If the next 10 years are anything like the last, Esprit is in for a dynamic and successful ride, give or take a few bumps.
But a little turbulence has never fazed Esprit chairman and group chief executive officer Heinz Krogner. Nor would the 67-year-old apparel executive and former management consultant be shy about making a sharp turn or quick exit, if conditions require it. He’s done it before and he’ll do it again to keep Esprit on the road as one of the world’s fastest-growing and most profitable lifestyle brands.
Put in plain dollars and cents, when Krogner took the reins of Esprit’s European operation in 1995, the company had global sales of $350 million. Today, he said, Esprit’s sales are at about $5 billion, and market capitalization has surged to $14 billion. “We’ve made a lot of people rich,” he quipped, though that wasn’t the primary goal.
Since acquiring the American rights for the brand in 2003, the now-fully global Esprit Holdings Ltd. has increased sales almost 250 percent and operating profits about 350 percent.
Following 27 and 31 percent gains in sales and operating profits, respectively, for fiscal 2007, sales for the Hong Kong listed blue chip (with central design and distribution headquarters in Ratingen) were up 25.6 percent to 37.23 billion Hong Kong dollars, or $4.8 billion, in fiscal 2008 (ended June 30). Operating profits increased 23.4 percent to 7.72 billion Hong Kong dollars, or $990.7 million. U.S. dollar figures are converted from Hong Kong dollars at an average exchange rate for the period.
However, three major retail group bankruptcies and overall weak consumer spending in the German market, where Esprit generates about half of its volume, has Krogner in a more cautious mood for the year ahead.
“We usually aim for 20 percent gains, but right now I can’t say. Wholesale for the first half of the year has been flat or a little up. Our business is intact,” he emphasized, “but at this moment, we have to be patient.”
Esprit took ratings cuts, and shares have tumbled 32.8 percent since the group reported its 2008 results Aug. 27. “The share price exploded over the last two to three years,” Krogner commented.
“Some investors want to take their profits — there’s nothing wrong with that. It’s normal, it’s a shift. But I was surprised at how violent the reaction was,” he acknowledged. “But it’s not my business. My business is to keep this company strong.”
When Krogner entered the scene in the mid-Nineties, the American sportswear house had been in trouble at home for some time. Its then-20-year old German-based European daughter was an independent entity, as were operations in the Far East, and had pioneered close retail partnerships with shop-in-shop concepts as well as company-owned and franchised stores in Germany. However, Esprit Europe also was facing increased pressure from other vertical competitors and was stylistically at loose ends and strategically confused. A slide into the red looked imminent.
Krogner reorganized the company, installing 12 divisions to offer the end consumer a broader range of products.
“The idea was to allow the same woman or man to buy everything from Esprit. But to be competitive at wholesale, you have to be independent,” he said. “We need companies within the company. Instead of one whale, it’s better to have 12 barracudas — who fight.”
Fit was perfected, quality improved. Speed programs were introduced and a 12 collection delivery cycle implemented. “We said, if a girl likes a shop, she usually goes there 10 times a year. But you can’t just give her two collections. She’ll get bored,” he suggested.
The third big shift was to focus on Esprit’s retail operations. “To build a brand, you have a choice between doing advertising and your own stores,” Krogner said. Esprit chose the retail route. With stores, he pointed out, “you can learn from the end consumer and begin thinking like retailers.”
Today, Esprit operates more than 690 directly managed stores worldwide and distributes through approximately 14,500 controlled-space wholesale points-of-sale internationally, including in-store shops, franchises and “identity corners,” occupying total selling space of over 10 million square feet in more than 40 countries. Europe has the lion’s share of all three controlled-space wholesale distribution channels.
Over the last decade, centralization has been the name of the game at Esprit. In 1997, Esprit Far East and Esprit Europe were merged under Esprit Holdings Ltd. “I had to centralize [the business]. It was a disaster. But it’s now time to start to decentralize,” Krogner stated.
In 10 years, he predicts Esprit will have three strong international headquarters — North America/New York, Asia/Hong Kong and Europe/Germany — as well as three continental presidents who “have more of a say. We’ll still have a global management team here [in Ratingen] but I hope the presidents will take more initiative to make Esprit made-to-measure for their worlds,” he said.
Retail also is expected to play an even stronger role in the next 10 years. “It’s time to roll out internationally,” Krogner commented. “We don’t want to find ourselves overdistributed in Germany or Benelux,” which currently account for 51 percent of Esprit’s wholesale turnover. In Europe, he and Esprit brand president Thomas Grote targeted Spain and Italy as important Esprit growth markets.
Though Krogner admitted that he “loves wholesale more [as] it saves headaches, there are markets where it’s just not possible.”
India is one, and a new market entry for Esprit. The initial plan was to have 35 stores in five years, but “we’ve opened 23 stores in the last 18 months, with 120 signed for the next 24 months,” Grote reported. “We’re already the second-largest international brand there after Benetton, and it’ll take just one to two years to pass them.”
The key, he said, is to build stores and offer products of international standards, not just a cheap local version.
In Mainland China, where Esprit owns 49 percent of a joint retail venture with China Resources, the label has generated growth of 30 percent each year. And if its partner wanted to sell out, Krogner added craftily, “we’d love to buy.”
Russia also is picking up steam. “We have about 50 stores there with a partner, and will more than triple our turnover there in the next five years,” said Grote. “The whole of Eastern Europe continues to grow. Russia is often very underestimated when it comes to our sector. There are the very rich who own Prada bags by the dozen, but our target group is growing like crazy there.” Moreover, Esprit is often described as “Prada for the middle class, which suggests the middle class feels at ease with our name,” he added.
Indeed, Esprit remains devoted to the much-maligned middle market. “In China, the middle class increases by 50 million every year. It creates a new country for us every year,” Krogner commented. “It’s still the biggest part in the world, and worldwide, the middle class will definitely grow. What might change,” he suggested, “is that we move to where the middle class is growing, instead of where it’s squeezed, like Germany.”
As for the brand’s birthplace — the U.S. — Esprit is still fighting to reestablish itself.
“We invented young fashion. Who existed before ’68? That’s our heritage. All the other guys came later, even Gap,” Krogner stated proudly. But, he added, “we don’t do enough to tell people that we are the original. Like Levi’s.”
If the orientation of the collection — fresh, young, original and international — as Krogner sums it up, hasn’t changed over time, the content has. “If you mention Esprit to journalists in the U.S., they smile. The brand was part of their life, but they don’t know where they can buy it. It disappeared from the market.”
One of the key issues “is that people think we are very young. But we are more young in mind. The problem is to get these people back. They all loved us. We’re making progress,” he said, “but it’s slow going, due to stiff competition and a weakening economy.”
Esprit currently does about 4.5 percent of group sales in North America (including Canada), with the U.S. generating between 2 and 3 percent. “We are small compared to our potential, but we’re already a $200 million business [there],” Grote pointed out.
As Krogner sees it, it’s imperative to make Esprit “relevant” again. “There’s a difference between brand awareness, which means I know you, and brand relevance, which means I know you and I buy you,” he explained. And the main challenge in the U.S., he said, is that “you have to pay for it till the brand becomes relevant.
“We offer great price-value, and we’re actually too cheap for the quality,” he stated. Prices in dollars are only about 20 percent above the euro price, with pants for 49.95 euros, or $73 at current exchange, for example, selling for $59.50. That’s not exactly the going rate, but Krogner is convinced that, until the market learns to appreciate Esprit’s quality, the range has to remain highly competitive, pricewise.
While Krogner said he’d love to have good partners in the U.S., “it all depends on what you mean by good. A partner’s not good if you have nothing to say about price reduction, have no influence in store presentation. It’s why we pulled out of most department stores, though we still have local heroes.”
Three to four years ago, when Krogner tried to take the brand home again, “I thought we could implement our business model from Europe in the U.S. — that we could bring our own identity and personality to the shops like we do in Germany, but it didn’t happen. We had to pull out of 300 points of sale. It was my call, my fault,” he said.
In the meantime, even the traditional big retailers are interested in Esprit again, he continued. “Of course I like them, and it would be great to be in every store,” he said. “The brand would be relevant overnight, but not on the old terms. It would bankrupt us.”
Esprit, therefore, has decided to go its own way in America. And because the U.S. is so vast, the company decided to first focus on the Northeast, starting in New York with stores on Fifth Avenue and in SoHo, and trying to build a base from there.
“We’ve made some mistakes, like taking space in malls, but we’re now on top of the new direction. We now say we need full-price stores in only the best locations, and as there seems to be a real estate bottleneck [in the Northeast], we’ve decided to go to California, and have signed in L.A.,” he reported.
In more of a “coastline strategy,” Krogner could envision opening in Florida, too. And, parallel to that, the brand is opening a few outlet stores, but only in “triple-A locations,” he emphasized. At present, there are 24 directly operated Esprit stores in the U.S., and 48 in Canada.
The ceo said he’s “not happy with our progress [in the U.S.], but I don’t know if I could do better because I don’t live there. Our people say, ‘Be patient,’ and we can afford to be patient. We will have five to seven years in red figures, but you have to feed the cow before it gives milk.”
Not being in the U.S. is not an option. “It’s the richest market in the world, and we can’t ignore it, nor do we want to ignore it,” he said. “It’s important to us because we’re at home there, and it’s a market where we fit.”
Esprit is not yet present in South America. “We can’t be everyone’s darling at once, but we have to think about Brazil if we have time. Maybe it’ll be the job of our new North American president,” Krogner said.
Esprit’s product range currently is sold under two brands: Esprit and edc. Esprit Casual for women and men remains the top seller, contributing almost half of group turnover. Esprit Collection, which targets workweek wardrobe needs, generates about 9 percent and Esprit accessories is about 5 percent, whereas the younger range, edc, which has become its own business unit, does slightly over 20 percent. Other divisions, including Esprit kids, shoes and further licenses, make up the rest.
Fashion is not a word to be found in Krogner’s — or Esprit’s — vocabulary. “I’m a very rational person, and I can’t live with irrational words like better, or fashion. You can’t describe fashion, but you can describe newness. And newness you can measure. Fashion just misleads your designers, and we got beaten up like hell.”
Esprit, as its founders and Krogner like to say, is not about a specific age group, but an attitude. “Our target group is normal, intelligent and of a young mind-set — an international, business-oriented young lady who doesn’t got around like a parrot, though she wants to look new.”
While the magic number 28 often comes up when talking about the Esprit target customer, Krogner explained: “Twenty-eight is just an artificial number. We had to give designers some sort of idea, and psychologists said 28 is a super age. 20-year-olds want to be 28, and a 45-year-old doesn’t mind dressing like a 28-year-old. But this isn’t our target group. I have a [female] friend who’s 74, has short hair, drives a Porsche and shops at Prada. People don’t fall into these groups anymore.”
Nonetheless, Esprit has gotten older. And Krogner suggests it’s a reason for its success.
“With Esprit today, we can address 25- to 45-year-olds. That’s a 20- to 25-year life span, whereas before it was 15- to 25-year-olds. That’s only 10 years. But it’s also why we introduced edc — for the old Esprit customer. And we have Esprit kids. One can now go from the cradle to the grave with the same lifestyle attitude,” he stated.
A separate edc headquarters is being built across the way from Esprit’s modern center near Düsseldorf. And the range is being expanded to include men’s wear, accessories and shoes, but Krogner believes the brand is not yet ready for separate shops. “Yes, I think the business will grow, but edc has always benefited from the traffic of Esprit customers,” he said. “Independent stores would have less traffic — we’re talking about a 10-year customer span with edc versus 20 at Esprit. But we’re on our way and don’t have to rush.”
The next decade also will see a sharper outward profiling of Esprit. “The last 10 years we’ve built a business model. But the time has come to do something for the brand. We might have to strengthen communication.
“The girl who buys Esprit should be proud of it. We have to give her an idea, and we’ve lacked vision a bit for the end consumer. We have to invest in quality and image. This is the future,” he declared.
As is growth. “Whoever doesn’t grow in the next 10 years is out. Or in a tiny niche.”
His vision is to build Esprit into “at least a $12 billion company. Then you have a decent size. I don’t want to grow for the sake of growth,” he averred, “but it’s a must in a competitive market. The era of cheap sewing machines is coming to an end all over the world. Costs are going up, and to keep economy of scale as well as maintaining price and quality, we are forced to grow.”
As for a luxury brand in Esprit Holdings’ future, Krogner said the likelihood is decreasing. Having been in talks with Puma, Jil Sander, Escada and undisclosed others, Krogner said he’s not actively searching anymore, and just turned down a big deal. “I’ve always said we didn’t need to buy for growth, but rather to create value and equity for the company. But we also have so many strategic and operational advantages we could apply to a luxury brand, which mostly have outdated business models.
“But then I asked myself, should I do this in these hard times?” he continued. “There’s a capital crisis and an oil crisis to overcome. And I’m not getting any younger. My window of opportunity to manage such a brand is getting shorter. And my eagerness is less.”