Why Levi's Still Looks Faded

CEO Marineau is reaching out to new markets, but style-conscious rivals continue to steal sales

Ask Philip A. Marineau, the relentlessly upbeat CEO of Levi Strauss & Co., what progress he is making to turn around the struggling jeans maker, and he sounds thrilled to tick off his achievements. "We have very strong financial discipline," Marineau declares. "We have good control over our inventories and working capital and capital expenditures. Our debt has been reduced."

All that is true. But there's a gaping hole in his progress report: Sales at the privately held company are still sliding, continuing five years of steep declines. From a high of $7.1 billion in 1996, sales at the San Francisco-based company in 2001 skidded to $4.25 billion, down 8% from 2000. Levi's market share, too, continues spiraling downward as the company faces an onslaught of competition from edgier upstart brands, such as Seven and Blue Asphalt. Its estimated U.S. market share in men's and women's jeans is 12.1%, down from 18.7% in 1997, says consultancy Tactical Retail Solutions Inc. And on June 20, the company reported fiscal second-quarter sales of $924 million, a 12% decline from a year earlier.

That's not an inconsequential shortfall for a PepsiCo Inc. marketing veteran who arrived nearly three years ago with a mandate to breathe some life into a tired brand. True to his Pepsi roots, Marineau, 55, lost no time reinvigorating the advertising. He generated lots of talk with special-effects-laden ads such as "Crazy Legs," which showed a guy ambling through traffic with his legs moving at impossible angles, or the epic "Odyssey," where a couple crashes through walls and sprints up trees. Still, in the fashion business, marketing is only as good as your latest merchandise. And that's not necessarily a strong suit for Marineau, who staked his claim as a product innovator at Pepsi on a single new soda, the now-languishing Pepsi One diet drink.

True, Levi's stagnation didn't start with Marineau. When he arrived, Levi's were seen by many teenagers and other young consumers as jeans for the middle-aged. Trouble is, that hasn't changed. And Marineau won't launch a completely revamped set of offerings on store shelves until next spring: jeans with flared legs, jeans with low waists, and a line dubbed "Type One," made of dark denim with bright stitching and large pockets. Even more painful is that Levi sat on the sidelines as denim made a fashion resurgence starting a year ago, says Catherine Guinee, an analyst at Moody's Investors Service. In May, Moody's affirmed its months-old "negative" outlook on Levi's $1.9 billion of debt, suggesting that a downgrade may be issued later.

So far, the company's controlling Haas family evinces no signs of restlessness with Marineau's pace of improvement. "If you ask our board, to a remarkable degree we're totally aligned with what he's doing. Patience is worth extending to him," says Chairman Robert D. Haas, adding that Marineau had warned from the beginning that a turnaround would be a five- or six-year process. But he had best start delivering soon on his plan before the denim fashion window closes.

It's not as if Marineau has been sitting on his hands. He is orchestrating other major initiatives beyond overhauling the core product line. He has been trying to get his jeans into specialty chains, a sector of the retail industry that's healthier than Levi's mainstay department stores. And after months of industry speculation, Marineau acknowledges that he is toying with the idea of creating a new brand to sell through discounters, such as Wal-Mart Stores Inc. or Target Corp. Marineau figures these strategies should get sales growing again in 2003--well past the 2001 target he set soon after he arrived. "It took a while to get into trouble," he says, "and it takes a while to get out of trouble."

So why has the product overhaul taken so long? Essentially, Levi is still overcoming some bad habits formed in the 1980s, when the brand was hot and great designs were not essential to its success. Back then, Levi could get away with creating women's jeans from men's patterns, ending up with pants that didn't quite fit women's curves. It could treat teen girls and older women as one market, leading to jeans that were too snug for moms and too high-waisted for teens. To undo these habits, the company has shipped in staffers from its more fashion-oriented European division and held brainstorming sessions to suss out just what teen girls and older women want in their clothes. But the few new designs it generated in recent years produced anemic results.

To make the brand more alluring, Marineau is working to get his merchandise into more specialty retailers frequented by the young and hip. It's proving to be a tough slog. "They're too plain," complains Bree Edmunds, a 19-year-old shopping at the Hillsdale Mall in San Mateo, Calif., who wears labels ranging from Old Navy to Calvin Klein. "There's just not enough style to them." Levi is testing jeans in 12 Pacific Sunwear of California Inc. locations but so far, sales have been spotty. Some customers view the $78 price tag as too steep, while others haven't liked the fit, finding the waistband too high even on jeans labeled "low-rise," says a salesclerk at a store in Newport Beach, Calif. Other chains don't think the Levi's brand passes the cool test. Steven Strickland, senior vice-president of marketing at 180-unit Wet Seal Inc., says he's not ready to carry Levi's because "it's not on the radar screen of young women now."

Levi has made some progress moving upscale into such chains as Neiman Marcus, Saks Fifth Avenue, and Bloomingdale's, all of which plan to carry Levi's later this year. "Many customers want an all-American jean, and Levi's is a name associated with that," says Darcy Penick, an assistant buyer with Neiman Marcus Group Inc.

Marineau also is considering whether to move downmarket, getting Levi's into the discounters that are grabbing a rising share of apparel sales. Analysts like the sales potential of such a move. But the marketing risks are considerable for a company that is striving for an injection of cool. Even if Levi creates a new brand for the discounters, it would likely still use the Levi's name somewhere on the tag. That could complicate its efforts to polish its image with fashion-conscious shoppers. "The brand's not cool when you're at Target [looking] for detergent and you see a rack of Levi's," sniffs Wet Seal's Strickland.

The Levi's name is so well-known that "people are predisposed to the brand," argues Marineau. "So, if we get the product right, they'll buy." But that's exactly the problem: He hasn't got the right product yet. Until he does, Levi will be left hugging its middle-aged customers' expanding waistlines--and its own shrinking sales.

By Louise Lee in San Francisco

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