LONDON, United Kingdom — It’s not every day that you get to meet a CEO who oversees a fashion brand which does more than $7 billion in sales at retail. Indeed, Calvin Klein is one of the most successful American fashion businesses of the last 25 years.
But the Calvin Klein business is markedly different from many of its peers (particularly those based in Europe) in that it is almost entirely a licensing business, with scores of different agreements with partners who design, produce and sell Calvin Klein branded products from underwear to jeans to fragrances, and then pay a royalty on sales back to Calvin Klein.
In recent years, while some other fashion brands have been buying back their licensees, Calvin Klein has continued to push forward with a model that was born early in the history of the business, when Calvin Klein himself was still designing for the brand. Based on the success of this model, the Calvin Klein business was acquired by PVH Corporation in 2003, a massive brand conglomerate which also owns other licensed fashion brands Tommy Hilfiger, Van Heusen, IZOD, ARROW and Bass.
The day after a dinner in London to celebrate the Design Museum’s new home at the former Commonwealth Institute, I sat down with Tom Murry, chief executive of Calvin Klein, to learn more about how he makes this licensing model work.
BoF: Having grown up in North America, Calvin Klein was a brand that was everywhere I looked. But here in Europe, the brand doesn’t seem to have as much of a presence. Could you talk a little bit about your priorities for the European market and how this compares to your presence in Asia, where I understand your business is quite big?
Tom Murry: It’s deceiving what you observe, and sometimes this is different from reality. We actually do about 30 percent of our business in Europe, 50 percent in the US and about 20 percent in Asia. So we actually do more business here [in Europe] than we do in Asia.
We also have more free-standing stores here than we have in Asia. Our business model for Europe is primarily a free-standing store model. We do sell to department stores, but the most important part of our business model for Europe and Asia is free-standing stores.
BoF: Stores directly owned and operated by you?
TM: No, not directly owned by us. We operate primarily a licensing model, so we want our licensees to operate a lot of those stores directly. It’s a model that works very well. If you have really good licensees and philosophically they are on the same page — that is, as it relates to protecting the brand while they are growing revenue — then it works very well.
We are fortunate enough to have this today, but it wasn’t always that way. We have been here for 15 years now and we have weeded out the bad [licensees] and replaced them with good ones, Warnaco is our biggest licensee and we have a very good relationship with them, it’s a global jeans license; a global underwear license.
BoF: Yes, I understand that in all there are more than 40 licensing agreements across multiple geographies, and product categories. I’m curious about the decision to operate the business in the way that you do, when so many other brands seem to be buying their licensees out to take things back in-house. When a lot of the operations and consumer-facing elements are managed by others, you might not have as much control as you would were you to own everything. But the flipside is that to grow the business you require less capital to open stores, for example.
TM: Actually the way it works, we have complete control. We control everything. Our contracts are incredibly comprehensive. If you were to walk into a store, there is nothing about that store that we didn’t design or approve. The location, the design of the store, retail fit out, the fixtures, often the product mix that goes in there, all the creative, all the advertising, whether it be institutional or co-op advertising, the visuals.
Now having said that, we have over 700 free-standing stores around the world, and many, many more points of sale and shop in shops, but we really track the free-standing stores as they are really important branding platforms as well as revenue drivers.
BoF: How do you oversee such a vast network of stores to ensure the consumer experience and brand communication are in line with your vision?
TM: It’s difficult. We can’t really keep an eye on 700 different stores and more, so that part relates back to my earlier comments about having a licensee that’s on the same page and understands that it benefits them as much as it benefits us to protect the brand and do the right thing for the brand, and follow the guidelines we set.
We do spot checks all the time, all over the place, and we do have offices in Milan, Hong Kong and Tokyo. If we do see something we are not happy with, or we don’t agree with, then we communicate immediately with the licensee and get it fixed up.
We didn’t really sit back 15 years ago and say, ‘You know what, we are going to operate a licensing model instead of an operating model.’ What happened was we already had a big licensing business.
BoF: From the legacy of Calvin Klein himself?
TM: Yes. I remember sitting with Calvin, probably 14 or 15 years ago, and talking about [our] need to hire people all over the world to watch everything, not quite to that effect, but we need this large army of people to make sure all of licensees are doing the right thing wherever they are.
I said, ‘I understand the concept but it’s not practical, we’d have to hire thousands of people.’ From a financial standpoint that would not be feasible. What we needed was to get rid of some of these bad licensees, and replace them with world class, top quality, professional people that want to protect the brand as much as we want to protect the brand. So that’s what we set out to do..
BoF: And you also control all the marketing in-house?
TM: Yes, we have an in-house advertising agency, we have an in-house PR firm, we have a large in-house design organization, which either designs virtually every bit of product in the whole world or approves it. Philosophically, We don’t always care as much who designs it as long as it’s great product and looks like Calvin and we approve it.
BoF: Do you think the consumer understands the relationship between all of the Calvin Klein sub-brands? You’ve even launched apparel off CKOne, which itself started as a fragrance line. With so much different branding around Calvin Klein, how do you keep it straight in the consumer’s mind?
TM: Anytime you operate in multiple price zones, there is a risk of some confusion, whether it’s us, Armani, Ralph Lauren or any others. Ralph Lauren is an incredible company, and they have even more zones than we do.
In the research that we do, when speaking to consumers [we find that] they look at it more simplistically than we in the industry do. To them it’s all Calvin Klein and if they come into a store and they like the product, they buy it. They don’t think ‘Oh wow this is confusing to me, because which Calvin Klein is this?’ It’s Calvin Klein and they purchase it.
We’ve done seven or eight studies over the years, not only in the US but throughout Europe, I think that’s the way it breaks down. But each one of our sub-brands stands for something different: the prices ranges are different; the target consumer range is different.
But having said that, I think we are in all the businesses, for the most part, that we should be in. We get requests every week. Almost anything you can think of comes across my desk and of course we turn things down. The first thing we [ask] in any new business category is: ‘Is this going to be brand enhancing?’ And if we are sure it’s going to enhance the brand then we will start to think about the revenue opportunity.
BoF: Of course, the one business that you do own and operate in house is Calvin Klein Collection, designed by Francisco Costa and Italo Zucchelli. And just based on my very rough, back-of-the-envelope calculations, it’s a very small part of your overall business and probably represents quite a large cost: the shows, the advertising, the designers. What is the role you see for Calvin Klein Collection as a marketing tool and what role does it play as a business that actually contributes to the bottom line?
TM: Well it’s not a business that contributes to the bottom line and it probably never will be. For us, it’s a marketing expense and we generate an incredible amount of editorial that is based on being in that business. The PR department creates over $400 million a year in equivalent editorial, which is massive and which we believe has a very significant impact on our brand image globally. It’s a very small business, but a very important business. It’s the only business we are in that doesn’t lend itself to the licensing model. The reason for that primarily is that it requires a lot of investment to do it right and it’s usually not a money maker, and if it is a money maker it’s fairly minimal in terms of the return.
The business was slowly going down, so we brought it back in house with Spring 2009 and we’ve steadily been improving the business: the execution, the delivery, the quality, the consistency, all of those things which requires a lot of capital. But, we feel that it’s worth it and we are still not anywhere near where we expect to be. It’s a ten year project, it’s not a five year project. We are very, very committed to it because we really want to develop a commercial success that matches the press success that we are currently enjoying and that’s going to take time.
Right now, our fastest growing business is in Asia. We are doing very well there and we are talking to a luxury retailer over there about them taking over all of Asia, opening flagships in Shanghai, Beijing.
I spend more time on that little business than any single little business, because (a) it’s very important and (b) because it’s the most complicated business we’re in.
BoF: If Calvin Klein Collection is generating $400 million of press coverage for you, is that ultimately what drives the sale of underwear and fragrance? Have you been able to draw links between the two?
TM: It’s very hard to quantify. What we do hear when we do consumer research is that it impacts what they think about the brand; what they see as the brand image. From a practical standpoint, every time we dress one of these celebrities they end up in all of the grocery tabloids. Those absolutely influence the department store consumer for example. The people that generally shop in grocery stores and read those magazines aren’t luxury consumers, but that consumer is influenced by that and we get a tremendous amount of coverage. This year, the increase in coverage we had at all of the awards shows was amazing. It was like three or four times the previous year, so that’s really important, really significant. We believe as a return, it’s probably more brand image than it is driving someone to a store to buy something, but we still consider it to have very significant value.
BoF: If they can’t buy a Calvin Klein Collection gown, then maybe they can afford Calvin Klein underwear?
TM: Underwear is usually how a young person is introduced to this brand, more on the men’s side than the women’s side. We’ve learnt this from research too. The first item they’d have was a pair of Calvin Klein underwear.
BoF: When I think of Calvin Klein underwear I think of those Kate Moss ads; those Marky Mark ads. It was really the first aspirational product for that kind of consumer with that kind of fashion branding. But that model has been rolled out, not just by fashion companies like Armani and D&G, but by all sorts of other companies. Can you tell me a little bit about how you see your position in the market and how you protect the equity that you’ve built?
TM: There is more competition and it is more difficult, yet it’s still great business and it’s still growing between five and ten percent every year off a big, big base. The way that we do that is through very frequent product innovation and very powerful marketing that supports it. That’s the way you stay ahead.
CEO Talk is BoF’s forum for in-depth discussions with the fashion industry’s global decision makers, conducted by BoF founder and editor-in-chief, Imran Amed.