All in the Jeans
Let me tell you a story
about jeans. Actually, let me tell you a story about two companies that sell
jeans. One of them, Levi Strauss, is about the best that American capitalism
has to offer both in terms of ethical business practices and the way it treats
its workers. The other, Guess Inc., is about the worst, notorious for its
maltreatment of its workers and its ruthlessness in business. Now, if this were
a story with an ending written by social democrats, Levi's would be rewarded
and Guess would be punished. And if this story had an ending written by
neoclassical economists, Guess would triumph and Levi's would pay the price for
its attempt to evade market imperatives. What makes the story interesting,
though, is that young consumers are writing it, and so it ends with two
companies doing business in polar ways but arriving at exactly the same place:
somewhere behind the curve.
Levi's is the world's
largest clothing manufacturer, doing $7 billion in sales every year. It is also
one of the few privately held large companies left in the United States, thanks
to a management-led leveraged buyout in 1985. Since the LBO, which followed a
year in which the company saw its earnings drop by 97 percent, Levi's economic
performance has been outstanding, thanks in no small part to the rebirth of the
501 Buttonfly and, unfortunately, the remarkable success of Dockers. A recent
outside appraisal of the company placed its market value at somewhere near 105
times what it was in 1984, a growth rate analogous to that of companies like
Microsoft and Oracle.
In the
past couple of years, though, Levi's has struggled. Overall sales have slowed,
and its share of the men's jeans market has shrunk from 48 percent in 1990 to
26 percent in 1997. It would be great to see this decline as divine retribution
for the invention of Dockers, but the answer has more to do with dramatic
changes in the kinds of jeans kids buy and Levi's failure to adapt to those
changes. At a time when kids influenced by hip-hop culture were buying jeans
with legs as wide around as their waists, Levi's was still pushing its classic
straight-leg look. And although it's now starting to push its baggy Silver Tab
jeans hard, so-called private brands, marketed by department stores like J.C.
Penney, are stealing the low end of the market while Ralph Lauren and his
clones are eroding the high end. Levi's has become the dreaded "tweener,"
caught between the boomers and the echo-boomers.
The results have not been pretty. A month ago, Levi's
announced that it would be closing 11 of its plants and laying off one-third of
its North American work force, an astounding step for a company renowned for
what its CEO called "long-term brand building, corporate social responsibility,
and community involvement." Levi's workers have always been well paid relative
to the industry as a whole, and the company has kept 55 percent of its
manufacturing work force in Canada and the United States. In 1993, the company
implemented Japanese-style production techniques in its sewing plants, breaking
apart routinized assembly and giving individual workers more responsibility.
Even Levi's severance package is impressive. With each laid-off worker
receiving eight months' pay plus one week for every year of service, and
company-funded retraining to boot, one union observer called it "by far the
best severance settlement apparel workers have ever gotten."
Given all
that, the easy way to understand what happened to Levi Strauss is to assume
that its generosity caught up with it. If you employ unionized American workers
instead of dollar-a-day Mexican workers, you will fail. But a look at its
competition shows that Levi's main problem is not price cutting but image. Its
largest competitor, VF, which makes Lee and Wrangler, charges only marginally
less, and yet its market share has risen as Levi's has fallen. Retailers like
Tommy Hilfiger and Ralph Lauren, whose jeans are not dramatically superior to
Levi's in quality, are able to charge more simply because of their name. In the
end, staying ahead of the style curve is both harder and more important than
cutting costs.
As evidence, one might want to look at Guess
Inc., the jeans maker legendary for making Anna Nicole Smith a household name
(well, in some households at least). Guess--there's a question mark at the end
of the name, but typing it over and over is more annoying than you can
imagine--was the hip jean of the 1980s, and it has spent most of this decade
growing rapidly, both at home and abroad. Unlike Levi's, Guess has made its way
in the world by subcontracting out production work, violating minimum-wage and
maximum-hour laws, and suing everyone in sight. In the 1980s, for example, as
part of a legal battle with Jordache, which at the time owned 50 percent of
Guess, the Marciano brothers--who now own the company--set up a kickback scheme
with contractors that ensured that money went to them and not to their
partners. About the same time, they suborned an IRS agent into initiating
criminal tax probes of Jordache's owners, probes that ended up going nowhere
but were wonderful harassment devices.
In 1992,
Guess paid the Labor Department $573,000 in fines for those minimum-wage and
overtime-pay violations, and things seemed to have quieted down a bit within
the bulletproof-windowed, razor-wire-surrounded stone building that serves as
the company's bunker ... I mean, headquarters. But in the past year and a half,
Guess has seen its stock price cut in half, had the only outside member of its
board of directors quit after being on the job for a few weeks, and watched its
chief financial officer resign for "personal" reasons. Meanwhile it has had a
formal complaint filed against it by the National Labor Relations Board for
firing 20 employees who were trying to organize a union, creating an in-house
union to undermine those organizing efforts, and coercing workers into
participating in an anti-union rally. It's capitalism with an inhuman face.
Coincidentally or not, Guess' earnings and revenue also
have slid sharply, and what's interesting is that Guess' problems seem, in
substance, almost identical to Levi's. Although the Marcianos are legendary for
their abusive and intimidating management style--one former company CFO called
Paul Marciano "psychotic" in a sworn affidavit--and for their habit of taking
huge dividends out of the company's profits, they're not doing anything
different today from the way they did business three years ago. They've always
been crazy. It's just that now the Guess label has lost its cachet. The buzz is
fading, and the company's jeans in particular, which a Fortune writer
once said "made women look like Parisian hookers," seem like a vestige of a
time when we read Less Than Zero and listened to Echo and the Bunnymen
(which we may do still, but while wearing khakis). Without cachet, what does
Guess have? Mostly, a really lousy labor-relations record.
So is the moral of the story
that both the high road and the low road can take you into trouble if you stop
paying attention to the taste makers? Partly. But the differences between the
two companies--both, it's worth remembering, controlled by a small group of
shareholders--also demonstrate that the choice of the high or the low road is a
real choice. And our ideas of what constitutes a fair wage or a fair return on
capital are historically contingent. Is a corporation supposed to net 12
percent of its sales or 20 percent? Should executives be paid 20 times the
median wages of their employees or 300 times? The market does not dictate a
universal solution to these questions, and so Levi's and Guess are able to
answer them in very different ways. Unfortunately, in the face of the universal
solvent of hipness, how you answer those questions seems to matter less than
how you respond to this one: "So, do you have the 35-inch-wide legs or don't
you?"
