How well will the footwear business weather another downturn?
The category was largely resilient during the official recession period of December 2007 to June 2009, and during the sluggish recovery. But now, as economists ponder the possibility of a double-dip recession, executives are challenged not only with economic headwinds but also rising sourcing and transportation costs.
The recent downgrade of the federal government’s credit rating by Standard & Poor’s, as well as a listless job market, high gas prices, Wall Street volatility and a still-slumping housing market, are all contributing to an atmosphere of uncertainty.
“We’re all really waiting to see how things will turn out,” said Brown Shoe Co. Chairman Ron Fromm. “Consumers are very nervous, and any time that happens it’s a concern [for us].”
“We will have some significant challenges ahead of us,” added Jim Monahan, VP of footwear at Asics America Corp. “There are no indicators to make us think different.”
Still, many feel the category is well positioned to grow, even in the face of a second recession. “The reality is that the economy is not strong, but footwear has made some great strides,” said Kevin Burke, president and CEO of the American Apparel & Footwear Association. “[The category has] had a good couple of years. The industry has gone to great lengths to make sure they have the right inventory, and we’ve come a long way in determining how much demand we have for our products.”
But other insiders said cost pressures are driving the industry into unknown waters.
Tom Florsheim, chairman and CEO of Weyco Group Inc., said the latest economic turmoil comes at a particularly precarious time as manufacturers are finding it all but impossible to maintain price points. “The timing won’t be very good if we go back into a recession,” he said. “Given what’s going on with raw materials and labor and transportation and everything else, brands don’t have any choice but to raise prices.”
Labor costs in China are increasing by 10 to 20 percent versus a year ago, and raw material and transportation costs are rising as well.
“A couple of years ago, you had an option if you were going to pass along price increases,” said Monahan. “Today, you don’t have an option. There is not an item in our line that won’t see some level of increase [for spring]. This industry is facing a seismic shift.”
At Wolverine World Wide Inc.’s Outdoor Group, VP of global marketing Craig Throne said the company began raising prices gradually three seasons ago to prevent consumers from experiencing a sudden jolt. But he worries there is still a limit to what consumers will pay, and shoes priced higher than $100 could discourage buying.
“The consumer isn’t going to suddenly say they’re fine paying $110 for something that was $95 a year ago,” Throne said. “This changes the game. As we went into the last [recession], the [price] pressure was just starting. It wasn’t as intense as it is now. It’s harder to hit that price point.”
Still, Marshal Cohen, chief industry analyst at The NPD Group, said that while rising prices are always a concern, his research has not revealed consumer resistance to price increases for shoes. “I have yet to see retail numbers that are showing that consumers are responding negatively to higher prices [in footwear],” he said.
Still, Cohen added in a note last Thursday that the consumer is under an intense amount of pressure. “Distractions are at a fever pitch,” he said. “From higher gas prices, to the jobless rate, to the NFL lockout, to the debt ceiling debate and then the S&P downgrade, the consumer has endured a lot. And now we add in the stock market roller-coaster ride. And we have a consumer that has forged ahead despite all of that for the first six months of 2011. But how much more can they endure?”
BBC International CEO Bob Campbell agreed that price bumps are small enough that they’re not discouraging shoppers. “They’re not going up dramatically, maybe [6 to 9] percent,” he said. “So far, we haven’t had too much resistance [from consumers].”
Many vendors noted they are banking on innovative product to encourage buying, even if the industry is hit with another recession.
“If we make the right shoes, there is no recession,” said Titan Industries CEO Joe Ouaknine. “We are fashion. This is a category that operates against the state of the economy. Women have to have the right trendy item even if they can’t afford it.”
Throne, too, said Wolverine is depending on fresh product to get consumers excited about footwear. “The way we keep [consumers] coming back is through innovation,” he said. “Footwear is still something [consumers] seem happy to spend on, even as they cut spending in other areas. They might not buy a car, but they will by footwear.”
Florsheim said he hesitated to draw too many comparisons between the recent recession and the current economic climate, mainly because the factors that impacted the industry then are different now. “The recession was new territory for a lot of us,” he said, citing the severity of the cutbacks in spending, and the banking and housing crises. “We won’t have those this time; we will have different [challenges], but hopefully not as severe ones as last time.”
And many of the key factors that contributed to the footwear industry’s resilience during the recession remain relevant, said Christopher Svezia, an analyst at Susquehanna Financial. “We’re still going to see growth in footwear,” he said. “Even in the depths of the horror two years ago, the footwear business was on better footing [than most]. I’m still a believer that, all in all, we’re still in a good cycle where the trends are still favorable … to the overall business.”
The luxury business, in particular, is firing on all cylinders, and insiders predicted that won’t change unless there are more steep market declines.
“People are going to continue to make luxury purchases unless we see a drastic, say 2,000-point, drop [in the indices],” said Jennifer Black, president and CEO of Jennifer Black & Associates.
Morningstar Inc. analyst R.J. Hottovy, however, was less optimistic, noting that the strength of footwear during the recession could be a big weakness going forward.
“Footwear had a nice run for two years,” he said. “Given [that] people have been buying, [shoes] may be one of the purchases that consumers have second thoughts about before proceeding. [Spending] won’t be completely crippled, but there will probably be a deceleration of sales trends.”