Consumer Business

Apparel & Footwear Industry

Top 10 Issues 2004

Audit . Tax . Consulting . Financial Advisory.

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.

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 instore 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 postSeptember 11 concerns. Industry players should look to pursue the appropriate global solutions to risk management issues.
2

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-productrevenue 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.

1. Growth and Innovation in a Mature Industry

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.
U.S. Apparel Production: A Difficult Decade
Employment, 000 1000 Production Index, 1997 = 100 105 100 800 600 95 90 85 80 75 200 0 1992 93 94 95 96 97 98 99 00 01 02 03
Employment (left scale) Source: U.S. Department of Labor, Federal Reserve Production (right scale)

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.

400

70 65 60

As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP.

2. Channel Strategy and Channel Conflict

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.
Long-Term Trends in Consumer Expenditures on Apparel and Footwear
Total consumer spending on apparel/footwear at all retail formats, including department stores, specialty stores and other $Bil. $350 $300 $250 $200 $150 $100 1983 85 87 89 91 93 95 97 99 01 03
CAGR: Compound Annual Growth Rate Source: Bureau of Economic Analysis CAGR, 1983-1993 Current $: 5.8% Constant $: 4.2% CAGR, 1993-2003 Current $: 3.1% Constant $: 4.9%

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, customerfriendly 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.
Apparel Speciality Stores Are Capturing a Larger Share of Total Apparel/Footwear Expenditures
Apparel Specialty Store sales as % of total consumer spending on apparel/footwear 42% 41% 40% 39% 38% 37% 36% 35% 1992 93 94 95 96 97 98 99 00 01 02 03
Note: Total consumer spending includes apparel/footwear spending at all types of retail formats Source: U.S. Census Bureau, Bureau of Economic Analysis

Footwear Specialty Stores Are Losing Share

Footwear Specialty Store sales as % of total consumer spending on apparel/footwear 9%

Current $ Constant $

8%

7%

6% 1992 93 94 95 96 97 98 99 00 01 02 03
Note: Total consumer spending includes apparel/footwear spending at all types of retail formats Source: U.S. Census Bureau, Bureau of Economic Analysis

As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP.

3. Cost Reduction
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. 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 nonmerchandise-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
Apparel/Footwear Consumer Price Index, 1982-84 = 100

U.S. Apparel/Footwear Retail Prices: Flat-to-Declining Since 1994

Apparel/Footwear Consumer Price Index, 1982-84 = 100 140 130 120 110 100 1983 85 87 89 91 93 95 97 99 01 03
Source: U.S. Department of Labor

% change from year ago 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% Jan May Sep Jan May Sep Jan May Sep Jan 01 01 01 02 02 02 03 03 03 04
Source: U.S. Department of Labor

As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP.

4. Brand Management & Brand Extension

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 grossmargin 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. 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
No. of Stores with Payrolls 158,000 156,000 154,000 152,000 150,000 148,000 146,000 144,000 1997
No. of stores (left scale) No. of stores -5% Sales/store +31%

Sales/store (000) $1,200 $1,000 $800 $600 $400 $200 $0

2002
Sales per store (right scale)

Source: U.S. Census Bureau's 5 year economic census

As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP.

5. Risk Management
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. 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
During the next 12 months, do you plan to increase spending for any of the following technologies to support compliance with Sarbanes-Oxley?

Security Storage Specialized process control Records management software Business intelligence software ERP software 0%
Source: Forrester Research, May 2004

20%

40%

60%

80%

As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP.

6. Global Sourcing & Trade Management

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 WTOmember 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. 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.
2003 Import Prices: Strongest Increases Since Mid-1990s
% change from year ago in Import Price Indexes for Apparel and Footwear 3% 2% 1% 0% -1% -2% -3% 1992 93 94 95 96 97 98 99 00 01 02 03
Source: U.S. Department of Labor Apparel Footwear

2004: Apparel and Footwear Import Price Movements Are Out of Sync
% change from year ago in Import Price Indexes for Apparel and Footwear 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% Jan May Sep 01 01 01 Jan May Sep 02 02 02 Jan May 03 03 Sep 03 Jan May 04 04
Apparel Footwear

Source: U.S. Department of Labor

As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP.

7. Revenue Collaboration and Market Integration

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, knowledgedriven, 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. 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
At what state is your company in the adoption of a centralized data warehouse of customer information? In production or upgrading 46%

Rollout underway 8% Piloting 5% Considering 16%

Source: Forrester Research, May 2004

Dont know 1% No plans 24%

As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP.

8. The Wal-Mart Factor

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. 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*
$Bil. $300

$200

$100

$0 1978 1983 1988 1993 1998 2003 Compound Annual Growth Rate, 1978 2003: 25%/year
*Growing 25% per year, on average, for 25 years Source: Wal-Mart

10

As used in this document, the term Deloitte includes Deloitte & Touche LLP and Deloitte Consulting LLP.

9. RFID
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. 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
Government Chemicals Wholesale Industrial products High-tech products Consumer products Retail 0%
Source: Forrester Research, June 2004

5%

10%

15%

20%

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.

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10. Product Lifecycle Management

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. 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
Reasons for purchasing apparel for 12 months ending Sept. 2003 Shares based on total dollars spent on apparel 70% 60% 50% 40% 30% 20% 10% 0% Style/Color
Source: NPD Group Women Men

Price

Comfort

Fit

Quality

Brand Reputation

Womens Footwear Sales: Casualization Trend Is Growing

$Bil. $8 $6 $4
-5% +11% -1% 2002 -4% 2003

$2 $0 Dress Dress Casual Casual

Note: Data for 12/200211/2003 vs. 12/2001-11/2002 Source: NPD Group

Active/ Leisure

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Conclusion
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. 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.
10-Year Trends in Retail Sales Growth: Deflation Has Impacted Most Segments
Compound Annual Growth Rate, 1993-2003 14% 12% 10% 8% 6% 4% 2% 0% Other General Merchandise* Apparel Stores Footwear Stores Dept. Stores
Current $ Constant $

*Includes mostly warehouse clubs, supercenters and dollar stores Source: Bureau of Economic Analysis

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About Deloitte
Deloitte, one of the nations leading professional services firms, provides audit, tax, consulting, and financial advisory services through nearly 30,000 people in more than 80 U.S. cities. Known as an employer of choice for innovative human resources programs, the firm is dedicated to helping its clients and its people excel. Deloitte refers to the associated partnerships of Deloitte & Touche USA LLP (Deloitte & Touche LLP and Deloitte Consulting LLP) and subsidiaries. Deloitte is the U.S. member firm of Deloitte Touche Tohmatsu. For more information, please visit Deloittes Web site at www.deloitte.com/us. Deloitte Touche Tohmatsu is an organization of member firms devoted to excellence in providing professional services and advice. We are focused on client service through a global strategy executed locally in nearly 150 countries. With access to the deep intellectual capital of 120,000 people worldwide, our member firms, including their affiliates, deliver services in four professional areas: audit, tax, consulting, and financial advisory services. Our member firms serve more than one-half of the worlds largest companies, as well as large national enterprises, public institutions, locally important clients, and successful, fast-growing global growth companies. Deloitte Touche Tohmatsu is a Swiss Verein (association), and, as such, neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each others acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names Deloitte, Deloitte & Touche, Deloitte Touche Tohmatsu, or other, related names. The services described herein are provided by the member firms and not by the Deloitte Touche Tohmatsu Verein. For regulatory and other reasons, certain member firms do not provide services in all four professional areas listed above.

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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

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

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