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VF Corp.: Agent of Change

Mackey McDonald has led VF Corp.'s transition from category manufacturer to a major lifestyle-brand entity.

Appeared In
Special Issue
WWD/DNR CEO Summit issue 11/14/2007

Mackey McDonald has led VF Corp.’s transition from category manufacturer to a major lifestyle-brand entity.

Transforming VF Corp. from a category apparel manufacturer into a lifestyle-brand juggernaut has been more about effective execution than the implementation of revolutionary ideas, according to Mackey McDonald.

As chairman and chief executive officer of the Greensboro, N.C.-based company for the last 12 years, McDonald has overseen the wholesale transformation of VF’s DNA. What once was a company known for being a dominant but conservative maker of such stalwart brands as Lee, Wrangler and Vanity Fair has shed its stodgy image in favor of acquiring and developing flashier names like The North Face, Vans, Reef and Seven For All Mankind.

A look at VF Corp.’s acquisitions since 2000 shows how the company has moved well beyond its denim and intimate apparel roots. Despite the change in growth strategy, heritage brands such as Lee and Wrangler have continued to find ways to grow.

On the Acquisition Trail
2007
Seven For All Mankind
Eagle Creek
Majestic Athletic
Lucy Activewear

2005
Reef
Holoubek (licensee of Harley- Davidson apparel)

2004
Kipling
Napapijri
Vans

2003
Nautica
John Varvatos
Earl Jean
E. Magrath

2000
Chic
Eastpak
Gitano
H.I.S.
The North Face

Spurring this change was the need for McDonald and his management team to confront two issues. The first was satisfying Wall Street’s demands for constant and substantive growth. The second, and perhaps more crucial to the company’s survival, was the recognition of a shift in how consumers were approaching the apparel retail environment.

“We were primarily a jeanswear, intimate apparel and imagewear business,” McDonald said of the company as it was in 2000. “Great brands, a very stable business, but there was one real challenge and that was growth. We were not growing the top line. We had stayed about the same for a number of years.”

By this time it was also becoming clear that the idea of achieving growth by attempting to clothe the world in Lee or Wrangler wasn’t viable. Consumers, seeing their disposable incomes whittled away by ever-increasing costs of living, had made a fundamental shift in their approaches to shopping with which VF had yet to come to terms.

“We identified a trend that we felt has driven a lot of the changes over the last five years,” McDonald said. “[Consumers] were buying less apparel items, but they were spending more on each item. They wanted to make a stronger statement about what they were wearing, the brands they wore, the lifestyle they lived.”

A change in the consumer demanded a change in the approach to the retail channel. Growth could not reasonably be expected to occur at the level VF needed it to by continuing to operate in the commodity arena of the jeanswear or intimates markets. Lifestyle brands were the answer that would charge growth engines and allow for expansion on an international level. Management also looked to change the way VF interacted with leading retailers, gathering more information about consumers and shopping habits in order to properly position brands.

The acquisition of The North Face in 2000 planted the first seeds for a strategy that would see management shift the focus from being a dominant category player to a company that excelled at acquiring and developing lifestyle brands.

The elements inherent in The North Face business became the key criteria that management would apply to future acquisitions. The North Face had a small but extremely loyal consumer base; its brand name was associated with more than one type of product and a way of life that centered around an outdoor experience, and the brand had ample room to expand both its wholesale and retail business domestically and abroad.

“I say often that The North Face added 50 basis points to my IQ because of what we were able to accomplish with that acquisition,” McDonald said. “It lost $75 million a year before we acquired it. It’s now one of our largest and most profitable businesses. It sort of set the model for what we did with many acquisitions after that.”

The North Face is the bedrock of the company’s outdoor business segment, and with revenues of $1.87 billion in 2006, the segment is VF’s fastest-growing business unit and the second largest after denim.

As the company sought to replicate The North Face model, McDonald looked to other consumer product companies outside the apparel industry in order to better understand the process of developing brands. The management team visited companies such as Procter & Gamble, General Mills and General Electric, and came away with a firm belief that optimizing its back-office operations and delving into more academic approaches to product development would give VF a leg up. McDonald characterized it as focusing more on the science of the business.

“One of the things you’ll recognize is that these aren’t brilliant ideas,” he said. “You’ve seen these strategies mentioned by many different companies in the apparel industry. The thing that we realized fairly quickly is that growth and success come from brilliant execution more than they do brilliant ideas.”

The company started working more closely with its retail partners to gather data on everything from body types to the spending habits of those body types. Rather than designing a product based on a guess of what the consumer might respond to, emphasis was placed on understanding all the aspects of a specific consumer in order to put a product in front of them at the right time and place that would insure a purchase. This tactic worked not only for newly acquired brands, but was picked up by the company’s heritage brands, as well. McDonald credited the adoption of this approach with reenergizing the Lee brand. Lee’s management segmented its consumers by type and when they wore certain items.

“They were able to take the consumer types and wear occasions and look at how many people actually fell into these categories,” he said. “What is the volume opportunity, how many of these consumers shop in the retail outlets where our brands are placed.” Knowing the answers to these questions ahead of time helped fine-tune product assortments and increased sales.

Maintaining the culture of each of the brands the company acquires has been another necessity for success. The passion of those most intimately involved in the brands is one of their biggest assets, which is why McDonald said VF prefers to work with the management already in place.

“It’s a challenge to get people passionate about being part of a large corporate entity,” he said. “Being passionate about being part of VF — I’m passionate about it, but to get 45,000 people passionate about that is a big challenge, so we don’t do that. We don’t try to do that. We want our people to be passionate about their brands.”

VF also is devoting considerable resources to expanding its company-owned retail network. With lifestyle brands, in particular, McDonald said it is crucial to reinforce the full image of the brand.

“[Consumers] have got to see The North Face in the context of an athlete climbing a mountain — doing the kind of things they aspire to do,” he said. “That has to be constantly in front of them. The great way to do that is through owned retail.” It has the added benefit of keeping employees of the brand energized.

The company has committed itself to substantially beefing up its owned-retail operations over the next several years. It finished last year with 460 stores and 78 outlet stores in the U.S. Management had set a target of opening between 75 and 100 stores this year. With the acquisition of Lucy Activewear over the summer, the company picked up 50 stores at once, and this week will mark the opening of the first-ever Seven For All Mankind store, in Los Angeles. A second Seven store is set to open in Dallas soon.

Committing VF to lifestyle brands also has required jettisoning those parts of the group that no longer fit the model, including one of the company’s namesake brands. On April 2, VF revealed the sale of its intimate apparel business — home to the Vanity Fair, Lily of France, Vassarette, Bestform and Curvation brands — to Fruit of the Loom in a deal worth $350 million.

In an earlier statement referencing the sale, McDonald said, “The time has come to strategically rebalance our portfolio and to focus our energies and resources on the many growth opportunities across our jeanswear, outdoor, imagewear and sportswear businesses.”

Aside from not meeting the requirements of a lifestyle brand, the intimates segment had been in a skid since 2004 and showed no signs of a turnaround. Revenues fell 9.8 percent to $817.7 million in 2006 from $906.5 million in 2004.

The new VF model has proved itself a winner. The company’s revenues have risen more than 63 percent since 2003 and share price has skyrocketed to more than $80 a share recently, compared with around $20 a share in 2000. Lifestyle brands will play an increasingly important role in the company’s development, with management targeting 60 percent of revenues being generated by lifestyle brands over the next several years.

McDonald will be relinquishing his role as ceo come the first of the year, capping a 24-year career with VF and one of the longest tenures of any executive in the apparel industry. He joined the company’s Lee division in 1983 and worked his way up the management ranks. He was appointed president in 1993. Three years later he was named ceo, and in 1998 added the title of chairman. He will retain his role as chairman and will help identify future acquisition targets.

“I thought a lot about this one,” McDonald said of his exit. “I wanted to go out at a point in time when I was still having a great time and really enjoying it….I wanted to go out when the company was on a good path to growth and had a lot of runway ahead of it, and I just feel like this is the perfect time for that. [Incoming ceo] Eric Wiseman is a tremendous person, a great person, a great leader and he has a good combination of strategic capabilities and operating skills. So VF’s in very good hands.”