Issue of Selling Levi's in Walmart

Problem Faced with 5 years of declining sales, should Levi’s sell a brand to mass discount retailer, Wal-Mart? Executive Summary Quick! Name the first company that comes to mind for the following products: facial tissue, photocopiers, and jeans. Did you answer Kleenex, Xerox, and Levi’s? I bet you did. The #1 apparel brand for brand awareness and recognition, “Levi’s” is virtually synonymous with “jeans. ” In the past several years however this strong brand recognition has failed to translate into sales growth and in fact the company has seen a progressive decline over the last 5 years.

Faced with the declining sales, Levi Strauss & Co. ’s CEO, Phil Marineau, has been considering selling a Levi’s brand to mass discount retailer, Wal-Mart. Bad idea. Clearly this would be brand suicide or, brandicide if you will, sacrificing long-term survival for short-term growth. Levi’s should instead put an end to its brand’s dilution and concentrate its target on trend-setting members of Generation Y by positioning itself as an ultra cool brand with a social conscience.

In addition to working closely with its current retail outlets to re-invigorate the brand image, Levi’s should work on growing the number of Original Levi’s Stores worldwide in order to retain as much control as possible over the positioning of the brand. The forecasted financial results show that choosing to revitalize and refocus the brand rather than diluting and devaluing it further by selling a value brand to Wal-Mart will cost the company 50 million dollars in the first year.

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However, within 3 years the efforts are expected to payoff with a 330 million dollar revenue increase over 2002 vs. 270 million dollar projected revenue loss for the Wal-Mart choice. Plus, Levi’s will be able to hit the triple bottom line by remaining socially and environmentally responsible while increasing shareholder earnings. Situation Analysis Strengths •Worldwide recognition of its brand name – #1 for apparel brand for brand recognition and brand awareness. •Global presence •Owns 12 proprietary specialty stores. •Long-standing relationships with many retailers, enabling it to work across several channels of distribution. •Continued success of Dockers. Commitment to ethical conduct and social responsibility. •Reputation as the brand that started the blue jean revolution Weaknesses •Presence across several retail channels with a number of products aimed at different segments with price points “from the $250 level to the $25 level” diluting the brand. •Being used as a loss leader in several chain and department stores is devaluing the brand. •The average price paid for Levi’s at retail dropping. •History of Levi’s 1994 Canadian dispute with Wal-Mart may be a barrier to rekindling a relationship with the mass retailer. Recent product releases have met with poor results, particularly in the US. •Major stockholder’s deficit •Ineffective marketing efforts (30% of sales spent on marketing, yet sales continue to drop) Opportunities •The jeans market is growing •Teens continue to be biggest jeans buyers •Mass merchant channel largest and fastest-growing retail channel for jeans and apparel Threats •Competitors at all levels of spectrum including high-end segment, vertically integrated retailers in middle segment, and private-label brands offering comparable designs at reduced prices. •Apparel sales down in 2001 Average price of jeans has dropped over the past 10 years due to the proliferation of off-pricing and private-label brands – 40% of jeans sold below $20. Issues facing the organization As the jeans market has polarized towards the low and high ends, the Levi’s brand has found itself caught in the middle. Priced between $30 and $50 a pair, the jeans do not offer the same image or design as the high-end brands, or the complete wardrobe selection of the vertically integrated retailers. Also, they do not offer the inexpensive alternatives found through private labels.

Further, while the jeans market continues to grow, to stand out in the cluttered market, a company must have a real competitive advantage. In the case of Levi’s it seems that mere brand name recognition isn’t enough. And with 5 years of declining sales, Levi’s has to reinvent itself or die. After reviewing the situational analysis of the company, several alternatives can be considered. Alternatives 1. “Do nothing” and hope to sell more. Faced with a 5 year decline in sales, doing nothing isn’t a very sound strategy.

However, perhaps current initiatives such as new product offerings and specialty retail channels need more time to catch on. 2. Enter a new market with a new product. Sell a Levi’s value brand to mass retailers such as Wal-Mart, a retail channel that accounts for 31% of all jean sales. The potential increase in sales from this new channel is probably very good in the short term, however the risk is that entry into the discount market even with a Levi’s value brand that’s differentiated from the main product line, will further devalue and dilute the brand, making it unattractive to its current retailers.

If Levi’s gets dropped from chain, department stores, and independents because its brand is no longer relevant to its customers, then the potential loss could offset a good deal of any potential gain. Further, once the brand loses its “shine,” through dilution, discounting and devaluation, the benefits to Wal-Mart of carrying a higher profile “national brand” are lost.

A likely scenario is that in the long-run, Levi’s would only be carried in discount stores, its brand image too tarnished for chains and department stores, and even in mass retailers used as a loss-leader for the store’s own private labels. 3. Another alternative, which is similar to the last, also involves Develop and sell a non-Levi’s branded line of jeans to Wal-Mart. The advantage of this is that Levi’s could open up a major new retail channel without devaluing the mother brand.

However, this scenario is probably far less interesting for Wal-Mart that would be looking to leverage the nationally recognized brand to improve its own brand image. Interestingly, this scenario is probably far less interesting to Levi’s too, since if Wal-Mart did pick up the generic brand, chances are that it would fall under the “better” or more likely the “good” end of the spectrum rather than the “best,” and the price point would either be unprofitably low or set unreasonably high in order to drive purchases of Wal-Mart’s private labels. 4.

Stop extending the brand to the point of complete dilution. Update brand personality and marketing mix to make Levi’s a fresh and relevant brand that resonates with trendsetting youth and speaks to Levi’s management’s perceived competitive advantages, such as commitment to ethical conduct and social responsibility, and the focus on product innovation, quality, and value, rather than simply trying a new channel for a distressed brand. In speaking to a specific target, rather than trying to be everything to everyone, marketing dollars can go a lot further.

And by focusing on the demo with the most influence on trends, youth, who have the most dollars going towards jeans per person per year, the chance for growth is good. Plus, by focusing less on the product and the retail outlets and more on the Levi’s experience, there is major potential for organic brand extensions and growth. On the other hand, the risk is that the brand has already been too neglected and diluted and is so “old school” that it’s too late and will never be perceived as cool by the youth market.

In this case getting the last bit of life out of a dying brand by distributing it through mass market channels may be the only answer. Recommendations The financial analysis (appendix A) compares projected results of taking a value brand into Wal-Mart with not taking the brand to mass market and instead concentrating the target, dialing up the cool factor and re-positioning the brand to resonate with the 20% of consumers who have the potential to bring in 80% of revenue (the 20/80 rule of business) – the tween, teen & young adult market.

As we see, introducing a value-brand at Wal-Mart is expected to sacrifice long-term revenue growth for short-term gain since the devaluation of the brand through its association with a discount mass retailer would likely cause department stores and chains to drop the brand one by one. Once the brand has no life beyond the discounter, its value goes down and is likely to command lower price points and less sales even at the mass level.

Within three years, we predict that going the Wal-Mart route over the re-positioning route will cost Levi’s 660 million dollars and ensure that the brand is headed towards extinction. On the other hand, while sales are not likely to grow while the brand is in the process of the transition to focus on becoming relevant to the younger, influential market, we see that after the first year, increased price points and distribution, particularly in its specialty outlets should translate into steady long-term growth for the company.

Therefore, in order to turn sales around while protecting the integrity of the brand, the best alternative is the last one, which relies on a market penetration strategy, increasing share among existing customers by focusing promotional efforts, combined with a product development strategy, to identify the best products to appeal to the target demographic. The first step in reviving the brand is to choose to fight brand dilution through concentrated targeting.

Levi’s must identify the marketing segment that is most important to Levi’s present and future growth and identify the characteristics, needs and motives of that segment in order to develop and maintain a highly specialized marketing mix. By choosing Generation Y (young people born between approximately 1979 and 1994), also called the Net Generation, or the Millenials, as the main target to lead the brand revitalization efforts, Levi’s would leverage several attributes of this group. First, it represents a demographic of about 76 million in the US.

Second, they are in the “young single” stage of the life cycle, which means they have few financial burdens and therefore more disposable income. Young people are also an aspirational reference group for fashion. If young, hip, trend-setters choose to adopt the brand, this would significantly improve the brand image. Levi’s apparently understands this in theory, selling a few higher-end brands aimed at fashion-forward youngsters in the 15- to 24-year-old range, however the problem is that these brands aren’t resonating well enough with this influential demo to have the intended halo effect on the rest of the jeans line.

In order to gain success with this group Levi’s must first change neutral or negative beliefs about product attributes into positive ones. For example, Levi’s needs to go from being “your parents’ jeans,” to a brand that has relevance in the lives of these young people. Brand is very important to this demographic and they are willing to pay a premium for it. In addition, Gen Y likes and expects personalization and customization. Further, this is a segment that has a much bigger environmental and social conscience than does the generation preceding it.

Other important considerations when marketing to the tween and teen demographic, according to Paul Kurnit during his presentation on Understanding Youth, in order to build a relationship with the brand are to: make it lifestyle relevant, give it badge value, generate buzz, make it authentic, let them own it (“I’ve created this”), and keep it fresh in the long term. By re-positioning the Levi’s brand as a stylish brand with a social and environmental conscience, Levi’s can become extremely relevant to this demographic.

And this positioning is actually very close to what management already claims are its competitive advantages, including commitment to ethical conduct and social responsibility, ad the focus on product innovation and quality. The re-positioning will simply take these perceived competitive advantages, shout about them, and give them relevance for a very targeted segment. Some recommendations for the marketing plan to achieve this re-positioning and turn around Levi’s fortunes are: Product •Higher-end fashions that appeal to Generation Y Environmentally friendly fabrics used in products (e. g. organic hemp weave) •Use manufacturers worldwide that practice fair employment practices & use environmentally friendly production processes. •Bags for merchandise should be paper, made of recycled materials and be cool and of high quality so that consumers will want to reuse them for other things. •At flagship stores, offer customized tags with percentage of proceeds going to charity. Place •Original Levi’s One stores to be leaders in shaping brand re-positioning. Increase presence by opening more specialty stores in urban areas. Image department stores & high end chain stores. •Independent jeaneries •Promotion •Associate differently coloured tags with key charities so that people can express their social conscience. •Support traditional media buys (television & print) with the untraditional advertising and promotion methods that Gen Y seeks out. •Leverage the popularity of consumer-generated content by giving consumers online tools, including popular music, and video clips, to make their own ads featuring Levi’s styles that they can share with their friends. Create an international online community to leverage the positive image of the brand among trend-setters in other countries and to integrate into young people’s lifestyles. •Using guerilla marketing tactics that create buzz such as sending small armies of models dressed only in jeans through city streets in fashion-forward urban areas. •Sponsoring mobile phone services like concert alerts. •Everything in the store should speak to the young person’s lifestyle, including music. Price

The high-end styles should but be priced a little bit lower than other designer and fashion-forward jeans to give a slight cost advantage while the brand is re-building. The recommended target price range is between $50 and $80, but skewing towards the $50 price point as an average price in the first year as the brand regains its “cool factor. ” Conclusion It is easy to understand why Phil Marineau, faced with 5 years of declining sales, would consider getting Levi’s into the discounters that are grabbing a rising share of apparel sales.

Certainly there is a good deal of sales potential of such a move in the short term. But the marketing risks are considerable for a company that has historically strived for a constant injection of cool. Even if Levi’s creates a new brand for Wal-Mart, it would likely still use the Levi’s name somewhere on the tag, which would quickly destroy any relevance the brand has for fashion-conscious shoppers and signify the beginning of the end for this iconic brand.

Instead, Levi’s should turn its perceived competitive advantages like product and promotion innovation and social responsibility into pillars of the brand and sharply focus its target on the segment that spends the most on fashion-forward apparel, the Generation Y. Next steps for implementation In order to fulfill its triple bottom line promise, in its first year of re-positioning, Levi’s should audit current manufacturers for social and environmental best practices and develop plans to improve production processes where necessary.

Next, build relationships with key charities that would want to partner with Levi’s on the charitable coloured tab idea. Then, it should begin work on redesigning flagship stores to fit youth lifestyle and work with top retailers to revitalize presence at department stores to fit with fresh branding. Finally, it should introduce the new customizable, altruistic tag jean & launch it with a global online community that gives young consumers a chance to express themselves and make the brand their own. Appendix A

We will focus on sales, based on the information provided in this case, and assume that the additional costs that might be associated with re-positioning the brand (in particular adjusting manufacturing processes or changing manufacturers and opening new stores, since promotion and product development costs would be similar to previous years, just directed at a new target) would equal approximately to the costs associated with moving into mass market (distribution system changes, especially re-configuring supply chain system to be compatible with Wal-Mart, could be costly) Projections based on Levi’s introducing value brand to Wal-Mart Projected profit on each unit of Levi’s value branded jean (based on highest price of top national brand at Wal-Mart, Dickies $26 – 6$ to retailer): $20 50 million pairs of jeans are sold at discounters out of the 569 million pairs of jeans sold in the US, representing 10% of all jeans sales each year. Assuming that Wal-Mart was selling half of these 50 million pairs each year, then a Levi’s value brand is likely to take a 20% of these 50 million pairs, or 10 million units . We will base our projection on this: 10 million units in year one, with a 10% drop in number of units sold after the first year (due to brand devaluing as it is taken out of other retail outlets) (9 million in second and third years). Currently, the top 10 customers for Levi’s account for approximately 60% of its total 4. 2 billion in sales (approximately 2. 5 billion dollars). If we assume that 1. billion of this comes from Levi’s jeans sales and if each of the 10 customer’s business is worth approximately 1/10th of that amount, than losing even one customer would cost Levi’s 150 million in jeans sales. Assuming that 1 customer stops carrying the Levi’s brand each year, which is a conservative assumption since, as industry insiders agree once “you have mass distribution now, we can’t make money on you, you’re gone. ” Projections based on Levi’s re-positioning brand & targeting Gen Y specifically By keeping its current retail channels and re-positioning its brand, we project that in the first year, Levi’s will have flat sales while the brand is being revitalized, however we project a conservative 10% growth in sales from the current retail channels (from above calculation, this will be 10% of 1. billion in estimated jeans sales) in the 2nd year due to more units being sold and a higher price point and 20% growth in the 3rd year due to expanded Levi’s Original Store sales (with higher margins) and continued growth in traditional Levi’s retail outlets. Year 1Year 2Year 3 Revenue increase from sales Levi’s Wal-Mart value brand$200,000,000$180,000,000$180,000,000 Revenue decrease from removal from other retail outlets 150,000,000300,000,000450,000,000 Total projected sales increase/decrease from entering Wal-Mart50,000,000(120,000,000)(270,000,000) Revenue increase from re-branding efforts0150,000,000330,000,000 Net gain/loss from choosing to re-position brand rather than selling a value brand to Wal-Mart(50,000,000)270,000,000600,000,000