Underwear Explains Everything

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Alan Greenspan liked to talk about men’s underpants. “The Undertaker,” who funereally served as the chairman of the Federal Reserve from 1987 to 2006, didn’t share his preferred inseam or stance on gusset sizing, but he pointed again and again – always emphatically – to the Underwear Index, which tracks boxer and brief purchases and pricing. He declared the index a bellwether for the broader economy. His point was simple: Men abstain from buying underwear when times are tough. Sales of men’s underwear predict what is to come.

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Men’s underwear sales fell sharply during the Great Recession. This year, first-quarter earnings results showed a similar trend. HanesBrands disclosed on an earnings call that net sales of innerwear — a category that includes men’s underwear — dropped an ominous 4.5% between April 2022 and April 2023, when Hanes blamed “macroeconomic pressures” for the anemic performance.

It sounded (at least to Keynesian economists) like Chicken Little announcing the sky had descending slightly YoY.

But it’s not 2008 and the underwear market doesn’t just conform to macroeconomic trends. It stretches. It bulges. And right now it is being torn in two directions, pulled apart at the crotch seam.  Facing economic headwinds, underwear brands are not simply accepting losses. They are altering their businesses. Some are working overtime to keep prices low – below inflation – and maintain market share. Others are doing precisely the opposite, seeking safety in the luxury market. Is Greenspan’s favorite index still an indicator of where the economy is going? Most likely. But the prices on underoos speak to the future of retail more directly, especially when retailers and brands across categories apparel and otherwise appear to want to continue to raise prices. Welcome to the age of premiumization.

“During inflation, everybody has an incentive to increase prices,” explains Z. John Zhang, professor of marketing at the Wharton School of Business at the University of Pennsylvania. “One of the things brands tell you is ‘Our cost has increased, so that’s why we want to increase the price,’” but that may not be enough to justify the price hike to the consumer. Adding new bells and whistles may be more compelling.

Premiumization — which Zhang defines as the addition of high-end features to support a high-end price point — allows luxury brands (and wannabe luxury brands) to avoid margin loss due to inflation. To prevent inflationary and supply chain pressures from eating into their profits, raise prices on higher-priced items – or invent new products (see: all those elaborately scented candles during Covid.)

Luxury shoppers don’t necessarily feel the pinch, so retailers may be more comfortable raising prices on bigger-ticket items. And by creating new products – sustainable underwear, for instance – brands can get away with raising prices because they are ostensibly selling something new.

While premiumization is happening all over the retail sector, it’s  particularly pronounced in the men’s underwear market.

U.S. men’s underwear sales amounted to $3.8 billion in 2022, down 1% from 2021, but up 16% from 2019, according to market-research firm Circana. But while dollar sales dropped only that measly 1%, unit sales — the actual number of pairs sold — declined 12%.

That sounds like weird math, but according to e-commerce pricing data from Centric Pricing, a pricing technology provider, the average price for a Calvin Klein purchase jumped 20.3% from $41.99 in January 2021 to $50.50 in January 2023. In January 2021, the average amount paid for a Ralph Lauren purchase was $42.36. In January 2023, the average purchase was $47.73. That’s 13% more in just two years.

Meanwhile, Hanes, which was rocking an average purchase price of $35.39 in January 2021, dropped to $34.50 two years later, a price reduction of 2.5%. Jockey underwear increased in price just 0.3% between 2021 and 2023 even as consumer prices rose 4.9%, according to April data from the Bureau of Labor Statistics. (Centric Pricing’s figures track average purchases, but not how big the basket is: it could be an individual pair or a pack.)

Some of this was predictable. Tim Ouimet, co-founder of pricing technology firm Engage3, says that many retailers keep prices low even when doing so shrinks margins. The goal? Entice buyers to put more in their basket. During an inflationary cycle (or a recession) low prices are a desperate plea for consumers to keep on consuming. Budget underwear, which can be quickly replaced, may be a target for a lower price to drive customers into the store.

“The retailer is interested in margin mix across the entire basket,” says Ouimet. “I’m going to use that as a loss leader to get him in and get them to buy a higher margin product somewhere else.”

Hanesbrands’ product sales through U.S. mass merchants accounted for approximately 19% of its total net sales in 2022. Walmart was the biggest mass retail channel, making up approximately 16% of total net sales. Mid-tier merchants accounted for 8% of total net sales, while consumer-directed sales — which cover its owned e-commerce websites and pure-play e-commerce sites – made up 17% of total net sales. In short, the brand had a strong incentive to keep prices down: maintain a critical relationship; fill up DTC shopper’s carts.

Ouimet points out that the strategy can build consumer trust. But luxury brands don’t sell trust.

“If you have a brand that’s differentiated, and there’s social esteem or social capital associated with it, you can still maintain your cost structure and margin structure, even in a tight market,” says Ouimet.

You can, for instance, introduce a new line of men’s underwear with “non-restrictive fit” and “moisture-wicking properties” to create a “Friction Free Pouch.” That’s what Polo Ralph Lauren did. Or, more specifically, what Hanes, which is the longtime license holder for Polo Ralph Lauren men’s underwear, did on that brand’s behalf.

While premiumization will continue to shift prices upward for higher-end labels, budget brands aren’t likely to embark on any major price increases until the economy improves, says Andrew Grant, associate professor of finance at the University of Sydney Business School.

For savvy shoppers, one positive effect consumers might see in a recessionary period is the outlet-mall effect, that of premium brands dropping prices once products have cycled through, suggests Lara Koslow, managing director and senior partner at Boston Consulting Group.

“I think that over time, you may see more quality products in what I would consider the discount channel,” she says. “You often see in a recession, more of that quality product in those channels because not all of it is purchased because prices have gone up.”

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