As the U.S. economy flirts with recession and European clothing prices soar, the North American retail sector is facing a crisis of unprecedented depth, according to the head of a major U.S. department store chain.
Ron Frasch, president and chief merchandising officer of the upscale department store chain Saks, said retailers sifting through the creations on offer at Paris Fashion Week are taking a bigger gamble than usual as they try to guess what products will entice U.S. customers next spring.
"This is a tough one. This is maybe the worst I've ever seen," Frasch told The Associated Press in an interview on the sidelines of fashion week. "Everybody is in a struggle right now. It's a very, very difficult moment."
Saks last month reported a wider-than-expected loss for the second quarter of this year and said it expects its 2008 operating margins, excluding certain items, to decline from 2007 levels.
Shares in Saks Inc., which operates Saks Fifth Avenue, fell more than 10 percent in New York on Monday amid a general stock tumble.
Frasch said his team of buyers in Paris were walking a tightrope between selecting products with a strong perceived added value, and steering away from those that scream conspicuous consumption, which may not feel appropriate in six months' time.
"Honestly, we don't know. It's all a big guessing game, obviously. We're just trying to make intelligent choices of products based on who we know our customers to be," Frasch confessed.
Adding to the challenge are budget constraints for American buyers facing the twin impact of a weak dollar and rising European prices.
"The price issue is a big deal," said Frasch. "Most of our partners did a pretty good job for many years controlling the prices, but really this season, for fall, they got to the point, they had their own margins to defend and so we had this very significant growth in prices."
Although he declined to say whether budgets have been cut back for next spring, the retail executive said Saks would be keeping inventory levels tight.
"We're approaching our budget reflective of how we're approaching our sales performance. Our objective is really to have our inventory levels in line with our sales expectations," Frasch said.
"The challenge of course, with everything so turbulent, is how do you really forecast the demand levels over the next six months, let alone over the next month?" he added.
He predicted that large, established brands would ride out the economic storm, but younger designers may not survive. Saks has done particularly well with Chanel and Louis Vuitton in recent seasons, and is also pleased with the performance of Christian Dior.
"It's really tough to add new brands right now," Frasch said. "I feel badly for a lot of these small brands, because they look to the Sakses and the Neimans and the Nordstroms of the world as a launching location."