By  on September 10, 2010

If there was ever a retailer and designer brand attached at the hip, it would be Macy’s and Tommy Hilfiger.

“We meet every six weeks. They bring in 10 people, we bring in 10 people and we talk through the whole business,” said Terry Lundgren, Macy’s Inc. chairman, chief executive officer and president. “They’re regular collaborations. The buyers meet every week, too.”

Since unveiling the strategic alliance in October 2007, making Macy’s the sole department store retailer in the U.S. of Tommy Hilfiger men’s and women’s sportswear, high expectations for growth have been sustained.

“We expanded with a Tommy Hilfiger kids’ business this year, and we are looking into creating an active line, which will really be more of an athletic line,” Lundgren said. “We think there is an opportunity for dresses and maybe some dress-up product for men and women, and bigger handbag and shoe businesses. All of those pieces are still in front of us. We couldn’t be happier with the results. We actually ended up exceeding original expectations.”

Asked what’s behind the success, Lundgren responded simply that it’s the way Hilfiger designs. “He designs everything with a twist. It’s not just classic or traditional. He keeps it very sensible, but with a stitching detail or a different color. There is always some little surprise or something unique about the product that adds that cool factor.”

Then, if there is a bestseller or product that Hilfiger really likes, he goes with it.

“Tommy reinvents his favorite items with each delivery,” Lundgren said. “[The design] keeps evolving and building on the wardrobe. He thinks about what customers purchased in prior deliveries. It’s brilliant how the team merchandises the line.”

Asked what’s working best in the collection, Lundgren replied: “The cotton shirts are great. He does plaids, chambray, oxford shirts — all of those are very Tommy.” Lundgren also cited shirtdresses and khakis.

“The business is driven mostly by product that truly and totally represents the assets of the brand — classic American cool,” added Fred Gehring, ceo of the Tommy Hilfiger Group. “When it becomes too basic or too fashion-forward, it doesn’t fly. If it’s quite wearable, not overly complicated, and has a point of view that makes it quintessential Tommy, it sells. We see a lot of opportunity. The brand has the potential to be two to three times what it is today.”

Right now, Hilfiger’s footing at Macy’s seems sure, though it wasn’t always guaranteed. Macy’s relaunched Tommy Hilfiger as an exclusive collection in October 2008, just when Lehman Bros. was tanking and taking the world economy with it.

Moreover, while still widely recognized, the brand was not performing well in the U.S., particularly in women’s side. Around the start of the 21st century, sales started to decline amid a growing sense that the Tommy Hilfiger brand needed to show a fresh face. The vision, as Gehring puts it, became all about “bringing the brand back to its roots, ridding it of its excessive promotional nature, and basically trading up.…You cannot just have a strong brand [name] and expect it to sell. The product has to shine and when it does, there is no resistance to it. But we needed a stage in the U.S. on which to perform.”

That’s where Macy’s came in. Lundgren already had a personal connection to Hilfiger: Their kids went to elementary school together at Sacred Heart in Greenwich, Conn., so they knew each other. But like many business deals, the Macy’s-Hilfiger pact was born on a golf course in 2006.

“A group of us was playing golf,” Gehring recalled. “I guess you could battle over who planted the first seed. Macy’s was on its way building exclusives, and we realized Macy’s [after its merger with May Department Stores Co. in 2005] had an incredible retail presence. Macy’s has become such a dominating force, but nobody, in my opinion, truly was benefiting from that level of concentration.”

He said it took about a year to iron out a deal. Macy’s at that time had seven divisions operating with much autonomy and regional differences with varying merchandise demands. That meant more cooks in the kitchen and challenges forging an agreement, and “it felt like a long time” before the deal was concluded in October 2007.

Subsequently, Macy’s consolidated its divisions into one central organization, making it a true national chain. “Now, of course, it’s like a complete total marriage between us, with a lot of benefits and so many efficiencies,” Gehring said.

“We were talking about this for some time,” concurred Lundgren. “But Tommy was right in that sweet spot — a big powerful brand with potential to grow if we really focused on it. It was the first big pure brand exclusive,” for Macy’s. “We had done some smaller relationships before, and we already started with Martha Stewart,” though Stewart was still selling at Kmart at that time.

What seemed to seal the deal was a trip by Macy’s executives to Amsterdam, where Tommy Hilfiger is based, in spring 2007. “I wanted my entire team to be fully committed to getting behind the Tommy product,” Lundgren recalled. “We wanted to know there was a full team of talented designers [there]. With these exclusive relationships, we always look at the people behind the brand. At the time, the business was not strong [in the U.S.], and not much was happening in the accessory area. It was really just a strong men’s brand, but we just believed in it.”

Lundgren said the label was doing better in Europe because it was less promotional, had higher-end fabrics and styles. In Europe, “It was more along the lines of what we had to do in America. We were prepared to take on higher prices and higher-quality fabrics and step out. Agreeing on that was a big moment. Now there is some unique product for Europe and the U.S., but there’s a lot more synergy.”

The deal also charged Macy’s with expanding and improving Hilfiger assortments in store and on macys.com and elevating quality and styling. Macy’s renovated Hilfiger shops in high-volume stores, put in shops for the brand in locations that didn’t have them, and began featuring the designer himself in marketing campaigns.

At Macy’s, the Tommy Hilfiger men’s shops average 800 square feet and the women’s shops average 500 square feet. However, at three Macy’s flagships, the Hilfiger areas are much larger. Macy’s Herald Square operates a 3,500-square-foot men’s shop and a 2,300-square-foot women’s shop. Macy’s Union Square in San Francisco has a 2,200-square-foot men’s shop and a 1,200-square-foot women’s shop, and on State Street in Chicago there are 2,400-square-foot men’s and 1,300-square-foot women’s shops. Men’s shops are in 580 Macy’s doors and women’s are in 530 doors.

All products distributed through Hilfiger’s various licensees are sold on a nonexclusive basis at Macy’s, as well as other retailers. Importantly, the agreement precludes Tommy Hilfiger from creating a lower-priced line exclusively for another retailer like Wal-Mart or Target.

After two years in the forefront at Macy’s, Tommy Hilfiger has emerged as the store’s largest or second-largest exclusive brand, in terms of volume, and is among the chain’s top resources overall, whether it’s an in-house private label or national brand. Lundgren said Tommy Hilfiger and Martha Stewart Collection, another Macy’s exclusive, are close in volume, but he declined to specify sales figures. The private label INC and Charter Club brands are volume leaders, as well.

Macy’s doesn’t disclose its Tommy Hilfiger volume, but it’s possible to get an idea based on numbers that have been disclosed. For the year ended March 31, 2010, Hilfiger global sales were 1.6 billion euros, or $2.27 billion at average exchange, with 34 percent, or $772 million, generated in the U.S. Of that, the bulk would be at Macy’s, and the rest would be through the 170 Tommy Hilfiger stores in the U.S.

Like the rest of the retail world challenged by the difficult economy and penny-pinching consumers, Macy’s needs to drive much of its volume through price promoting, affecting the pricing on Tommy Hilfiger and other brands. Gehring acknowledged he’s still at times uncomfortable with the level of promotion he sees at Macy’s, but he is relieved that it’s toned down since 2008. “Ultimately, the consumer controls this,” Gehring said.

While growing within Macy’s, Tommy Hilfiger is also rolling out namesake stores in America. Asked if they could cannibalize one another, Gehring shot back: “No. The market in the U.S. is physically so big, our need to be [situated] close to Macy’s is very limited. In Europe, we have 500 stores and 6,000 points of sale through wholesale customers. Many times I feel their emotional anticipation, but over and over again we find when our stores open, the wholesale client benefits. We will never compete with Macy’s on a promotional level. We anchor the brand and carry a huge scope [of merchandise] that we sell through our stores that doesn’t make it into Macy’s. Obviously, there is a limited level of overlap, but I don’t feel it’s competitive at all.”

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