Penny-pinching in the most recent recession has changed where and how customers shop. Sales at Wal-Mart, the world's biggest retailer, rose almost 15% in 2001. At fellow discounter Target, they climbed 8%, and at Kohl's they shot up almost 22%. Conversely, Federated Department Stores, the biggest upscale retailer in the US, has seen sales drop 15%. The May Department Stores Company (Lord & Taylor, Foley's) and Dillard's have also been stuck in sales slumps. Discounters have been undercutting their high-end rivals on name-brand apparel, forcing them to take a more democratic approach.

Upscale retailers have been turning to private-label apparel and away from name brands to avoid costly designer fees and offer merchandise at lower prices. Federated's house brands accounted for 16% of its department store sales in 2001, and that number is expected to grow. Middle-of-the-road retailer Sears has tightened the scope of its private-label portfolio by dumping several of its under-performing in-house brands and replacing them with a single line called Covington. Across the mall, J. C. Penney Corporation has been getting almost half of all sales from private-label merchandise.

As department stores de-emphasize brand names, some designers are setting their sights a little lower to find new markets. Mossimo started the trend in 2001 by sewing up a three-year, billion-dollar licensing deal with Target for a line of sportswear and accessories. Haute couture designer Todd Oldham and architect Michael Graves have also signed with the discount chain to create their own lines of home furnishings as well as designer Liz Lange, who is creating a maternity line exclusively for the company. At beleaguered retailer Kmart, the Martha Stewart line of household products have brought in a welcome $1 billion in annual sales.

Women's clothing designers such as Liz Claiborne and Jones Apparel are also creating low-priced lines for Mervyn's and Kohl's while outsourcing manufacturing to focus funds on licensing and marketing. For many American clothiers, "Made in the USA" is no longer an affordable option. The #1 maker of brand-name apparel, Levi Strauss & Co., has moved virtually all of its production overseas where labor costs are cheaper and environmental regulations are not as strict as in the US. At VF Corporation, the world's leading jeansmaker, more than 80% of its products are made in Latin America and Asia.

While searching for cheaper production, specialty retailers have also been looking to offer the exclusive trends that inspire spending. The simple, casual fashions on which The Gap and Limited Brands built their brands can now be found at the big discounters. The Gap tried vying for the younger market by adding glitter and stick-on-stars to T-Shirts and blue jeans. However, sales refused to pick up, sending the company back to basics. The Limited has responded to changing customer patterns by playing up its strengths and expanding its most profitable division, the Intimate Brands unit (Victoria's Secret, Bath & Body Works).

In the UK, department store mainstays, such as Marks & Spencer, have been steadily losing ground to cheap-and-chic rivals NEXT, H&M Hennes & Mauritz, and Inditex's Zara. Like its American counterparts, Marks & Spencer is focusing on its own brands to regain market share. In Japan, the nation's worst recession in 50 years is sending money-conscious consumers to discount chains. Fast Retailing has presented an overseas success story, with the rising popularity of its Uniqlo (affordable casual wear) stores.

Competition from abroad may also threaten American retailers. The influx of style-conscious, low-cost chains, such as Sweden's H&M and Spain's Zara (also known as the European Gap), is increasing the choices for the trend-minded shopper. In the battle for tightly held consumer dollars, sheer size is no longer enough; the players in the apparel industry will need to look to innovative and original business models to stay in fashion.