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January 22, 2007

THE JOURNAL REPORT: BOSS TALK

VF's New Math

(Strong entrepreneurs) + (financial controls) = growth
By RAY A. SMITH
January 22, 2007; Page R4

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Over the past five years, Mackey J. McDonald has transformed VF Corp. from a manufacturer of Lee and Wrangler jeans and underwear under the Vanity Fair label into the largest apparel maker in the world.

In doing so, the 60-year-old chairman and chief executive has snapped up a diverse portfolio of brands ranging from the North Face to Nautica and Vans to the John Varvatos design house.
THE JOURNAL REPORT
1

Wyeth's CEO discusses2 sales tactics, TV ads, finding new drugs and consumer resentment. Plus, what management skills do you need3 to save a struggling company? Debra Cafaro should know. See the complete Boss Talk report4.

They're all part of his strategy of assembling so-called lifestyle brands that appeal to different groups of consumers, while providing faster growth than the company's legacy brands. The challenge for Greensboro, N.C.-based VF, which now has annual sales of $7 billion, has been striking a balance between giving the brands, which also include Reef and JanSport, autonomy and helping them grow into meaningful contributors to VF's bottom line.

Mr. McDonald, a former U.S. Army pilot and 23-year VF veteran who took over as CEO in 1996, says the company chooses brands with strong identities that it believes would benefit from VF's financial muscle and relationships with retailers. And while the brands continue to operate independently, he centralizes functions like technology and finance. He likes to say that the brands provide the "art" and VF provides "the science." We spoke with Mr. McDonald about the importance -- and challenges -- of diversification. Here are excerpts:
The Consumer Fragments

THE WALL STREET JOURNAL: What are some of the top challenges the apparel industry as a whole faces? MR. MCDONALD: The No. 1 challenge is the fragmentation of the consumer. The customer's needs are based on lifestyle, culture and activities. It is a challenge and it is also an opportunity for a company. What you don't find today is the major trends in apparel that you used to.

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For example, in jeans, where everyone is sort of moving in the same direction. Or short skirts or hem lengths. Today it is fragmented more and more. So you need to be very focused on each individual segment. WSJ: Is that one of the reasons VF Corp. has decided to move from being solely a big manufacturer and building a portfolio of smaller lifestyle brands? MR. MCDONALD: It was certainly driven by the changes going on with the consumer. We began to see that the consumer is fragmenting and they need more areas than the current brands we had. They also are moving more toward brands that really say something about who they are and what they do. It's more important that [the brand] makes a statement about the fact that you are an outdoor adventurer. When you think of Reef, you think surfing. You think of the whole attitude and lifestyle of surfing. It gives you the opportunity to, one, emotionally connect with the consumer, but also it gives you a lot more different product categories to use that brand to sell product to the consumer. WSJ: How do you fold these brands into VF, yet allow them to retain their characters? MR. MCDONALD: We have what I always refer to as a centralized/decentralized organizational structure. When we acquire a brand, we would like to retain the entrepreneur who really developed the brand. We want to leave it in the same location because that's where the culture is. And the people who do that sort of just stay as part of it. It doesn't always happen that way, but that's our ideal situation. And so we give them autonomy, and empower them to make decisions about targeting the consumer, the products that they are going to deliver to the consumer, the pricing, distribution channels, the marketing. All of that stays with that entrepreneur, who is really passionate about the brand and close to the customer. But then we provide the support that helps them take advantage of the synergies of a large organization and disciplines that many entrepreneurial companies don't have. Part of it is what we call the art and science of the business. We have the art through these acquisitions, from the people who are there. And then we bring science to it, which is some of the controls such as finance and forecasting. We have, for example, an office in Hong Kong that has 600 people in it. They are doing a lot of the sourcing and quality-control checks. Making sure the fabrics are labeled. Making sure that shipments are on time. We can bring a lot of those synergies to the business. There are other sciences also that relate to studying the consumer. We take a lot of these research capabilities and we help the marketing groups do studies that help them understand the consumer. Those are all synergies that we bring.
Creative Room

WSJ: In the free-standing stores for your brands, such as John Varvatos and the new Nautica stores, there is a strong sense of identity in everything from the architecture to the props. Is the idea to give brands the creative room to do what they do best?

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MR. MCDONALD: It is critical, autonomy. That's the way that we are able to put this portfolio of brands together. Because to be honest with you, it is a lot easier to get people really passionate about the brand versus being passionate about a corporation. As a large corporation, we have our values, which are very important things across the corporation. We believe in being open. We believe in being very direct. We tell them the good news and the bad news. We want the brands to have their own abilities. We don't want people to think, "Well, this is VF Corp." So the identity is what he drives, what he decides, and it is how he presents his brand. That makes the marketing to the consumer much more powerful. The connection with the consumer is much more powerful. We talk to people quite often. The last thing they want to do is be part of a big corporation. But our best selling tool for that is just to talk to them. They help us make those decisions. They help us make the best financial plans. They make strategies. We make sure the strategies make sense so we get the return on investment. This is where it is hard sometimes. Because a lot of times they want control over everything. And that's the trouble. We don't end up making an acquisition with those kinds of people. The reason acquisitions fail nine times out of 10 is because all parties aren't totally upfront as to what happens. Most times, something is going to change. We try to be upfront about these things. WSJ: And that's going to vary from brand to brand. MR. MCDONALD: It does. And it also varies on the other side. There are some people who are ready to cash in and are ready to move on. And in those cases, if you have a powerful enough brand, then we look [to see] if we have someone else who is in the organization that can go in and then can drive the business. WSJ: Would that apply to Nautica, whose founder, CEO and chief creative officer, David Chu, left a year after you acquired the brand in 2003? MR. MCDONALD: In that case you had the founder, the designer, the driver of that brand who was at a point in his career when he wanted to do something else. We planned out a transition period, how the transition would occur. We worked through that and brought in people who had the right background to be a

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driver of the brand. And that worked extremely well. That's not our purpose. Our purpose is to continue, because we already know the track work of the individual who built it. But at the same time, he had a brand that was strong and that has good consumer recognition. WSJ: Did Nautica require more involvement from VF Corp. in terms of the business but also the creative side? MR. MCDONALD: We did a lot of research with the consumer to understand exactly how Nautica was positioned in their minds. And also what they expected in the product lines. A lot of that work was infused to help give some of the really talented merchants and other people who were part of Nautica information they really didn't have. And that's where we have a lot of tools for people who have the creative skills, but don't have the information.
Why Some Deals Don't Work

WSJ: There have been some examples in the apparel and retail world of a giant acquiring a smaller company and things don't go so well. Why do collaborations like this sometimes not work out? MR. MCDONALD: Every situation is different. But there are some really general themes you find in those that don't work. I believe that the primary cause usually is not a good, clear understanding on both sides of what was going to happen as a result of the acquisition. Because there are differences in the way a large corporation operates in most cases and the way an entrepreneur controls a business. And you really have to have good, clear, honest discussions about what isn't going to change and what is going to change. I think that there are two things that really helped us in the last five years in the acquisitions. The reason was we don't change everything. There are things that we want to keep in place. We can make an acquisition and we want that entrepreneur to stay. Not only does he stay, but stay engaged and feel empowered to feel like they are driving a business. And they are making the decisions. But also understand that there are going to be financial controls that we are going to bring. And our people are going to be part of the organization and help make that happen. And we have all that clear upfront versus coming later and saying, "Here is your new operations guy" or "Here is somebody who is going to be looking over your shoulder."
--Mr. Smith is a staff reporter for The Wall Street Journal in New York.

Write to Ray A. Smith at ray.smith@wsj.com5

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