By  on August 27, 2007

When a novice paddles into southern California’s fiercely competitive surf lineups, he is mercilessly mocked. Seasoned surfers hoot at his every error, and he is sometimes even driven off the beach in shame. If he happens to have a lot of money and has outfitted himself with the latest board and gear, he’s even more subject to intense derision. Winning acceptance can take many seasons.

Not so for VF Corp., the Greensboro, N.C.–based apparel conglomerate that posted $6.2 billion in sales last year. In 2004 VF burst onto the boardsports scene with its $396 million purchase of Vans, the favored footwear maker of surf rats and skater boys. Not one to sit idle, the moneyed arriviste then scooped up another footwear label cherished by surfers, buying sandal powerhouse Reef for $188 million. By the end of this year, VF Corp. projects that the two brands will have doubled their annual revenues since their respective acquisitions, both bolstered by rapidly growing apparel programs. The secret to VF’s SoCal success? Empowering existing personnel to grow the brands, and respecting action sports’ hallowed culture.

The story of VF’s boardsports victories began long before their acquisitions. In the interest of diversification, the company, already a denim powerhouse via its Wrangler and Lee labels, had been developing a portfolio of active lifestyle brands organized under its “outdoor coalition.” Executives carefully studied the phenomenon of consumer loyalty to activity-based labels, seeking to understand what type of brands cultivated fanatic emotion on the part of enthusiasts.

“We came up with a list of sports, and then we zeroed in on brands within those sports,” says VF chief executive officer Mackey McDonald. “In some cases we spent years building relationships with the brands prior to acquisition. We were looking for brands built by people with passion, who are actually engaged in these activities and lifestyles.” McDonald and his team, including Eric Wiseman, who is now the company’s president, analyzed prospective buys on a country by country basis—to qualify for consideration, a brand had to be rooted in a sport that was global in its appeal. This studied approach led to the purchases of marquee names like The North Face, Vans and Reef.

Several apparel conglomerates have made strategic purchases in the action sports world, but few have reported the same successes as VF. Wiseman attributes the company’s strong track record to its practice of giving acquired brands maximum autonomy. “When we acquire a business, we sit down with management and develop the business plan, which then becomes the responsibility of the acquired company,” he explains. “That leads to an open, honest discussion about the potential of the business. It creates an alignment that we don’t waiver from. We completely empower brand management, and that way there aren’t a lot of meetings.” CEO McDonald famously meets with each of the owned brands just once each quarter.

Dick Baker, president of the Surf Industry Manufacturers Association (SIMA), says that VF has changed the perception of “outsiders” in the surf industry, which sold almost $7.5 billion worth of goods at retail last year. “A couple of years ago, when there was all the activity of non-endemic strategic buyers going after surf companies, there was a heightened alarm that our world was going to end and that all these core brands would be taken over by corporations that didn’t understand the culture,” Baker recounts. But now, he says, VF Corp. “stands head and heels above other” outside buyers.

VF’s hands-off approach to Reef and Vans has seduced many in the close-knit surf and skate world. “VF now has considerable credibility with action sports companies,” says Christy Lowe, managing director of USBX Advisory Services, a boutique investment bank in Los Angeles that has been involved with several acquisitions in the boardsports segment. “Who would mind their brand sitting alongside Reef, Vans and The North Face?”

Of VF’s two action sports  properties, Vans is the older and larger. At the time of its acquisition in mid-2004, the footwear company was reporting annual sales in the neighborhood of $330 million. Listed on Nasdaq, it was one of a few publicly traded names in action sports at the time, though its orientation was still strongly grounded in southern Californian skate culture.
Lowe considers VF’s purchase of Vans visionary. “They bought at exactly the right time,” she says. “The brand was struggling a bit, and the retail business was tough”—a reference to Vans’ company-owned full-price and outlet stores, which still constitute an important revenue stream today. (Vans owns and operates a total of 163 stores worldwide.) “The acquisition also came just before the whole retro vintage trend happened, and Vans fits into that very nicely,” Lowe adds.

The expansion of Vans’ apparel offerings has been a top priority in the last three years, according to Steve Murray, Vans’ president since the acquisition. (Murray was previously Vans’ chief marketing officer.) “VF’s expertise and infrastructure for apparel was the biggest attraction for us when the deal was first proposed,” he says. “We were putting so much effort into footwear at the time, and our apparel business was quite neglected in terms of resources and managerial attention.” Immediately after the deal was completed, Vans dispatched its designers to meet with VF’s sourcing experts in Asia. The brand also hired Michael Schulam, then at corporate sibling The North Face, as vice-president of apparel.

Vans apparel is distributed in three channels: core skate and surf shops, Vans’ own retail stores, and mid-tier chains (namely, J.C. Penney and Kohl’s). “We have always seen as part of our mission bringing skate culture to the masses, and to do that you have to be in the mid-tier,” Murray says. Product offerings at Kohl’s and Penney’s are different than those in core shops, of course, but Vans’ decision to sell to the mid-tier has helped it to grow apparel to a percentage of sales that Murray says is in the high teens. (The original goal was to make apparel a fifth of all revenues by Vans’ fifth year under VF; Murray says the brand is ahead of schedule in that regard.) At the time of acquisition, there were five employees dedicated to Vans apparel. Now there are 30.

When Reef was bought by VF in 2005, its annual revenues were $75 million, with all but a tiny fraction coming from footwear. Dave Gatto, now president of VF’s outdoor coalition, with oversight of the Reef, Vans, The North Face, Napapijri, Kipling and JanSport brands, was with Reef then, serving as the brand’s president. (Reef was previously majority-owned by Swander Pace Capital, a private equity firm.) “It was clear we needed more resources to go after the apparel opportunities we saw,” Gatto says. “Now apparel growth for the brand is right in line with our expectations.”

Gatto’s replacement as Reef’s president, John Wilson, confirms that apparel has grown to about 5 percent of revenues. Like Vans, Reef aims for an eventual 20 percent of sales to come from apparel, and has built its sportswear staff to about 30.

VF has supported Reef’s gradual entrée into apparel, even though diving in headlong would have been easy enough. “Reef is a market leader in sandals, and it has only just recently started to extend its brand,” says SIMA’s Baker. “Fortunately, VF has the patience to develop that competency properly.” Wilson agrees, framing the brand’s choice to slowly enter the apparel game as one made only with “the permission of our consumers.”

Unlike Vans, Reef doesn’t sell apparel to mid-tier retailers, and has no plans to do so. “Ninety-five percent of our business is done in core specialty shops,” Wilson explains, adding that Reef’s current objectives center more around brand-building and completing the product portfolio, rather than expanding distribution to broader channels. The label’s latest initiative is a major push into women’s sportswear and swimwear, to hit retail in force this spring. “Our intention is to make the leap from sandal company to global, tier-one apparel and footwear brand,” Wilson says.

Also separating the two brands is Reef’s disinterest in branded retail, at least in the near term, a decision that VF has supported. “We’ve looked at opportunities for e-commerce and retail, and a lot of other brands in the outdoor coalition have stores, but for now we’re focusing on product,” says Wilson. “One of the nice things about being owned by VF is that there is no pressure to do anything we’re not ready for. We [at Reef] completely own the front end of the business.”

That sort of consideration for the core—the trust placed in the actual practitioners of action sports—is analogous to VF’s own respect for its brand executives, and it is this nurturing but distanced paternity that has been the key to VF’s success. “VF has attained a certain level of respect here based on the level of execution they’ve shown with all of their outdoor brands,” says Baker. VF’s McDonald doesn’t hesitate when asked if the company has an appetite for another boardsports label: “We would be very interested in adding brands that don’t overlap with the ones we already have,” he says. “We want to be very active in this market.”

And so, with a tempered mix of ambition, empowerment and respect, the new kid on the block has won over the boys on boards.

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