Stores sold a dummy by a change in the dress code

High-street giants like Arcadia have been deserted as customers decide that looking good means going upmarket
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If the executives at Arcadia, the clothing retailer, had arranged a jolly good night out on the town, they would have seen the phenomenon for themselves.

If the executives at Arcadia, the clothing retailer, had arranged a jolly good night out on the town, they would have seen the phenomenon for themselves.

The clothes in their stores - which include Top Shop, Burtons and Principles - are simply not as fashionable as they once were.

The result of this was graphically demonstrated last week, when Arcadia announced interim pre-tax losses of £8.6m and a plan to cut 3,500 jobs.

But Arcadia isn't the only clothing retailer to be having a tough time of it.

Marks & Spencer, C&A, Bhs and Littlewoods have all seen their market share of clothing sales dip down over the last five years (see the graph below).

One common thread which binds these companies together is that they are stuck in the "middle market malaise". If Arcadia chief executive John Hoerner had travelled further than his beloved Groucho Club on his nights out, he would have seen people - young and old - dressed in smart expensive gear, which is typically bought from smaller retailers.

Mike Godliman, director of research consultant Verdict, explained the trend as follows: "The clothing market has been turned upside down. People are willing to spend more money on a few items and are shopping in upmarket establishments.

"At the same time, people are going to discounters for their everyday items. Therefore, this is creating a vacuum in the middle of the market."

The problem for the retailers doesn't end here. The vast majority of clothes shopping is done by people under the age of 30. But as a percentage of the population, this number is falling, which is further eroding retailers' sales.

As a result, price deflation has crept into the middle market as retailers have cut costs in a desperate attempt to win customers. Credit Suisse First Boston, the investment bank, has estimated that the deflation is somewhere between 5 and 10 per cent, which further pressurises margins.

But there is a different story at the opposite end of the market.

Last week, for example, Ted Baker, which operates at the top end, announced a healthy 33 per cent increase in sales, which saw pre-tax profits rise to £7.9m. Analysts said its success was due to its strong brand and quality products.

A similar story can be told at French Connection, which is enjoying considerable success from its FCUK advertising campaign.

Meanwhile, discount retailers like Matalan, Peacock and Primark - which is owned by Associated British Foods - have almost doubled their market share in the last five years.

Richard Kirk, chief executive of Peacock, which specialises in discount women's wear, said: "We are as good as the middle-market shops with the same quality product and service, but with an emphasis on low, low, low cost."

He added: "We can do this because we don't have a plush head office, we have very low-cost warehouses and because our shops are in cheap secondary locations."

As a result, Peacock has carved out a neat little niche for itself - in Mr Kirk's words - by "turning the 40-year-old frumpy mum into a sexy mum".

Peacock has clearly benefited from the change in people's shopping habits and the shift in demographics. However, the company - along with Matalan, Ted Baker and French Connection - has what many middle market retailers are lacking: focus.

Mr Godliman, of Verdict, commented: "Arcadia just hasn't dared to be different. Its brands are too similar - appealing to the 18 to 50 age range."

Along with its dismal results, Arcadia last week announced it is to close 400 shops, which will see the Principles for Men name disappear from the high street altogether. As well as bringing £160m in cost savings, the policy is designed to concentrate the company on its core brands.

But many City analysts think Arcadia could go much further.

"They still need to be more focused and radical," said Richard Ratner, retail analyst at stockbroker Seymour Pierce. "They should have hived off all their men's wear divisions and Principles altogether. This would give the company a clearer identity."

He also argued that Arcadia's management needs restructuring to make it more competitive.

The management of the company's shops is currently divided up on a geographical basis. It has, for example, a team which looks after its brands in the North-west of England. Mr Ratner believes each brand should instead have a separate management team.

"This would make Arcadia a bit more aggressive, give them a clearer identity and make them fight each other a bit - which is good for competition," he said.

There has been a similar lack of focus at M&S, the UK's largest clothing retailer. After the scare of retail entrepreneur Philip Green threatening to make a bid for the group, its new chairman Luc Vandevelde has launched a restructuring programme.

He recently introduced a new fashion range - Autograph - which goes some way towards cornering the upper end of the market. Conversely, Mr Vandevelde has given M&S a budget string to its bow by discounting other ranges.

Over at Bhs, which for years has been regarded as M&S's poorer relation, change is also afoot.

Its new owner - Mr Green - is expected to shift the company's focus either up or down market to shed its tired middle-market image and capture a new breed of customer.

Mr Green said that changes would be duly announced in three weeks, when the acquisition has been completed. He would not comment on which way he would be taking the company.

Joan D'Oliver, a retail analyst at Deutsche Bank, said: "[Mr Green] has got to do something radical. But it won't be without risk. Bhs is in lots of expensive high street sites, so going down market would be a hell of a gamble because he would be cutting margins. If he goes upmarket then he risks alienating his existing customer base."

It is not all gloom for middle market retailers, however. A handful of smaller retailers have survived the malaise.

Take Next. It has developed strong customer loyalty though its own brand and its internet and directory services. This was reflected in a solid set of results earlier this month, which saw sales grow by 8 per cent.

Then there is Oasis. It has, arguably, the ultimate focus. Asked to describe where its fits in the market, its chief executive Derek Lovelock rattled off this explanation: "We are aimed at the fashion-conscious 20 to 30-year old. She is typically single, living at home or in a flat with a friend and enjoys going out to bars or clubs. She enjoys fashionable clothes, but wants to buy something a little bit different."

And Gap, the American company, has stood out with its emphasis on customer service, its solid product range aimed at 20 to 30-year-olds and its effective advertising campaigns.

Clearly these companies stand out head and shoulders above Arcadia. But if they have aspirations to grow rapidly to a similar size - as Gap has publicly stated - then they could be bedevilled by similar problems.

Mr Godliman warned: "If companies such as Gap want to keep expanding, they will have to deal with the same problems as the big boys are suffering from.

"They need to concentrate on how to maintain their focus, and to ensure that the thing which makes them different doesn't get diluted."