Back in September, menswear label Five Four sold out of a new $325 peacoat in one week. Buyed by strong orders from retailers, including Macy's, designer Andres Izquieta ordered luxurious fabrics from an Italian mill.
"I was thinking we were going to have a new category of $300 to $500 coats for fall 2009," says Mr. Izquieta, 28 years old. His co-chief executive, Dee Murthy, also 28, was confident, too; indeed, he had splurged on a new Aston Martin Vantage sports car for himself in March.
Alas, when world markets crashed the following month, consumers snapped their wallets shut. Many of the retailers that sold Five Four's trendy, casual jackets, shirts and other heavily detailed pieces canceled orders or backed out of payments.
Suddenly, Five Four found itself in free fall. "I feel like I woke up the first week of October, when everything stopped," Mr. Murthy says. The founders of the Los Angeles-based company would have to act quickly.
In the aftermath of last fall's credit crunch, the future is unclear. But as businesses like Five Four traverse the new terrain, they are creating long-lasting changes that will affect all consumers -- from where clothes are produced to their price and quality.
Marketing guru Paco Underhill predicts that the business world "will change more in the next five years than it has in the past 100." The process isn't purely destructive. "Each time something is gone, it frees up room," Mr. Underhill says. Five Four's scramble -- ranging from its rethinking of supplier and vendor relationships to an expansion into socks, rather than $500 coats -- show the evolution under way.
Knowing that only the agile would survive, Mr. Murthy and Mr. Izquieta worked quickly last fall to save their seven-year-old company. The line of $500 coats was out. They decided the new price had to be below $200.
At six o'clock one evening, Mr. Izquieta emailed the Italian mill operator to cancel the $17-a-yard fabric order. The mill operator immediately dropped his price to $7.50 a yard. "I could tell from his tone that he was under water," the designer recalls. The Italian textile industry is known for high quality and better factory working conditions, but numerous designers are fleeing its high prices.
Mr. Izquieta, too, had to put cost-cutting first. He located a mill in India that would produce a worthy fabric for $2 a yard, reducing the retail price of the coat to $185.
Meanwhile, lenders were shutting off credit to Five Four's vendors and many of the 1,000 stores that sell its clothes. For November, it had orders worth $1.2 million -- but only about $100,000 came from retailers with sufficient credit. "We had to figure out ways to ship these customers their winter orders," Mr. Murthy says.
He called retailers, saying, "This is a vicious cycle. If you can't pass credit, I can't sell you these goods, and if I can't ship you the goods, I can't stay in business." The solution: Five Four shipped on faith -- accepting post-dated checks, personal credit-card payments, and even verbal IOUs. "They offered any terms we wanted," says Dan Kogan, chief executive of Emoda, a retailer with stores in Philadelphia, Atlanta and online.
When one over-embellished shirt style sold poorly at Atrium, a store in New York, Five Four took it back and sent other shirts. "Their price was significantly lower than most of their competitors, given the quality of the goods," says Ivo Nikolov, Atrium's menswear buyer.
Mr. Murthy and Mr. Izquieta laid off four employees, bringing their work force to 25, and cut all advertising. They pulled out of the trade shows where they had sought new retailers. They stopped using airmail to ship some goods to and from their manufacturing facilities in China. They dropped the thread count of some woven shirts to 40 from 50. When their landlord declined to renegotiate their Los Angeles warehouse and office lease, they found new space for 50% less.
The survival plan was to help keep their existing retailers in business by making extra accommodations and to drop prices 20%. Both turned out to be important measures in cementing relationships: When Emoda cut its brand portfolio to 120 labels from 280, it doubled down on Five Four.
Back when Mr. Murthy and Mr. Izquieta launched Five Four while students at the University of Southern California (deriving the name from college slang they used when saying good-bye) the fashion world seemed to offer surprise riches. The first jeans they made, five years ago, cost $14 to make and carried an intended retail price of $68. A day before the pants shipped, a friend commented, "Nobody buys jeans for $68. You should sell them for $110." The partners snipped off the tags that night -- and the jeans blew out of stores at the higher price.
But to raise cash these days, Five Four is manufacturing just about anything that will turn a buck: backpacks, wine-bottle openers and socks -- three pairs for $20. They're cutting out middlemen by selling direct to consumers on their Web site and in pop-up stores -- a trendy retailing concept in which shops open for just a few days or weeks.
Five Four's net sales wound up flat at $8 million in 2008. With widespread store closings among their retailers, the brand is being sold in 800 stores, down from 1,000.
On a recent day at Five Four's office, Mr. Izquieta said he's still ambitious. "I want to create our generation's Polo. You can't be a megabrand in the U.S. today if you're selling a woven shirt for $200," he said. "I think the concept of luxury is passé."
Moments later, the company's chief financial officer stepped into the room with more disquieting news: Their buyer at Macy's had just been laid off, leaving Five Four with no relationship at a key customer.
Meanwhile, Mr. Murthy laments the end of his love affair with his still-new Aston Martin. It's nearly paid for, but he's convinced people give him dirty looks. "I always wanted a sports car. Now I'm like, 'What a stupid purchase. What did I think I was proving by buying that?'"
ARTICLE COURTESY OF THE WALL STREET JOURNAL
LINK TO ARTICLE: http://online.wsj.com/article/SB123440697707875869.html
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