Fashion Industry

Esprit Not Dressed to Impress

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Esprit is a global brand but half its sales are made in Germany.
  • Why it matters

    Why it matters

    Esprit was once one of Europe’s biggest fashion retailers, but poor management and over-expansion have seen it overtaken by brands such as Zara and H&M.

  • Facts

    Facts

    • Esprit was founded in San Francisco in 1968but is now based near Düsseldorf in Germany.
    • In the past five years, its sales fell by a third to €2.2 billion ($2.4 billion); last year the firm lost €428 million.
    • José Manuel Martinez, a former executive at Spanish fashion giant Inditex, took over Esprit’s management in 2013.
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    Audio

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José Manuel Martinez, the chief executive of German fashion company Esprit, likes to make an analogy between his struggling firm and the fortunes of his favorite German football club, Borussia Mönchengladbach. The team, based in a town not far from Esprit’s headquarters near Düsseldorf, has a glorious past. But in recent years it suffered a worrying decline, only to mount a remarkable comeback in the past year and compete among Europe’s elite.

Esprit’s past is much the same – except it is yet to mount a comeback. The company has massive problems, and Mr. Martinez is still working on a return to the big time, competing with the likes of H&M, Gap and Zara, owned by the Spanish firm Inditex from where Mr. Martinez hails.

“With the right coach and strategy, Gladbach returned to the top echelon calmly and modestly,” he said. “I want to get back there with Esprit.”

It is still an open question whether the battered fashion firm will manage to resurrect itself. Years of bad decisions have eaten away at the company’s substance. The decisions led to, among other things, poor quality goods at excessively high prices; a bloated network of stores; and problems with large department store chains such as Kaufhof, Karstadt and P&C.

“Quality in relationship to price and fashion level – at Esprit, they didn't fit each other any longer.”

Jose Martinez, CEO, Esprit

In just five years, sales fell by a third to €2.2 billion ($2.4 billion). What was a meager profit of €20 million turned in the last fiscal year into a loss of €428 million. Nevertheless, the company announced that it has been debt-free since February.

“But when customers have abandoned a fashion brand, they seldom return,” said one former top executive in the fashion industry.

Esprit is one of the most high-profile victims of the radical changes that have been afflicting the industry. On the one hand, Esprit – like other established German clothes brands such as Gerry Weber, Tom Tailor, S. Oliver and Cecil – are experiencing the breakdown of their business models.

Such companies produce neither the type of high-end fashions displayed on the runways nor really cheap goods, and the firms also are often at the mercy of larger retailers. Competitors such as Zara, Massimo Dutti and Sweden’s H&M have low prices and keep everything from design to sales within their own organizations.

It is not company executives but consumers at cash registers who decide what is popular. The tempo in the industry has accelerated. Many suppliers who have their clothes made in Asia because of low costs can’t keep up. Zara manufactures primarily in Europe, and if necessary the brand can make substitutions within a few days for products that have flopped. H&M brings new products into its stores every two weeks.

To make matters worse, Primark is a new player that presents itself as super-cheap, and has the characteristics of a sort of cult: No advertising, no online stores, no product more expensive than €50. The newcomer from Ireland is thereby snatching away not only teens but also their parents. “Primark,” Mr. Martinez said, “is a great game-changer in our industry.”

 

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Esprit boss Jose Martinez came from Spanish fashion retail giant Inditex. Source: Esprit

 

Esprit, which is traded on the Hong Kong stock exchange, owes its decline to its own catastrophic mistakes.

“Precisely in the phase when H&M and Zara achieved such growth, Esprit betrayed weaknesses everywhere: In fashion, display-window design, store construction – all run-of-the-mill,” one German fashion executive said.

Between 1993 and 2009, management pursued a high-growth policy.

“The tempo of expansion was too extreme. As a consequence, it seemed to be everywhere,” said Kerstin Florack-Abromat, an analyst specializing in fashion stocks. She believes Mr. Martinez’s predecessor lost sight of the company’s target group – women aged 30 and older. If the store of an Esprit franchise partner was doing well, the first reflex was to set up one of Esprit’s own stores in the neighborhood.

“Not much thought was given to whether the location could really handle a second Esprit store,” said someone close to Mr. Martinez.

Mr. Martinez is hoping to get the company back on track by copying the competition’s methods. He recruited Inditex’s Arndt Brockmann, who as head of Esprit’s German operations is tasked with stabilizing business in the country. The German market represents 48 percent of the company’s revenues and thus is immensely important. Also on board at Esprit are former Inditex executives including Rafael Pastor, two other top-level managers and Jose Castellano Rios, who was Inditex’s chief executive.

Esprit was founded in 1968 in San Francisco by Susie and Doug Tompkins. Mr. Tomkins, an environmental activist and multimillionaire, sold his Esprit shares long ago and purchased huge tracts of land in Patagonia, a sparsely populated region in South America. He died earlier this month at the age of 72 in a kayak accident in Chile.

Mr. Martinez took over Esprit’s management in early 2013. The news that the new chief executive came from the admired Inditex company boosted Esprit share prices by more than 10 percent at the time, to more than €4. As head of sales and distribution at Inditex, Mr. Martinez had seen to it that T-shirts, dresses and jeans were delivered quickly and smoothly to the more than 5,600 stores of the Spanish fashion giant in 84 countries around the world.

But Esprit can’t be revamped at the push of a button: Simply transferring the Inditex formula to Esprit doesn’t work. Mr. Martinez says that his strategy is more a “living animal” that he constantly adapts to new situations.

The strategy isn’t entirely working, and the share price is stagnating at about €1. Mr. Martinez, who studied business economics in Madrid and in the United States and worked for nine years at McKinsey, nevertheless maintains a casual and upbeat demeanor. He says he can clearly see the problems Esprit created for itself.

Mr. Martinez is intending to close more stores or downsize them if he considers them to be too big.

“Quality in relationship to price and fashion level – at Esprit, they didn’t fit each other any longer,” he said.

In the meantime, the Spaniard has initiated many changes. When he began, the designers never got feedback from the sales division and 40 percent of the goods never made it to stores’ shelves. Today they work together in sections organized according to product groups, instead of engaging in complicated and time-consuming communication by e-mail.

“The way a pair of pants, a dress or a T-shirt was developed at Esprit, the collaboration between designer, purchaser and technical specialist, was inefficient and slow,” Mr. Martinez said.

And what ended up in the stores and, by luck, matched the taste of customers, was quite often too expensive, and the problem persisted for a long time.

“Our prices were far out of line with market realities,” Mr. Martinez said.

If the competition offered sweatshirts for about €30, Esprit charged €40 or even €46. The difference, however, wasn’t accompanied by especially modern cuts or visibly better quality. Mr. Martinez intends to change that and also reduce the number of suppliers from 352 to 226.

Mr. Martinez has also brought expenses into line with reduced revenues. Of Esprit’s 1,100 own stores at the time he took up his position, less than 900 remain. The number of employees has fallen from 10,700 to 9,000. Mr. Martinez is intending to close more stores or downsize them if he considers them to be too big. Since February, Esprit has been bringing out only four collections instead of 12 – one collection for each season. Each collection has 40 percent fewer items than before.

He has also reduced the dependence on large department stores. In the meantime, Esprit sells significantly more in its own stores or via franchisers than through external retailers.

But it is questionable whether all this will be enough. In addition to competition from Zara and Primark, there is increasing price pressure from online retailers such as Amazon and Zalando. In response, Mr. Martinez is taking a risk: The branch stores are supposed to issue customer cards. If the customer then shops at the online store of Esprit, the franchiser gets a cut of 5 percent of the purchases made by the customer. Jürgen Michelberger, head of digital operations at Esprit, says that he knows of no other brand that “shares its Internet business so generously with its retail partners.”

Even if the approach bolsters customer loyalty, it will reduce Esprit’s margins. Industry experts interpret the offer as a gift to soothe the spirits of frustrated franchisers who have lost patience with Esprit over the years and are now supposed to be kept on board with the conciliatory donation.

“I tend to doubt whether with a commission of 5 percent, these online sales are still even profitable for Esprit,” said Peer Hohn, the founder and managing director of the Phizzard in Berlin.

But Mr. Martinez is not altering his course and says he is optimistic. “Since we began introducing the newly developed collections into the stores in February, our retail business has started growing again,” he said.

He reported that the trend is continuing thanks to another satisfying season this autumn. “We are growing again in Germany and, in comparison to the previous year, attained higher growth than the rest of the clothing market.”

The company’s investors – the largest shareholders are the financial group Sun Life and the hedge fund Lone Pine Capital – have just extended Mr. Martinez’s contract indefinitely. But market observers are more skeptical.

“I’m not very optimistic that Esprit will achieve the turnaround,” said the head of a German fashion firm. “Basically, the brand has to be completely reinvented.”

 

This article originally appeared in the business magazine WirtschaftsWoche. To contact the authors: online@wiwo.de

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