Does Ralph Lauren See the Perfect Storm?

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\"RalphIf So, Is Stefan Larsson Up to Chief Navigator?

Let’s take a minute and talk about the three major storm fronts that seem to be colliding at the same time in the “House of Lauren.”  In my view, these fronts could be creating the horrific perfect storm that may very well tip the brand onto a slippery slope downward.  And if newly hired CEO Stefan Larsson turns out to be “no Roger Farah,” so to speak, the downward slide will accelerate.

Storm number-one began when COO Roger Farah left the company.  Arguably, he was the best strategist, as well as operating and business executive that Mr. Lauren ever had. Roger is considered one of the industry’s finest leaders, and his departure had to have been one of the major catalysts for the recent decline in Lauren’s sales and profits.  This storm alone — if it were happening in a normal, reasonably healthy geo-political and economic world and in a balanced, reasonably competitive and growing U.S. economy — could be viewed as a mere hiccup in a normally volatile industry and financial environment.

But that storm isn’t the only weather front, nor is it happening in a manageable, normal macro-environment.  Because the business decline is also happening at the onset of storm number-two. This second storm is causing the biggest and most profound transformation in the history of retailing. It is driven, indeed forced, by the full-on effects of the Internet, new technologies and globalization. And these disruptions are being uber-powered by the largest and most powerful emerging consumer culture since the boomer generation: the millennials, of course.

Finally, the third storm, which has been growing in intensity across the entire industry and is described by most C-level executives I talk to as the most destructive, uncontrollable and unavoidable storm of all. It is the absolutely insane pricing tactics and other forms of discounting that are spreading like a stage-four cancer throughout every sector of retailing, both online and off. Indeed, this storm alone is powerful enough to sink a lot of ships.  The perfect storm of all three fronts combined will leave a lot of retailers in its wake.

Does Mr. Lauren Understand the Power of These Storms?

My guess is that Mr. Lauren fully understands the effect of storm number-one on his business and likely why it’s happening. He probably believes it is controllable and correctable.  The simple answer of course, and with a not so light-handed nudge from his friends on Wall Street, grow baby, grow. How to grow is the $64K question.

And Mr. Lauren would have to be living on Mars not to see storms two and three brewing on the horizon. His son David clearly understands the digital and technological aspects of storm number-two, and is guiding many of the strategies that are transforming the business in those areas.  Also, with all of those very capable professionals throughout the organization, Ralph Lauren understands globalization and its enormous opportunity for growth.  Finally, the organization clearly understands the emerging millennial culture.  However, understanding all of the dynamics of storm number-two is one thing. How to turn those dynamics into growth is a totally different  — and an enormously challenging exercise.

Lastly, the final storm of discount madness and race to the bottom (particularly for a luxury brand like Ralph Lauren) is almost impossible to understand and totally impossible to control and avoid.

So, Ralph and company understands the storms and their various elements, but apparently as he sensed the potential destructive power of this perfect storm, he believed he needed a more skilled chief at the helm to navigate the business through to greater growth opportunities.  Accordingly, Mr. Lauren made the incredibly surprising decision to cede his CEO title to Next Gen, 40-year-old Stefan Larsson, current President of Old Navy, apparently believing he is a more skilled chief.

Is Stefan Larsson Seaworthy?

Mr. Larsson comes on board with the experience of 15 years as head of global sales for H&M where, according to some, he was instrumental in expanding the business across 44 countries to its current $17 billion in annual sales.  This was followed by his three-year stint as President of Old Navy, where he was successful in adding a billion dollars to Old Navy’s top line, reaching $6.6 billion in 2014, and turning it into Gap Inc.’s sole growth engine.

Not so incidentally, I point to the fact that he arrives with absolutely no wholesale experience.

Some of the immediate head winds Mr. Larsson will encounter as he takes the helm are a 5.4 percent decline in sales in the first quarter of the 2016 fiscal year, coupled with a 60 percent drop in net income.  Also, earnings before interest, tax, depreciation and amortization have fallen from 20 percent of revenues in its 2013 fiscal year to an estimated 15.5 percent for 2016.

Although the decline has been explained by costs attributed to a major restructuring and currency exchanges, Mr. Larsson will have to hit the ground running. He will have little time to develop his strategic, longer-term goals to achieve the level of profitable growth that Mr. Lauren has apparently hired him for.

Is Larsson up to it?

His track record at H&M and success in powering growth at Old Navy were the result of his supply chain skills and expertise in how the fast-fashion process works.  He was able to apply a hybrid version at Old Navy, increasing speed to market, thus turning out more new lines, more often and more efficiently than produced by traditional supply chain cycles (adding more top and bottom line growth).  Secondly, Mr. Larsson gained global retailing skills during his H&M tenure, which many analysts believe will provide greater impetus to Ralph Lauren’s international growth.  The general belief is that 30 percent of sales should be generated by each of the three regions of the U.S., Europe and Asia, while Europe is currently providing 20 percent and Asia, 12 percent.

So these are generally perceived to be Mr. Larsson’s primary skills, which would be effectively applicable to Ralph Lauren’s business.  However, I would point out that his skills were applied to value-driven brands, which would lead one to question how Mr. Lauren would find Mr. Larsson’s expertise in that sector transferrable to the luxury positioning of the Ralph Lauren brands. Furthermore, while one might assume Larsson honed his leadership skills during his three-year stint as President of Old Navy, as he takes the helm at Ralph Lauren Inc. he will immediately become the boss of many highly seasoned and accomplished professionals — many as his direct reports.  Of course I’m sure Mr. Lauren carefully weighed that fact into his decision to hire Larsson.

Oh, and then there’s that “no wholesale experience” thing again.

What might be a major positive among Mr. Larsson’s skills?  My speculation is based on the fact that a large (if not the largest) percentage of sales and profits are generated by Ralph Lauren’s more basic goods like polo shirts and khakis, sold through outlet stores and off-price distribution, as well as through mainstream retail sectors.  In my opinion, Mr. Larsson’s skills in the fast fashion supply chain process and its positive result of producing more new lines with greater efficiency is a synergy that could yield more profitable and sustainable pricing strategies — plus accelerated growth.  His experience could provide a huge defense against being sucked into the vortex of discounting, the uncontrollable storm number-three.  And I hasten to add that Larsson may have the strategy to protect against consumers’ perception of the devaluation of the Ralph Lauren brand.
Assuming this strategy, or a version of it is planned under Mr. Larsson’s watch, there is a huge “if” attached to it: “if” Mr. Larsson can implement such a strategy.

And, the successful implementation would be up against some major challenges emanating from storm number-two and the emerging millennial culture.  The millennials expect and reward such rapidly changing new lines at great prices from the likes of H&M, Zara and apparently Old Navy. But as designer Michael Kors expanded into all price point sectors of distribution, becoming ubiquitously accessible, the brand finds itself going from hot to cold and the financials are following suit. Is the Kors experience the calm before Lauren’s inevitable perfect storm?

Mr. Larsson will need to navigate a fine line between newer, faster, credible and great value for the brand, and more, newer, faster and just plain cheap.  Furthermore, this millennial generation is more brand-agnostic and fickle than the retiring boomer generation for two reasons: 1) they have unlimited and instantaneous access to thousands of equally compelling brands, (scanned through in minutes on their smart phones); and 2) they tend to make special individual choices that offer exclusivity and what they think looks cool on their own bodies, over the brands that have become ubiquitous, on every body, as being exemplified by the Kors experience.

How to give Wall Street infinite growth while maintaining scarcity and exclusivity has always been an oxymoron.  It’s a big reason why luxury fashion brands should not go public.  However, Mr. Lauren’s enterprise is just that, and he must live with it. Therefore, the oxymoron becomes strategy number one.  However, executing that strategy for this new generation of consumers is going to be a “storm number two” enormous challenge.

Regarding Mr. Larsson’s international retailing experience during his 15 years at H&M as head of global sales, one could ask how sales skills in the fast fashion space, and again in a vertically-integrated model with no wholesale experience, will add value to the global expansion strategies of a multi-faceted, more complex business.

So What’s The Answer?

I do not have an answer (or an opinion, surprisingly) regarding whether or not Stefan Larsson will be successful in leading the Ralph Lauren enterprise with all its brand extensions to a new, faster and more profitable growth trajectory.

I do, however, have a question that should raise many red flags.  Will Mr. Larsson, with the skills cited in this article, end up taking the brand closer to the race to the bottom, which is a debilitating downward slope to competing in the world of commodities. This is what much of our apparel world has become.

If so, than it’s not only bye-bye Stefan Larsson, but, bye-bye to the image of one of the greatest American brands in all of history.



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