Designing-Up in a Down-Economy?

Three major specialty-apparel chains—$2.4 billion Ann Taylor; $1.3 billion J. Crew Group; and $15.76 billion titan Gap Inc., which owns Banana Republic—are all pushing new, higher-priced upscale collections. Fast on the genteel heels of BR Monogram, the first J. Crew Collection store will open in Manhattan on Madison Avenue and 79th Street this summer. J. Crew is aiming highest of the three, offering limited-edition products—such as a $3,000 jacket with French sequins in various shades of tortoiseshell hand-sewn into silk chiffon—that are already available online. "It's about finding and using the best designers and craftsmen, fabrics, mills, and factories in the world to create the highest quality products possible," says Mickey Drexler, C.E.O. of J. Crew Group. "It is not about putting a label that just says 'Collection' on our clothing." For decades, midpriced specialty stores have done well churning out khakis, sweaters, jeans, and suits at lower prices than designer equivalents in department stores. But with the luxury tier of fashion performing better than midpriced merchants during the last few years, humbler fashion chains have been coveting that Italian hammered-brass ring. Catching hold can mean higher profits—getting consumers to step up one price point can improve the gross margin by 10 points, notes Michael Silverstein, a Chicago-based senior partner at the Boston Consulting Group and co-author of Trading Up. And, of course, as any consumer of luxury items knows, there's simply the snob appeal. "There's an ego thing about running a higher-end business," says Peter Schaeffer, retail and consumer products partner at Carl Marks Advisory Group, an investment banking consulting firm. "It sounds more glamorous to add an upper tier." But the risks are big. A company can alienate loyal customers—as Banana Republic did with Hunter and Regan—while failing to attract new ones. Shoppers seeking more expensive items made from better-quality materials already have plenty of choices at department stores, designer and contemporary boutiques, and online. "It's a very hard transition to make," says Michelle Tan, a specialty-apparel analyst at UBS Securities. "At premium price points, most of that business is dominated by department stores, [and for] retailers that tried to do that on the specialty side, it hasn't worked well." What's worse, the three chains are trying to trade up just as an economic slowdown hits consumers across the board. Monthly same-store sales results, a key measure of retail health, for March are the worst in 13 years. Some experts fear that the economic downturn will crimp shopping until late next year. Ann Taylor and Gap are also struggling to turn around their main businesses. Ann Taylor recently announced plans to close 117 stores, delay its new concept store until 2009, and cut jobs in a massive restructuring to improve earnings. Banana Republic has been healthier than Gap or Old Navy, but it-too stumbled in March, with same-store sales plummeting 8 percent.
(Sourced from Portfolio.com)