business management

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MN6003 Levis Strauss Case: Adapted from: “Does Levi Strauss still fit America?” by Caroline Fairchild October 6, 2014, Fortune Magazine and “Levi Strauss - The Boss and the yogi” Jul 12th 2014 from the Economist

It used to be the only name in denim. Today the

161-year-old family owned company is just one

name among hundreds. Can anyone bring the

blue jeans pioneer back to its old glory? Enter

Chip Bergh—a former P&G brand whiz who once

made razorblades cool. Chip Bergh is not an

“apparel guy,” he says, while walking through

Levi’s Stadium in Santa Clara, California, the new

home of the San Francisco 49ers. Levi’s 20-year,

$220 million investment in the naming rights for

the 49ers stadium is part of a larger push to tap

into the nostalgia Bergh believes everyone has

for the brand. Despite the setting, Bergh isn’t

really a “sports guy” either. He is much more of a

company man. “I still bleed Procter & Gamble

blue,” he says about his former employer.

A crowd full of fans wearing your clothing is the

fantasy of anyone heading an apparel company.

But at Levi—the largest jeans company in the

world and the undisputed founder of the

category—the fantasy has been far from reality

for a long time. The creator of the 501 has

struggled to keep its brand relevant for what

Bergh calls Levi’s “Lost Generation.” For 120

years the term “Levi’s” was synonymous with

“blue jeans.” Then came the turn of the 21st

century, when a fashion explosion in denim

suddenly gave shoppers a range of high-end

choices—including brands like 7 For All Mankind

(founded in 2000) and True Religion (2002),

whose labels sounded more like cults than pants.

At the same time, lower-end rivals that had been

kicking around for a while (Lee and Wrangler)

began nibbling away at market share and

consumers defected to cheaper jeans, sold by

“fast-fashion” retailers like Zara and H&M. Levi

got lost in the middle. With $7.1 billion in 1996

sales, the company used to be bigger than Nike.

By 2003, Levi’s revenues had bell-bottomed out

to $4.2 billion. Over the next decade, sales rose

only barely as the company failed to translate

affection for the brand into actual purchases.

Levi’s design team was late to key trends, like

colored denim for women and more tailored jeans

for men. Once in the top quintile of

the Fortune 500, Levi dropped off the list in 2012.

That kind of decline would be a challenge for any

new CEO, yet Bergh, a 57-year-old vegan and

former U.S. Army captain, is bringing a discipline

to the company that had been missing for nearly

20 years. He has taken an axe to the company’s

inflated cost structure and is convinced that he

can make Levi grow again. While still relying

heavily on the classic pieces of clothing that are

the seam of the denim giant’s business (think the

button-fly jean, the white pocket tee, the trucker

jacket), Bergh is now investing in ways that, with

luck, will allow the company to be a trendsetter

again.

CEO Chip Bergh, above left, in head-to-toe Levi’s

Photo by Winni Wintermeyer for Fortune

For Bergh the strategy is as much about returning

to its roots as it is moving forward. “People really

tell stories about what they’ve done in their Levi’s,”

he says, with glassy-eyed nostalgia. “Some guy in

Russia wrote in on LinkedIn today saying he still

has his Levi’s from when he was a kid. You talk to

anybody, they want this brand to be successful.”

Bergh is loth to raise prices, which would cede

the middle of the jeans market to rivals like

Wrangler. Instead, he is taking almost the

opposite tack: a new marketing strategy shifts the

brand away from rust-belt edginess and toward a

cheerier mainstream.

Listen to Bergh for even just a few minutes and

it’s clear that he’s not just a sentimentalist—

though he is that. He is, perhaps even above all,

a “brand guy.” And Chip Bergh knows, in every

fibre of his heart, that Levi’s is the ultimate brand.

A 28-year veteran of P&G and the former head of

its then $7 billion global male grooming business,

Bergh was a key architect in helping the company

turn Gillette Fusion into a $2 billion brand. Now

Levi, a family-owned company with public

bondholders, is betting that Bergh can work the

same magic there. While the company has four

brands (Levi’s, Dockers, and the budget-

conscious Signature and Denizen labels), Levi’s

accounts for about 84% of total sales. The

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company must somehow capture older

disaffected shoppers (“fans who love us, but quite

frankly left us,” says Levi’s brand president James

Curleigh), as well as the lost generation (“fans

who don’t really know who we are”). It must also

battle a deteriorating retail environment, as both

brick-and-mortar traffic and industry-wide denim

sales continue to fade.

The twin challenges are so immense that Bergh is

hesitant even to claim he’s on the path to

achieving it. “This is not a turnaround yet—it is a

turnaround in the making,” he told Fortune in an

interview this summer. A month later Bergh is just

as cautious talking about his plan. “That’s what

makes me nervous doing this whole interview,” he

says. “It is way too early to declare success.”

There are just five Fortune 1,000 apparel

companies that have been around since the 19th

century. Founded in 1853, Levi Strauss is the

oldest. The company’s namesake creator, a

Bavarian native, had journeyed to San Francisco

in the midst of the Gold Rush and set up a dry

goods business. It wasn’t until 20 years later,

though, that Strauss and a Latvian émigré named

Jacob Davis invented their famously sturdy

pant—then called the “XX” and later renamed the

501. Davis came up with the idea of putting metal

rivets at points of strain, such as the base of the

fly and pocket corners, and Strauss agreed to

take a patent out with Davis for the new riveted

pantsmaking process.

Ask executives and family members how the

apparel maker has survived so long, and the

response is nearly uniform—and surprising: It has

been the company’s focus on things other than

profit, they say. Levi Strauss himself was a

notable philanthropist. In the 1890s he

established scholarships for students at the

University of California at Berkeley. Upon his

death he donated a portion of his wealth to the

Pacific Hebrew Orphan Asylum in San Francisco.

And ever since, say insiders, the company has

pursued a mission executives call “profits through

principles.” Strauss’s great-great-grandnephew

Robert “Bob” Haas, who was CEO from 1984 to

1999 and is now chairman emeritus,

spearheaded a code of conduct for overseas

suppliers and became the first Fortune 500 CEO

to extend medical benefits to employees’

domestic partners. In the 1980s, Haas was also

one of the earliest corporate executives to

champion research funding for HIV/AIDS.

To ensure that this high-minded mission

continued, Levi—which had been publicly traded

from 1971 until 1985—took itself private through a

leveraged buyout. The deal was widely lauded,

including by Fortune. But somewhere along the

way, the company’s focus on the greater good

wasn’t enough to keep other, more prosaic

problems at bay. Levi executives, accustomed to

a monopoly on the denim market, hardly noticed

when young fashionistas began trading in their

Levi’s for cooler jeans. Today the company has a

12.5% slice of the U.S. denim trade, down from

14.4% in 2004. Globally, its share has fallen from

7.2% to 5.3% (see chart below). While Levi still

lays claim to more market share than any other

company, VF Corp.—which owns Lee, Wrangler,

and 7 For All Mankind—is right at its heels,

according to data from Euromonitor International.

GLOBAL MARKET SHARE, JEANS COMPANIES Chart

Source: Euromonitor International. Fortune

The blame for this slow but steady decline, say

current and former executives, as well as industry

analysts, comes down to equal parts

complacency and arrogance. “If you look at any

other design team, they go out in the world, they

see trends, and they come back with inspiration,”

said one former high-ranking executive. “At Levi,

designers sit in the company’s archives and look

at old Western shirts and jeans…We have one of

the greatest brands in the world, but I think that

there may have been periods where we thought

the brand itself could carry us through thick and

thin, there is no question that we got complacent.”

Bergh was in Beijing on a project with P&G when

his phone rang. On the other end was a

headhunter who had a CEO role in mind. In the

previous six months Bergh had gotten a handful

of phone calls like this. He never took them

seriously. But when the headhunter said the

position was the top job at Levi, Bergh couldn’t

put down the phone. “I’ll never forget it,” he says.

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“The words out of my mouth were ‘Oh wow. That

could be amazing.’”

Off the top of his head, Bergh figured that Levi

was a company with $10 billion in revenue. By

September 2011, when Bergh actually stepped

into the job, the true sales figure was less than

half that. Right from the start, he assessed one

critical problem his new company faced. Back in

2009 a team of consultants Levi had brought in

had recommended that management grow

revenue by no less than 8% a year, akin to some

of the apparel company’s largest competitors. To

get there, Levi’s execs quickly opened 400 new

retail outlets, boosting its store count from 1,900

in 2009 to 2,300 a year later. What little growth in

sales the company garnered was more than

offset by expenses. As employee headcount

ballooned 37%—reaching 16,200 in 2010, up

from 11,800 the year before—operating expenses

shot up by 15%.

Bergh, a former member of VF’s board, knew Levi

didn’t have nearly as wide a brand portfolio as its

competitor and could not realistically grow at the

same rate. VF, in short, wasn’t just a blue jeans

company. It owned brands like North Face and

Vans in booming categories like athletic wear. By

contrast, roughly 85% of Levi sales came from

pants; the denim market, meanwhile, was barely

expanding, creeping up just 2% to 3% a year. The

consultants’ plan wasn’t working, but Levi kept

ploughing ahead with the same strategy.

At a Levi leadership meeting in July 2012, Bergh

gathered the company’s top executives from

around the world to communicate the need for

radical change. The answer was clear, says

Bergh: grow revenues as well as profits, modestly

but steadily, year in and year out. “If we want to

be a great company, that is what great companies

do,” said Bergh.

The first mile of that march had actually begun

before Bergh knew where he was heading. The

new CEO, weeks into the job, had travelled to

Levi offices around the world to interview its top

60 employees for an hour apiece. Bergh asked:

“What three things have to change at this

company?” and “What one thing do you

want me to change?” Bergh was disturbed to

learn that so much of his senior management

team was unaware of how poorly the company

was doing. Bergh discovered that few of his top

executives had much incentive to perform—and

many of the most talented individuals wanted it;

they preferred to work in a meritocracy. The

company’s culture had created a blanket of

complacency. Bergh’s response was to rebuild

his team—before long, nine of his 11 direct

reports were gone.

In their stead came some key hires. Chief

financial officer Harmit Singh was one of the first.

Singh, a former CFO of Hyatt Hotels, could

“squeeze blood from a rock and get savings out,”

says Bergh. Singh began his tightening with the

eventual goal of saving the company $175 million

to $200 million a year. Levi is on track to cut

nearly 20% of its nonretail and nonmanufacturing

employees, roughly 800 positions. The company

is also targeting its cumbersome supply chain.

From shopping bags to fabrics, Levi has long

sourced most of its products regionally rather

than get a better price with a global buy. Bergh is

changing that: By 2015 the company plans to

reduce its global vendor base by about half.

With a better cost structure in place, Bergh turned

his attention to what he spent his career doing:

building great brands. Bergh points to companies

like Burberry and Converse that have struggled in

the past and have come back by reminding

shoppers of their histories, be they grand or cool.

For Levi that means highlighting the company’s

position as the inventor of blue jeans and the

trucker jacket—something they had failed to do

for nearly a generation. Bergh is now trying to

woo shoppers back, in large part with a $100

million marketing campaign dubbed “Live in Levi’s”

that conjures up the brand’s heritage as an

American classic. “We are a democratic brand,”

says Bergh. “It’s multimillionaire Silicon Valley

entrepreneurs and schoolteachers and plumbers

and cowboys and miners. That’s what this brand

is all about.”

Bergh hired James Curleigh, former CEO of

Salomon Sports North America, in 2012 to

become Levi’s brand president and lead the

company’s renewed focus. Rather than sit in the

company vaults for inspiration, he scouted stores

and shoppers in Las Vegas, Hong Kong, London,

Berlin, and New York in a two-week span this

past summer. He is overseeing the rollout of

major displays spotlighting the company’s historic

501 jeans in a majority of Levi’s now 2,900 stores

globally. With the right nostalgia-driven

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messaging, Curleigh thinks Levi can be the

undisputed Goliath of denim again.

A central aspect to reinventing the Levi brand in

stores is simplifying the often dreaded process of

buying jeans. So Bergh and his team have put a

“denim bar” in the heart of most Levi stores:

Shoppers sidle up to the bar and a storetender

helps them figure out what fit, style, and fabric will

wash down well. Levi rolled out the concept with

its retail distributors as well, and the idea seems

to be working: When J.C. Penney traffic numbers

were sliding in 2013, Levi experienced double-

digit sales growth in its stores, Bergh says, thanks

in large part to the bar design. Levi is currently

working to refit Macy’s stores across the U.S. with

similar bars.

It’s also emphasizing a concept that feels oh-so-

Silicon Valley: “innovation.” Yes, the denim

business is a surprisingly fertile ground for high-

tech reinvention. At the Eureka lab a team of 30

technicians work on prototypes day in and out,

their hands turned indigo from the dye. It has

gotten so that the team can turn out roughly 30

prototypes a week, taking a product from idea to

design in less than 24 hours. The items that have

come out of Eureka run the gamut from an

environmentally sustainable pocket tee to tech-

advanced women’s denim that fits differently

depending on your body shape. In July the team

was working on a prototype for denim with a

metallic finish built for commuters who bike. While

the pants look like an ordinary pair of jeans during

the day, their metallic finish lights up when hit with

fluorescent light (like that from a car’s headlights)

to ensure the biker is seen in the dark.

Bart Sights, head of Levi’s innovation lab, confers with

colleagues. Photo by Winni Wintermeyer for Fortune.

There are some notable early signs of Bergh’s

success. In 2013, the company raised revenues

over the previous year (albeit just slightly) while

also growing its profitability; Levi increased

shareholder value by more than $1 billion.

Operating margins have improved from 7% in

2012 to 10% in 2013, inching closer to the mid-

teens seen at VF. Despite such encouragement—

and Bergh’s aggressive and, frankly, sensible

approach—he is correct to say, “This is not a

turnaround yet.” From a fashion standpoint, the

company continues to miss key trends, like

stretchier denim for women, which, Bergh says,

hurt the business for the past three quarters.

There are also challenges ahead that may be

outside Bergh’s control. The verdict is still out on

whether younger shoppers will adopt the brand.

The chief executive sees that in his own home:

When he took the top job at Levi in 2011, neither

of his sons (then 24 and 28) had ever owned a

pair of the company’s jeans.

As for the denim market overall, that continues on

its plodding course. In 2013, U.S. denim sales

were up just 2.6%, to $19.1 billion, and

Euromonitor predicts that annual growth will slow

to as little as 1.2% by 2017. “Denim has been in a

downward spiral,” said Macy’s president Jeffrey

Gennette in a September investor presentation.

There is growth to be had in China and India,

tracts of which are still denim-less. Having tried

and failed to launch a cheaper Denizen jeans

brand in Asia, Levi’s is putting all its chips on the

main brand, which is pricey by local standards.

Among American men, Levi’s most important

customers, there is a trend to greater formality at

work: they are wearing tapered trousers to the

office rather than 501s. There is another, more

menacing trend, “athleisure”—wearing gym kit as

everyday attire. Its main practitioners are women,

who would just as soon lounge around in yoga

pants as in jeans. Barclays estimates the

domestic athletic apparel market—think yoga

pants and Lycra tops—will increase from $70

billion to $100 billion by 2020. Despite the glaring

divergence in growth targets, Bergh appears

unfazed. “I am not afraid of yoga pants,” says

Bergh. “They are a fad. They are going to come,

they are going to go. Blue jeans are going to be

around for another 141 years.”