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Fashionably Late

Will franchising join the apparel party?


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Why is it so unusual for apparel stores to franchise in the U.S.? The answer could fill 50 pages of this magazine, according to Mark Siebert, CEO of iFranchise. Let’s go with the annotated version, however: The No. 1 reason, Siebert said, is that they don’t need to—most national apparel retailers already have the capital necessary to build their own channels of distribution domestically. Businesspeople commonly turn to franchising looking to leverage off the capital of the franchisees—and if capital’s not a problem for you, you don’t really need franchisees.

A sufficiency of capital isn’t the only issue preventing apparel retailers from franchising in the U.S., however. Siebert also points to the question of what to do with product that doesn’t sell in a franchisee’s store. Do you send it to an outlet store that’s most likely owned by someone other than the franchisee? Do you tell your franchisees when and how aggressively to mark down their merchandise? These are questions that most clothing retailers prefer to avoid, Siebert said.



Apricot Lane stands out from the crowd as  a franchised clothing store in the U.S. Will other brands follow suit?

Then, there’s the breakneck speed at which fashions and trends evolve, complicating the fact that fashion-oriented retail typically needs to place orders for inventory six months in advance, Siebert said, adding that this means a franchisee owner of a clothing store would “have to rely heavily on the franchisor’s or the parent company’s judgment on selling to the future based on changes in fashion that are very hard to predict.”

“So the combination of the advance ordering, the need to take markdowns when things don’t work out, the need to have a channel for the outlet-type products and the fact that they don’t need a lot of capital to do this in the first place has led a lot of American (apparel) retailers to not necessarily go down that route (of franchising),” he said.

Retailers who did go down the franchising route are finding the current industry a mixed bag of opportunity and struggle. In response to the down economy, “retailers have looked inward to reduce costs,” said Sandy Kennedy, president of the Retail Industry Leaders Association. “The resulting savings and focus on gross margin instead of overall sales have allowed many retailers to remain profitable.”

According to the RILA, U.S. retail numbers for July 2009 fell 8.3 percent below July 2008, and total sales from May 2009 through July 2009 were down 9 percent from the same three-month period the previous year. “On the negative side,” Kennedy said, “retailers are pulling back on many concepts to conserve capital, while on the positive, retailers are introducing some new concepts to spur sales and fight for consumer spending. In general terms, though, retailers have reduced the number of new store openings. The capital that has been invested tends to focus on remodeling and refreshing existing stores. This less capital-intensive approach has allowed retailers to experiment with layout designs and assortments that could attract new customers.”

Steve Murphy, president of franchising for Winmark Corporation (which runs franchised resale stores), said that comparable store sales in the company’s “used” businesses through July 2009 were up across the board—16 percent for Plato’s Closet, 13 percent for Once Upon A Child, 12 percent for Play It Again Sports and 6 percent for Music Go Round.

Murphy and others agreed with Siebert that apparel is an unpopular choice for franchising in the U.S. Franchising can, however, be a viable means of expansion internationally. Recently, Gap Inc. struck a deal to franchise its clothing stores in Thailand, and American Eagle Outfitters signed a similar agreement in the Middle East. Mark Siebert said that franchising can reduce risk to a retailer who’s worried about political or economic stability when setting up shop overseas. Sandy Kennedy of the RILA said that franchising can help a retailer navigate different regulations, operational practices and human resource policies in a foreign country.

 

Domestically, franchising has been a good model for his company, Murphy said, though he admits “there’s always a little loss of control when you go to a franchise model versus a corporate model.” But this issue is more of a problem for brands that become inventory in Winmark stores, like Abercrombie & Fitch, Hollister and American Eagle Outfitters—all corporately owned apparel stores.

“In the fashion industry, trends vary so much across the country it becomes difficult to merchandise,” said Marc Kiekenapp, a franchise consultant who works with Bijoux Terner, a franchised accessories store that’s popular in airports. “Retailers need more freedom to quickly change. The franchise industry moves much slower.”

Apricot Lane is one exception to the rule: The fashion boutique sells its clothes and accessories domestically in franchised stores—with great success, as CEO Ken Petersen would tell it. “We created a ‘third space’ between national fashion apparel chains and independent fashion boutique operators,” Petersen said, adding that through franchising, Apricot Lane benefits from purchasing power to bring in name brands, the franchisor’s support systems, a local entrepreneur running each store and flexibility to tailor individual stores’ inventories to the local markets. But this flexibility—uncharacteristic of franchising—is key to the concept’s success: Says Petersen, “our franchisees are buyers all across the country who are free to buy locally without prior franchisor approval.”

Whether you’re selling clothes or secondhand oboes, the real estate market is making it easier than ever to get into retail, Siebert said. “You’re finding retail space at bargain basement prices—we’re seeing flexibility from landlords on pricing, terms and buildout that we haven’t seen in decades,” he says. “I would speculate that more companies would turn to franchising in this environment because you have such great opportunity. Companies may find themselves in a situation where they have more retail space opportunities than ever at prices that they’ve never had, but they don’t have the ability to take advantage of all those spaces. I think there’s a one-of-a-kind opportunity for anyone who’s got a strong concept.”

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