What Gap, J. Crew Can Learn From The Grocery Aisle

(Bloomberg Gadfly) -- Many of the titans of America's apparel industry are not exactly dressed for success right now.

Ascena Retail Group Inc., the corporate parent of Ann Taylor and Loft, saw its stock tumble more than 60 percent in 2017 amid sagging sales. Gap Inc.'s Banana Republic and Chico's FAS's White House Black Market also grappled with dismal sales, and the picture at J. Crew Group looked so grim that Mickey Drexler stepped down as CEO back in June.

As these troubled companies try to map a future for themselves, they should look outside the mall for inspiration. In particular, they should take some cues from the grocery aisle.

Here's what I mean by that: In recent years, the packaged-food and personal-care industries have been rocked by a growing consumer fondness for niche, boutique-like brands.

But the giants of the sector have gotten the message. Campbell Soup Co. has been aggressively buying smaller brands, including a $700 million acquisition of Pacific Foods that closed last month. Thanks partly, perhaps, to nudges from activist investor Nelson Peltz, Procter & Gamble Co. seems to be moving in this direction too, announcing in November a deal to buy Native, a natural deodorant brand. Unilever NV, meanwhile, is tailoring more products for local markets.

These behemoths are also trying to fix flagship mega-brands such as Campbell's Soup or Gillette razors. But they are adding new concepts to their stables to adapt to the mindset of today's shoppers.

There's reason to believe specialty apparel chains could benefit from this approach. After all, we don't just see consumers thinking small in the grocery store. Tiny restaurant chains with less than 20 locations are gaining traction in big cities. Upstarts such as eyeglasses-seller Warby Parker and mattress-in-a-box company Casper are nabbing market share partly because their brands feel under-the-radar. More of our fitness dollars are going toward specialized concepts such as SoulCycle and Orangetheory Fitness.

So why aren't beleaguered clothing companies trying harder to cash in on this emerging consumer behavior?

In particular, I'm thinking of Gap, Ascena, J. Crew, Express and Chico's. All of these companies have core brands that are seriously struggling.

They could offset some of that weakness by adding more small-batch brands to the mix -- ones not meant to be as prolific as the flagship stores.

You might argue that some of the companies I've called out already have smaller, growing brands in their stables that could fulfill this role. J. Crew, for example, has Madewell, and Gap has Athleta. Both labels have healthy growth. But Madewell has been around for more than a decade, and Gap acquired Athleta in 2008. We often think of these concepts as these retailers' new babies, but they're actually not so fresh anymore.

That's why there's room to invest in ideas that were built from the ground up to court today's digital-centric, niche-seeking customer.

Apparel behemoths could do this through acquisitions. Many clothing and accessories startups have emerged in this lane in recent years, including Everlane, Reformation, Marine Layer, Cuyana and MM.LaFleur, to name a few. I don't know what any of these startups' balance sheets look like, but we have some sense they're catching on with shoppers: MM.LaFleur expected to ring up more than $70 million in sales in 2017; Reformation is on track for $140 million in annual sales.

Gap, to be fair, has made some effort on the acquisitions front, such as purchasing bridal-party attire startup Weddington Way in 2016.

But I think all mid-priced apparel stalwarts are making a mistake if they are not looking closely at such newcomer businesses and considering scooping them up. They ought to move fast, too, because less-direct competitors smell opportunity. Wal-Mart Stores Inc. already has bought Modcloth and Bonobos, two of the brightest young stars of the apparel universe.

Alternatively, the specialty clothing giants could get in the fashion sandbox and start dreaming up some fresh concepts of their own. Across the Atlantic, Hennes & Mauritz AB is already doing this, launching a concept called Arket last year and moving quickly to grow & Other Stories, a relatively new brand.

Ascena's Loft chain has the right idea by developing its spinoff Lou & Grey concept. But in general, I'm surprised how little of this kind of innovation there has been among its competitive set. I have a hard time seeing how stores such as Express, White House Black Market and Banana Republic return to their former glory. Why not divert some resources from those brands to test the waters on something more of-the-moment?  

Apparel is undoubtedly a hard business these days. But big retailers in this category could help themselves by thinking small.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Sarah Halzack is a Bloomberg Gadfly columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

To contact the author of this story: Sarah Halzack in Washington at shalzack@bloomberg.net.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net.

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