THE DIVERSIFICATION DYNAMIC
Byline: Kristin Larson
NEW YORK — In a time of economic stagnation and profitability problems in apparel, two mainstream conglomerates — Liz Claiborne Inc. and Jones Apparel Group — have used their recent diversification strategy to strengthen their foundation.
The powerhouses — with combined sales of $7.3 billion — have become aggressive in the acquisition trail in the last few years, buying brands and obtaining licensing agreements to broaden their brand portfolio. The strategy has worked to build volume, but also to lessen the risks of investing a company’s resources in a megabrand approach.
“It’s really given us multiple legs for growth,” said Anita Britt, senior vice president of finance and investor relations at Jones, which in addition to its signature brands in sportswear and ready-to-wear has in its stable Polo Jeans Co., Lauren by Ralph Lauren, Evan Picone, Rena Rowan, Nine West Group and Norton McNaughton. “Especially in this industry, you continue to see consolidation and I think to be a player for the long haul, you’ve got to be a major player.”
The non-Jones brands now comprise about 75 percent of the $4.2 billion company. The company’s overall net earnings for 2000 were $304 million, compared with $238 million in 1999. Revenues for the year were up 31 percent, to $4.14 billion. For the first six months of 2001, income was up 20.6 percent, to $152 million, but revenue dipped 1.9 percent, to $1.95 billion.
“If you look at Jones and Liz, [diversification] has made us very significant players and it has been a strategy that has worked for us,” Britt said.
With 24 brands under Liz Claiborne’s umbrella, the company differs greatly from its original core of signature-related lines. Ever since striking its first major outside deal in 1997 with DKNY to produce jeans and activewear, Claiborne has been on an aggressive acquisition and diversification path. Its brands today include Sigrid Olsen, Laundry by Shelli Segal, Lucky Brand Dungarees, City DKNY, Kenneth Cole and, most recently, the European apparel and accessories company Mexx Group BV, based in the Netherlands.
The company’s overall net earnings for 2000 were $184.6 million, compared with $192.4 million in 1999. Sales for the year were up 10.6 percent, to $3.1 billion. For the first six months of 2001, income was flat, at $78 million. Sales were up 5.6 percent, to $1.55 billion from $1.47 billion.
“We’ve repositioned the brands, changed the value chains, reengineered the processes and changed every single information system in this company,” said Paul R. Charron, chief executive officer. “This is a fundamentally different place that is built differently than it competed in the past.”
Today, the firm’s non-Liz Claiborne brands represent close to half the volume of the $3.1 billion company. Having revitalized Liz Claiborne since joining it in 1994, Charron’s sights are set on increasing business to $6 billion initially and then eventually to $10 billion.
But growth for growth’s sake is not what Charron has in mind, he maintained. Instead, it’s about sticking to a specific strategy with clear parameters and understanding the risks of diversification. Charron said it’s less about diversification and more about leveraging the company’s core strengths.
“Strategy is the road map, it’s not building a low-price brand or selling something to J.C. Penney’s. It’s how can I extend what I do well to better serve other consumers in other venues. The answer to that is a strategy,” Charron said. “We’re in the fashion apparel and accessories business. We’re not a commodity apparel [firm]. Any growth strategy depends on an understanding of who you are and what you’re good at.”
Andrew Jassin, founding partner of the Jassin O’Rourke Group, an industry consulting practice, said diversification can work for certain companies because it allows them not to be reliant on any single brand. He said the companies best poised for diversification have complex infrastructures in place that can benefit from additional business opportunities.
“Those opportunities come from owning back-end systems such as computer systems, financial services and global sourcing networks,” Jassin said. “Companies can have sales and design divisions, which may even be independent, not reliant, on any one division being successful because people change their attitude about brands. Certain brands are hot sometimes and certain brands are not. It’s the wisest way to go because it spreads risk, allows new divisions to be born and increases operating efficiencies.”
Other key sportswear and rtw players in the moderate-to-better department-store segment include Kellwood Co. and The Leslie Fay Co.
Bob Salem, consultant and former senior vice president of corporate marketing at Leslie Fay Co., drew a comparison to investing in the stock market when discussing brand diversification.
“It’s probably the single-most-important strategy for companies not only because of growth but because of safety,” Salem said.
In addition to its signature dress and sportswear divisions, Leslie Fay’s brands include Rimini, David Warren and Cynthia Steffe — all acquired through acquisition — and it holds the license for Liz Claiborne dresses.
“If you invest in a single stock, that’s rather risky,” Salem said. “But we think diversification provides value, safety and stability for our company, as we have our sites set on quantum growth. Do we want to grow? Yes, but we want to do it in a controlled way and we want to minimize the risk.”
Salem said when he came into this business in 1960, the country was expanding rapidly.
“These were the decades when we built the suburbs and the shopping malls, and you had to be a complete idiot not to be successful,” he said. “Each year, you had more stores to sell and an expanding population. In the mid-Eighties, supply exceeded the demand in fashion apparel and since then, we’ve had this normal adjustment. Prices came down, there’s been a tremendous amount of mergers and the market is shrinking and will continue to shrink until supply and demand are once again level.”
While there are benefits to diversification, there are also pitfalls.
“Anytime you enter a new channel, you run risks,” said Kurt Barnard, president of Barnard’s Retail Consulting Group in Montclair, N.J. “One of the problems with diversification is that senior management over the years has come to know their business very well. Now they suddenly acquire a company that is out of their general realm of experience and what they have to do is surround themselves with people who assure them that they are experts.”
However, the greater risk for a publicly held company is not to diversify, said Allan Ellinger, senior managing partner of The Marketing Management Group, a New York-based consulting firm.
Ellinger noted: “The risks are choosing the wrong label or not folding in the acquisition properly. But any large diversified company has got to be looking at expanding their business through acquisition. The industry is divided into three columns — buyers, sellers and the undecided.”
While Britt said Jones is still assessing how the events of Sept. 11 will affect long-term planning, she said the company will continue to exercise caution and look for acquisitions that strategically make sense down the road.
“For the next three months, we will be sitting on the sidelines as far as actively pursuing acquisitions,” she said. “The focus right now is to steer the business through this next quarter, which we think is going to be a very challenging period.”
Still, Britt said the company’s overall strategy is to grow into a more complex firm with multiple product lines that will attract more varied audiences and feature multiple brands.
Even Charron admitted that managing more than one brand is more challenging and said he has walked away from transactions where he didn’t find compatibility.
“You have to keep lots of balls in the air simultaneously and you have to understand where each ball should be, relative to one another,” Charron said. “Each ball needs to make a distinctive contribution to the overall portfolio and they’re all balls you’re keeping in the air. It requires lots of people sharing common approaches and common values with many checks and balances.”
Jeffry Aronsson, president and ceo of Oscar de la Renta, said he understands how the concept of acquisitions and licensing might be interesting for some companies, but pointed out that all strategies aren’t right for all firms.
“For us, it’s simply not an element for the development of our company,” Aronsson said. “Our company faces boundless opportunities to grow its business under the Oscar de la Renta brand, and we believe that the correct strategy for our company is to focus all of our resources, energy and attention to the proper development of the multitude opportunities our brand presents.”
At this time, Aronsson said any acquisition would be more of a distraction than a benefit. “People can get swept up in a tide and there’s a tide of acquisitions. That doesn’t necessarily mean it will work out,” he said. “But public companies have pressure to grow more than we have and expectations that have to be met.”
Similarly, Bud Konheim, ceo of Nicole Miller, said his firm is single-minded.
“A brand to me is an emblem of trust you build with the customer,” said Konheim. “The customer expects certain things from Nicole Miller because she’s here doing it and the organization is here to back up her idea. Martha Stewart is all about her stamp on everything she does. These are things that add to the idea of a brand being very personal.”