Having worked in retail for about a decade of my life, I can speak from experience that it's no cakewalk, and the goods do not, as is often perceived, sell themselves.
Working in the retail sector taught me just how fickle consumers are about their spending habits, and how fashion trends for everything from clothes to jewelry can change at the drop of a dime. I also witnessed firsthand how family and friends hold a lot of influence over consumers' buying habits who often want unbiased reassurance that they're making a smart purchasing decision.
This means apparel retailers need to play a tightrope game of making sure they have enough of the hot-selling items in stock to cover demand, while also ensuring that that don't overstock their store and get forced into huge discounts simply to move merchandise. Making matters worse, these purchase decisions are done months in advance of an upcoming season, so it's always a bit of a shot in the dark for apparel retailers. There will be hits and misses during the course of the year; retailers merely have to hope the hits far outweigh the misses.
Of course, figuring out which companies appeal to consumers isn't as cut-and-dried as it might appear. Brand loyalty comes at a premium within the apparel sector, and frankly it's incredibly difficult to measure. That's why today I'm going to turn your attention to a recent report from research firm Brand Keys, which utilized its proprietary Customer Loyalty Engagement Index to rank the apparel retailers from top to bottom in terms of how engaging they are with their customers and how these companies utilize that image to transform walk-ins into lifelong customers. Overall, Brand Keys examined 13 well-known mall-based apparel brands, and left just one to sit atop the heap.
However, before we get into the secret behind this leading company, let's have a look at why customer engagement and loyalty matter in the first place for apparel retailers.
Why customer loyalty is so important for apparel retailers
You don't need to look too far past the pricing policy of retailers to understand why appealing to consumers on a personal level and making them loyal for life is so important.
Normally, promotional deals or the necessity to buy (i.e., a special occasion) is what drives a customer into the store. You'll see ads littering television, radio, and print, but its sales prices that are most often the biggest draw to first getting the customer into the store. The problem with promotional activity is that sales prices weigh on margins, and too much of an apparel retailers' revenue being skewed toward highly discounted items will negative impact profits.
That's where loyal customers come in. Loyal customers don't require a deep-discount sale to purchase something as they've already forged an emotional connection with the brand. They're more concerned with purchasing items that make them feel good and allow them to express themselves. Without consumers that are loyal to the brand apparel retailers would have a difficult time expanding because their cash flow, and even seasonal trends, would be largely unpredictable.
Some retailers get it all wrong
What should come as no surprise to investors, or consumers, is that apparel companies that are lagging behind their peers are doing so because they lack a loyal and engaged consumer base.
Pacific Sunwear (NASDAQ:PSUN), which came in second-to-last, has lacked a true brand identity for more than half a decade. Consumers associate store closings and niche seasonal clothing (i.e., summer and surfing attire) with PacSun, pigeonholing the retailer into a tight niche that it's been unable to escape from. With losses mounting, PacSun may be beginning to run out of options.
Others have trouble differentiating themselves
Whereas PacSun has struggled on all fronts, other apparel retailers have had trouble either remaining consistent or in developing their brands' identity.
Aeropostale (NASDAQOTH:AROPQ), which occupied the middle of the pack in Brand Keys' survey, has struggled for the better part of two years with sluggish sales and the need to heavily discount its merchandise (more so than it already does) in order to clear out its inventory. While Aeropostale remains an occasional stop for teen shoppers, it lacks the branding power of some of its pricier peers which hasn't exactly given shoppers a reason to return to its stores with any consistency.
Teen retailer American Eagle Outfitters (NYSE:AEO) is in a similar boat, ranking just one notch ahead of Aeropostale. While I've pointed out previously that the company has a good knack for responding to the ever-changing fashion trends of teens, and that it's done a good job of establishing itself as a desirable brand by teens, it still caters to a group of consumers that leaves the company susceptible to natural ebbs and flows (i.e., it lacks consistency.)
Just missed the mark
If you're interested in a company doing just about everything right in apparel, look no further than Gap (NYSE:GPS) which ranked as the second-best brand when it comes to customer engagement and loyalty.
Gap did hit a rough patch a few years back, but the company has worked tirelessly to reestablish its brand by bringing in a number of key people, as well as connecting with consumers via social media and an expanded direct-to-consumer campaign. Gap understands that convenience is what matters most to shoppers, so by focusing on convenience it's been able to lure previous and new shoppers into its stores and keep them coming back.
The company with the "Secret" that keeps consumers coming back
Before I reveal which company topped the list of in terms of customer engagement and loyalty, do you have any guesses which retailer you think hit the mark?
Got your answer?
For those of you who took the hint and said Victoria's Secret, give yourself a pat on the back, because you're correct!
Owned by L Brands (NYSE:LB) (formerly Limited Brands), Victoria's Secret has relied on a number of factors to help grow its brand and keep consumers, both men and women, coming back to its stores.
For one, Victoria's Secret relies on the perception of high-quality products to attract consumers. Let's face it: Victoria's Secret isn't inexpensive by any means. However, those higher prices come with the perceived notion that its lingerie and accessories are going to last longer and be a superior product relative to less costly options. In other words, "you get what you pay for" doesn't always translate over well from industry to industry, but based on Victoria's Secret's approach to lingerie it's working perfectly.
Another way Victoria's Secret is getting customers back in the door is with its top-notch loyalty program known as the Angel Card. Victoria's Secret customers that leave their email address and phone number receive more promotions than those that don't, so the company has quickly learned that incentivizing its customers upfront can give it multiple reasons to stay in touch with frequent shoppers.
Finally, Victoria's Secret does a great job of remaining innovative, keeping its products relatively exclusive, and appealing to both genders regardless of season. Consumers are just as likely to shop for its lingerie and accessories during the summer as the winter, and it's been able to cross the gender gap to make men buying for women feel perfectly comfortable in its stores. Combined, these advantages gives Victoria's Secret an edge over its peers, and could give L Brands a leg up on other stocks within the sector over the long run.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.