Frederick's of Hollywood, the granddaddy of specialty lingerie retailers, has its work cut out for it.
Faced with changing public attitudes and competition from other retailers--including department stores, independents and Victoria's Secret, the Limited's powerhouse intimate-apparel chain--the purveyor of provocative undergarments is grappling with how to update its image and selling methods. At stake is a basically stagnant market that industry insiders estimate is worth $5 billion a year.
"We're in a situation that could best be described as a time warp," acknowledged George W. Townson, who last May took over as chairman and chief executive of Frederick's from the company's founder, Frederick Mellinger. There are too many areas of the business that are not computerized, he said, "and that has prevented us from reacting quickly enough."
Frederick's began as a store in New York, moving to Los Angeles a year later and eventually expanding to 148 outlets in 33 states, plus a nationwide mail-order operation. Last week it reported the first annual loss in its 39-year history--losing $148,000 on sales of $45.5 million for the fiscal year ended Sept. 1. Townson said the loss resulted from a "lack of (inventory) control caused by a lack of timely and useful information." He blamed a short-lived and disastrous switch to a computerized mail-order operation.
Other Problems Cited
Industry observers contend that the problems go beyond that, however.
"Frederick's is outdated," said Mitchell Shrier, owner of Trashy Lingerie, an 11-year-old store in West Hollywood that counts several film stars among its clientele. "They're not selling the new styles. They're still selling junk, which was great when nobody else had lingerie." Shrier claims to have the only store in the United States that makes all its own lingerie and outerwear, with prices ranging from $8 for basic garments to $2,000 for a leather-and-fur dress.
Indeed, observers said that Frederick's, which still counts heavily on its mail-order business, has been slow to perceive that women no longer feel shy about buying slinky, vampish garments.
"The working woman has done a lot to popularize intimate apparel," said David S. Leibowitz, an analyst with American Securities Corp. in New York. "She has discovered that she has to wear the same type of uniform as her male counterpart." And, he said, she compensates by "wearing lacy or sexy intimate apparel under the constraining outfit of the business day."
In addition, the fashion industry has credited pop singer Madonna with giving a lot of exposure to lacy undergarments.
To be sure, this "yuppie, upscale market" would not be thought of as the main target for Frederick's, which caters to a "lower-middle-class" market, Leibowitz said. Townson describes the Frederick's niche as being "much more sensual and sexy, romantic and fun" than that of competitors.
In an effort to expand beyond this market, Frederick's has enlisted Walter K. Levy Associates, a New York retail marketing consultant, to develop a customer profile and formulate a marketing strategy, Townson said.
Changes at New Store
The company also is testing an innovative design at its new store in Westminster Mall. The company's trademark purple color is still much in evidence, but the store has what Townson calls a "much softer look," with mirrors, brass and marble and warm, white lighting, a big change from the harsh fluorescent lights in the company's other stores. And Frederick's will be installing a new computer system by December that should ease the bottleneck caused by manual order taking.
Within about two years, Townson said, the company hopes a $1-million remodeling of its stores will spur a 25% increase from current annual sales of $200 per square foot. In fiscal 1985, the Frederick's of Hollywood stores accounted for about 75% of the company's sales, while mail order contributed about 21%.
With these changes, Townson said, the company seeks to return to profitability. Earnings have declined sharply since 1981, when net income peaked at $2.2 million on $39 million in revenues, he said.
Frederick's also is banking heavily on its Private Moments division, a five-store chain of upscale intimate-apparel stores that compete more directly with Victoria's Secret. Private Moments had an ill-fated mail-order operation that resulted in losses totaling about $750,000 in 1983 and 1984 and was phased out, Townson said, but the parent company plans to expand the chain.
By contrast, both the mail-order and retail operations of Victoria's Secret are "very successful," said Al Dietzel, vice president of financial and public relations for the Limited. In 1982, when the Limited bought it, Victoria's Secret had only two stores. It now has 84 stores nationwide and will expand to 95 by Feb. 1, he said.
Because the market is considered finite, industry insiders note, one retailer's market share comes at the expense of another's. The Limited, a fast-growing specialty retailer, saw potential for Victoria's Secret to steal market share from department stores, which sell the vast majority of intimate apparel.
This it has done, said Peter Velardi, president of Vanity Fair Mills, a subsidiary of VF Corp., which makes Vanity Fair lingerie. But "whether they've done it profitably or not is something hidden within the Limited's numbers."
With the exception of Frederick's, Victoria's Secret is the only attempt at a national chain of specialty shops in the lingerie business, said Art Charpentier, an analyst with Goldman, Sachs & Co. in New York. Although Victoria's Secret does not yet have a wide national presence, he said, the Limited realizes that its market is not just "high-end chic" but the "bread-and-butter intimate apparel that women wear all the time."
The fact that the market is stable doesn't faze the Limited, Charpentier said. "The Limited looks at the size of the market rather than the growth of the market," he said. "If they have a small fraction of a very large market, the element of growth becomes a non-issue."
Clearly, Victoria's Secret is playing the growth game successfully right now.
"Frederick's has always played up the tawdry angle, whereas Victoria's Secret plays up the romance," Charpentier said. "And romance is in."