Cane 8-18 LeeCo. 677 —_—. Case 5-13 Lee Co.* For more than 50 years, the five-pocket blue jeans made by Lee Co. of Merriam, Kan., were the uniform of cowboys and farmhands. Lee did a good, steady business, and that was enough to satisfy the dry-goods merchant Henry David Lee, who owned the company. But the once-stable jeans business has become extremely volatile, and the ‘Lee brand has fallen on hard times. Today it is trying for a comeback. In the 1960s of Bob Dylan and Vietnam, and even more so in the late "70s of designer jeans, Lee was riding high. The cotton denims, sud- denly fashionable among women as well as men, crashed the gates of ‘every American institution from high school to Studio 54. Lee couldn't make pants fast enough. The company, which was ac- ‘quired by VF Corp. in 1969, added new automated sewing planta and, in the °80s, laundries for stonewashing dungarees. The way Lee saw it, Jeans were a permanent fixture, and the Lee name was spun gold. But its vision proved myopic. In the early 1980s, the shrinking popu- lation of young people (age 12 to 24), the spreading body shapes of the older generation and the new popularity of sweat pants, warmup suits and khakis ended the boom. In 1989, only 387 million pairs of jeans were sold in the United States, down from 502 million in'the peak year of 1961. After 1987, Lee experienced a two-year decline in U.S. jeans ‘sales totaling 23 percent. VF had let inertia, not demand, steer the business. ‘Today, VF finally is aggressively trying to solve its Lee jeans prob- lems, but the brand still is reeling (aee Exhibit 1), ‘Boom and bust left Lee with too many factories and too much unsold stock. In the past two years it has closed 10 plants while working down its inventory. To attract more retail business, Lee this year has also ‘cut wholesale prices 6 to 9 percent. ‘The brand now must recapture luster lost to neglect, while such arvenus as Gitano, Guess and private-label imports sold by Gap Inc. ‘and other big retailers were cutting into the market. Lee is counting on the success of a new collection of casual pants, which are to be intro- duced in the fall—four long years after Lee's privately held rival, Levi Strauss Associates Inc. introduced its enormously successful Dockers brand. Lee also has to catch up in the thriving jeans markets overseas, where Levi, the inventor of blue jeans and ever the leader, has a beach- head, “Source: Teri Agi, "Botiom Ling.” Phe Wall Street Journal, March 7, 1991, pp. A, 4. Reprinted by permiasion of THE WALL STREBT JOURNAL, © 1991 Dow Jones fe ‘Company, Ine: All Rights Reserved Worldwide,618 Port Marking Strategy and Program Development EXHIBIT 1 VF Corp: A Blue Jeans Market Earnings have been hurt. ‘While business struggles... ‘Annval net income, in millions ‘Lins of busines ana parcet of ‘3200 oe 1985" 10861987 1986 1969 1990 3 Sportewear 3508, a Fa ine 0 9 ‘apparel ee In afteree markt. And the soak tage 1080 US. para hare fading ef Corp ck ant {stor pret Dy te nd Aparl inter eit og Dan Test 100 i. [pv erie unar= os Wrangler* 55 sae Ps Gitans a7 * . Chie 25 o| 7 TP Gon 1 ‘Other wo 0 a — » oreo Seale wins SEMAMIT ASO NDS Fourth quarter net income at Levi Strauss jumped 51.2 percent, $75.3 million, boosted by international sales and strong demand Dockers, which had 1990 sales of about $500 million. ‘While Lee continues to be a major force in the $6.3 billion U.S.j industry, second only to Levi, the brand's market share has slipped. about 10 percent. Fred Rowan, chief executive since 1989, figures ‘will take Lee two more years to accomplish “an architectural: of ts operations. “You can't get rid of your sins in six months,” he All top executives in marketing, operations, and manufacturing bbeen replaced since 1989,Case 5-13 Lee Co. OB Meanwhile, Lee's parent, VF, is leaning on its other operations to ‘keep shareholders happy. VF owns Wrangler, Rustler, and Girbaud jeanswear, all of which are in better shape than Lee; Vanity Fair lingerie; Jantzen sportswear; Red Kap uniforms; Bassett-Walker fleecewear (sweatshirts and such); and Health-Tex children’s clothes. On Feb. 12 VF announced a fourth-quarter net loss of $9.9 ‘million, the result of, among other things, an $11.5 million restructuring charge from the Lee division and « $21 million provision for excess inventories at Lee. VF's jeanswear brands contributed some $1.4 bil- lion of the $2.6 billion in sales. (Analysts estimate that Lee's sales account for about $600 million.) Over the past two years, Lee's problems have cost VF some $100 million in profit, estimates Deborah Bronston, an analyst who follows the apparel stocks at Prudential Securities Inc. In December, Standard and Poor's lowered VF's long-term debt rat- ‘ings, cautioning that the extent of its progress on its turnaround “is still uncertain,” S&P also cited softness in both retailing and the jeans market. Just about everybody involved—stores, competitors, insiders— blames Lee's problems partly on VF and partly on the management of Lee. Critics say that VP ordered Lee to bolster corporate earnings by ‘squeeting as much as it could from its basic jeans business while doing no long-term planning. Others say the Lee division itself was heavy with managers who had a “commodity nientality,” meaning they would fill the retail pipeline with basic jeans and let retailers worry about how to sell them. “We had a management problem at Lee,” says ‘Lawrence Pugh, VF's chairman. VF was just a lingerie company with annual sales of $69 million when it bought Lee in 1969, a year in which Lee had $87.5 million in ‘sales. Lee could boast that it had outfitted World War I reseed the actors on “Gunsmoke” and “The Beverly Hillbillies” and supplied the rodeo circuit. Then in 1972 Lee realized something that seemingly hadn't dawned on other big jeans makers: Women wanted Jeans made for women, jeans that fit. Lee developed the Ms. Lee brand, and Lee today remains America’s best-selling women's jeans. Its total Jeans sales, men’s and women’s, doubled from 1972 to 1978 and grew another 70 percent between 1981 and 1985, even as the jeans industry overall was declining. ‘When jeans were the rage, Lee apparently gave little thought to anything other than boosting production. Lee jeans were in such de- mand that they sometimes were rationed to retail stores. But the com- pany had a reputation for not servicing its retail accounts, of refusing, for example, to participate in cooperative ad campaigns with some stores.(680 Part 5 Marketing Strategy and Program Development “The managers at Lee were very conservative, they didn’t encourage creativity, they wanted a safe output,” says Kathy Ferguson, a former Lee vice ¢ who left for Levi Strauss after 13 years. ‘As other jeans makers branched out into different styles, Lee clung to its basic Lee Rider, which Lee felt transcended faddishness. In 1978, Colonel Days, a chain of 84 Midwestern jeans stores with headquarters in St. Louis, did 80 percent of its business in four different styles and three different brands—all in dark indigo, the traditional color of blue Jeans. “As long as you could procure product, it was a ‘no-brainer’ when ‘it came to selling,” says Gary Krosch, the chain's president. ‘Today the chain carries eight brands and 40 styles (including baggy jeans that everybody calls “anti-fit”) in a range of colors from black and ‘white to every conceivable shade of blue down to the ultrapale “ice washed” denim. ‘As jeans sales flattened in the early 1980s, Lee made the tactical blunder of broadening its distribution to mass-market chains such as Bradlees and Target. Discounters at the time were intent on replacing ‘most of their private-label jeans with brand-name goods. In a way, Lee's decision made sense. Mass merchants and dis- counters now sell more than a third of all jeans—more than specialty stores: and department stores combined. Selling through discounters ‘would, it was assumed, guarantee Lee an outlet. But the decision had unwanted effects. “They figured they could grow their way out of the slump through production instead of trying to find ways to market fashion,” says a former Lee sales executive. Selling to discounters threw Lee into the hurly-burly competition with low-cost jeans importers like Gitano, which had a strong name and did a lot of advertising, Lee jeans were priced as much as pereent higher than other brands sold in discount stores, 80, to the merchandise, stores would mark down the jeans, at the expense In a survey of discount-store shoppers by Leo J. Shapiro Assoc the top-selling brands in 1990 were Gitano, Sasson, Jordache, and Chic. Lee, which had been the most popular brand in the survey in 1989, fell to No. 21, as stores cut back on their orders of Jeans because the profit margins were slimmer. ‘When Leo started selling to discount chains, some department, decided Lee was declasse and dropped their pants in favor of priced and more popular brands, including Girbaud jeans, now ‘VE brand. (Lee continues to do much ofits business with J.C. Sears and Montgomery Ward.) Meanwhile, Levi's jeans, priced and sold both by department stores and chains like the Gap, tained their status.Case 5-13 LeeCo. 681 “When the demand is down, everybody gets pickier, and a product with an OK image and an OK price will get squeezed out,” says Robert Grogory, who was president of Lee in 1982 and 1989, then president of the parent, VF, from 1983 to 1990. ‘VF hit on another way as well to attempt to build market share, with {ts 1986 acquisition of Blue Bell Holdings Inc., the maker of Wrangler, Rustler, and Girbaud brand jeans. In buying Blue Bell, VF increased its domestic jeans market share to about 27 percent, compared with ‘Levi Strauss's 22 percent, according to MRCA Services Inc., apparel marketing consultants. ‘The acquisitions should have been good for Lee. Wrangler was a popular brand with adult men; Rustler was popular with budget retail- ers—Kmart and Wal-Mart, which Lee doesn’t deign to sell to; Girbaud is aimed at people with deeper pockets. Wall Street analysts believed ‘VF would benef from the merger by combining operations, but it didn’t do that. Instead, VF continued to operate Wrangler and Lee separately. “They were killing all of this with the duplicate staffs,” recalls Josie Esquivel, an apparel-industry analyst at Shearson Lehman Brothers Inc. While Lee was preoccupied with trying to reinvigorate jeans sales, it failed to notice an emerging trend. More older consumers—the s0- called “broad-butt market” —preferred other types of trousers. Christine Rogers, a 38-year-old computer programmer from Fort ‘Lee, N.J., says that she didn’t buy jeans last year. She prefers now to wear sweatpants and leggings. “Jeans just aren't a big deal for me anymore,” she says. ‘VP actually had a head start in casual clothes when, in 1984, it acquired Troutman Industries Inc., the maker of Skeets casual pants. But making the pants cost too much to sell them at a profit, VF con- cluded, s0 it closed Troutman in 1986. VF's chairman, Mr. Pugh, now thinks the move may have been a mistake. “In retrospect, (the product] was right,” he says. “Perhaps we didn't give it enough time.” In 1986, Levi Strauss introduced its Dockers casual pants—tailored styles with a more generous cut in the legs and hips. Retailers ordered ‘s0 much of the stuff that Dockers at first couldn't deliver the goods. Store buyers urged Lee's sales force to come out with competing prod- ucts. “You could have driven a Mack Truck through the opportunity we missed by not following Dockers,” says a former Lee sales vice presi- dent, who says one Lee executive wore Dockers to work every day for a week to rub in the point, “The last pair of jeans I bought was four years ago,” says Mark Plummer, 30 years old, a part-time graduate student who works at Stephens Inc. a securities firm in Little Rock, Ark.(982 Part § Marketing Strategy and Program Development ‘About “once every two weeks,” he wears his old jeans, he says. “But when I want to be casual and I'm going out to eat, I'd rather wear Dockers or Haggar,” cotton slacks that “are kind of loose and baggy and more comfortable,” ‘This year, both Lee and Wrangler will introduce casual-pants collec- tions, Wrangler’s Timber Creek line will be out in the spring, and Lee ‘says it will introduce its line, yet to be named, in the fall. But Dockers is already an entrenched, $500-million business. As jeans sales fell, Lee started tinkering with its image, which had become as dowdy as its age-old ad slogan: “Lee, the brand that fits.” For years, Lee had eschewed close-up photos of rear ends in its ads, Finally it realized what Madison Avenue long knew: Sex sells. And, ‘with advice from the ad agency Fallon McElligott, it changed its adver. ‘ising to appeal to younger customers. Inspired by the gritty, urban appeal of Levi's 601 button-fly jeans, ‘Lee ran black and white ads on TV and in magazines showing kids in convertibles and at the laundromat wearing Lee Jeans. The ad agency ‘won prizes, but customers didn't seem to get the message. VF chair-. man Mr. Pugh shudders at the very thought of that campaign: “Wrong, wrong, a big mistake,” he says, Lee's assault on youth exposed a number of its weaknesses. The brand added a number of fancier jeans to its repertoire—jeans with cargo pockets, jeans with embroidered detail. But Lee's factories — despite all their unused eapacity—would have had to be retooled to ‘make them. So Lee started using overseas contractors that were Iate ‘and erratic in their deliveries. In the back-to-school selling season of 1989, just, half of Lee's jeans shipments got to stores on time. As a result, orders were canceled. Hundreds of thousands of jeans were re- ‘turned. Today, VF is concentrating on integrating its businesses. With sweatpants outselling jeans at many stores, both Lee and Wrangler (a big supplier of desert fatigues to the Pentagon) are selling fleecewear manufactured by VF's Bassett-Walker division. Lee and Wrangler are retooling their factories to be more flexible. Wrangler now ean produce some styles for VF's Girbaud brand that had been made by contractors. Still, Lee has a long way to go. It is easy enough for VF to set goals, for improving manufacturing operations, but it is harder to predict when, if ever, in a shrinking market consumers will again think that Lee jeans are hot,