LEAVING LEVI'S

February 23, 1999

Harry Bernard, chief marketing officer and a partner at Colton, Bernard, Inc., a San Francisco based apparel marketing consulting company; Carol Emert, a retail reporter for The San Francisco Chronicle; and Elizabeth Dipilli, a partner at Project X, a youth brand research and consulting firm, discuss the recent layoffs at the Levi Strauss Corporation.

JIM LEHRER: Levi's -- jeans blues: Tom Bearden begins. TOM BEARDEN: Yesterday the Levi Strauss Company announced it will lay off nearly 6,000 workers, and shut down half of the company's 22 North American factories. For decades, Levi Strauss has been the largest maker of blue jeans in the world. Wearing a pair of Levi's became a quintessential American fashion statement. The San Francisco-based company was founded during the 1850 California Gold Rush by Levi Strauss. It made denim pants for miners and other workers. Jeans became trendy in the 1950's, even more so when they became a kind of uniform for baby boomers in the 1960's and 1970's. As the company grew, it kept many of its plants on American soil, unlike rivals who took advantage of lower production costs overseas. Instead, these American-made fashions were exported, and Levi's blue denim pants became known throughout the world. The company also manufactures the popular Dockers slacks. But in recent years, Levi's jeans have lost their cachet. Market share among younger consumers has plummeted. The 1995 movie "Clueless" demonstrated teenagers' concern for the latest fashions. Most young people now prefer designer jeans, wide legs, and low-slung waistlines. Last week, Levi Strauss reported its sales fell 13% in 1998. Ten of the plants targeted for closing are in the United States: Four in Texas, two in Tennessee, and one each in Georgia, North Carolina, Virginia, and Arkansas. The other factory is in Ontario, Canada. Levi's workers will get eight months' notice of the impending layoffs, three weeks' severance pay for every year of service, and up to $6,000 for retraining, education, or moving expenses. Levi Strauss plans to shift production overseas to make the company more competitive, and says it will concentrate on developing and marketing products to younger consumers. CATHY CHUPLIS, Director of Communications, Levi Strauss: Well, you know, there was a time when you looked out there, and the Levi's brand was the jean; everybody was wearing it. I think that when you look in the marketplace today, there is a plethora of competitors who are going for those same dollars. So what this decision is all about is to reframe, if you will, or reshape our business, so that it is very focused on product development, on marketing, and on the consumer who buys our jeans. TOM BEARDEN: This is just the latest round of cutbacks for Levi Strauss. More than 7,000 North American workers were laid off in 1997. JIM LEHRER: Elizabeth Farnsworth in San Francisco has more. ELIZABETH FARNSWORTH: And for a discussion, I'm now joined by Carol Emert, retail reporter for the San Francisco Chronicle; Elizabeth DiPilli, a partner at Project X, a youth brand research and consulting firm; and Harry Bernard, chief marketing officer and a partner at Colton, Bernard, Inc., a San Francisco-based apparel marketing consulting company. Mr. Bernard, how did this happen? I remember when the word "Levi" - "Levi's" was virtually synonymous with the word blue jeans. HARRY BERNARD: It pretty much is. But I think there are two sets of dynamics at work here. One is the real sense of fashion that was lost, and the other is operating style and operating capabilities. Levi, as you just heard the spokesperson say, was very -- very much concentrating on the marketing aspect of the business and didn't do a very good job at the operational aspects. ELIZABETH FARNSWORTH: What do you mean? HARRY BERNARD: Well, efficiencies, getting goods to market on time. They didn't have to. The brand was so popular that people put up with almost anything because it was the demand jean. Over these last years, the industry has changed, as again, we heard before. Most of the competition has either gone totally offshore or globally to source and produce the goods, or has developed a great balance of domestic programs and international sourcing capabilities whereas Levi's, I guess because the company is one of such compassion for its employees and for community service and the best interests, which I feel is one of their great strengths, but it has turned into a vulnerability for them because they were left standing at the edge of the precipice while all of their competitors were going overseas and developing products for less money. ELIZABETH FARNSWORTH: Let's take those two issues one at a time. Elizabeth DiPilli, starting with the style issue, what did young people want that they weren't getting from Levi Strauss? ELIZABETH DiPILLI: Well, young people want to show their individuality and Levi's just wasn't allowing them to do that. Levi's was their mother's jeans, the older people wore Levi's, as well as teenagers, but they want to set their own style, set their own trends and Levi's just wasn't providing that kind of brand identity for them. ELIZABETH FARNSWORTH: Ms. DiPilli, what did Gap do that made them more popular, for example? ELIZABETH DiPILLI: Well, Gap has no branding on them and Gap has the retail traffic that Levi's doesn't have. So when all the kids are going in to the Gap, the jeans are there, they're fine and just something that Levi's has to contend with is a lot of young people aren't wearing that many jeans as much as they used to. They're wearing cargo pants, which is very much an Old Navy product, they're wearing khakis, which is very much a Gap product. So Levi's has, you know, a few problems in their blue jeans just with that fact alone. And then you have people like Tommy Hilfiger, Polo -- Ralph Lauren, you have off priced brands that have come in, and a lot of those brands are taking away from Levi's market share. ELIZABETH FARNSWORTH: So Carol Emert, the restructuring announced yesterday is aimed at what, making a whole new set of brands that will be more popular and also being cheaper, staying with the style issue first, though. CAROL EMERT: Really what yesterday's announcement signified -- what was significant about that is that Levi's made a decision that it was no longer able to manufacture in the United States. It doesn't really have as much to do with their softness at retail. They closed 13 plants last year, and fired about 7,000 people, and that was because of softness at retail. The plant closings that were announced this week are really a long-term strategic decision by the company, that they have to give up their humanitarian goal of manufacturing in the United States. They simply can't compete. ELIZABETH FARNSWORTH: So you don't think it really is about style at this point. This is a much, much, much more basic issue, just cost? CAROL EMERT: Well, Levi's has a number of problems, and style is certainly one of them. They actually recognize that, and they are planning to come out with much more fashionable styles in the fall. Traditionally, they have their core line, the 501 line, which is straight legs and five pockets, has been the Levi's jean. It's the icon. It's always referred to as an American icon, but young people just don't want that, and even baby boomers want more of a choice. So this fall Levi's is going to roll out more teen-oriented fashions such as cargo pants and carpenter pants as part of their core line. ELIZABETH FARNSWORTH: Mr. Bernard-- and any of you that want to jump in on this-- explain the cost issue. How much did it cost them to make a jean? How much did they sell it for, and how much cheaper will it be in Mexico or wherever else they're going to go? HARRY BERNARD: I can't give you those numbers, I wish I could, but I can tell you that the pricing becomes far more competitive to do it offshore simply because of the pay scales. There's also a difficulty, though, that's added to that, and that's in coordinating the production so that it is delivered to the stores on time and together with the tops that go with the bottoms, but I can't really tell you the dollar amounts involved. ELIZABETH FARNSWORTH: Carol Emert, can you? CAROL EMERT: Yeah. On the pricing issue, the non- promotional price for Levi's jeans is about $52. It's more for Silver Tab, which is a trendy teen line. It's about $48 for Calvin Klein, Tommy Hilfiger, Ralph Lauren -- designers that are actually much more desired these days than Levi's. Levi's just can't compete. Their wholesale prices are $3.00 higher also. ELIZABETH FARNSWORTH: And are they going to lower their prices? CAROL EMERT: They will not say they're going to lower their prices, but clearly there's a competitiveness issue. Their retailers say there's a competitiveness issue and it's obvious from the pricing and the demand for the different lines that there's a competitiveness issue there. I think it's easy to draw the conclusion that they should drop their prices. ELIZABETH FARNSWORTH: Elizabeth DiPilli, do you think this is going to work, that they can come up with a brand that's more appealing to the young people and also make it cheaper? ELIZABETH DiPILLI: Yes, I think it can work. Just going back to the jobs moving overseas, I think it's important to note that teens are very socially aware. They have a tremendous social conscience and Levi's is a company known for their social conscience. Now, to bring these jobs overseas, it's something they should be concerned about, because it might affect their brand image. Let's look at NIKE. They brought some jobs overseas and they had a bit of a publicity problem after that. And I would hope Levi's would learn from them and not make the same mistakes, because teens are very socially conscious and aware of companies that do the right thing when it comes to their employees. Also, when it comes to other brands that have infiltrated Levi's kind of positioning, Levi's positioning is original, and that's been their strategy with their new advertising agency. That's a good strategy but it's just not enough. It's not enough to bring Levi's into the 1990's and into the millennium with the teens. That's why people like Tommy and Polo and even very cheaper brands and small brands that are, you know, no one's ever heard of, the young people are really buying them because they want to support the small companies and they want to show their individuality. ELIZABETH FARNSWORTH: Miss DiPilli, you're telling me the young people realize they're smaller companies and they want to support them? ELIZABETH DiPILLI: Absolutely. ELIZABETH FARNSWORTH: How is all this information getting out? ELIZABETH DiPILLI: They get out by word of mouth. There's the trendsetters out there that will find and seek out the most remote brands and find who no one else is wearing, they will find that and that's how a trend gets started. And they will be in school and people will see them and say, "wow, where did you get those?" And it just goes from there. And they want to support these small, local companies. And Levi's is a very big company. HARRY BERNARD: They drum it across the Internet. ELIZABETH FARNSWORTH: Go ahead, Mr. Bernard. HARRY BERNARD: They drum it across the Internet, as well -- taking your last spokesperson's comment. The teens do see this every day on the Internet and instead of just seeing it in the hallway at school, they're watching it on their little screen at home. Also, some of the smaller companies that are very edgy and that kids really like, understand the value of literally marketing on the Internet and send out all kinds of information about themselves. So that's one of the big differences that are happening with the kids today. ELIZABETH FARNSWORTH: Carol Emert, Mr. Bernard, you actually referred to this earlier, Levi Strauss has this reputation here in San Francisco and elsewhere as being a very humane company, not laying off workers here when they could avoid it. There's the story that one of the Levi Strauss leaders during the time of the Depression wouldn't fire anybody and had them all building new floors in the building and the factory so he didn't have to fire anybody. What would those older leaders think about what's happening today? CAROL EMERT: Well, I think if they saw what's happening to Levi sales they would be concerned, unless they had no care about sales and money -- unless they didn't care if the company was successful at all. Even the upper levels of the company are still run by family members. The chairman and C.E.O. is Robert Haas. I believe he is the great, great grandnephew of the founder of the company. And he has recognized the need to go overseas. He has also recognized that the corporate philosophy needs to be changed. There's something that the company has been using for their human resources policy called the aspiration statement, which was developed in 1987 and it said people must respect each other and decisions should be made in a group. If it didn't say that, people took it that way, and it's led to a lot of problems at the company: People not making decisions, a lot of bureaucracy, a lot of slowness, and the aspiration statement is being rewritten and Robert Hauss is behind that. So certainly at least that member of the family recognizes that something needs to be done. ELIZABETH FARNSWORTH: We have little time. HARRY BERNARD: There have been just too many layers of individual management that decisions had to go through and they weren't being made. I think corporate politics very often has reared its ugly head. I think many decisions that could have been made and would have been made earlier were not made because of political best interest rather than the corporate or brand's best interest. I think that that's finally come home very loud and clear to the top management. And for the very first time, I think, in the company's history, they are going to the outside world to recruit some new fresh blood. Our concern is, one, we applaud the idea that they are going out and bringing in fresh blood to the company, which it does need, but I'd like to see what kind of people they're really bringing in. I'd like to see who they're thinking of, because unless they are going to bring a different aspect of culture to revolutionize the culture at Levi's, it's going to be same old same old. ELIZABETH FARNSWORTH: Okay. Well, thank you all very much for being with us.

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