Esprit Comes Home

By Michael Schuman

Heinz Krogner, Chief Executive of clothing designer and retailer Esprit, is one of the world's great turnaround artists. A decade ago, Esprit was a declining casual-clothing business. But Krogner rebuilt Esprit into one of the fastest-growing apparel retailers. Sales in the past fiscal year, which ended in June, probably topped $3 billion, nearly triple its revenues in 2001. In those five years, Esprit's market value has increased eightfold, to more than $10 billion, roughly on a par with Limited Brands and almost twice the size of Abercrombie & Fitch.

The comeback story, however, has had an ironic wrinkle: the U.S., where Esprit first became famous, has been left out. Though now its main offices are in Hong Kong and Germany, Esprit was founded in San Francisco in 1968, and by the 1980s its brightly colored knits and shirts were must-haves for any American teen. But today sales in North America account for only about 3% of revenues. Even Krogner admits that the brand "has lost its relevance" to the American consumer.

Not for long, he says. Esprit is plotting to replant and revive itself on its former home turf with new stores and a long-term investment plan. To succeed, the company must battle for the fickle American shopper with such entrenched chains as H&M and Banana Republic in a very crowded, hypercompetitive casualwear market. "They're inhabiting the middle of the pack, and it's going to be tough for them to break out," says Steve Harty, chairman of the New York City office of ad agency BBH. Consider the Gap, which is struggling mightily to find its fashion mojo. But the U.S. is absolutely crucial to Esprit's future. "We want to be a global player," says Krogner, 65. "Global means you have to be in the U.S."

There's encouragement to be found in other comeback clothing brands. Lacoste, whose trademark alligator had once adorned countless polo shirts, used celebrity buzz to restore U.S. sales; Abercrombie & Fitch transformed itself from a chain for paisley-wearing grandfathers to a hip shop for preppy youngsters.

Krogner has given Esprit a major makeover--administered with a touch of ruthlessness. A former management consultant, he joined Esprit's European unit in 1995 and quickly replaced the management. He applied a similar take-no-prisoners approach to Esprit's business model, moving the company upscale in both quality and customer. Once primarily a shop for teens, Esprit focuses on people in their late 20s. The new format revived European sales, now 85% of the total.

The performance must have impressed Hong Kong businessman Michael Ying, who controlled Esprit's Asia business. The Asian branch acquired the European outfit in 1997, and Ying later made Krogner global CEO. Krogner then exported his plan to Asia. Esprit has a strong presence in China, with 69 stores operated through a joint venture. Last year Esprit opened its first store in India, through a local franchisee.

Esprit is tapping into a new trend in apparel retailing called fast fashion that has been exemplified by H&M. Shoppers buy clothing more frequently and wear each item less often, in part because the prices are low. Esprit now replaces its clothing lines almost entirely each month. Not only does that give shoppers more new items to purchase each year, but it also decreases Esprit's risk. If one trend flops, a new one hits the stores a month later.

One trend American shoppers won't be seeing much of is the teenybopper pastel sweaters and T shirts that were once Esprit staples. Instead, the selection is more mature--khaki pants, jeans, striped shirts and white blouses. Although Esprit still sells basics, its designers add some clever flourishes to give the styles more panache. The company is positioning itself to sell clothing at prices 10% to 15% lower than Banana Republic's. Krogner calls Esprit clothing "for good girls. Not the one with a ring in her nose or showing her belly."

A U.S. turnaround could go a long way toward helping Esprit maintain its frenetic pace. "Because growth rates have started to slow down, they need to get into bigger markets where their penetration is low," says Macquarie retail analyst Ramiz Chelat in Hong Kong. Hello, U.S.A. By 2002, sales had fallen to $150 million, from $700 million in 1987, according to Macquarie. Krogner got control of Esprit's American business when Ying bought the U.S. trademark in 2002. (The company is now publicly traded; Ying owned 15.8% as of the end of 2005.) As part of the acquisition, Krogner forced a shutdown of Esprit's existing American operations to afford a fresh start.

That time Krogner stumbled initially. He tried selling through department stores like Macy's and Dillard's--a strategy that had been successful in Europe--but unhappy with the placement given his product, he pulled the brand out. (Esprit is still carried by Nordstrom.) Then in late 2004, he reintroduced Esprit retail stores and now has 15 stores and outlets, most of them in the New York City area, including a flagship in hip SoHo. Again, some of those locations flopped, so Krogner dispatched COO Jerome Griffith to oversee the U.S. operation. Krogner also plans to open five more stores this fiscal year in ultra-prime locations and intends to focus on the region from Boston to Washington.

Esprit intends to invest $20 million a year in the U.S. business, but some retail-industry watchers say it may need to get more aggressive. To win customers in the U.S., Esprit has to spend more on splashy marketing to create new buzz around the brand, they say. "Word of mouth takes a long time to spread," says Marshal Cohen, a retail analyst at market-research firm NPD Group. "They've got to do more than open doors. This isn't the Field of Dreams." Meanwhile, analysts complain, the brand still fails to resonate, especially with younger consumers who don't remember Esprit. Says retail analyst Emanuel Weintraub: "For young people, Esprit might as well be their father's Oldsmobile." Good girls may shop Esprit, but bad girls shop everywhere.

Krogner says his conservative approach is the best way to preserve Esprit's strong profits while his management team figures out the U.S. retail scene. "People have lost their pants" in the U.S., he says. "You don't do a marathon if you have the flu."

It could take five years, Krogner says, for Esprit to gain traction in the U.S. market. But he's starting to see some positive results. U.S. sales surged 83% in the first half of the 2005-06 fiscal year. "Why shouldn't we make it in America?" he asks. "It's our home." Or at least it was.

With reporting by Kathleen Kingsbury/New York