An article published on February
3, 2009 in Wall Street Journal reported that American Eagle Outfitters Inc. is
trying to reengineer the way it produces clothes after steep discounting cut
its margins last year.
It hopes to recalibrate its costs
with moves that involve everything from changing where a garment is made (fewer
Chinese factories and more Indian villages) to how it's shipped (less use of
air freight) to how it looks (no patterned pockets in many jeans).
Many retailers fear they will be
forced into still more rounds of price cuts as the economy continues to
sputter. "Eighty percent off is the new normal," says Allan Haims, a
retail consultant and former president of Wet Seal Inc.
Fire-sale prices please shoppers
but they depress store margins. American Eagle's gross margins for its fiscal
third quarter, ended Nov. 1, fell 6.4 percentage points to 41% of sales.
Analysts believe that after the latest tide of markdowns during the holiday
season, the margins at its 954 stores have declined further.
American Eagle hopes to cut its
manufacturing costs significantly. Recently, the company began moving some
production out of China, where wages are on the rise, and into cheaper labor
markets in Cambodia and Vietnam, which are increasingly able to make hoodies
and T-shirts in their factories. American Eagle is still moving cautiously in
Southeast Asia, but it believes it can shave 4% to 8% from its per-garment
production costs at its Chinese factories.
Next year about 10% of
embroidering will be done in India, another new territory for the company.
India "is really emerging for us," says Chief Executive Jim
O'Donnell, who recently hired an agent there to scout the countryside for small
operations that specialize in embroidery and bead sewing at lower costs than
those in China. He also concedes that "the countries have very limited
infrastructure," but is confident time will eliminate the kinks.
American Eagle plans to entice
its customers with brighter colors, hipper silhouettes and ruffles on women's
tops for spring. But it's cutting out a few things it hopes its teen customers
won't miss: the ribbon that lines the waistband of its khakis, for example, and
the color pattern on the material used for its jean pockets.
Changing pockets and eliminating
ribbon saves only eight to 10 cents a garment, the company says. But
eliminating relatively invisible features allows designers to add hip, visible
details — like embroidery on the back pockets of denim jeans — that are more
likely to lead to sales.
Swamped by low-end competitors
like Old Navy, the specialty retailer realizes "we can't be the cheapest
in the mall," says Mr. O'Donnell. "If they wash it twice and it falls
apart, they'll say it's not a good shirt," he says. "There's a fine
line between price and value."
Source: Casey, Nicholas, “Fashioning Ways to
Hold Down Prices,” Wall Street Journal,
February3,2009.