Riding Hip Jeans into New Luxury Markets
You might think that for a young brand, netting $100 million in sales of $100-plus jeans is a sure sign of success. And indeed, labels such as True Religion (TRLG), Rock & Republic, Citizens of Humanity, and 7 for All Mankind have graced the pages of fashion bibles like Vogue and Elle, and are sold in high-end stores from Saks to Barneys New York.
But for this new generation of fashion startups, "premium"—or $100-plus—jeans are just the springboard for launching upmarket lifestyle brands. Many are entering 2007 by offering expanded lines of clothes, accessories, outerwear, eyewear—even a hotel—that they hope will boost customer loyalty and fully establish them as multicategory brands.
Of course, today's designer jeans phenomenon isn't the first wave of premium denim to hit shelves since the first blue jeans were made, patented, and sold to laborers by Levi Strauss & Co. in 1873. But contemporary premium jeans companies are setting their brands apart from the designer jeans businesses of the 1980s rather than emulating their models.
Premium denim's first wave was led by fashion designers Gloria Vanderbilt and Calvin Klein, well-established names who used jeans to court mass-market audiences. They saw jeans as a less expensive fashion item that could conspicuously display their name on the back pockets. Today's denim executives are deploying the opposite strategy: building high-end brands from the blue jeans up—and using their staggering sales growth to fund luxury clothing and accessories lines.
A New Status Symbol
The success of these ambitious young jeans makers, who have seen sales double or triple in the past year, stands in particular contrast to the fate of the well-known traditional jeans maker, Gap (GAP), which is floundering (see BusinessWeek.com, 1/5/07, "Sales Gap at the Gap") with falling sales and talk of a buyout. In fewer than 10 years, these companies have effectively—and collectively—established a new category that's not quite luxury, and not quite downmarket weekend wear, but something in between.
"Consumers now see blue jeans as an investment and will pay more for them. They're a staple in a person's work wardrobe. Steve Jobs of Apple (AAPL) is always photographed wearing jeans," says James Sullivan, author of Jeans: A Cultural History of an American Icon (Gotham Books, 2006).
Sales of premium denim provide proof of jeans' popularity. True Religion, for example, saw net sales increase 41.8%, to $109.3 million, in the nine-month period ending Sept. 30, 2006, up from $77.1 million in the same period the year before. These are striking figures, especially compared to those from the company's first year in business. True Religion brought in $2 million in 2003.
The company recently announced licensing agreements for scarves, footwear, and outerwear, making clear its intention to become a global lifestyle brand. And Rock & Republic, which saw estimated growth of 270% in 2006 from its $100 million sales in 2005, launched an accessories line of men's and women's shoes, bags, and eyewear at the end of last year. The company expects to expand into cosmetics and even a chic Rock &Republic boutique hotel in 2007.
"Adding accessories and clothing to build a lifestyle brand can work for those jeans companies with a strong customer following," observes Marshal Cohen, a retail analyst with market researcher NPD Group. "To be a one-trick pony in today's world is risky and limits growth, which every company in any market is judged on. But the brand has to be strong, otherwise the expansion is capricious."
NPD Group data indicate that department store sales for women's premium denim jeans priced at $100 and more grew the most among all women's denim categories in the year ending November, 2006. Jeans priced at $100 and above saw a 23% sales increase, from $165 million to $203 million. Jeans priced $75 to $99.99 grew 16.9%, to $55 million.
Even denim stalwarts such as Levi Strauss and Guess (GES) sell premium styles to keep up with consumers' demand for higher-end jeans. Levi Strauss sells $250 jeans in its Capital E line, launched last year.
The line is characterized by more elegant craftsmanship and refined materials—such as 100% organic cotton—than its core line of Red Tab, lower-priced jeans that sell for around $40. And the average price of women's jeans at Guess stores in the U.S. (see BusinessWeek.com, 12/18/06, "How Guess Got Its Groove Back") is now $103, reflective of higher-end cottons and more sophisticated styling. That's double the average cost of women's Guess jeans a few years ago.
Although Guess did follow a similar path in the 1980s, starting with denim and then growing into a larger lifestyle brand offering apparel and accessories (including a higher-end line, known as Marciano and named after the company's founding brothers), only recently has it entered the higher-end market for jeans.
The business strategy behind denim's new use as a brand springboard is simple: the product doesn't require much risk, in terms of audience demand, design complexity, or even startup costs.
A Design Yardstick
"The longstanding success of the blue-jeans business is that it's a relatively easy market to get into," observes James Sullivan. "It's a proven category. There's low overhead. The design, for example, is a classic fashion staple. You start with the standard Levi's 501 and add distinguishing traits, such as back pocket stitching or seams."
Seven for All Mankind jeans, for example, feature characteristic—and much imitated—swoosh embroidery on back pockets. (The downside is that such details are easily knocked off by lower-market brands. In addition, there's intense competition among increasing numbers of companies with similar products.)
In any case, compared to launching a full clothing line, countless design hours can be saved. The silhouette and construction of jeans change slightly, yes, from lower waistbands to skinnier legs, but the basic construction of pant legs, pockets, belt-loops, and fly generally stays the same. Not to mention that cotton denim pants are less expensive for a young brand to produce than, say, a handbag made of buttery leather.
But not all premium denim labels are moving upmarket as a strategy for business growth. Paper Denim + Cloth, a maker of exclusive jeans once in the $100-plus range, is maneuvering in the opposite direction.
In mid-2006 the company began focusing on mass-market sales in the $80 to $90 range, taking it out of the "premium" category. At first, says CEO Chris Gilbert, he was interested in developing a low-priced second line—think Isaac Mizrahi for Target (TGT).
But keeping the Paper Denim + Cloth name "kept us from doubling our overhead and bringing in a second design team," says Gilbert. "Plus we realized we'd have instant recognition if we kept the same brand. We wanted to build on the cachet we've built over six years in business."
Gilbert says that the high quality of the jeans hasn't changed, the same premium cottons are used, but that they can offer the lower price-point by shifting manufacturing from Kentucky to the Dominican Republic, where all of the company's jeans will be made.
Paper Denim + Cloth now has a distribution deal, which started in June, 2006, with Federated Department Stores (FD), the largest conglomerate of department stores in the U.S. and operator of Macy's, Bloomingdale's, and other chains. The move broadens the range of customers from a boutique audience to a wider demographic.
And although the company is going downmarket, it is also following the lifestyle trend among its competitors by launching outerwear, sweaters, shirts, and other items targeted to a more mass-market audience.
Critics might see lowering price points and a larger distribution as brand dilution, but Paper Denim + Cloth's strategy reflects one of the realities of the denim marketplace: Although lower-priced women's jeans saw dips in department store sales in the year ending in November, 2006 (according to NPD Group), these lower price points still generate more overall revenue than their higher-end rivals. Jeans selling for $25 to $49.99, for instance, saw the biggest dip in annual department store sales, down 22.9% to $283 million, but that's still $80 million more than the total sales of $100-plus jeans.
The key for Paper Denim + Cloth and the more expensive premium-denim labels alike as they expand will be to keep their brands consistent and distinctive. As they translate their casual-chic brand identities into numerous new products and begin to compete with more established lifestyle brands such as Polo Ralph Lauren (RL), these premium-denim companies face a design and marketing challenge that will require more than just fancy stitching on back pockets.