It took a Dutchman to figure out how to turn around a quintessentially American preppy brand.
Fred Gehring has been at the center of Tommy Hilfiger's growth for the last 13 years, ever since he became chief executive officer of Tommy Hilfiger Europe when it was originally a licensee of the U.S. company. Gehring oversaw the brand's growth in Europe even as the U.S. business floundered, and helped rebuild the American business once he became the group's global ceo in 2006 after U.K.-based private equity fund Apax Partners acquired Hilfi ger for $1.6 billion.
No wonder a key to the deal for Phillips-Van Heusen to buy Hilfiger earlier this year for $3.1 billion was for the senior management, particularly Gehring, 55, to stay on board. Now, "controlled growth" is the key aim of the business, said Gehring during an extended interview in his office at Hilfiger headquarters in the Starrett-Lehigh building in New York's West Chelsea.
"We want to have a national presence to be attractive to the consumer without being overpromotional and to look for growth opportunities without being fanatically growth focused," he explained. "Let the brand every year reclaim its credibility to the customer that we are working toward."
That ethos has been a success, and the Tommy Hilfiger U.S. business turned a corner this year, following a prolonged period of decline. From fiscal 1999 through last year, U.S. sales slid from $1.57 billion to $719.2 million, with the steepest falloff in the wholesale segment, where sales dropped from $1.33 billion to just $192.7 million.
During the same 10-year period, Hilfiger's sales in Europe — where the brand has enjoyed a more stable and premium positioning — steadily have grown from $76.6 million in fiscal 1999 to $1.13 billion last year.
However, under an exclusive deal with Macy's, which started in 2008, the U.S. wholesale segment has reversed its decline and Tommy Hilfiger management expects sales to climb to $237.4 million this year, the first increase in a decade.
The issues impacting the U.S. business during its rise and fall — and now rise again — were complex, said Gehring, chief among them a brand message and product design that strayed from Tommy Hilfiger's original DNA.
"At its inception, Tommy Hilfiger was a truly quintessential preppy, Americana, collegiate brand, from its start through the first 10 years. Then preppiness in general became a trend in the urban and streetwear market. For a few years, Tommy as well as competitors were part of that trend," explained Gehring. "And then Tommy began to design into it. It went very jeans-y, baggy, oversize and it became an explosion. It was a phenomenon. It was analyzed by everyone and understood by few."
For a while, the move worked. Tommy Hilfiger sales steadily climbed. But after reaching a saturation point, the brand lost favor with both the urban market and its original preppy base.
"It was a quintessentially preppy brand but then became a hard-core urban brand. How could this exist? Clearly it couldn't," said Gehring. "It was a huge business but not necessarily aspirationally right. It lost its credibility with the preppy market and no longer was relevant in the urban market, where a whole new crop of brands had started to emerge from the grassroots. So it found itself in a vacuum."
Stepping into that vacuum, Gehring made a strategic decision to reduce the size of the business in the U.S., raise quality and prices and reposition the brand toward its original heritage.
"When we were able to take control of the business in the U.S., we had the benefi t of it already being smaller and it gave us the ability to be relatively drastic with what was deemed to be the ‘American problem,'" recalled Gehring. "We wanted the brand to go back to its roots of ‘classic, American cool,' which was the same positioning as everywhere else in the world. It was a complete makeover, really. We got rid of the volume and went for positioning."
In fall 2008, Tommy Hilfiger embarked on the strategic alliance with Macy's and started an exclusive wholesale distribution deal with the department store in the U.S. The Macy's deal simplified the U.S. wholesale business and reduced the costs of dealing with multiple retail accounts.
"Seventy-five percent of the business was already at Macy's, so why not make it 100 percent and take all this complexity out?" explained Gehring of the rationale for the exclusive arrangement. "We team up with a customer and focus on each other and work together to unlock new business opportunities. Plus, we get benefits like very strongly profiled shops in better locations, right off the escalators. We renovated all the shops, which we did on a 50-50 basis with Macy's. And we really get treated like a most-favored-nation supplier."
Of course, while the setup sounds sweet, Gehring cautioned that it's not necessarily "a one-way ticket to hassle-free success." However, it did provide Hilfiger with a broad, stable platform to refocus the U.S. wholesale business.
"You have to perform, but we needed a stage on which to perform," said Gehring. "What the Macy's deal did for us was to give us that stage. And what we have done on that stage is perform."
The initial term of the agreement with Macy's ends on Jan. 30 and is renewable at the option of Macy's for up to three renewal terms of three years, for a total possible term of about 12 years. Macy's has expressed interest in extending the exclusive arrangement and the two parties are close to inking that deal, according to a recent Securities and Exchange Commission filing by PVH.
Last year, Macy's represented about 56 percent of Tommy Hilfiger's total North American revenue and 6 percent of its global revenue.
The launch at Macy's in 2008 came at the same time as the financial crisis sparked by the failure of Lehman Brothers. The resulting tsunami of retail markdowns sent vendors' pricing and merchandising strategies across the industry into disarray. "Perfect timing," Gehring laughed.
However, over the past year, business has recovered, spurring Tommy Hilfiger's sales gain in the wholesale segment — although volume is not the company's overriding goal. In fact, Gehring has no desire to get the brand back to its U.S. sales plateau of more than $1.5 billion.
"It was too big then and it would be too big now. We were selling something like 100 million garments annually, and at that level, it's hard to retain a level of aspirational value. What we want to do is find a fine balance between positioning and volume," said Gehring.
The company has made a concerted effort to raise the quality of U.S. product to put it on par with European product, and has been able to increase average retail ticket prices by 25 percent — mostly by reducing reliance on markdowns.
"People here have an addiction to marking down, and so if you have a shirt that is being designed for $59, really everyone knows that shirt is going to sell for $39, so they design it so that it can be sold for $39 and everyone can still make money. So really, it doesn't look like a $59 shirt, it looks like a $39 shirt," pointed out Gehring. "We decided to make it look like a $59 shirt — or actually a $69 shirt — and take the money that we are making from the full-price sales and reinvest it in the product, rather than [keep it] as a reserve fund for markdowns. Customers have responded to that immediately."
Burnishing the Tommy Hilfiger brand in the mind of consumers who may have become confused by what it stands for is a crucial element of the company's U.S. turnaround. The current "Introducing the Hilfigers" advertising campaign is the latest incarnation of those efforts to create an image of "classic, American cool." The global campaign also introduces the concept of tailgating to international audiences that may not be familiar with American football and its related pastimes.
"Internally, we have done a lot of soul searching about the brand and what it stands for," said Gehring. "We are not preppy in an ultratraditional sense, but preppy with a sense of irreverence. It's younger preppy instead of classic preppy. So around the world, we have the challenge of telling the American preppy story to an audience that may not even know what tailgating is. We haven't made this campaign with America in mind, per se, and not with Europe in mind. We made it with ourselves in mind, and how Tommy sees the brand."
One thing the company has not done is consolidate product for the European and U.S. markets. There continue to be separate design and merchandising teams in each region, despite the duplication of personnel and expenses.
"It's suicide if you don't conform to the requirements of the marketplace in terms of fit, size, fabric weight, climate and, to a degree, even taste," explained Gehring. "When we first bought the business, we thought there was an opportunity to eliminate the duplication of efforts. The thought was, Europe was so successful, let's just sell the European product in the U.S. a little bit tweaked. But we realized that was too dangerous, too complicated, and the U.S. market was too specific. The price points, the way the product is shown, the delivery cadence, the fit and size and fabric weight — all those things are so specific. So now, there is collaboration and one global design brief and a lot of cooperation between Europe and the U.S., but ultimately there are still two different collections. And I think it's the only way to be successful."
Making a play for a younger demographic, Tommy Hilfiger will introduce a new label, called Tommy, that is geared toward college students and twentysomethings. The line is launching in Canada this fall, including in three freestanding dedicated stores, and will roll out to the U.S. in the spring, with other markets to be added in coming seasons.
"When Tommy Hilfiger first launched, it was a really young brand — the Abercrombie of its time — and college students were wearing Tommy Hilfiger. Today, that's not the case," said Gehring of the new label, noting the core demographic that buys the brand today is in its mid-30s. Even the younger-skewing Hilfiger Denim line appeals mostly to consumers in their late 20s.
"We're very comfortable with that — it's a good demographic. But it's not young. We recognized our roots were younger than where we are today and we wanted a way to get a younger flavor to the brand," said Gehring of the Tommy launch. "We are going to let it find its way organically for a few seasons. I would hope and expect that it will succeed. Probably we will be able to take that product, if not the entire segment, and use it for our businesses in China, Asia, South America and even at some point for Europe, but that is probably three years from now."
Apart from Hilfiger Denim and Tommy, the company operates a small golf sublabel, as well as sailing apparel and skiwear lines. "We are contemplating making a more consolidated effort in golf," said Gehring. "These are mostly lifestyle components. We want them to make money, but they are also there for image purposes."
Tommy Hilfiger got its start as a men's business and the company still makes the majority of its sales from men's product. Gehring said men's is a more stable business for the brand and the company is still finding its way, to some degree, in the more fickle women's arena.
"Typically, men's is solid as a rock and women's is a bit more erratic. We'll have strong seasons and then weaker seasons and that's a global issue," he noted. "The women's business could benefit from greater clarity of position. I think the women's core product is fine, but when we get into fashion, we can get it really right and we can get it sometimes wrong. But never before have we felt such an incredible amount of opportunity in women's."
By category, Tommy Hilfiger traditionally has been stronger in tops, specifically knits, while weaker in bottoms and outerwear. "I think outerwear is the one category that has major opportunities for improvement, in both Europe and the U.S.," said Gehring. "I think our design effectiveness hasn't necessarily been there in the past. When it comes to pants and outerwear, we play along instead of lead. And it comes down to product excellence and execution from our organization, rather than something that the brand cannot handle."
In the licensing arena, Gehring said most of Tommy Hilfiger's licenses are performing well, with a few laggards.
"If you take the whole roster of licenses, of course they are not all great," he admitted. "The majority of them are good. We recently switched eyewear to Safilo, which we have great expectations for. Our men's suiting with Marcraft is doing extremely well, which surprised us. The whole dress shirt and dress neckwear categories with PVH are doing well."
Categories that remain unlicensed currently that Tommy Hilfiger could potentially enter include home furnishings in Europe and jewelry. Fragrance is doing well overseas but is weaker in the U.S., added Gehring.
"It's an area where we are thinking about a relaunch of Tommy or Tommy Girl, with new packaging and repositioning," he noted. "We are looking at possibly some kind of fragrance collection for our own stores, as well."
Looking forward in Europe, Tommy Hilfiger sees opportunity in France and Italy as well as Scandinavia and Eastern Europe, building on its existing strength in Germany, Spain and the U.K., which are the brand's top three markets. In July, the company announced it will open a flagship on the Champs-Elysées in Paris this fall.
"I think the investments we are making there are very illustrative of the belief we have in the French market," said Gehring. "In Italy, we have opened a number of stores — not on the magnitude of Champs- Elysées, but we feel that in Italy our goals can be better achieved by covering Italy entirely. It's not so one-city focused. And we are running it with an incredibly stepped-up level of advertising."
In Asia, Tommy Hilfiger operates a $300 million business, including Japanese and Chinese businesses that it has converted from outside licenses to inhouse divisions.
Discussions are under way to open a Tokyo flagship in March 2012, said Gehring. "We also need to develop dedicated product for Japan, which we've never done and is a major urgency for Japan as the fit is different there," he added. "Marketing spending has not been robust in Japan, either. So we have a sizeable and profitable business in Japan, but not necessarily a brand with great presence. If we beef up marketing and really work on the product, the ability to grow the Japanese business strongly is definitely there."
Next year, Tommy Hilfiger will assume direct control of its China business from licensee Dickson Concepts (International) Ltd. "We will announce details on our plans for that business. We plan to engage the market in a meaningful way," said Gehring. "We believe that China is now one of the main growth drivers in the world. There is a learning curve involved and we have to learn how to limit the risk involved there. However, the opportunity when you get it right is so great, the risk-reward ratio balances out well."
Asked how big the China business might become over the next few years, Gehring demurred on specific targets. However, he noted, "Clearly, we are not there to make it a $100 million business. Ideally it should be several hundred million."
An interesting quirk of the Chinese market is that the quality expectations for product are actually higher there than in Europe or America, claimed Gehring. Product that is made for the domestic Chinese market is therefore made in different Chinese factories than that made for export markets.
Besides running Tommy Hilfiger, Gehring has assumed responsibility for expanding the PVH legacy brands in international markets.
Arrow is the first brand Gehring is focused on building in Europe, as the brand already has a presence in the region. "It has some ongoing activity that makes sense to engage in first," said Gehring. "It's also a single-product group — dress shirts — although the opportunity is larger than that, so it's a relatively easier business to engage with on short notice."
Izod, which has not been previously marketed in Europe, will follow Arrow's rollout.
In terms of working with company founder Tommy Hilfiger, Gehring termed the relationship "ideal," noting the designer helps provide creative leadership on design, advertising campaigns, runway shows and seasonal briefs, while the day-to-day execution of that vision is delegated down to the global organization. "While Tommy isn't actively involved on the day-to-day, his personality is so inclusive and friendly and open, everybody feels they are working in his spirit," said Gehring. "We have the benefit of interacting with him on a macro level where it really matters. He continues to be an outstanding ambassador for the brand throughout the world."
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