LOS ANGELES -- American Apparel bit the dust. So did Nasty Gal. BCBG Max Azria filed for bankruptcy, along with teen retailer Wet Seal.
The fashion industry has long been a fickle beast, with trends rising and dying sometimes in the space of weeks. But changing consumer habits -- including the emergence of e-commerce and the decline of traffic at many malls -- are shortening the life of many fashion brands, analysts said.
"Thirty years ago, you didn't have to adapt as fast," said Ron Friedman, a retail expert at accounting and advisory firm Marcum. "The retail environment is completely going through a revolution. [Stores] are restructuring. Brands are going out of style."
Bankruptcies in the retail sector have been on the rise. In 2012, three retail companies with liabilities of $50 million or more filed for bankruptcy, according to a study by consulting firm AlixPartners. Eight retail bankruptcies occurred in 2014 -- a number that was reached just six months into 2015, the last year analyzed in the study (although that still pales in comparison to 20 bankruptcies in 2008 during the height of the recession).
Once-hot brands faded away with nary a whimper before the digital age -- Robert Hall in the 1970s, Rogers Peet in the 1980s and Merry-Go-Round in the 1990s. But the Web has been a double-edged sword for fashion brands, both a way to reach a worldwide audience for their wares, while also serving as a giant emporium where shoppers can click to a rival site in seconds.
"I don't know if many retailers can adjust," said Corali Lopez-Castro, a partner at Kozyak Tropin & Throckmorton who has handled retail bankruptcies.
BCBG concedes that its failure to harness the Web contributed to its downfall. The Los Angeles company said e-commerce sales made up only "a small proportion" of its overall business, according to bankruptcy documents.
The rise of fast-fashion rivals also has shortened the attention span of consumers. Before H&M and Zara came on the scene, retailers that had a lackluster season could course-correct a few months down the line -- knowing shoppers probably would return to browse while strolling in the mall. But now shoppers can hop online or go to fast-fashion stores that introduce fresh fashions on a weekly basis.
"If you are a fashion apparel retailer, you have to have a steady flow of newness," said Craig Johnson, president of Customer Growth Partners. "You can't just regurgitate what was hot last year."
At the same time, consumers are spending a diminishing chunk of their income on clothing, opting to shell out for electronics or experiences instead. Less than 4 percent of every dollar is now spent on buying apparel, Johnson said, compared with 8 percent in the mid-1990s and 20 percent a century ago.
The offshoring of manufacturing has dramatically reduced the price of clothing over the last few decades. That has wounded brands catering to young shoppers. California-based Wet Seal, for example, is preparing to close its stores after filing in February for bankruptcy for the second time.
"There is virtually nothing that places like Wet Seal or American Apparel sell that you can't get on the Internet for a lower price," Johnson said. "There is nothing that distinguishes it."
New fashion brands also are finding an increasingly tough climb. They can reach potential customers directly on social media and sell product from their own websites. But it requires heavy investment to get eyeballs -- especially when companies are trying to attract investors by demonstrating fast growth, analysts said. Nasty Gal, a once-hot Los Angeles company that sold its intellectual property for $20 million after filing for bankruptcy in November, saw its sales plunge after it ran out of money to invest in online marketing and advertising.
Friedman, who has consulted for fashion brands for decades, now tells new businesses that they need starting capital of $500,000 to $1 million. That's compared with $200,000 to $300,000 about a decade ago, he said.
"Before, you could go to Fred Segal and get your product on the floor, or go to Bloomingdale's headquarters and get it on their floor," Friedman said. "Today, you have got to go to the Internet and sell direct to consumers, and the cost can be very high."
That cost means that fashion brands can burn through cash quickly, which can be a death knell for those without fresh investment or brisk sales.
After changes to the U.S. bankruptcy code in 2005, retailers that are forced to file for bankruptcy protection also are less likely to survive. Those changes shortened the time frame that retailers have to get approval for restructuring or a sale; companies have only 210 days to decide whether to hold on to or get rid of store leases.
Business on 03/23/2017