Levi’s Blueprint

Can ‘Segmentation’ Strategy Stretch Sales Without Tearing Into Profits?

By Sally Beatty
Staff Reporter of The Wall Street Journal

Like a fair number of American companies these days, Levi Strauss & Co. is struggling with accounting, tax and legal problems. Yet Levi’s biggest problem today is something more fundamental—selling jeans.

One of America’s most durable apparel brands is fighting for its life in the midst of a tough environment for apparel retailing, and the fact that it’s carrying more than $2 billion in debt gives it little room for error.

The company’s predicament reflects more brutal conditions than anyone in the business can remember. “We are trying to turn around a company in a very difficult environment with an enormous amount of debt,” says Levi’s chief executive officer, Phil Marineau. He says the company appears to be on the right path.

Levi’s for Everyone

Mr. Marineau, a former top PepsiCo executive who was paid more than $25 million last year to rescue Levi Strauss, has a daring plan that he calls segmentation: He wants to sell Levi’s to everyone without alienating anyone, a delicate fashion tactic in the best of economies. He is targeting various population segments—the high-fashion elite, trendy teens, aging men and budget shoppers—with different jeans styles placed in different stores, from Neiman Marcus at the high end to Wal-Mart Stores.

Wal-Mart, which sells Levi’s Signature brand jeans for $23, has publicly praised the line’s sales. The goal for Levi is to reach the 160 million consumers who shop in discount stores each week, and reduce Levi’s exposure to troubled department stores, which are losing market share to mass merchants and specialty stores. Levi badly needs the volume that only a big retailer like Wal-Mart can provide to offset the decline in its main jeans business.

The risk is that the down-market retailers will damage the brand’s image. If this happens, consumers now paying as much as $200 for a pair of Levi’s high-end jeans might not want to be seen wearing the Levi’s brand. That’s why Levi isn’t advertising its Signature jeans: The company wants to avoid damaging its status in fashion circles or irritating its full-price customers. Even Ralph Lauren, who positions his Polo Ralph Lauren brand as a luxury label but sells huge volumes of sheets and polo shirts through his own discount outlets, has steered clear of mass merchants.

Still, Levi is a resilient brand that has long appealed to both workers and socialites, so it just might pull this off.

Levi enjoyed a resurgence late last year, but consumer demand fell off generally early this year, resulting in yet another sales decline. While Levi showed 4% growth in the third quarter, the gains came from the low-price Signature line—otherwise, Levi revenue would have slipped again. Skeptics in the financial community note that the recent launch of a high-fashion jeans line called Type 1, sold at department and specialty stores, proved too cutting-edge for many shoppers.

Levi has little wiggle room, and not just because of its big debt. Even if the jeans keep selling, the company’s reward could be minimal because mass-market profit margins tend to be thin. Wal-Mart is widely expected to ask Levi to lower prices still further. Competitors, meanwhile, will also add pressure: VF Corp. sells its Wrangler jeans in Wal-Mart for $15 to $18 a pair. And Wal-Mart sells its own line of private-label jeans for $9.99.

But for those manufacturers cagey enough to deliver the right product at low cost, doing business with the mass merchants can be highly profitable. That’s because retailers such as Wal-Mart tend to sell their goods faster. They also don’t often ask for “markdown money”—payments from suppliers to boost margins for department stores when goods don’t sell.

Deflation in Denim

Levi’s bet reflects the larger economic issues affecting the apparel business, including deflation resulting from an oversupply of goods. Five years ago, department stores sold men’s jeans at an average price of $40. Today, the jeans sell for an average of only $34. At national chains like Sears Roebuck or Kohl’s, the price is about $24. And once new free-trade policies with China take effect in 2005, the U.S. market will be flooded with even more cheap clothing. All of this promises to put greater pressure on Levi to lower its prices.

Levi executives are quick to cite some upbeat developments. Levi has improved its fit and styling. It has shortened the time it takes to get a pair of jeans to market from 15 months in late 1999 to 10 to 11 months today. The goal is to get to 7-1/2 months by the middle of next year.

In addition, consumers bought more Levi’s and Dockers in the third quarter than a year earlier, Levi says, based on reports from retailers. However, this was offset by lower orders from traditional retailers; Levi attributes this to concerns about losing shoppers to Wal-Mart.

Eager to quiet such fears, Levi surveyed 1,000 stores within 7-1/2 miles of Wal-Mart and found that surrounding retailers haven’t suffered. Now the company is formulating plans to boost promotional activities with Wal-Mart.