A half century ago, Ralph Lauren began to build his fashion house based squarely on his own high standards of quality and style, and, arguably, on his unique interpretation of an American ethos: a British preppy-ness with a cowboy flairāupscale yet accessible,Ā appealing to everyone from country club golfers to celebrities on the red carpet and hip hop stars like Kanye West.
This style carried Lauren and his company far. In 2007, revenues wereĀ $4.2 billion, ballooning to $7.5 billion in 2014 and holding steady. As of the first quarter of last year the company ran 466 freestanding stores globally, totaling some 3.6 million square-feet, plus 536 concession-based shop-within-shops and 10 e-commerce sites. In a nod to the brandās ability to interpret āEnglishness,ā none other than Wimbledon itselfĀ tapped Ralph Lauren to be its official outfitter in 2006.
In short, according to Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates Inc, Ralph Lauren is āthe most powerful apparel brand in history, end of sentence.ā
Even so, the company is suffering: sales are faltering and profits, hampered by huge, underperforming stores worldwide, have fallen 50% in the last two years; its market value is now at $7.9 billion, from $16 billion just three years ago.
That has led CEO Stefan Larsson, who arrived last fall from Old Navy, to announce the companyās āWay Forwardā plan in June, which will see the closure of 50 underperforming stores (about 10% of its fleet), corporate job cuts of some 1,000 positions, and a new focus on its best-selling brands. (A Ralph Lauren spokesperson in an email referred Retail Dive to a transcript from its June 7 investor meeting and declined to address specific questions beyond that.)
ā[W]ith our Way Forward Plan, we will build on our strengths, refocusing on our core brands and instilling a financial discipline that is highly focused on return on investment,ā Larsson said in a statement.
The blueprint is underpinned by common sense moves, including one to speed up its fashion-to-manufacture timeline from 15 months to nine, that experts tell Retail Dive are āno brainersā and a long time coming. But itās not clear whether some ideas, like a drastic pullback on wholesale, are smart, or others, like the speed-up in the supply chain, are enough. Plus, no one yet knows whether Larsson is the man for the job, āor whether he or Lauren understand the dimensions of today's consumer demands.
The early days
Ralph Lauren cut his teeth in retailĀ the old-fashioned way. As a young man he worked in sales at Brooks Brothers and at a New York tie-maker, but left to open his own business in 1966 when the company rejected Laurenās idea for a wide European style tie, inspired by one worn by movie star Douglas Fairbanks Jr.
That first necktie effort was the beginning of the āPoloā brand and Laurenās sartorial empire. First specializing in menswear, LaurenĀ then expanding to womenswear in 1971Ā after winning the prestigious CotyĀ award. He thenĀ took his vision inspired byĀ classic Hollywood starsĀ to the silver screen, working with costume designers to outfit Robert Redford in 1974Ā movie adaptation of "The Great Gatsby," which wonĀ an Oscar for costume design,Ā and Diane Keaton in the title role of Woody Allenās 1977 "Annie Hall." According to the Guardian,Ā Lauren, along with Giorgio ArmaniĀ and Calvin Klein, wasĀ part of the first class of designers that became household names in the '80s, expanding into housewares and creatingĀ an immersive experience in his Manhattan flagship store.Ā
āRalph Lauren has always been good at listening to whispers before they become roars,ā DavidowitzĀ said about Lauren's keen eye for fashion trends.Ā
Now, Ralph Lauren Corp. includes a stable of brands including Polo Ralph Lauren, Ralph Lauren Purple Label, Ralph Lauren Collection, and Black Label, each incorporating an overarching sense of classic-yet-vogue.
But its size may be a problem. While sales have risen 7% in the last three years, inventory bloated by 26% in that time, forcing promotions at department stores and a glut of merchandise at the companyās outlet stores and off-price retailers. Ralph Lauren said this monthĀ that it expects net revenues to decline in the first quarter at a mid-single digit rate and that its fiscal 2017 Q1 operating margin would be approximately 110 to 160 basis points below the comparable year-ago period.
āIn short, we have not focused enough on nor evolved enough the core of what made us great in product, marketing and the shopping experience,ā Larsson said during a conference call with analysts last month. āIn addition, our underlying business engines are not running at full speed. We also have an inefficient cost structure and an organization that's not nimble enough in the marketplace.ā
A question of leadership
Over the decades, Ralph Lauren came to lean on highly effective managers at his right hand, who balanced his fashion and merchandising ideas with a tight rein on the less flashy, but no less important, business side. Two men over the years have been particularly helpful, experts say.
Fresh off his 1970 Coty Award win and the successful launch of his now-iconic Polo shirt, Lauren found himself struggling with his company's finances and logistics. "I almost blew my business," Lauren reportedly told Forbes about the move. "I wasn't shipping on time and had problems delivering.ā
After injecting $150,000 of his life savings into the company to save it,Ā LaurenĀ recruited Peter Strom from his position atĀ Norman HiltonĀ to be his business partner, whoĀ agreedĀ to join for a 10% equity stake in the business.Ā After StromĀ came on the company switched from direct manufacturing to largely dealing with licensing deals, which gave Lauren more room to focus on marketing and design. Strom retired from the company in April 1995.Ā
After Strom retired, Lauren brought onĀ Roger Farah in 2000, Ralph Laurenās longtime operations chief and executive vice chairman.Ā Understanding both the brandās rise in the past 10-plus years, and its recent stumble, means appreciating the role of Farah, sayĀ Davidowitz and Mark A. Cohen, director of retail studies at Columbia University's graduate school of busiiness.
Farah, they say, hadĀ decades of experience at department stores including Macy's, is widely credited with transforming the already strong U.S. brand into a global powerhouse. Like Strom, Farah was expert in enabling Lauren's visions (Lauren has famously said: āI donāt design clothes, I design dreamsā) while holding a lid on costs and keeping operational decisions rational. Farah left the company in 2014 for Tory Burch, who tapped him to be co-CEO. Ā
āLosing Roger Farah was a tragedy for this company,ā Davidowitz told Retail Dive. āHe was perfectly suited and had performed magnificently, and maybe Ralph Lauren is accountable for that mess. His job was to motivate Roger Farah and his top people. Since Farah left theyāve wasted three years, and thatās a lifetime in this business. A month is a lifetime. Heās been off track, and a lot of things happened in those years. One is Amazon, two is athleisure-wear and fast fashion, and the department stores are wrecked.ā
Analysts at investment bank Cowen & Co. projectĀ that Amazon, which this year launched a suite of private label apparel and accessories goods, will leapfrog Macyās to become the number one U.S. apparel retailer by 2017. Meanwhile, fast fashion has brought trendy styles swiftly and inexpensively to consumers, hurting higher quality, higher priced apparel brands like Ralph Lauren. Once more, many consumers are more inclined to wear workout leggings than pretty polos on the street, hardly an expression of Ralph Lauren's idea of "elegance."Ā All these trends have lead the company to look to outside help to turn things around.
Is Larsson the guy to turn it around?
Experts say that the jury is simply out about Larsson, or his ability to work with Lauren, as Strom and Farah did, to impose a rational path to growth and accomplish the goals set out in the āWay Forwardā plan.
Under Larsson, Old Navy prospered, outpacing its sister brandsĀ and benefitting from Larssonās moves to speed up the supply chain. Although the brand has stumbled since Larsson's departure, Old Navy reported same-store sales growth for many quarters, and in the past four years has accumulated $1 billion in annual sales over four years, a major turnabout.
Even with this experience, Cohen and Davidowitz say that Larssonās move to scale back wholesale activity within department stores presents the company with a tricky problemāwhile department stores have resorted to promotions to move merchandise in the huge spaces dedicated to Ralph Laurenās brands, the fact is that theyāre also a significant source of profits, pulling in 44% of the companyās revenue, according to Davidowitz.
āThis is not going to be a straight forward thing to do because the department stores are going to have things to say about this, and theyāre not easy to deal with, and this guy Larsson has no experience in wholesale,ā Davidowitz told Retail Dive. āHe put together all these numbers and it sounds okay, but what if sales start to drop much faster than he projects because the department stores stop cooperating with him? They have to do all this hand in handātheyāre the supplier, theyāre not in charge.ā
Ralph Laurenās plans to close storesĀ is also a consequence of opening too many large storesĀ in less-than-ideal locations, says Davidowitz. Itās also evidence, he says, that the company struggles with store operations.Ā But Shelley E. Kohan, VP of retail consulting at store analytics firm RetailNext, does think that Larsson is up to the job, noting that Lauren has had the right instincts in the past about who could help him run things.
āI think Ralph Lauren is one of the most brilliant businessman not just in our industry but in the world,ā she told Retail Dive. āHeās done an amazing job on the marketing and product side. In todayās challenging environment I think all of us should trust the instincts of Ralph Lauren, who has built this business for 50 years. I think Mr. Larsson is very capable of running the businessāobviously he put him in there for a reason.ā
Kohan says that, in fact, because Larsson also sped things up at Old Navy and has fast-fashion experience from his time at H&M, he could accomplish even more than whatās in the āWay Forwardā plan, and that he may need to.
āThey talked about going from 15 months to nine months, which is big step in the right direction,ā she said. āBut is that enough? Iām not sure.ā
Off price, off-kilter
Another problem affecting Ralph Lauren is also influencing many of its peers in the accessible luxury market.
Ralph Laurenās apparel and accessories are known for their high quality, but for a long time its brands have been easily found at outlet stores and off-price retailersāstores that have been seeing positive sales even in a difficult environment for many apparel retailers. At this point, the company may be suffering from its own success in that arena, making it difficult to demand higher prices and appeal to a more upscale customer.
āThey have a lot of great things about their brand, itās that they have to choose what direction they want to go in,ā Ried Niziak, research lead at L2. āI think itās vey hard to be successful in both. Think about Michael Kors, going into outlet stores immediately tarnishes the brand. Are they willing to let some shrinkage happen, to hold on to that brand equity?ā
Certainly, off-price retailers T.J. Maxx, Ross, and Burlington, and, to a lesser extent, department store and outlet counterparts, have had stronger reports in recent quarters.Ā And Moodyās Investors Service has predicted steady growth of 6% to 8% for them in the next five years, above the 4% predicted for the rest of retail.
But the time when Ralph Lauren could get away with so many off-price sales may be over, experts say. Especially, says Cohen, considering that the retailer has tried so hard in recent years to become a more overtly luxury brand. According to the Wall Street Journal, Lauren wanted to exclusively sell the company's Purple Line in China after the company bought back its licensing rights in the country in 2010,Ā pullingĀ the company's lower-price brands from the market. Ralph Lauren then removed all its discounted merchandise from the lower levels of its Madison Avenue flagship stores in 2014, dedicating the space instead to higher-priced watches and handbags. After the move, sales at the flagshipĀ stores declined, although a spokesperson from the company told the Journal that poor store traffic seen industry-wide was to blame.Ā
"This is a curious condition in light of his decision years ago to pivot to the luxury space, rather than carefully step into the space, and where theyāve got killed," Cohen says. "Itās not that he doesnāt have the taste or that the merchandise is badāhis mens shirt is made in Italy and itās beautifully made. But that [luxury] space is tiny. Thereās tremendous competition and that space is tough right now.ā
The changing consumer
Essentially, Ralph Lauren finds itself in several quandaries of its own making. Beyond speeding things up or running a tighter ship, however, shoppers just won't buy unless there's something almost meaningful about their purchase, especially at higher prices.
While the company has begun to transition the brand to a more upscale customer, Ralph Lauren hasnāt really transitioned their relationship with the consumer, says Chris Paradysz, founder and CEO of marketing firm PMX Agency. Even in luxury, says Paradysz, āitās hard to get people to take their wallets out.ā
āThe consumer has evolved and become more specific about āwhy is this brand important to me?ā and āwhy do I need that?ā" Paradysz told Retail Dive. āItās not a āmillennialā statement, either. The consuming audience is now demanding way more specifics about what am I getting and why, and has a lot less emphasis on āhow does this brand make me feel.ā Itās not just āI want it now. Itās a harsher evaluation of the brand value.ā
While much ink has been spilled about LaurenĀ forfeiting the CEO job to Larsson, Lauren isĀ still at the helmāLarsson reports to himāand he retains some 80% of the companyās shares. That means that Lauren and Larsson will be working closely together, and, if they are to prevail, they must listen to the "whispers and the roars," not just circling around about fashion, but also concerningĀ the consumer's changing wants and needs.
āTheyāre getting closer to the customer, taking out steps, those are all needed for sure," Paradysz says of the "Way Forward" plans to eliminate delays. "But theyāve led the consumer as far they couldāthe wind is now changing. Itās not like the brand isnāt great, but itās a big tent that hasĀ had to hold a lot of things inside.ā