What's Ailing America's Fashion Darlings?

09-Jul-2018 | By: Cathaleen Chen

Once popular American labels are struggling to adapt to a perfect storm of shifting consumer tastes, failing department stores and the rise of direct-to-consumer.

NEW YORK, United States — They’ve won CFDA awards. They’ve opened stores in Dubai, Bangkok and Tokyo. They were called the “cool kids,” the “anointed ones” and the “fashion darlings.”

For the cohort of American luxury brands that rose to prominence a decade ago, growth and prosperity are no longer a given. As brands like Alexander Wang and Proenza Schouler work to reconfigure their business models in order to adapt to changing times, others are shrinking their staffs or hiring new kinds of employees.

Rag & Bone laid off about 20 people in its New York office last month in a restructuring, while Opening Ceremony laid off most of its design team this year. Over the past five years, multiple CFDA/Vogue Fashion Fund participants have shut down their labels, including Suno, Thakoon, Wes Gordon (now creative director at Carolina Herrera), Band of Outsiders (which later relaunched with a different design team), Orley, Peter Som and Ohne Titel.

These brands and others have run into trouble despite an expanding global luxury market, which grew 5 percent last year according to Bain. Instead, emerging online brands and legacy European houses have captured much of that growth. American luxury labels that found success at a time when department stores were still the epicentre of retail are struggling to adapt as e-commerce chips away at the wholesale model. Hundreds of department stores have closed in recent years. Online, they are playing catch-up to a new crop of digital-native brands for the attention of younger customers, many of whom prefer a more casual style.

Now these old-school fashion brands face a reckoning: many took on debt or private equity capital to expand. Investors who anticipated rapid growth are pressuring designers to cut costs and close stores, or pushing for a sale. Additional funding isn’t always forthcoming either; venture capital firms, which have invested billions of dollars in hundreds of fashion companies in the last five years, prefer newer, web-savvy apparel brands like Outdoor Voices and Everlane.

“It’s a very crowded space. There are too many brands, and the environment is changing faster than ever,” said Elsa Berry, founder of Vendôme Global Partners LLC, a financial advisory firm that represented Dries Van Noten in its recent sale to Spanish group Puig. “You’ve got a very fickle consumer that knows everything, and the wholesale model is more than ever in question because department stores are having trouble.”

Many of the same forces that propelled US brands to success in the 2000s have become liabilities in recent years.

Chicago-based label Creatures of the Wind, founded by Chris Peters and Shane Gabier in 2008, gained a cult following in upscale department stores like Barneys New York. The brand’s specific flavour of eclecticism won rave reviews, culminating in a CFDA/Vogue Fashion Fund runner-up award in 2011.

The label has since had a complex relationship with retailers and investors. In 2013, it received an investment from The Dock Group, but the partnership ended in a year. In 2014, it sold a minority stake to Soave Enterprises, which the duo has since bought back.

And their wholesale arrangements with department stores, while great for the brand’s visibility, eventually became a source of tension, Peters said.

“A lot of department stores were informing the products we were making,” he said. “It became very confusing when we started making these ladylike cocktail dresses for consumers that we did not understand… We felt completely removed from where we started.”

Now, they’ve shifted their business model from runway collections to capsule projects and mainly sell through boutiques and multi-brand stores including Dover Street Market.

Making the shift from brick-and-mortar to online has also proven daunting for many brands. E-commerce made up about 10 percent of US retail sales last year, up from 6 percent in 2014, according to the Census Bureau. A 2017 survey of 1,000 American adults from Astound Commerce found that 55 percent of respondents want to buy from brands directly rather than from department stores and other multi-brand retailers.

That’s a problem for companies like Rag & Bone, where wholesale made up 65 percent of total sales as of early 2017, chief executive Marcus Wainwright told BoF at the time. According to a Rag & Bone spokesperson, the layoffs last month included "a number of performance-related workforce reductions" and will allow the company to make new hires.

“These ready-to-wear premium brands with limited distribution are struggling to compete for mindshare because they don’t have the direct relationship with consumers,” said Justine Mannering, a managing director at investment banking firm Alantra.

For wholesale brands, fulfilling orders around the country is a radical shift. Direct-to-consumer start-ups like Everlane are set up for shipping to customers’ homes from the beginning and scale up operations as demand grows. A 15-year-old label that previously relied on in-store sales must overhaul its entire backend wholesale system in order to accommodate online orders.

“Even if you have a lot of money, it’s a hard game because you’re competing with companies that can ship better and do logistics better than you, and the shipping costs are exorbitant,” one American designer told BoF.

Another common misstep: a focus on ready-to-wear rather than handbags, shoes and other accessories. High-margin leather goods help houses like Louis Vuitton and Chanel ride out tough times and generate double-digit growth during luxury booms, said Gail Zauder, managing partner of Elixir Advisors, an investment banking firm that has represented Donna Karan and Joseph Altuzarra. In the US, Michael Kors and Tapestry have swelled into international conglomerates on the strength of their handbag businesses. “Even a brand like Céline, which isn’t a legacy house, was able to succeed because Phoebe Philo built one hit bag after another,” she said.

Then there’s the matter of money. Small clothing brands typically need outside investment to expand, as they lack the capital needed to open stores and distribute globally. While private equity firms can provide that capital, they expect immediate top line growth to maximise their returns and sell the company a few years later. But that approach is better-suited for fast-moving consumer goods rather than luxury brands, which need years — even decades — to find success, Berry said.

That hasn't stopped private equity firms from making bets on fashion, however. Berkshire Partners, a Boston-based private equity firm, bought a minority stake in Opening Ceremony in 2014 through Front Row Partners. Just two years ago, the brand was staging attention-grabbing runway shows and touting expansion plans. In 2016, founders Carol Lim and Humberto Leon told the Los Angeles Times that the company had plans to open stores in cities across the US. But the new stores never opened, and the brand laid off much of its in-house design team in May.

Investors also don’t always provide the necessary guidance for proper growth, said Creatures of the Wind's Peters. He said he has seen designers spend “insane amounts” of money on shows that ultimately weren’t necessary to increase sales.

“You can be given a lot of money that you don’t know how to allocate, and you have all these ideas of what you think a company should look like,” he said.

For Creatures of the Wind, finding the right path forward meant taking full creative control. This entailed ending their traditional retail partnerships, ceasing runway collections, lowering price points and breaking up with investors. Now, the duo creates repurposed vintage pieces without the deadlines of a seasonal fashion calendar. The sell-through rates, they said, have never been higher.

“We’re taking our name back, and we’re figuring out how to make products together by ourselves,” Peters said. “It’s been 10 years, and now we have freedom to really focus on what we want.”