Nau Is Then

The hip green clothing label with an unconventional approach to style, materials, and retailing calls it quits. What went wrong?

When the founders of Portland (Ore.)-based Nau first came together in 2005 to lay the groundwork for a sustainable fashion company, their strict eco-principles and innovative e-tailing strategy appeared to be ideas whose time had come. Its stylishly minimal clothes in muted colors, made of sustainable materials such as organic cotton and recycled polyester, went on sale in 2007 and appealed to outdoorsy types and city dwellers, tapping into the growing green fashion trend. Nau's few bricks-and-mortar stores were eco-friendly showcases for products, but customers were encouraged to buy online with a 10% discount. And as part of the company's social enterprise initiative, 5% of all sales—from a $38 tank top to a pair of $138 "lean jeans"—were handed over to nonprofit organizations, chosen by the buyer.

"All the ingredients were in place for this business," recalls Ian Yolles, vice-president for brand communications, about the startup's corporate, design, and brand philosophy. Indeed, in its first and only year of operation, Nau attracted a cult following; Even today its Web site is jammed as the company sells off remaining stock at half-price. But at a board meeting in Portland on May 1, the directors decided to shut it down, just two weeks after its L.A. store had opened.

So what went wrong?

Nau's business model, with its multiple retail channels and sophisticated product line—as well as a heavy commitment to the ideals of sustainability, including tracing the origins of the wool it used back to the sheep in New Zealand—was not only ambitious but capital intensive. Yet Yolles believes it was largely external factors, from the liquidity crunch to a general nervousness among investors about retailing in a recessionary environment, that contributed to Nau's demise. Taken together, "these issues raised larger questions," Yolles says, about the viability of the fledgling business.

Solid Start

Nau started out on a solid footing, with executives like Yolles and Chris Van Dyke, son of entertainer Dick Van Dyke, all with experience at companies like Nike (NKE) and Patagonia. Before the market went sideways, it raised $35 million from private investors, private equity firms, and hedge funds. This went toward research and development of the company's signature sustainable fabrics and design of its quirky, slim-fitting style. A third-party distributor working out of a Portland warehouse was contracted to handle online sales. Nau opened five stores—in Chicago, Portland, Seattle, Boulder, Colo., and Los Angeles—and had plans for more this year in San Francisco and Boston as well as second stores in Portland and Seattle. Staff grew to 60 at the Portland headquarters, with about 40 sales associates in the stores.

By the end of the first fiscal year, sales "had met or slightly exceeded targets," Yolles says, although he declined to provide figures; $250,000 had been donated to charities. But Nau had burned through its initial capital and wasn't forecasting profitability until late 2009 or early 2010. It needed further financing to open more stores and pump up revenue but was struggling to persuade investors and board members to pledge more money as the economy and the retail sector deteriorated. In the end, Yolles says, the company was $5 million to $10 million short of its financing goal.

At Once Fresh and Bland

Retail analysts agree Nau brought fresh ideas and a sense of social responsibility and green awareness to its business. But they also suggest some aspects of its retail model and design approach were flawed.

Take the clothes. Many fashionistas and design insiders say Nau raised eco-chic—famous for resembling formless, floppy yoga pants or pajamas—to a new level.

"They did a fantastic job creating something out of the ordinary in the eco-fashion frame of mind," says Cheryl Roth, co-founder of OrganicWorks, a New York eco-focused branding company. "It was different, and very cool." But others considered the Star Trek-like snugness and neutral colors pricey and uninspired.

"There was a sameness to the merchandise, a certain blandness," notes Candace Corlett, president of WSL Strategic Retail, a New York consulting company, about Nau's color palette of charcoal grays and chocolate browns. "Even if you wanted to participate in the goodness idea of Nau, there weren't a lot of items you felt you just had to take home."

Yet subdued colors and a pared down silhouette were part of Nau's performance-meets-sustainability-and-beauty package. Colors were constrained because the company banned toxic dyes and finishes, which often give clothes brighter, sharper colors. As for the style, Yolles says the idea was to make it last and appeal to consumers for at least 10 years, through the ups and downs and changing tastes and colors of "lifestyle" fashion.

The Price of Nontraditional Retail

Critics say Nau might have been more successful by adopting a traditional retail strategy, including setting up boutiques within department stores. This would have broadened the brand's awareness and placed the clothes in a setting amid a wider variety of styles and labels. In a department store, "you get tons of traffic and hints about what works and what doesn't," explains Howard Davidowitz, chairman of Davidowitz & Associates, a New York retail consultancy and investment bank.

Another mistake, he says, was Nau's relatively small, low-impact stores, which averaged 2,000 square feet. These were located in different settings, including traditional closed shopping malls, and in Chicago, the best-performing store, on a busy shopping street of boutiques in the Lincoln Park neighborhood. Still, says Davidowitz, "customers don't want a small selection in tiny stores. They want a large selection at a good price."

Selling through department stores, however, would have meant rethinking Nau's corporate philosophy. The company wanted to keep total control over its product presentation, which might have been altered by department stores that tend to cherry-pick what styles they prefer. "We wanted to present the products and our rich story, and design the customer experience, and that would not have been possible" in department stores, says Yolles, who does not regret the decision.

Delayed Gratification

With an emphasis on online shopping, the stores also created the perception that one of the most important elements of retail—a shopper's instant gratification of walking out of the store with purchase in hand—might not be met at Nau.

But that wasn't exactly the case. Customers could view all Nau merchandise in the store, try on what they wanted, and then decide whether to buy on the spot and take it home or order online at an in-store computer kiosk (about 45% opted for online, more than Nau executives had anticipated). While stores did stock "every color and size of every model," Yolles says, and typically restocked twice weekly, the dual strategy meant Nau kept less inventory on hand than conventional retailers. This reduced store square footage, staff size, and the ecological footprint. But, he acknowledges, "there was the possibility that, like at other stores, you wouldn't be able to get what you wanted."

Perhaps Nau was too fashion-forward, with its higher production costs—the company's sustainable fabrics cost 10% to 20% more than commercially available offerings—and unusual products, like a $32 men's boxer made of a biopolymer derived from corn, sold in a new age-y store. While Nau's prices were comparable to like-minded retailers Patagonia and North Face, they couldn't match megaretailers such as Steve & Barry's, whose $8.99 dresses sold in massive, unadorned stores are wildly popular in tough economic times.

Retail consultant Corlett says shoppers like to keep things simple. "The concept of going into a Nau store and seeing a sparse presentation and unfamiliar products without racks and racks of clothes, and then choosing a charity, and possibly going home without the purchase—it's too complicated for anyone," she explains. "We're just not ready for that."

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