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New York Times, Sunday, June 25, 2000
Money & Business, Section 3, Page 1
Tough Jeans, a Soft Heart and Frayed Earnings at Levi Strauss
By KARL SCHOENBERGER
SAN FRANCISCO—Robert Haas, the beleaguered chairman of Levi Strauss & Company, has a problem on his hands that few people outside the company fully appreciate: endangered family values.
Mr. Haas is the scion of a proud San Francisco clan that for five generations has owned and managed Levi with an unconventional devotion to principles as well as profits. But now, with sales falling and profits scarce, a new pragmatism has taken hold.
A new chief executive has been recruited from outside the family. In the last three years, half the headquarters staff has left or been replaced. And a plan to pay hundreds of millions of dollars in bonuses to employees has been canceled.
Even so, financial results disclosed last week suggest that the company has only slowed its decline. Sales continued to deteriorate in 1999, and the company -- after a huge restructuring charge -- was barely profitable.
Back in 1996, Mr. Haas made a risky decision to address family disputes and the lack of a family successor through a leveraged buyout that consolidated ownership within a group of relatives who shared his values.
But to pull it off, Levi took on $3.3 billion in debt. And while dissident family members and senior employees who sold their stock were handsomely rewarded, the timing could not have been worse for the company.
Soon after, Levi, the world's largest manufacturer of branded apparel, saw its sales go into a free fall. The company, whose founder began selling the original patented blue jeans to gold rush prospectors in the 1850's, woke up to find its market deteriorating. Mr. Haas, acknowledging that his company had fallen prey to complacency and sloppy management, says it hardly noticed that its iconic blue jeans were losing their appeal to the young.
"There's nothing as blinding as success," Mr. Haas said in a two-hour interview last week. "It's easy to get inbred and forget that businesses go through cycles. We took our eye off the ball. I plead guilty as the C.E.O. in charge."
The Haas family's paternalistic management was the first principle to be compromised. Long after his competitors had rushed to use cheaper contract labor in developing countries, Mr. Haas resisted the dry efficiencies of globalization. Now, after 29 plant closures and the layoffs of 18,500 people -- nearly half the work force -- the company has moved the bulk of its jeans production into contractors' hands overseas.
THE debt, meanwhile, though reduced to $2.3 billion, continues to pressure the company -- interest costs actually rose last year -- and to crimp its ability to retool.
Prices for Levi's bonds, now publicly traded even though all the company's stock is privately held, sank to as low as 50 cents on the dollar last year. They rose to the still-dismal level of about 80 cents only after the company decided to open its books wider to investors in April, by, among other steps, making quarterly announcements of its results.
Levi Strauss is still reeling, too, from a chaotic management shake-up in January 1999, when the company's president, Peter Jacobi -- a Levi veteran who had been in charge of operations only a year -- retired under a cloud with no replacement in sight. The situation did not begin to settle down until September, when the leading candidate to replace Mr. Jacobi demanded Mr. Haas's title of chief executive -- and got it.
Mr. Haas bashfully stepped aside and brought in the candidate, Philip A. Marineau, a corporate turnaround specialist and marketing strategist who ran the North America division of Pepsi-Cola. Mr. Marineau, 53, had distinguished himself as an executive at Quaker Oats by turning Gatorade, the sports drink, into a mass consumer brand.
"This enterprise is too big and there's too much at stake to leave it to genes alone," Mr. Haas said in the interview. "What we need is professional and competent leadership."
Under the leadership of a cola war veteran, Levi Strauss is fighting on several fronts. First, it must overcome deep skepticism among bond investors and make a convincing case that triage has put it on the track toward recovery.
More specifically, it has the urgent task of fixing persistent delays in its distribution to stores, which have worsened the sales decline. The big test comes in late summer, when Levi needs to get orders on retailers' shelves in time for the new school year -- a test that the company has failed miserably in recent years.
Equally important is a need to revitalize its most important asset, its legendary name. Without the aura of the Levi's brand -- which long stood for authenticity, fashion, quality, personal freedom and even political consciousness -- the company might have been just another purveyor of denim pants.
The brand also benefits from the company's social values. Levi's history is rich with episodes illustrating the Haas family's belief that there is more at stake in business than profits, and that this ethical orientation is ultimately good for business.
The company kept idle workers on the payroll during the Depression, then became a pioneer in integrating factories in the South in the 1950's. Amid the rising furor over contractors' exploitation of foreign workers in sweatshops, Levi set a standard in 1992 with a global code of conduct for protecting worker rights. When some monitoring groups criticized Levi as not living up to its code, the company responded by allowing outsiders to have a closer look at its contractors. Doing the right thing, Levi's leaders reasoned, guards the brand from scandal.
As the latest example, Mr. Haas cites the generous severance and retraining benefits offered to employees of the factories that the company closed over the past three years. Those gestures earned Levi grudging praise from its unions. With the exception of angry protests in Europe, where five factories were closed, workers greeted their termination with quiet resignation. Severance and restructuring costs totaled $1.5 billion.
"I don't want my tombstone to read: 'He shipped a billion pairs of jeans,' " said Mr. Haas, 58, who kept the flame of a small denim-colored candle conspicuously burning on his office table during the interview. "I can sleep better at night knowing that the package we put together for our displaced people provided them with far more benefits than what is conventional."
IF laying off American workers seems at odds with the family's values, Mr. Haas has proven himself willing to trim excess capacity. Shortly after he became chief executive in 1984, he closed 27 plants and dismissed 10,600 employees. "You have to have a financially viable business," he said, "or all the words about values can ring hollow."
But if Mr. Haas remains company philosopher, Mr. Marineau has championed the cause of pragmatism. He says he shares Mr. Haas's principles, but wants Levi to operate more as a conventional business. "Levi's is unique in how strongly it states its values and aspirations," he said. "My goal is not to reinvent the values, but to make them relevant to the market and the experience we are in."
Employees credit Mr. Marineau with improving company discipline. He started by cleaning house.
He inherited personnel problems that were perhaps symptomatic of the organization's decay. There were allegations of embezzlement: in one publicly disclosed case, an administrative assistant in the customer relations department was arrested after being accused of stealing $224,000 by double-billing expenses and making personal charges on a corporate credit card. She pleaded guilty to theft and tax evasion and made full restitution. And there were recurrent sexual-harassment accusations, including a lawsuit, settled out of court, involving an executive in the Dockers division.
In Mr. Marineau's drive to improve company performance, about half of the 1,800 employees at Levi's Plaza, the corporate headquarters near downtown San Francisco, have been replaced with new recruits over the past three years, said Dan Chew, a spokesman.
While Mr. Haas is measured and self-critical, Mr. Marineau is an exuberant pitchman who argues that the second-quarter earnings report is a positive one, showing as it does that annual sales declines have slowed from double to single digits. He says stability is just around the corner.
STILL, those results suggest that sales will end up well below $5 billion this year, a steep decline from the $7.1 billion peak in 1996. Last year, sales were $5.1 billion and net profit -- after a huge $500 million write-off as that year's share of the restructuring costs -- plummeted to $5 million.
The first such financial disclosures, at a company that has long resisted public scrutiny, came in April. The company filed to register $800 million in debt with the Securities and Exchange Commission, seeking to allow wider ownership and trading. But the disclosures also represented Mr. Marineau's new policy of openness. Abandoning the company's traditional insularity will help instill greater discipline, he said, and enhance the value of the brand. "We're sitting here trying to be as transparent as possible," he said.
If Levi's new exposure helps raise investor confidence, it also reveals how far the company has fallen. In the 1996 leveraged buyout, which ended the employee stock plan, the company promised its workers bonuses of a full year's salary in 2002 if certain financial goals were met. By last year, the company was so far from reaching those goals that the bonus plan was canceled.
The company also warned in its filings that its debt had retarded its ability to compete with other companies that are less leveraged. "Debt does sharpen your focus," Mr. Haas acknowledged. "But we feel that we have the financial breathing room to accomplish what we need to do."
Mr. Marineau has no plans to build stores around the nation like those run by its rival, Gap Inc. Levi has only a few stores, continuing to sell mostly through other retailers. It began selling jeans on its Web site in November 1998, but stopped this January after running into logistical problems and a disappointing response.
Nor does Levi plan to grow through acquisitions, as its other major competitor, the VF Corporation, owner of the Lee and Wrangler brands, has done. Levi's share of the $12.2 billion domestic jeans market has dropped to about 14 percent, down from 31 percent in 1990.
Levi says it expects to have enough cash to promote renewed growth. But instead of building factories or stores, the company plans to shore up its brands. With new products on the way this fall, it is increasing its advertising budget, shifting from cryptic mood advertising aimed at younger audiences to more ads that focus on products.
THE company has credited steady growth in sales of Dockers, its casual men's clothing brand, with offsetting erosion in blue-jean sales. But the growth of the Dockers line has leveled off, and Mr. Marineau envisions only a small expansion in its 22 percent share of the company's revenues, at least in the near future. This fall, Levi plans to extend its successful Slates brand of men's dress trousers to men's and women's pants, jackets, shirts and accessories like belts.
More important is the denim division, where Mr. Marineau plans to place greater emphasis on setting fashion trends, especially in women's clothing. Denim still accounts for 76 percent of Levi's sales.
To win back American youth, Mr. Marineau is counting on what the company calls "Engineered Jeans," coming this fall, which he says have already been a hit in Europe and Japan. Company executives boast that the jeans' slanted back pockets and skewed seams have ergonomic advantages and enough fashion appeal to bestow a halo on the entire denim division.
If debt analysts are gaining confidence in the company's financial stability, apparel analysts are still unsure about Levi's fashion sense and its new leader.
Harry Bernard, an apparel industry analyst at Colton Bernard in San Francisco, says he thinks that Levi Strauss should stop trying to be a fashion innovator and instead hone its core business of selling competitively priced jeans.
"I believe they'll be around for a long time to come as a major player," Mr. Bernard said. "But they'll never again be a leader in fashion trends for young consumers."
He expressed doubts about Mr. Marineau's grasp of the complexities of the jeans business. "He was tremendously successful in taking Pepsi ahead of Coke, but all he was marketing was brown water in a can," he said. "He simply has to have the time available to transfer his skill sets to the crazy fashion industry. It's totally emotionally different."
Mr. Haas, however, remains confident that he has found in Mr. Marineau a capable chief who also subscribes to the business principles that distinguish Levi Strauss from its competitors.
Because the company no longer has so many of its own workers left to benefit from its paternalism, the real measure of its sincerity in putting values on a par with profits may come in the overseas factories where most of its products are now made. After a decade of nimbly skirting controversy, Levi withdrew production earlier this year from the Pacific island of Saipan, where allegations of labor violations are persistent.
Company executives say they must remain vigilant. On May 15, an e-mail message to employees from Mr. Haas, Mr. Marineau and Karen Duvall, a vice president in charge of Levi's supply chain, warned overseas executives that, even while the company was floundering, they must not try to cut costs by skirting the code of conduct.
"We have always said that the true test of management's commitment to our values is how we will behave when times are tough," the message said. "Make no mistake: despite current challenging business conditions, our guidelines are not negotiable."
BUT if Levi's code of conduct has inspired the adoption of similar policies by many other companies, it still isn't easy being the first to put company values on the line.
"When you set your standards high, it becomes a huge risk, because if you can't live up to them you risk being called a hypocrite," Mr. Haas said. "I'd rather have that then have the risk of being part of just another conventional company."
GRAPHIC: Photos: One task for Philip A. Marineau, left, Levi's president and chief executive, and Robert D. Haas, chairman, is to fix distribution delays. At right, a plant in Blue Ridge, Ga. Most jeans production is now overseas. (Peter DaSilva for The New York Times); (Robin Nelson for The New York Times)(pg. 12); Two of more than 500 workers at the Levi Strauss plant in La Bassee, in northern France, who were laid off in March 1999. (Associated Press)(pg. 13); (Tony Cenicola/The New York Times)(pg. 1)
Charts/Maps: "Shrinking, Worldwide"
In 1996, when its sales peaked at $7.1 billion, Levi Strauss employed a global work force of 37,500. Over the next three years, the company announced plans to eliminate more than 18,500 jobs, cutting its work force nearly in half and closing 29 of its manufacturing and finishing facilities. Like much of the garment industry, Levi Strauss now relies heavily on overseas contractors. Maps show plants in operation at the start of each year, along with the job cuts and plant closures announced.
Three plants -- one each in Australia, the Philippines and Indonesia -- are not shown; all have remained in operation through the period.
(Sources: Levi Strauss; Securities and Exchange Commission filings)(pg. 13)