Assignment
Introduction
For Chip Bergh, CEO of Levi Strauss, the fact that Levi's owned and operated e-commerce sites accounted for only 4% of the company's net revenue, much lower than its competitors, was unacceptable. Levi's overall direct-to-consumer (DTC) sales from its company-owned stores, factory outlet stores, shops-in shops, and e-commerce sites accounted for 35% of its net revenue in 2018, up from 29% in 2015. The DTC channels offered better profit margins and lower prices compared to traditional independent retail channels (Garcia, 2019). With the relaunch of the company on the New York Stock Exchange in March, 2019, share prices quickly climbed amid the buzz generated by the initial public offering (IPO) (Garcia, 2019). The company reported strong earnings in 2018; it had a net revenue of $5.6 billion, after several consecutive years of strong financial performance (Levi Strauss & Co., 2019). Levi's attributed some of its success to its diversified marketing channels. However, changing market conditions and the potential risks of continued decline in traditional retail stores coupled with Levi's reliance on independent retailers as its primary marketing channel were all factors that Bergh needed to address for his new shareholders. Past aggressive DTC efforts alienated many of its independent retailers and conflict erupted to the extent that Levi's stopped its e-commerce sales for several years (Collett, 1999). Should Bergh risk these relationships once again by expanding its online presence?
Levi's Business Model and Challenges
Founded in San Francisco in 1853, Levi Strauss & Company was an iconic American company and one of the most recognizable consumer brands in the world. It was privately owned until it went public in 1971. It was taken private in 1985 until its new IPO in March 2019. Known worldwide for its blue jeans, Levi's had the highest brand recognition globally in jeans wear (Levi Strauss & Co., 2019). Besides men's jeans, products included men's, women's and children's tops, no-jean bottoms, and footwear, sold under the Levi's and Dockers brands. Dockers had been a staple in casual menswear since the business casual trend in the 1990s.
Levi's business model was characterized by marketing channel and geographical diversifications (Levi Strauss & Co., 2019). Levi's products were sold in 50,000 retail locations via independent retailers and directly to consumers. The majority of Levi's net revenue, 65% in 2018, came from independent retailers. High-end department stores, such as Saks Fifth Avenue and Nordstrom; mid-range department stores, such as Macy's and Dillard's; and value department stores, such as Kohl's and JC Penney offered various levels of Levi's assortments. Other independents selling Levi's included mass merchandisers, such as Walmart, Amazon, and Target; farm supply stores, such as Rural King and Tractor Supply; close out stores, such as TJ Maxx; specialty apparel stores, such as Urban Outfitters, and other outlets operated overseas by international franchisees dedicated to Levi's brands. In terms of DTC sales, company owned mainline and factory outlet stores generated 26% of its net revenue; shop-in-shops (i.e., designated branded space in host retailers) in department stores and other retail locations operated by Levi's made up 5%; and e-commerce sites operated by Levi's generated only 4% of its net revenue.
Levi's world-wide presence covered three geographic regions: Americas, Europe, and Asia, totaling 110 countries. While over 50% of Levi's net revenue was generated from the North and South Americas region, followed by Europe (28%) and Asia (16%), the growth in the latter two regions rose from 39% in 2015 to 46% in 2018, indicating the company's success in geographical diversification (Levi Strauss & Co., 2019). The company planned to further expand in key emerging markets, such as China, India, and Brazil. Sales in China made up only 3% of Levi's net revenue, far below China's 20% global apparel market share. Levi's global presence exposed the company to geopolitical risks and other challenges of international trade. Political, economic, and social instability in countries where Levi's operated could disrupt its business operations. International trade policy changes such as tariffs or trade sanctions often led to increased labor and materials costs. Weak intellectual property and trademark (e.g., the red tab with the word "Levi's" along the jeans' back pocket) laws in foreign markets also added to the financial as well as reputational risks.
Another potential challenge faced was the general economic conditions: the apparel industry was susceptible to unfavorable economic conditions, which often led to a reduction in consumers' discretionary spending on items such as apparel. Ever-changing customer tastes and fashion trends, such as the rise of athleisure apparels, posed additional challenges. While Levi's sales was dominated by men's wear, therefore less affected by the popularity of athleisure, Levi's planned to expand its sales in women's wear and merchandize categories beyond denim (Levi Strauss & Co., 2019), which seemed like a logical decision considering denim sales accounting for 74% of its net revenue, tops totaling only 20% and footwear and accessories at 6%.
Levi's, with 12% market share, faced strong competition in the apparel industry, including Wrangler and Lee jeans, the Gap, and American Eagle (Cheng, 2019). To increase its competitiveness and to attract millennial customers, Levi's had introduced new styles and enhanced fit, and fabric of its existing products, such as tapered fits in men's jeans, stretch and fit in Dockers khaki pants, and women's jeans using its patented four-way stretch fabric (Levi Strauss & Co., 2019). Also, Levi's attempted to differentiate itself from competitors by offering in-store tailor shops so customers could add stitching and patches to personalize their jeans and trucker jackets. On its e-commerce sites, Levi's launched Ask Indigo - an AI-powered stylebot - that offered online shoppers product suggestions based on their needs. Finally, Levi's updated its information systems to allow in-store return of items purchased on online (a convenience expected by today's customers), and it installed a new RFID inventory tracking management system and new enterprise resource planning system to improve operational efficiency, strengthen data and analysis capabilities, and shorten go-to-market processes. Despite Levi's efforts in channel, geographical, and product diversifications, as well as product innovations and enhanced operational efficiencies, it faced a potential but serious threat: its dependence on independent retailers as its primary distribution channel. Given the increasing number of brick-and-mortal store closures, a decline in the financial conditions of those retailers would have adverse effect on Levi's. Another major concern was the absence of long-term contractual relationships between Levi's and independent retailers in the U.S., which meant either party could terminate the relationship at any time (Levi Strauss & Co., 2019). Even decreases in order size or assortments, reduction in floor space and product display prominence would have negative impact on Levi's. Also, independent retailers could change their apparel strategies, such as Target's recent introduction of its own private label brand, Universal Thread, a denim-focused lifestyle brand (Piacenza, 2018).
Chip Bergh's Decision
With its recent capital infusion through IPO, Chip Bergh planned a three-pronged strategy (Friedman, 2019): increased sales beyond the established men's jeans category; expanded international markets; and deepened relationships with key independent retailers by offering more targeted product assortments: premium labels to high-end department stores (such as Nordstrom and Saks Fifth Avenue) to compete with such brands as Tommy Hilfiger and Calvin Klein; and to value-conscious customers, products under the Signature by Levi Strauss label sold at Walmart and Denizen at Target. However, to reduce the risk of dependence on independent retailers as its primary distribution channel, Bergh knew sales on his e-commerce platforms must increase. How should Bergh strike a delicate balance between Levi's sales goals versus those of its independent channel members?
Task
I. Discuss the external environmental factors that are affecting Levi's sales?
II. What are the strengths, weaknesses, opportunities, and threats (SWOT) for Levi's as it refocuses its marketing channel strategy?
III. Discuss the potential causes of conflict between Levi's and its independent channel members if Chip Bergh goes forward with his plan to aggressively grow Levi's e-commerce operation? Use provided articles to begin your research.
IV. Discuss the pros and cons of (i) expanding the e-commerce distribution channel and (ii) keeping the current distribution channel structure. Should Chip Bergh go forward with his plan to aggressively grow Levi's e-commerce sales? Justify your decision
References
1) Cheng, A. (2019, March 21). Levi's return of the public stage with a bang, but how long will the hype last? Forbes.
2) Collett, S. (1999). Channel conflict push Levi to halt Web sales. Computerworld, 33(45), 8.
3) Friedman, A. (2019, March 15). New path for denim powerhouses contains challenges and opportunities. Sourcing Journal.
4) Garcia, T. (2019, March 30). Levi Strauss sees growth opportunities in high-end department stores. MarketWatch.
5) Levi Strauss & Co. (2019). 2019 initial public offering prospectus.
6) Piacenza, J. (2018, May 2). Rebuilding the Levi's brand. Morning Consult.