Retail consolidation in the US has been squeezing the apparel industry for several years, but after a succession of disastrous financial results wholesalers appear to be adapting to the new environment. David Robertson reports.

Major suppliers have seen sales and profits slump as department stores have merged, eliminating millions of square feet of prime retail space all across the country.

The highest profile example of retail consolidation was last year's $17bn merger of Federated Department Stores and May Department Stores. Federated, which owns Macy's and Bloomingdales, has announced about 75 store closures as poorly performing locations and duplicates are axed.

Research by retail analysts shows that the number of US department store groups, once the (literal) corner stone of suburban shopping malls, have declined in number from 50 in 1989 to 17 today.

The retailers that remain are now bigger than ever and have been squeezing suppliers for bigger discounts, adding to wholesalers' agony. Over the last couple of years the red ink has seemed unstoppable.

Jones Apparel Group, which includes the Anne Klein and Nine West brands, announced first half sales last week that were down 9.3% to $2.2bn. Gross profits were off 8.3% to $855m compared with the same period last year.

Liz Claiborne, another heavyweight in the clothing industry, has also struggled. Its first half sales were off marginally at $2.2bn but earnings per share fell 7.7%.

However, wholesalers are developing strategies to cope with the new retail environment and many are confident their future is bright.

Branded clothing
One of the most notable trends is for manufacturers to concentrate on branded clothing. Brands command greater consumer loyalty, which means they can charge premium prices and are also harder for department stores to axe.

Liz Claiborne chief executive Paul Charron told just-style last month: "We have a collection of lifestyle brands that only operate at the upper end. We have no opening-price point area because the people who deal there are effectively selling commodity goods. They are living on borrowed time."

Those companies that already have a strong stable of brands have found another way to deal with retailer consolidation: they are establishing their own presence in malls and shopping precincts.

VF Corporation, which makes Lee and Wrangler jeans, had 525 company-owned stores at the start of 2005 but plans another 400 by 2009.

The contribution to sales by company-owned stores will rise from 13% to about 18%, and these Lee/Wrangler stores will also be used to promote the company's other brands like North Face and Vans.

Paul Mason, a spokesman for VF, said: "It is a fact that retail consolidation has impacted our business but we have focused on our customers and retail partners to reduce the effect on our revenue and earnings. We are not doing retail for retail sake. It is about building our brands with consumers and that is easier if we own our own stores."

Jones Apparel has gone even further and bought Barneys of New York - an upmarket department store - to ensure its place in the retail sector.

Maintaining a retail presence
Maggie Gilliam, a retail analyst in New York, said: "Wholesalers are having to go vertical [pushing into the retail market] because that's the only way they can keep up their retail presence as companies consolidate and close doors."

Gilliam also points out that another tactic being adopted by branded wholesaler/retailers is the spreading of their brand image into other market segments.

This is particularly true of the brands targeted at teenagers and a number, like Abercrombie & Fitch and American Eagle, are rolling out new designs and stores aimed at older consumers.

Ralph Lauren, meanwhile, is going in the other direction and attempting to lure younger consumers.

However, of the various strategies employed to deal with retail consolidation this appears the weakest.

Gilliam explained: "Just because you are successful with one concept does not necessarily mean you will be successful twice.

"The most common objective is to try to expand your customer base out of the core stores assuming that people a bit older will want the same things. But the whole market is fragmenting and people want different things when they grow up."

Targeting Europe?
Given the contraction in retail opportunity in the US it is perhaps surprising that more apparel companies are not targeting Europe, where consolidation is still relatively unknown. Liz Claiborne is one of the few companies aggressively trying to build its European portfolio.

Most apparel companies appear to have decided to focus on the US and not risk throwing away money trying to chase success in markets they don't understand.

But what is clear from the trends emerging in the US is that the traditional concept of wholesaler and retailer are disintegrating. Retailers are increasingly sourcing direct from factories in Asia for their own-label brands while wholesalers are developing brands and opening stores.

In the American market at least, these hybrids appear to be the future.