Selling to the middle-class shopper has rarely been so tough.
Last week, Macy’s lowered its 2015 earnings forecast, amid sales-growth slowdowns resulting from shopper malaise. The department store giant’s troubles follow the January shuttering of Kate Spade Saturday, C. Wonderand Gap Inc.’s Piperlime—three businesses aimed at young, fashion-conscious professionals who can’t yet afford true luxury—and a spate of middle-market retail closures in 2014. And the hatchet is expected to continue falling.
“Being average in the middle is death,” said Kevin Mullaney, president of retail consultancy the Grayson Co. “The high end and the low end—those two businesses are thriving. If you’re in the middle, you’d better have a darn good reason for being there based on product and freshness.”
Hundreds of store closings
Unfortunately, many stores didn’t get the memo. Though fast-fashion players such as H&M and Forever 21 are in expansion mode, and luxury brands from Ralph Lauren to Tory Burch continue to roll out new products, midtier retailers are struggling.
Bankrupt chains Delia’s, Wet Seal and Caché have all closed hundreds of stores since the fall, and 1,700 RadioShacks will follow. Though retailers are dealing with the oversaturation and decline of shopping malls, there’s a more widespread problem at play. Worried about an uncertain global economy and rising prices, middle-class spenders are seeking deals, such as a $6 T-shirt, or splurging on truly special, must-have merchandise, like a $1,200 Canada Goose jacket. Stores such as J.Crew, Gap and Aéropostale are getting squeezed as a result.
For the quarter ended Nov. 1, J.Crew reported that same-store sales declined 2%. In January, long-ailing San Francisco-based Gap announced it was letting go of its creative director, who had been with the company since 2012, and axing the position altogether.
Meanwhile, brands such as Aéropostale and Sears, which occupy the lower end of the midtier, are closing underperforming stores left and right. And Macy’s is investing an additional $100 million in capital spending this year for new store concepts and international growth, in order to ramp up sales amid sluggish traffic.
“We had another good year in 2014,” said a spokesman, noting that Wall Street always wishes for higher projections.
Many of these brands are offering steep discounts to reverse the downward slide.
“You either have to be lighting people on fire and getting them excited about product, or you find yourself like J.Crew and Gap, running 30% to 40% off your entire store,” said Mr. Mullaney.
In addition, middle-market apparel sellers are also faced with increased competition from specialized online players such as Bonobos and Asos—buzzy brands that often don’t have the same overhead associated with large brick-and-mortar chains.
“There is such a wealth of options, particularly with the Internet,” said Kelly Tackett, research director at Planet Retail. “It’s really hard to stand out among that crowded field.”
The consumer buying these brands is part of a shrinking middle class whose wages nationally have stagnated. Median household income in the U.S. was $51,939 in 2013—adjusted for inflation, that’s 8% lower than in 2007 and 9% less than the 1999 peak, according to the most recent available U.S. Census Bureau data. For many retailers, this means marketing to customers who now care more about price than brand.
Though gas prices are down and the dollar is strong, many shoppers are dealing with inflation on everyday essentials like groceries, housing and education. The New York-area consumer price index for food rose 3.5% during 2014, for example.
Any extra income accumulated from gas pumps is being used to pay off bills or stored in savings, or spent on luxury items that are now must-haves, experts said.
“There’s not as much consumption as you might expect,” said Milton Pedraza, chief executive of research group the Luxury Institute. He noted, however, that technology is still thriving because consumers now consider such purchases essential. “They will stretch for iPhones, but may not stretch $70 for a J.Crew pair of pants when you can get them at Uniqlo for two-thirds of the price.”
Some of the recent closures can be attributed to timing. C. Wonder and Saturday were barely out of their infancy—C. Wonder was founded in 2011, Saturday two years later—and expanded too quickly out of the gate when consumers began tightening their purse strings.
These brands tried to be everything to everyone at once, rather than focusing on doing a single product right and expanding into other categories over time.
Ralph Lauren started with ties when he founded his namesake brand nearly four decades ago, and eventually grew it into a $7.4 billion lifestyle label. C. Wonder has closed its 32 stores, which included three local shops. Saturday, a lower-priced label that lacked an identity distinct from its parent, will shutter its Spring Street store by July, along with 18 other locations.
“There were a lot of new entries at a time when retail wasn’t really flourishing,” said Rebecca Duval, a retail analyst at BlueFin Research Partners. “It wasn’t the best time to come into the market or try to develop a growth story.”
To attract spending, retailers need to introduce more eye-catching products, experts say, though there are few trends right now to bet on. Athletic looks have already become ubiquitous; consumers can find the same me-too jogger pants at H&M that they can find at J.Crew.
“We have a plethora of retailers with that same weak message in terms of the trends they’re getting behind, and eventually they’ll continue to lose market share,” said Ms. Duval.