
97 99 00 03
Footwear Specialty Store sales as % of total consumer spending
on apparel/footwear
96 95 94 93 1992
8%
7%
98 01
Note: Total consumer spending includes apparel/footwear spending at all types of
retail formats
02
As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP. 5
Wholesalers and retailers are working on large-scale, after-tax
cost reduction projects that they hope will boost their
performance in an increasingly price-sensitive and competitive
environment. More efficient supply chains will help reduce
cycle times and may lead to an improved ability to meet
consumer demand. At the same time, typical areas of
internal cost control focus include all steps in operations, tax,
transportation, cash management, procurement, real estate,
finance, distribution, human resources, marketing, and
technology. After comprehensive reviews and process
changes, many apparel and footwear companies are
achieving cost reductions and working capital improvements
that enhance after-tax bottom line results and business
viability.
New scanning technologies support improved forecasting,
and production and distribution planning. All of these benefit
suppliers who are feeling more of the financial-risk burden in
these times of low-cost, global, tax-advantaged sourcing.
Data derived at the sellers end enables retailers to better plan
inventory levels, replenishment and promotional activities.
Specially developed software programs allow retailers to use
this data to replace manual and time-prohibitive tracking
activities with more efficient methodologies for executing
enterprise-wide pricing, promotion and markdown strategies.
3. Cost Reduction
The success of such efforts is often dependent on how well
this work is coordinated on an enterprise-wide basis. This
may include realigning staffing models and performance
metrics as needed, executing project plans and exploring and
applying best practices. As a result, it may also include the
elimination or reduction of low-value activities and non-
merchandise-related expenses. Top management buy-in and
strong project leadership are critical success factors
throughout the process. Success stories include
improvements ranging from better inventory management
(planning, scheduling, transportation, fulfillment) to enhanced
procurement leveraging power, more effective location and
market analysis reviews, and overall better management of
receivables, payroll processes, benefit programs, tax strategies,
and product profitability.
Many control and analysis tools have been introduced in
recent years to assist apparel and footwear companies with
meeting cost reduction challenges. A very positive, added
benefit of using such tools may be identification of
opportunities to improve business performance. Achievement
of both cost savings and performance improvements is a
winning combination.
Retail Prices in 2004 Are Starting to Firm
Source: U.S. Department of Labor
1.0%
-4.0%
Apparel/Footwear Consumer Price Index, 1982-84 = 100
Jan
01
0.0%
% change from year ago
-1.0%
-2.0%
-3.0%
May
01
Sep
01
Jan
02
May
02
Jan
03
May
03
Sep
03
Jan
04
Sep
02
U.S. Apparel/Footwear Retail Prices: Flat-to-Declining Since
1994
Source: U.S. Department of Labor
140
100
93 97 99 03
Apparel/Footwear Consumer Price Index, 1982-84 = 100
120
91 89 87 85 1983
130
110
95 01
As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP. 6
Apparel and footwear companies are looking for new ways to
manage and leverage their brands to their advantagean
objective that has grown more challenging in recent years. As
with so many business sectors, product differentiation and
careful customer targeting are critical success factors.
Additionally, these companies have the constant pressures of
price, quality and value. Another ingredient further
complicates brand management for clothing companies:
slowly and quietly, fashion has shifted its attention from
selling products to marketing pure image.
So, as markets become more global and similar in product
offerings and retail environments, it is essential to try to stand
out. The key is to carve out a niche, go into areas where the
consumer doesnt already have a preferred brand or create or
enhance a special customer experience through price, quality,
value or even store atmosphere.
The size, scope and penetration of private label and store
brands, for example, are on the rise. Beyond just the gross-
margin benefit (plus 10% on average that a private label can
bring), it can also differentiate a retailer from its competitors.
According to New York-based NPD Group, private labels
represented $58 billion in sales in 2002, or 36% of the $163
billion apparel market.
Oscar de la Renta and Michael Kors, among others, are
offering different levels of pricing in their products by
launching second label lines that are less expensive than
the bridge lines theyve had for years. For many companies
such as these, its important to have the ability to design and
source products efficiently, while maintaining the ability to
produce quality and design appeal.
Other companies are branching out into non-apparel lines as a
way of building on their brand recognition. Polo Ralph Lauren
has been a leader in product extensions for several decades.
Calvin Klein, Tommy Hilfiger, Donna Karan and others have
also expanded into non-apparel products, and Liz Claiborne is
adding to its broad range of offerings by introducing a
furniture line in 2004.
Coach, Liz Claiborne and Polo Ralph Lauren are among the
companies employing vertical retail approaches. The goal for
apparel and footwear companies is to explore all workable
options in producing greater efficiencies in lifecycles and
marketing while enabling logical line extensions and keeping
brand integrity intact.
4. Brand Management & Brand Extension
While marketing budgets are typically 3-8% of a companys
sales, it often is difficult to quantify marketing expenditure
benefits and to measure marketing value in terms of after-tax
ROI. As a result, many companies are employing new
analytical processes and tools that take a comprehensive view
across all elements of the marketing universe, from business
objectives to customers and events and media. The challenge
is to build the brand but also keep the focus on increasing
sales and gross margins while maximizing the return on
marketing dollars spent. Analysis and measurement often
result in more productive redirection of resources, fewer
promotional markdowns or failed events, and more specific
targeting of media and distribution strategies.
The fact is that few brands today truly resonate with
shoppers. Putting together the right combination of elements
that establish image, quality, variety, and pricing, can make
the difference between a brand that succeeds and one that
fails. Nike, for example, turned sneakers into something
moreathletic tools. Over time, many consumers have
developed a mindset about the difference between Nike
sneakers and any other brand of sneakers. Now, many years
later, Nike is exploring line extensions into other types of
clothing and footwear to bolster its brand against changing
demographics and lifestyles. This is one example of preserving
customer respect and loyalty while continually updating the
brands perception.
Sales Productivity of Specialty Apparel/Footwear Stores
Increased Between 1997 and 2002
Source: U.S. Census Bureau's 5 year economic census
158,000
144,000
No. of Stores
with Payrolls
156,000
1997 2002
154,000
152,000
150,000
148,000
146,000
$1,200
Sales/store
(000)
$1,000
$800
$600
$400
$200
No. of stores
(left scale)
Sales per store
(right scale)
Sales/store
+31%
No. of stores
-5%
$0
As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP. 7
Risksreal or perceivedare increasing the stress levels of
corporate executives. And the number of potential risks
continues to grow as the global business model becomes
more complex. The situation is further exacerbated by other
contributing factors, such as locations becoming more
widespread and potentially unfamiliar, employment practices
coming under greater scrutiny, and governments focusing on
tax enforcement opportunities.
Section 404 of the Sarbanes-Oxley Act of 2003 challenges
many companies to gain better control of accounting
practices or risk serious financial and image sanctions. In
addition, cash-strapped governments at all levels are
strengthening their enforcement initiatives and closing tax
shelters and loopholes.
Global sourcing leaves many companies exposed to the
inherent risks of doing business in unfamiliar places and
dealing with challenging differences in culture, tax and legal
systems, economic security and regulatory environments. As
pressures build for holding down costs, it only seems natural
that greater risks will evolve. China, for example, is a very
attractive source of low costs and high skill levels. But doing
business there is not without risk.
Employment and trade practices are under constant review by
trade unions and socially conscious organizations.
Additionally, companies must comply with consumer product
safety standards and regulations that vary worldwide.
Ignoring such country-specific rulings regarding the safety of
childrens sleepwear or the chemical washing and finishing
allowed in adult clothing can lead to both financial and
image damage. Brands can also be vulnerable financially and
legally to image-related decisions and promotional activities.
Negative press coverage of financial irregularities among
many high-profile companies in recent years has also
escalated executive fear of reputational damage. Corporate
reputation is now often evaluated along with a companys
financial statements.
5. Risk Management
Absent proper monitoring and oversight, apparel and
footwear companies that license the rights to use their names
on other product offerings in exchange for royalties risk losing
control of quality and image and damage to their reputation
and brand. Franchising, or selling the rights to open a
designer store, carries some of the same risks, yet many
companies are finding that they can no longer afford the
luxury of direct store ownership or resist ownership in foreign
locales.
Todays business environment demands that wholesalers and
retailers focus more attention on minimizing risksfrom
closer examination of internal controls, tax positions and
financial reporting practices to corporate governance, image
marketing, and human resources policies and procedures.
Such steps serve not only as insurance against future problems
but also as positive action toward enhanced shareholder
interest and value.
40% of Firms Will Increase Spending to Support Compliance With
Sarbanes-Oxley
Source: Forrester Research, May 2004
Security
During the next 12 months, do you plan to increase spending for any of
the following technologies to support compliance with Sarbanes-Oxley?
0% 20% 40% 60% 80%
Storage
Specialized process
control
Records management
software
Business intelligence
software
ERP software
As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP. 8
In todays challenging economic climate and increasingly
competitive landscape, apparel and footwear companies face
pressures to reduce costs, increase profitability, maintain
quality, and reduce time to market. Effective management of
the sourcing function is an important variable in achieving
these objectives.
Currently, about 50% of the apparel sold in the U.S. is made
abroad because of lower foreign labor costs in those
countries. U.S. imports come from foreign apparel makers
and from the foreign-owned plants of U.S. manufacturers
who have transferred a large part of their production
capacities to low-cost countries. These realities have given
rise to several major issues that will impact foreign trade in
the coming year, including the ending of trade quotas, the
need for wholesalers to more effectively integrate production
and sales in a global market and for wholesalers to deal with
stricter trade and tax law enforcement.
At the same time, demand for apparel and footwear products
is growing globally. Consumers in countries with higher
income levels are requiring faster updates in apparel selections
to match style trends. As demand grows, so does the
competition among apparel and footwear companies. This
combination of increased market demand and heightened
competition has given rise to two key objectives:
Broadened customer baseA global strategy enables
companies who may face a slow economy in one country to
expand revenues in faster growing markets.
Lower manufacturing costsApparel and footwear
companies are chasing the lowest cost labor markets, shifting
to manufacturers located in Asia, Latin America, Africa, and
the Caribbean.
The single most important external factor impacting both
trade management and global sourcing for the apparel
industry will be the elimination of quotas on textiles and
clothing. On January 1, 2005, Western countries will lift their
import quotasin accordance with World Trade Organization
(WTO) ruleson apparel and textile products from WTO-
member countries. This action is likely to produce shifts in
where many goods are sourced and produced, as well as lead
to even lower production costs and consumer prices for
apparel. China and India, in particular, are expected to
strengthen their production roles, because they are both
strong producers of clothing in terms of production scale and
product quality. Some analysts, however, suggest that the
U.S. government will enact certain safeguard mechanisms to
prevent a flood of new imports from entering the country.
6. Global Sourcing & Trade Management
In order to remain competitive, many apparel and footwear
companies may seek to identify, develop and place production
with capable business partners globally. Similarly, there are
critical requirements to optimize the efficiency of shipping
routes, to develop and share technology capabilities across
borders, to design and utilize tax-incented supply chain
transactions, to develop a tax customs and duty strategy, and
to provide information visibility. All of these factors allow
companies to consider not just their first cost but their total
cost of ownership. Sourcing decisions are being made with a
number of key factors in mind, including: geopolitical stability;
reliability and quality of certain infrastructure components,
such as transportation systems; transfer pricing arrangements;
tax incentives and issues; access to high quality management
talent; and exposure to environment and labor issues.
Wholesalers and retailers should focus on identifying the most
economical locations for sourcing materials and
manufacturing goods with minimal lead times. Effective
global trade management will require an all-encompassing
view of the entire order-to-after-tax-cash lifecycle for cross
border transactions. As part of meeting this need, many
companies are rapidly moving towards technology solutions
that help align their global trade functions with their
operational demands. Better management and streamlining
of global trade processes can significantly improve operating
efficiencies and cash flows.
2004: Apparel and Footwear Import Price Movements Are Out
of Sync
Source: U.S. Department of Labor
1.5%
-1.5%
Jan
01
% change from year ago in Import Price Indexes for Apparel and
Footwear
1.0%
-0.5%
-1.0%
May
01
Sep
01
Jan
02
May
02
Jan
03
May
03
Sep
03
Sep
02
0.5%
Jan
04
May
04
0.0%
Apparel
Footwear
2003 Import Prices: Strongest Increases Since Mid-1990s
Source: U.S. Department of Labor
3%
% change from year ago in Import Price Indexes for Apparel and Footwear
1992
2%
1%
0%
-1%
-2%
-3%
93 94 95 96 97 98 99 00 01 02 03
Apparel
Footwear
As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP. 9
Revenue collaboration and market integration between
wholesalers and retailers represents a trend that offers growth
and differentiation. Many apparel and footwear wholesalers
and retailers are exploring strategies that will deliver better
gross margins, increase the percentage of full-price selling
and attract more customers into the stores. Retailers often
refer to this drive as differentiation because the idea is to
offer a non-commodity item that the big discount chain
across the street doesnt have, or a personalized product line,
or a unique in-store environment, or a customer loyalty
reward lure.
Technologies aimed at profiling inventory levels and customer
interest help enable this new model by creating competitive
advantage. Euratex, a European research group composed of
apparel industry research institutes, machinery manufacturers,
software developers, and education and training
organizations, is working on Project Leapfrog to transform the
entire textile and clothing sector into a flexible, knowledge-
driven, high-tech industry. The Euratex initiative is aimed at
automating certain fabric preparation and cutting and sewing
technologies so as to enable mass customization. C&A, a
European retailer, is also testing a scanning technology that
takes individual customer measurements, forwards the data
to the manufacturer and delivers the custom garment within
four weeks.
7. Revenue Collaboration and Market Integration
Ultimately, automation efforts such as these aim to distill and
decipher critical information about the consumer buying
process. They help the supplier buy lower price goods and
control expenditures associated with freight, customs and
duties, and they support retailers in stocking what customers
want at a price they are willing to pay. These efforts help
keep inventory levels in sync with projected demand. In this
collaborative environment, retailers and wholesalers view each
other as members of the same team rather than as
adversaries. This means satisfying customer demands through
an infrastructure that links all points on the supply chain.
Customer Data Warehousing Is Becoming Widespread
Source: Forrester Research, May 2004
In production or
upgrading
46%
At what state is your company in the adoption of a centralized data
warehouse of customer information?
Dont know
1%
No plans
24%
Considering
16%
Piloting
5%
Rollout underway
8%
As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP. 10
Wal-Mart continues to grow revenues and profits, largely due
to supply chain efficiencies, execution of a global tax strategy,
collaboration with suppliers and ready adoption of new
technologies that help it respond better to customer wants.
In fact, 70% of Wal-Marts merchandise reportedly is
purchased by customers before the company has even paid
suppliers for it.
With approximately 4,000 stores, revenues of $245 billion and
1.3 million employees, the chains impact in apparel and
footwear wholesaling and retailing is not disproportionate to
its size and scope. The companys exceptional data
management, supplier relationships and expansion around
distribution centers have helped it to a 12% share of the
apparel industry, though it aims for 30%. Wal-Marts annual
clothing and footwear budget alone is $35 billion, which
enables it to carry significant influence with its suppliers.
As the company goes about reshaping the apparel industry on
many levels, there are lessons for other suppliers and retailers.
The companys success demonstrates the power of strong
relationships with suppliers. More than 200 of them have
established operations near Wal-Mart headquarters in
Arkansas to facilitate their partnerships. The company
declares that its low prices spur productivity on a global scale.
Suppliers, in turn, benefit from large volume, repeat orders,
predictable delivery schedules and state-of-the-art supply
chain technology.
8. The Wal-Mart Factor
Additionally, in other bellwether cost-saving moves for the
apparel and footwear industry, Wal-Mart has cut back and
consolidated the number of brands, styles and color schemes
for its fabrics, accessories and threads in an effort to obtain
more discounts from clothing wholesalers. It has also
implemented its own global procurement division to search
out cheaper raw materials, global manufacturers in far-flung
locales and more cost-effective shipping routes. By one
estimate, Wal-Mart now imports at least half of its
merchandise.
Wal-Mart affects the strategies and decisions of virtually all of
its retail competitors. Other companies are beginning to
duplicate Wal-Marts efforts in building stronger relationships
with suppliers, making their respective supply chains more
efficient and finding ways to keep the lid on price increases.
Wal-Mart Celebrates 25/25*
Source: Wal-Mart
$300
$0
1978
$200
$100
*Growing 25% per year, on average, for 25 years
Compound Annual Growth Rate, 1978 2003: 25%/year
$Bil.
1983 1988 1993 1998 2003
As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP. 11
Companies might want to consider using new technologies
to help improve supply chains, after-tax cash flow, customer
information and even customer service. The challenge will be
to use the information obtained through technology
innovations in a timely and cost-effective manner and as a
means of keeping the focus on the customer.
Chief among such developments is Radio Frequency
Identification (RFID), the eventual replacement for barcodes.
The technology consists of small radio tags with tiny
antennas. Due to a higher cost than bar-coding, most
wholesalers and retailers currently are inserting the RFID tags
on warehouse pallets rather than having them embedded in
individual items. However, even at the pallet level, companies
are experiencing benefits in tracking and replenishing
inventory.
The main benefit of the technology is to reduce out-of-stock
items and increase sales. At the individual product level, the
embedded chip provides a constant stream of information
that enhances inventory management (from live sales data to
dating and replacement) and pricing. Scan-based trading
enables additional inventory to be ordered automatically once
the computer chip registers that a particular product has
passed through the checkout counter. Additionally, the
concept of RFID technology is leading to other useful
innovations involving wireless networks that enable use of
hand-held devices to call up product and customer
information right on the sales floor.
Some companies are moving ahead with this technology at a
quick pace. In early 2004, Marks & Spencer in the UK began
testing RFID-tagged menswear at five of its stores. Stocks are
being scanned at the end of the day, and replenishment
instructions are sent to a distribution center. Product
availability and sales at these five outlets are being measured
against a control group.
RFID can offer after-tax cost savings due to the automatic
reading of the information in the normal course of an
items movement without extra human effort to position it on
a scanner. Ultimately, RFID tags can also improve tax
planning and tax strategies by leading to entirely new ways of
determining property tax, calculating inventory values and
conducting purchase check-outs.
9. RFID
But there are issues beyond the usefulness of RFID in inventory
tracking: privacy and protection of competitor-sensitive data,
for example. Due to the easy accessibility of information,
industry groups are setting standards for use, access, security,
record-keeping, and even ownership of data.
Still, most users agree that the industry is on a path to RFID
adoption because it transforms supply chains, reduces costs
and increases information access. In 2005, Wal-Mart will be
involved in the domestic implementation of RFID on pallets
and cases from its major suppliers. Other major U.S. retailers
such as Target have also issued RFID directives to their
suppliers.
Companies Increasing RFID Deployment Over Next 12 Months,
by Industry
Source: Forrester Research, June 2004
Government
0% 5% 10% 15% 20%
Chemicals
Wholesale
Industrial products
High-tech products
Consumer products
Retail
For many companies, significant portions
of RFID spending such as tag costs and
warehousing reengineering will come from
operations budgets outside of IT.
Forrester Research, June 2004
As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP. 12
Collapsing the cycle time from idea to revenue generation has
become a prerequisite to successful Product Lifecycle
Management (PLM). Increasingly, apparel and footwear
industry leaders are taking a comprehensive view of product
development and sales that helps identify opportunities for
reducing cycle timessome by nearly one-third.
By viewing PLM as a system that includes brand and product
strategies, disciplined development processes, efficient
resource management, information technology enablers, and
key performance measures, apparel companies are able to
quickly react to emerging trends, draw on the experience of
industry best practices and keep financial objectives on target
(including maximizing cash flow) through effective project
management. This often means doing things quite differently
than tradition dictates. The combination of component-based
product design and smarter sourcing can produce supply chain
efficiencies, re-inspire consumers and enhance top line sales
growth with fast fashionsthe apparel industry response to
the drive-through window.
Vertically integrated retailer Zara is a good example of a
company that has found the answer in practicing PLM. Zara
provides low priced, fashionable clothes in a broad, but
shallow, assortment. Stock rotation is quickabout a dozen
times a yearand unsold items are removed from the store
every two weeks. The company is able to do this through an
integrated process in which they control the entire design,
manufacturing and sales process. This results in new products
coming to market in two to five weeks. The design team is
large and works with a limited number of color and fabric
options, store information on sales is reviewed frequently, test
outlets are used for planning, and there is a lot of
communication among decision-makers about consumer
interest, new trends and the need for design or merchandising
tweaks.
10. Product Lifecycle Management
Liz Claiborne also practices PLM techniques. The company
uses technology, for instance, to communicate the latest
trends from outside forecasting experts to their designers.
Visual tools are used to help ensure that the latest fashion
concept is produced across all of the companys divisions, and
electronic communications vehicles are used to ensure that
retail outlets are aware of top-selling items.
When it comes to sourcing, The Gap uses an integrated
approach to vendor or contractor selection. The Gap strategy
and approach includes early reservations with suppliers and
initial purchase order confirmation to selected suppliers based
on the current production plan.
In all of these cases, PLM is used to effectively manage lines.
Product development is driven by clear brand strategy and
well-developed marketing plans that demonstrate consistency
across product categories and give clear goals for markets.
These companies use a disciplined process for idea generation,
product development, sourcing, and production. Then they
measure their results to ensure they stay on track with their
goals.
Style/Color: Most Important Reason for Purchasing Apparel
Source: NPD Group
70%
Reasons for purchasing apparel for 12 months ending Sept. 2003
Shares based on total dollars spent on apparel
Style/Color
50%
40%
30%
20%
10%
0%
Women
Men
Price Comfort Fit Quality Brand
Reputation
60%
Womens Footwear Sales: Casualization Trend Is Growing
Source: NPD Group
$8
Dress
$6
$4
$2
$0
2002
2003
$Bil.
-5%
Dress Casual
-4%
Casual
+11%
Active/
Leisure
-1%
Note: Data for 12/200211/2003 vs. 12/2001-11/2002
As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP. 13
Successful apparel and footwear wholesalers and retailers are
identifying and addressing many key issues, such as
globalization, supply chain efficiencies, tax planning and risk
management, and are making tough choices about growth,
innovation and investments in technology.
Merger and acquisition activity, for example, is already picking
up as many companies see business combinations as the most
efficient route for revenue diversification, geographical
expansion, product line extensions, and more clout in business
relationships and shipping arrangements.
Other companies are pursuing opportunities for cutting-edge
innovation as a means to boost profit margins and
competitiveness, including restructuring product lines to fit a
wide range of consumer budgets under a single brand,
outsourcing materials and processes to low-cost markets, and
introducing fast turnaround techniques for promoting quicker
inventory turnover.
Technology continues to play a big role in shaping and
supporting both innovative and cost saving ideas. Investment
in semi-automated equipment that replaces human effort will
likely continue to rise, paving the way for payroll reductions
and for new approaches to garment assembly that permit
quicker response to consumer demands. Apparel and
footwear wholesalers and retailers are also looking at the
financial potential of using scanning technologies to enable
mass customization of apparel and more efficient inventory
tracking and management through the embedding of
computer chips in manufacturing.
Conclusion
10-Year Trends in Retail Sales Growth: Deflation Has Impacted
Most Segments
Source: Bureau of Economic Analysis
14%
Other General
Merchandise*
12%
8%
4%
0%
Current $
Constant $
Compound Annual Growth Rate, 1993-2003
Apparel
Stores
Footwear
Stores
Dept.
Stores
*Includes mostly warehouse clubs, supercenters and dollar stores
10%
6%
2%
In todays competitive environment, success in the apparel and
footwear industry is dependent on having a powerful brand.
A companys brand is largely defined by three major
components image, product, and the companys people and
culture. By successfully addressing the ten issues presented in
this report, companies can help strengthen the three
components that build brand awareness among consumers
and drive profitability for the firm.
Member of
Deloitte Touche Tohmatsu
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Copyright 2004 Deloitte Development LLC. All rights reserved.
For More Information
For more information on Deloitte's Consumer
Business Practice, please contact:
Tara Weiner
National Managing Partner
Consumer Business Industries
Deloitte & Touche LLP
Tel: 215 246 2326
e-mail: tweiner@deloitte.com
Ed Carey
Global Practice Director
Consumer Business Industries
Deloitte Touche Tohmatsu
Tel: 312 374 3048
e-mail: ecarey@deloitte.com
As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP. 14
Matt Benjamin
National Consumer Business
Apparel, Textiles, Footwear, Accessories, and Cosmetics Leader
Deloitte & Touche LLP
Tel: 212 436 2735
Fax: 646 563 0458
e-mail: mbenjamin@deloitte.com
Jim Haines
National Consumer Business Consulting Leader
Deloitte Consulting LLP
Tel: 617 437 3600
e-mail: jhaines@deloitte.com
Nancy Wertheim
National Consumer Business Tax Leader
Deloitte & Touche LLP
Tel: 617 437 2722
e-mail: nwertheim@deloitte.com
John Scheffler
National Consumer Business Assurance Leader
Deloitte & Touche LLP
Tel: 510 287 2827
e-mail: jscheffler@deloitte.com
Brett Sherman
National Consumer Business Enterprise Risk Services Leader
Deloitte & Touche LLP
Tel: 973 683 6364
e-mail: bssherman@deloitte.com
Kevin Barrett
National Consumer Business Financial Advisory Services Leader
Deloitte & Touche LLP
Tel: 617 437 2500
e-mail: kfbarrett@deloitte.com
Sandra Viola
National Director of Marketing
Consumer Business Industries
Deloitte Services LP
Tel: 212 436 3058
e-mail: sviola@deloitte.com