Retailers Fashion Ways to Cut Costs

Excerpted from WSJ “Fashioning Ways to Hold Down Prices,” February 3, 2009, By Nicholas Casey

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After steep discounting on its tops, khakis and jeans ate into its margins last year, American Eagle Outfitters  is trying to reengineer the way it produces clothes.

It hopes to recalibrate its costs with moves that involve everything from changing where a garment is made (fewer Chinese factories and more Indian villages) to how it’s shipped (less use of air freight) to how it looks (no patterned pockets in many jeans).

Many retailers fear they will be forced into still more rounds of price cuts as the economy continues to sputter. “Eighty percent off is the new normal” …

Other teen chain stores are also growing wary of slipping prices. Abercrombie & Fitch which has tried markdowns since the holidays, says its brand would be harmed if it tarnished its high-end image with more price cutting. And Aéropostale says it’s looking to timed promotions to drive traffic rather than lowering price tags for good …

American Eagle hopes to cut its manufacturing costs significantly. Recently, the company began moving some production out of China, where wages are on the rise, and into cheaper labor markets in Cambodia and Vietnam … But shifting to less costly production carries its own risks … China is still tops in manufacturing talent and “there are definitely quality issues that are coming up” in places like Vietnam and Cambodia …

Even the way stores get their merchandise is evolving. In past years, distribution centers replenished each store’s clothes garment by garment. This year, the company is bundling many of its lines in prepackaged kits that include a small, two mediums, two larges and an extra large — a set that can go directly from the delivery truck to a display table.

American Eagle plans to entice its customers with brighter colors, hipper silhouettes and ruffles on women’s tops for spring. But it’s cutting out a few things it hopes its teen customers won’t miss: the ribbon that lines the waistband of its khakis, for example, and the color pattern on the material used for its jean pockets.

Changing pockets and eliminating ribbon saves only eight to 10 cents a garment, the company says. But eliminating relatively invisible features allows designers to add hip, visible details — like embroidery on the back pockets of denim jeans — that are more likely to lead to sales.

While it seeks savings, American Eagle has to be careful not to cut too much. Swamped by low-end competitors like Old Navy, the specialty retailer realizes “we can’t be the cheapest in the mall … If they wash it twice and it falls apart, they’ll say it’s not a good shirt,” he says. “There’s a fine line between price and value” … 

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