A Special Report Sponsored by   From Boppers to Shoppers Teens represent a lucrative – if hard-to-categorize – retail market   From June 2008 By Susan Reda, Executive Editor

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Teens love to create mashups. They cobble together text, graphics, audio, video and animation from various pre-existing sources to create digital media files that are uniquely their own. Merchants that cater to teen shoppers are very familiar with the mashup concept – even if they’re not particularly adept at digital media. They’re constantly trying to piece together the assortments, looks and methods of delivery they believe will resonate with this demographic. Taking on teens is a tough assignment. One minute they’re buying a stack of T-shirts at Hollister. Then, it’s on to American Eagle Outfitters for a “must-have” hoodie. Before they leave the mall they might duck into Claire’s for some bracelets or GameStop to check out the

latest Wii game. Later on, they bum a ride with Mom to Wal-Mart to pick up some cosmetics, and then go online that night to Threadless.com to create a custom T-shirt.

The STORES list of Top Teen Retailers highlights 15 specialty apparel companies whose brands are synonymous with today’s youth. Abercrombie & Fitch and American Eagle Outfitters rank at the very top of the list, closely followed by Express, Aéropostale, Urban Outfitters and Pacific Sunwear. Each has carved its niche in traditional shopping malls, winning teens’ affection with the latest jeans, T-shirts, hoodies, baby doll shirts and boxers.

With 2007 sales of nearly $4 billion, Abercrombie & Fitch is the pace-setter among teen apparel specialists. The company begins nurturing teen shoppers with abercrombie — its kids’ division — then gives them a choice of Hollister or A&F for the middle and high school years and on into college.

And, although there are fewer than two dozen RUEHL units, this concept – aimed at shoppers who have just graduated college and are heading out on their own – appears to be gaining traction. Earlier this year, A&F introduced Gilly Hicks, an intimate shop, hoping to extend the retailer’s Midas touch to an up-and-coming category.

At American Eagle Outfitters, where sales eclipsed the $3 billion mark in 2007, connecting with teens is a media-driven proposition. Last year AEO launched 77E, a multi-channel entertainment platform featuring original and user-generated content. The content was made available on ae.com, in stores and on television and, given the viral nature of content, it spread to sites including YouTube, MySpace and Facebook.

Like A&F, AEO is honing a strategy that will extend the brand to both older and younger demographics. Martin + Osa, which debuted in September 2006, skews to the 25-to-35 demographic. In the fall, AEO will step into the kids business with an online shop called 77kids by american eagle.

Express, a one-time Limited Brands division, is enjoying resurgence under the tutelage of Michael Weiss and the backing of Golden Gate capital. Aéropostale is winning over the masses with its fashion-at-a-price strategy combined with emphasis on events that sync up with teens’ concerns. Urban Outfitters is a bit of an enigma in the teen space. The brand targets the 18- to 30-year-old shopper, yet seems to connect with a younger

shopper, too. Even Urban’s other divisions, Anthropologie and Free People (both of which are targeted to an older consumer), seem to resonate with teens, particularly if Mom is willing to foot the bill.

PacSun is on the comeback trail. Led by retail veteran Sally Frame Kasaks, the chain is reconnecting with customers — particularly girls, who had strayed in recent years.

Eclectic expression
Part of the difficulty in trying to analyze teen consumers is their eclectic shopping patterns. On one hand, they’re locked into shopping where Mom and Dad shop; on the other, they often seek out different items based on their sense of style and their desire to either fit in or express their individuality. While retailers such as Steve & Barry’s, Old Navy, American Apparel, H&M and Zara are not included on the chart (in part, because their businesses do not target teens exclusively), each attracts teen shoppers and derives a percentage of revenue from them — or their parents.

Then there’s the online channel. While retailers recognize that traditional stores remain the venue where the lion’s share of teens’ transactions occur, they acknowledge that a lot of shopping journeys start online. The challenge for retailers is to be sure that their websites reflect the brand personality and store identity and strengthens their connection with teen customers.

Now, as if an ever-changing shopper base with constantly evolving expectations were not enough, teen specialty retailers find themselves under the same economic stress as their department store, mass-merchant and big-box brethren. With rising gas and food prices grabbing a bigger share of the household budget, ripple effects are being felt throughout the family.

In April, Piper Jaffray published the results of a national study conducted by senior research analyst Jeff Klinefelter and a collaborative team of research analysts. The study found that total teen spending on fashion declined nearly 20 percent on a year-to-year basis, and overall spending was down 15 percent for young men and 11 percent for juniors (young women).

Transition phase
The findings indicate that the fashion category represents 41 percent of the total teen budget and, while teenagers continue to spend a significant amount of money, this budget allocation is low compared with past years. “We’re currently in the ‘transition phase’ of the fashion cycle and believe that we have not yet hit bottom,” Klinefelter says. “The current economic challenges are impacting consumers at all income levels and ages, indicated by the historic low level of average planned spending in the fashion category this spring.”

And retailers that cater to teens need to be wary of some demographic shifts on the horizon. In most instances teens are defined as those ages 12 to 19; according to the U.S. Census Bureau, 33.5 million young people fall under this heading, but their numbers are expected to decline 3.3 percent by 2010.

By comparison, the number of Americans ages 25 to 34 is expected to rise 5.2 percent over the same period. Meanwhile, on the opposite end of the spectrum, the Census Bureau is reporting some four million births per year. These figures show why retailers are salivating over both the 30-year-old demographic and the pint-sized set.

Purchasing insight
Though Piper Jaffray’s 15th semi-annual teen spending survey yielded some sobering data, it also provided valuable insights into purchasing behavior and brand preference across multiple categories.

Nearly 700 students from 11 U.S. cities were surveyed through mall field trips, classroom visits and online questionnaires. Piper Jaffray also captured an additional 4,500 online survey responses through the national DECA organization, which partnered with the retail research team for the seventh time. Among the key findings:

Hollister remains the No. 1 preferred brand by teens, as ranked by mindshare, followed by Pacific Sunwear, Volcom, Quicksilver, Zumiez, American Eagle, Abercrombie & Fitch and Forever 21.

There’s been an increase in spending from fall 2007 among teen girls in the beauty category. In addition, privately-held, Swedish-based IKEA was the top choice among teens (followed by Pottery Barn/PB Teen) in the home furnishings or cataloger category.

Electronics represented 7 percent of total budget (10 percent for young men, 4 percent for juniors), up from 6 percent last year. Spending by young men in the video game system category rose to 13 percent from 9 percent last fall.

In the digital media category, 86 percent of students with MP3 players own some form of an iPod. Although iTunes continues to dominate the music download market (81 percent), 61 percent of the students surveyed indicated they download music illegally. In addition, 6 percent of students own an iPhone – and 9 percent expect to buy one in the next six months.

Though Starbucks continued to be the clear brand leader across the board in both the school and online surveys, premium coffee is potentially a growing category among teens: Dunkin Donuts appeared in the top 10 brands for the first time in the school survey.

Chipotle continues to gain teen market share, ranking among the top 10 brands in the online survey for the first time. In total, approximately 45 percent of students said they spent more money at restaurants in the past year than in the previous year.

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