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More trouble ahead for mid-market brands?

CONSUMER PRODUCTS INSIGHTS  | 

The mid-market has become a volatile landscape, as many brands have trouble keeping up with rapidly evolving customer expectations. Consumers have a growing amount of options, and without the proper attention and proactive strategy, brands can become stale and steadily lose market share. Director of retail and consumer products advisory services, former industry analyst Jeffrey B. Edelman, analyzes the missteps of some brands and details available opportunities to stay relevant and successful by focusing on the customer.

For the purposes of this discussion of mid-markets, one has to differentiate between the size of companies and the markets in which they operate as both will be addressed.

Many brands get tired: Often, brands lose consumer appeal, and are eventually phased out by retailers. Both Jones Apparel Group and Liz Claiborne, and their divisions, were market share donators over the past several years, making way for new and exciting brands that resonated with the consumer. Some did, others did not.

Coach is another example; it was a victim of its own success and lost touch with its target market. It still appears to be losing market share to Michael Kors and Kate Spade. While it is easy to document the market share shift in the accessories market, it is much more difficult in apparel as it is so fragmented in terms of numbers and distribution.

Volatility within the specialty store sector, especially the fast-moving teen market, is also worth noting–it exhibits too much sameness. Gap fell into that trap a number of years ago, allowing growth opportunities for A&F and American Eagle in the fashion area, and Aeropostale on a price basis. Now, those three retailers are struggling. The same could be said for the countless number of brands and specialty stores that have retrenched or are not around anymore.

Brands are so important: Consumers associate brands (national, store label, private or exclusive) with lifestyle, quality, consistency, fashion and value. Brand power extends across multiple product lines and categories, providing growth opportunities and increasing market share. Too often, it can be overexposed and saturated, making it more difficult to maintain relevancy. Others have become tired and less differentiated, moving away from their value proposition.

A brand's life cycle is getting shorter, while at the same time, opportunities for new or rejuvenated brands seem to be growing. Retailers place great emphasis on store and exclusive brands as a means of differentiation, in an attempt to control pricing and to capture a larger margin. The key behind longevity is differentiation and maintaining a constant dialogue with the consumer, thereby sustaining fashion newness and consumer allegiance.

Other consumers are more focused on buying a discounted brand, whether in an off-price or factory outlet store. The brand is more important than the latest fashion item, fabric or fiber content, thus not identical to that found in full-price venues. Off-price and outlet centers are taking some share away from the traditional big-box discount store, which offers less fashion to go along with its low price.

Price alone will not drive a purchase, although we should note Express has been very successful converting its clearance stores to off-price formats. Both Jones and Liz Claiborne were well represented with outlet stores offering substantial discounts, but the problem was unappealing product, which was central to their demise.

Setting the stage for Jones' revival: Brands such as Jones and some of the company's subsidiaries were on a slippery slope for a number of years before finally throwing in the towel last year. It was faced with a diminishing customer base due to department store consolidation and the rise of newer, more exciting brands. The parent company, The Jones Group, was acquired by Sycamore Partners last year and its Jones New York brand was closed in January after stating it was exploring strategic alternatives. Subsequently, The TJX Companies and brand management firm Bluestar Alliance expressed interest in buying the JNY brand.

Could Jones New York be the next disrupter? Macy's resurrected the Tommy Hilfiger name, transforming it into a visible and apparently successful private brand. Similarly, JCPenney developed Liz Claiborne into a strong house brand. Each has gained strong traction with the consumer searching both differentiation and value. Both displaced less important and weaker brands.

The TJX Companies built an impressive record on its ability to offer the consumer branded merchandise at a discount from generally prevailing prices at department and specialty stores. Its domestic volume approximates that of Macy's $28 billion, and it has maintained its momentum as many other apparel and home furnishings retailers have struggled. Either Macy's or TJX would have the capability of resurrecting the Jones New York brand. However, we believe TJX would be a more likely fit as it still carries a variety of "no name" brands that do not resonate with the consumer as Jones potentially could.

Which mid-market brands could be most vulnerable? Each consumer segment places a different relationship on price, fashion, quality, timeliness and uniqueness. Interestingly, those relationships have become more varied among consumer groups by product line. So, what are the characteristics of the next potential market share losers?

Specialty stores that have lost touch with their customer base and are suffering steady declines in store traffic are most susceptible. Some have recently gone into bankruptcy such as Cache. In addition, Chico's has had difficulties and announced acceleration in plans to rationalize its store portfolio and organizational realignment, reducing corporate headcount by 12 percent. Quiksilver is also struggling and exploring alternatives.

Department stores and mass merchants have been evolving their product offerings. The catalyst to discontinue a brand is often because another appears to offer more potential and perhaps exclusivity, rather than because the existing lines are underperforming. Some retailers have eliminated brands on certain categories, so they could extend a brand over a number of products to increase its impact and visibility. One store noted to a vendor that it was not about driving profits per square foot and return on investment, but rather to strengthen its corporate advertising program.

Is the mid-market shrinking? The mid-market as we know it is probably not shrinking; however, the market served by traditional mid-market retailers is. Conventional department stores that are broadening price points and discounters are gaining share, especially those with strong E-commerce efforts.

The landscape is evolving, and we reiterate; there is probably no reason for Sears to exist. Thus, additional market share could be up for grabs. JCPenney and Kohl's are looking to reverse momentum as they strengthen their value message with sharper prices. Focus should probably be on more of the right merchandise in the right place at the right time, in addition to the right price.

This evolution will likely lead to increased pressure on retailers to own label or exclusive merchandise in the quest of maintaining a targeted margin. However, they would also have to absorb the risk of excess inventory with no vendor to push back on. Key will be their ability to develop the proper business model to achieve targeted profitability that can generate cash for reinvestment; otherwise, they will continue to retrench.

Brands must stay ahead of the curve to survive: The balance of power has moved further to the retailer from the brand. This has been accentuated in some cases because logos appear to be less important to the consumer. Notable exceptions are those brands that continue to invest in their consumer loyalty and franchise through social media, cultivating customers that want to purchase, rather than those that need to purchase. The latter group tends to be more commodity in nature and likely more susceptible to potential replacement.

Successful brands understand their customer and the appropriate elements of the value equation that generate repeat purchases; these brands are likely to be among the market share gainers rather than donors.

Theoretically, mid-market companies have an advantage of being more nimble and able to react to market conditions faster, and thus increase market share. Winners succeed because their managements anticipate changes in their consumer and the competitive environment. Opportunities are there.

Jeffrey B. Edelman is director of retail and consumer products advisory services for RSM, and is located in the firm's New York office. He routinely advises senior management of companies operating in the consumer and retail sectors on strategic, sourcing, financial, marketing and distribution issues. He also works closely with internal teams on matters such as new business development, transactional advisory, including due diligence and tax. Jeff can be reached at 212.372.1225, or via email at jeff.edelman@rsmus.com.

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