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By building its omnichannel and e-commerce capabilities, Levi Strauss & Co. is emerging from the pandemic as a smaller, but stronger company.
Chip Bergh, president and chief executive officer of Levi Strauss & Co., talked with Evan Clark, deputy managing editor of WWD, about the company’s strategy to weather the global crisis.
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First, Levi’s built share through the pandemic, which is an indication of the strength and overall health of its business. Second, it doubled down on the consumer connection, particularly with the Levi’s brand. And third, it wanted to reshape its P&L, so although it would be a smaller company due to the pandemic, it would be financially stronger in a sustainable way.
“So as we build the business back to its pre-pandemic levels, we would be even more profitable. We’ve done all of that while maintaining a focus, first and foremost, on our values and protecting our employees through all of this,” said Bergh.
He noted that Levi’s fiscal year ended at the end of November, which is not a great time around Black Friday. Bergh said the first quarter started out pretty strong (mid single-digit, top-line growth) with some small impact of COVID-19 in China last December, January and February.
But in the second quarter, the company got hammered. Its stores were closed for 10 of 13 weeks of that quarter, and its wholesale customer doors were also closed for around the same amount of time. Their business was down 67 percent in the second quarter and the company lost a couple hundred million dollars in earnings. Bergh said they knew it would be painful. The company had to lay off 700 people, not knowing how long this would go on, and they would need to right-size the organization.
The big surprise came in the third quarter when the business bounced back, much stronger than expected, and it was profitable, he said. (The company reported an 8 percent drop in third-quarter sales to $1.1 billion, and had earnings of $37.8 million, a 32 percent decline from $55.2 million a year ago.)
“All the actions we took, building out new capabilities, e-commerce, omnichannel capabilities that we have built out — all those started to pay through. We had a much stronger-than-expected third quarter and now have some momentum going into the holidays,” said Bergh.
He was asked whether you can be smaller and more relevant?
“Absolutely. That’s part of just being close to the consumer,” he said. The COVID-19 crisis has changed many things from a consumer standpoint. Bergh said the consumer has learned a lot of important lessons through the pandemic, particularly when they were sheltered in place.
“I think the days of conspicuous consumption are gone. Consumers are much more focused on conscious consumption. They’re buying fewer things but they’re buying brands that they know and trust in many categories, even outside of apparel. Consumers are actually trading up during an economic downturn, which is the first time I’ve ever seen that in my career. They’re turning to brands they know and respect, but they trust. The other big phenomenon we see, which plays to our strength, is a real focus on sustainability,” said Bergh.
The final big trend is a hard pivot to digitalization and e-commerce, especially when they went into shelter in place. The company doubled down in building e-commerce and its omnichannel capabilities, which contributed to the big bounce in the third quarter, explained Bergh.
The San Francisco-based company has been talking about digital transformation for almost the last year. With Project FLX (future-led execution, which ushers denim manufacturing into the digital era), Levi’s is using and finishing about a third of its total bottoms business on lasers. They can postpone the finishing much closer to market which enables them to chase after inventory, which has come into play during the pandemic. When they talk about digital transformation, they’re talking about designing digitally all the way through the entire supply chain, from manufacturing and finishing a pair of jeans digitally to how they sell.
The company has invested in artificial intelligence to predict traffic patterns and plans its labor to inform its promotion strategy, enabling it to promote a little bit less and drive gross margins. “My belief is that the pandemic has accelerated what might have taken five or 10 years and compressed it into this short period of time, and we’re going to pivot hard into that digitalization of everything we do,” he said.
Bergh explained that omnichannel and e-commerce are very important to Levi’s. The company has been doing buy online, pick up in-store, buy online and pick up curbside, and built out ship from stores. While the stores were closed, store managers went to stores and filled e-commerce orders. Twenty percent of e-commerce items were filled from their retail locations, which helped optimize inventory and reduce markdowns.
They are excited about a new program called Levi’s SecondHand launched in October. “We are arguably the leading brand in thrift store business. People go out and they hunt for authentic vintage Levi’s, and even older, worn, broken-in Levi’s…We’re a hot brand in flipping. We sell authorized vintage products in many of our mainline stores around the world. It’s really a signal of how powerful this brand is,” he said. “We decided to turn this trend into a program.”
Consumers can bring in any pair of old Levi’s, and they will be given a store credit or gift card to purchase a new pair of Levi’s. The company takes that old product and is working with a third party that will repair it, clean it and post it online at Secondhand.levi.com and a consumer can buy it for less money than a brand new pair of Levi’s would cost.
The concept taps into Gen Z, who are into the circular economy and like to buy apparel in a thrift store and upcycle it for a couple of weeks or months later on one of the thrift sites. “It’s really early days. It helps drive traffic into our stores, which is a good thing. We’re able to tap into this insight about the importance of the circular economy, and there are very few brands that can pull this off better than us. This really does play to our sweet spot. The thrift industry today is about a $30-billion-a-year industry globally, and we’re probably the largest brand, and it’s projected to double in the next five years,” said Bergh.
According to Bergh, “Retail and brick-and-mortar stores have a role to play for a long, long time in the apparel world if it’s done right. You have to give the consumer more than a transactional experience. We’ve really tried to build our stores to be very experiential.” They have put in tailor shops so a customer can personalize and customize something just for themselves, which also creates a type of in-store theater.
“The important thing is to continue to follow the consumer where the consumer is going,” said Bergh. For example, more and more consumers want to transact cashless. “We’re building out mobile checkout, cashless checkout is probably not too far away. All these things give the consumer a better experience,” said Bergh.
Bergh has committed to building 100 mainline doors in the U.S. over the next couple of years. Now, the company’s footprint leans heavily to outlets. “The brand is arguably stronger than it’s ever been. We have cities where we don’t have a mainline store presence [such as Boston],” he said.
Historically, they built Levi’s stores in the U.S. that were 5,000 to 7,000 square feet. Bergh’s found, based on his European models, that smaller footprint stores, in the range of 2,500 to 3,000 square feet, can be more productive and financially attractive, and a much better return on investment capital. They have a little more than a half dozen open.
Last month, Levi’s hired Elizabeth Morrison as chief diversity, inclusion and belonging officer, and Bergh was asked how does he make her job easier?
“First and foremost, she’s going to be a great partner for me. I’m going to make her job easier by continuing to reinforce that building a more diverse organization will make this company a better company. It’s one of my top priorities as this country has come to grips with social justice and racial justice following the killing of George Floyd.”
According to Bergh, Levi’s diversity numbers internally were not great. “It’s arguably my biggest failure over the last nine years,” he said. The company has made commitments to make significant improvements. He said that broadly across the U.S., its numbers look pretty good. But when you look at the management headcount at headquarters, “our numbers are terrible.” He expects to make progress over the next year. Levi’s also committed to adding a Black leader to the firm’s board, and has a search underway.
During the Q&A, Bergh was asked how Levi’s wholesale strategy is transitioning to becoming direct-to-consumer.
He explained that the business has shifted over the last couple of years by design. “One of the strategic choices we laid out almost nine years ago was to become more of a direct-to-consumer retailer,” he said. When he joined the company nine years ago, 48 percent of global revenues were in U.S. wholesale, d-to-c was 21 percent. Today, total d-to-c is now almost 40 percent of global revenues, and U.S. wholesale is under 30 percent overall. “That’s not because U.S. wholesale business has been on a dramatic decline. It’s our international and direct-to-consumer business has been growing much, much quicker,” he said.
He said wholesale is financially very attractive and is very profitable. “It’s a big-scale business that we run with relatively small teams,” Bergh said. “In the d-to-c world, in brick-and-mortar and in e-commerce, we’re in much more control in how our brand shows up. We’ve focused on becoming a great retailer. We’re now pivoting and declaring that we’re going to be d-to-c-led. All of our processes and the way we run the business will be much more like a vertical retailer than like a wholesaler. That’s not to say wholesale isn’t still important to us. It is, and it’s profitable. We have lots of opportunities. We have 3,100 doors globally, of which we own 850. We have clear opportunities to open more mainline doors.”