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Industrial Engineer magazine

WEB EXCLUSIVE: American Giant CEO discusses evolving relationship between brands, consumers

By David Brandt
Web managing editor, IIE

In the Case Study section of its November 2013 issue, Industrial Engineer took a look at the focus on quality by sweatshirt-maker American Giant. The California-based company has grown dramatically inside of its 21-month history largely thanks to Internet-driven intrigue and word of mouth, all of which its founder and CEO mainly credits to decades of change in the relationship between name brands and consumers in the U.S.Bayard Winthrop, founder and CEO of American Giant

In this Web exclusive, I asked Bayard Winthrop to elaborate about his thoughts on a renewed interest among consumers in “Made in the U.S.A.” manufacturing, and whether American companies are picking up on the value of sentiment.

Q: In our initial interview, we talked briefly about the relationship between brands, manufacturers and consumers. How have you seen that relationship get redefined in the past few years?

Winthrop: The interesting thing that’s happening in the market today is consumers are increasingly empowered to direct their dollars toward brands and products that mean something to them. I think you’re seeing that across many, many industries. What Airbnb is doing to the hotel industry, for example, is pretty fascinating – you’re stripping down what the value paradigm means to a certain set of consumers and changing what some subset group of the consumers is requesting.

In the case of apparel, if at the end of the day you believe that a quality product is going to drive customer loyalty, then looking at ways to look at eliminating all the ancillary costs around building great product, theoretically, should support driving and building a big brand. In our case, we stepped back and looked at what the problem was, as we saw it, in the apparel industry. We saw lots of investment in things we didn’t feel were directly related to customer value. And that was massive marketing budgets; it was incredibly onerous margin structures that were necessary to support very complex distribution mechanisms with massive markdowns and big distribution channels like suburban malls or big retailers like Kohl’s. All of those things are directly impacting brands’ ability to make great product. And we felt that consumers were saying, very rapidly, that they were caring less and less about that.

There was certainly a period of time when shopping a suburban mall was a valuable experience for consumers, but the consumers have long left that behind. And yet, most apparel brands were still stuck in a mechanism that required them to have a presence there and to investment money there.

Q: Also in the initial interview, we talked about cases such as the Ralph Lauren Olympic uniforms in 2012 and the public backlash that came with learning those uniforms were not made in the U.S. What do you think some American companies are neglecting to consider when they plan to move their manufacturing and/or supply chain overseas, if anything? Is there a reasoning beyond trying to cut costs?

Winthrop: Speaking on behalf of brands, I’m just hypothesizing here. If you rewound the clock to 30 or 40 years ago to when a lot of these great American brands decided to move production overseas – whether it was Champion, Levi’s, Red Wing, or any of these great, iconic brands – I think at that time there was a major movement toward suburban living, access to brands in places like malls and Main Street were growing, … when lower-cost alternatives were coming into the marketplace. And at the time, I’m sure it felt very rational and very thoughtful to try and drive down costs to get your product into the hands of consumers.

I think what was lost along the way is the conversation we just had – any number of those great brands I just listed really, when you get rid of all the nonsense, are built on building phenomenal products. The classic Levi, right? That brand was built on an idea that a pair of pants could last a generation. But I think when you lose sight of that, the impact may not be immediate, but over time I think the impact is pretty fundamental. I would guess that a lot of the brands that have moved overseas and allowed the quality to deteriorate maybe didn’t have a long-term view about the institutions there.

On the other hand, it’s a different world today. We live in a situation now where customers can shop online and care less about suburban malls, and I think it’s a lot easier to sit where I’m sitting and say, “Oh, you should have stood firm. You should have not tried to cut your cost dramatically.” The reality is that 30 or 40 years ago, that was probably a critical piece of the pie for them, so that’s only part of the answer.

The other answer is a more basic one. I think if you move your manufacturing thousands of miles away, the challenge to maintain quality gets greater. I think all those brands know that and thought that through. They’re all big boys and they know what they’re doing. It just gets hard, and I think some of the degrading quality you see across a lot of brands today is, in part, having manufacturing that is all over the world in many different factories very far away. But I think they all thought of that – I don’t think it was a surprise.

Q: Can a brand that’s backed by a large-scale operation like Levi’s or Gap overcome the negative connotations of utilizing an international supply chain or manufacturing base without nurturing homegrown operations in the U.S., similar to American Giant’s business model?

Winthrop: I think the question really becomes what the brand’s foundation is, so if it’s “American-made quality and value,” let’s say, and you’re making your stuff in Asia and the quality’s crap, then it’s pretty hard to overcome that. We’re living in a world where consumers have incredible visibility and knowledge and the ability to shift loyalty in a heartbeat. So if that’s the paradigm you exist in, then you’re in deep trouble.

If, on the other hand, the brand’s core value is something different – sex appeal or really cheap fast fashion – there are a lot of consumers that don’t really care about great quality or an “American-made” story. It really depends on your “premise.”

I think where it’s going to get tough is if you are in the business of trying to sell great quality and good value apparel, I think it is getting increasingly difficult to be investing big portions of your cost structure in distribution and massive marketing. I don’t think brands are getting built that way – I don’t think customers care about the distribution mechanisms as much. What ends up happening is that you’ve got a business that is selling direct, that can deploy much more of its overall cost structure into building great product and maintaining a great retail price, versus a brand that are stuck in an old model and they have continue investing in things that the customers care less and less about. So, it gets hard.

On the other hand, suburban mall fast fashion with a $9 dress or a $5 T-shirt at Wal-Mart, there will continue to be real markets and real customer bases that want that. There’s no question that there is still a market for really cheap, lower quality T-shirts, and that’s not going to go away anytime soon. Your question is rooted in what the core brand premise is about, so if the brand premise is around great quality and great value, it’s getting increasingly difficult to not really examine fundamentally your whole value chain to your customer and rethink the way you want it.

Q: We also talked some previously about American manufacturing as it was 40 years ago as well as today in terms of quality and efficiency. You said at the time that the industry business model has grown outdated to the point that companies which still subscribe to it can’t change with the times and their customers. What traits from 40 years ago could still be used today in an innovation or re-invention manner, and what traits of the old business model absolutely must go?

Winthrop: It’s easy to forget that 25 years ago, about 90 percent of the apparel worn by Americans was made in the U.S. There was then, and is now, a huge asset base of both human capital and equipment and physical plans that are wildly underutilized. One of the interesting things is taking advantage of a huge underutilized human asset base to go make great clothing. One simple component of this answer is you go throughout the United States and there is an incredible amount of very high caliber sewers that are there looking for work and factories that are underutilized. So a simple part of that answer is just unlocking the assets that are already there.

A slightly more nuanced, maybe more subjective, comment is I do think that there is a cultural orientation in the United States around quality. It’s kind of inherent in who we are as a nation. I don’t really know how to put that into words other than to say that when you get a manufacturing base roaring in the United States, there is a quality component in the product that’s almost in the DNA of the workers. That’s been interesting. To be clear, that’s not to say that there hasn’t been really good products coming out of China, India, South America, or anywhere else, nor the ability for workers to build all that stuff.

But I think there’s a cultural pride – the “Made in America” brand that we grew up around – it really does seem to come through. When we get into a factory and we get a bunch of sewers working on some of our product, there’s a look that’s reflexive of desire or understanding that, “Oh, yeah, this is going to get made this way,” that’s transmitting into a great product. We’re finding that there’s this great understanding about it means to make great stuff here.

Read the Case Study article in Industrial Engineer.

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