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This year clothing chains have announced the opening of over 100 new branches and a 64-percent increase in their advertising budgets. Increased demand has not driven such rapid growth and neither have many of the chains invested in expanding their organizational structures or in developing a growth strategy.

This ballooning growth reminds many industry observers of the high-tech bubble of the late 1990s, and they are warning of a similar outcome. "Demand in the fashion market is declining," says Gabi Roter, CEO of Castro. "The key word is differentiation. There is a recession across the world, but anyone who can offer a different product and become a market leader in a specific field can earn profits. `Me too' concepts don't last long. Anyone who joins a vicious price war will soon find himself in trouble, because in the long run price wars aren't worth it."

Retail clothing sales in Israel declined by 9.4 percent in 2002 to NIS 1.5 billion, according to data compiled by Dun and Bradstreet. Despite this drop in sales, employment in the retail clothing industry rose by 2.7 percent to 2,200 workers. Investments in advertising from January 1 to April 30 this year soared to $24.99 million at list prices, compared to $15.18 million for the same period in 2002, according to information provided by the Ifat Advertising Monitoring company. (Actual prices are about 60 percent lower). Advertising spending in the fashion industry were $41.67 million at list prices for the whole of 2002.

"What we have here is the herd instinct," says Dudi Bresler, CEO of the Golf Group, which has opened three new branches in 2003 and is planning to open 5-8 more by the end of the year. "When one chain opens a store [in a certain location], everyone opens one there. In such situations the good stores succeed and the mediocre ones fail. What happened in the high-tech industry will have to happen in the fashion industry too. [Businesses] rise fast and fall fast."

Breslar also calls it an Icarus syndrome - flying too close to the sun with wax-bound wings. "Everyone says `I will do it better,'" says Bresler. "They try to go farther and higher - and crash." Breslar notes that while the fashion market has not grown, there has been a move from privately run stores to chains.

Eli Berkovitz, CEO of Renuar, agrees. "The decline in retail fashion sales comes from the decline in the market share of department stores. People used to buy all their clothes at department stores or small boutiques, now these is a rise in niche fashion chains." Renuar, which recently expanded too and has begun opening men's fashions stores, is planning to open seven ladies' wear and six men's wear stores in 2003.

About 37 percent of the public buy clothes from the large chains, according to a survey conducted in May 2003 among 500 Hebrew-speaking adults over the age of. CA Marketing Information Research Institute, which is managed by Noam Raz and Merav Shapira, took the survey. Of those questioned, 24 percent bought fashion items in private stores, although 30 percent said they had no preferences and bought from both private stores and chains.

The survey found that 50 percent of the public buys clothes at a mall where most of the fashion chain stores have branches. 39 percent buy clothing in the city center, and 24 at shopping centers outside cities (see chart).

"In the past 12 years there has been a marked drop in sales at stores on main streets, as opposed to the strengthening of sales at shopping centers," says Harel Vizel, CEO of Fox. "There is significant growth in the sales at a few chains and a decline in sales elsewhere. In 90 percent of cases, one fashion store that opens in a mall is at the expense of another. Anyone who is strong gets stronger and whoever isn't, disappears." In the past year Fox has opened 30 new branches, 15 of them for men's fashions. The chain now has 107 outlets.

Not everyone agrees the clothing market is saturated. "One has to examine the different categories," says Pe'er Nadir, general manager of the Azrieli Group's shopping malls. "There is still room for expansion and more players in children's wear. There is high demand for women's fashions so there is no limit to the number of chains and overseas brands that can succeed here. Men's fashion is a market that has grown in leaps and bounds in the past two years and it will take the market time to digest the situation." Nadir says that fashion sales grow by 10 percent at the Azrieli malls in the first quarter of 2003.

"Fashion buying in Israel is high relative to the size of the population," says Avi Malka, owner and CEO of Matim Li, "because clothes in Israel cost 40-60 percent less than in Europe. Since the tax on items imported from the Far East is just 12 percent, prices are low. No other country in the world has so many strong brands pushing international labels off the shelves."

Malka predicts that in a decade the Israeli chains will dominate the clothing market in other countries in this region. "This is not a bubble, but rather an Israeli success."

Roter justifies the expansion of the big chains, citing their advantages over private stores. Even so, he notes that every time a chain grows fast, it has to be stabilized. "At the end of the day the market forces take their toll and anyone who does not handle his business properly will close down. If there is a process of over-expansion, we will soon see some shrinkage."