J. Crew Group, Inc. Business Information, Profile, and History

History of J. Crew Group, Inc.

J. Crew Group, Inc. markets several lines of casual men's and women's clothing through distinctive catalogs, a chain of retail stores, and the company web site. Each year the company issues 24 editions of the J. Crew catalog, distributing more than 80 million copies. Its retail stores include 127 units in the United States, 45 of which are factory outlets, and 76 locations in Japan, which are operated under license by ITOCHU Corporation. J. Crew Group was owned by the Cinader family for most of its existence, but in October 1997 investment firm Texas Pacific Group Inc. purchased a majority stake in the firm. By the year 2000, Texas Pacific held an approximate 62 percent stake, a group of J. Crew managers held about ten percent, and Emily Woods, the chairman of J. Crew and founder of the J. Crew brand along with her father, Arthur Cinader, held most of the remainder.

1980s: Creation of a Famous Brand

Popular Merchandise, Inc., doing business as Popular Club Plan, was founded in 1947 by Mitchell Cinader and Saul Charles to sell low-priced women's clothing through in-home demonstrations. By the early 1980s, the owners of Popular Club Plan (which was by then under the direction of Mitchell Cinader's son, Arthur) watched as catalog retailers of clothing, including Lands' End, Talbots, and L.L. Bean, reported booming sales. In an effort to duplicate the success of these companies, Popular Club Plan initiated its own catalog operation.

The company focused on leisurewear for upper-middle-class customers, aiming for a Ralph Lauren look at a much lower price. Accordingly, Popular Club situated its merchandise in the niche between Ralph Lauren, on the high end, and the Limited, on the lower end. In an effort to connote a 'preppy' spirit, Popular Club Plan dubbed this operation 'J. Crew.' The first J. Crew catalog was mailed to customers in January 1983. Instrumental in orchestrating the J. Crew look was Arthur Cinader's daughter Emily Cinader (later Woods), who joined the company after graduating from college.

Over the next several years, J. Crew's catalog evolved a distinctive look featuring young, attractive models having fun in a variety of appealing settings. The pictures in the catalog appeared to be photographs from a house party of old friends, all of whom happened to be gorgeous and outfitted by J. Crew. Their catalogs often showed the same garment in more than one picture, worn by different models and coordinated with other products. As a result, customers could get a sense of how the garment looked on the body, how it hung and draped, and how it could be used with various items of clothing. In addition, J. Crew included close-up shots of the fabrics from which its products were made, helping to validate its claims of quality.

J. Crew closely controlled the production of its catalog, selecting images from more than 8,000 rolls of film shot each year and having all catalog copy written in-house. Catalogs with more than 100 glossy pages were mailed to customers 14 times a year. The company also maintained an in-house design staff to develop its products and carefully controlled the manufacturing process, hiring factories to produce garments to its specifications.

Throughout the mid-1980s, sales from J. Crew's catalog operations grew rapidly, as the catalog retailing industry as a whole experienced strong growth. During this time, J. Crew continued to refine its presentation and increase the number of people receiving its catalog. 'Growth was explosive--25 to 30 percent a year,' Cinader later recollected in the New York Times. Annual sales grew from $3 million to more than $100 million over five years.

With the success of its first catalog operation, J. Crew launched a second catalog program in 1985. Dubbed 'Clifford & Wills,' this operation sold women's clothing that was more affordable than the J. Crew line. In 1986 Emily Cinader was promoted to president of the J. Crew operation.

Despite the phenomenal success of J. Crew, and the prominent profile that the J. Crew catalog soon attained, internal management of the company was less than smooth. Both Cinaders, father and daughter, were reputed to be difficult to work with, and employee turnover was high. In 1987 the company suffered a setback when two high-level executives left to start their own catalog operation, Tweeds, which drew on the lessons learned and example established by the J. Crew operation. With a more European look, Tweeds was soon competing successfully with J. Crew.

Although J. Crew's sales continued to be strong throughout the fall season of 1988, when the company reaped annual sales of $100 million, by the end of the 1980s growth was beginning to slow in the catalog market as a whole. By 1989 rumors had begun to circulate in the apparel industry that J. Crew was in trouble and that the company might be up for sale.

Though these rumors were vociferously denied, it was clear that J. Crew would have to implement changes to sustain its vigorous growth. To begin with, the company undertook a number of steps to focus its attention on its most important and profitable units. In 1989 the company changed its name from Popular Merchandise, Inc.--a holdover from the 1940s, when the Popular Club Plan was the company's main business&mdashø J. Crew Group, Inc. In February 1989, the company announced that the Popular Club Plan would be sold to International Epicure, a direct-marketing food company. With the proceeds from this sale, J. Crew planned to help finance a broadening of its J. Crew enterprises, and to compensate, in part, for the fact that its operations were less solidly financed than those of many of its catalog competitors.

J. Crew also planned to expand into retail. In opening stores, J. Crew hoped to capitalize on the strong brand identity it had established through its catalogs, and also to tap the significant number of customers that did not shop through catalogs (company research suggested that 60 percent of clothes buyers did not shop by mail, and that only 15 percent of apparel customers bought a significant number of items from catalogs).

To avoid compromising its existing catalog operations, J. Crew set up its new retail branch as a separate unit within the company. The Cinaders hired Arnold Cohen, who had previously worked for Gucci, to head a new management team that would be in charge of a chain of J. Crew stores. The start-up staff for this arm of the company, dubbed J. Crew Retail, numbered 22. In order to minimize cannibalization of its catalog operations, J. Crew planned to make 60 to 70 percent of the goods offered in its stores unavailable through its catalogs. In March 1989 the first J. Crew retail outlet opened, in the South Street Seaport in Manhattan. With 4,000 square feet of selling space, this store was designed to appeal to the many members of the New York financial community who frequented the seaport. The company planned to open 45 stores in its first push into retail.

Five months after the opening of its first store, J. Crew added two new catalog lines: 'Classics' and 'Collections.' 'Collections' used more complicated designs and finer fabrics to create dressier and more expensive items, while 'Classics' featured clothes that could be worn both to work and for leisure activities, and acted as a bridge between the products J. Crew had originally offered and its 'Collections' items. With these lines, J. Crew hoped to further differentiate itself from its catalog competitors.

In the fall of 1989, J. Crew opened three new stores, each larger than the first, in Chestnut Hill, Massachusetts; San Francisco, California; and Costa Mesa, California. J. Crew chose these locations because they were in markets where catalog sales had historically been strong. Each of these openings was supported by print ads in local newspapers and magazines that featured images from the catalogs, with a line indicating the store's location. In November 1989, J. Crew also launched a national magazine advertising campaign. By the end of the year, this had helped to produce retail sales of nearly $10 million.

Despite 1989 revenues that were estimated at $320 million, J. Crew suffered a setback when its agreement to sell its Popular Club unit collapsed at the end of that year. In addition, rumors circulated that the company's Clifford & Wills low-priced women's apparel catalog was doing badly. J. Crew began to delay payments to its suppliers and lay off staff members.

Expanding Internationally in the Early 1990s

J. Crew embarked on an attempt to win greater sales from its existing catalog customers, noting that its expansion was limited by the relatively small segment of the population that served as its customer base, estimated at seven to ten percent of the population. J. Crew's target customer was young, educated, and affluent, with a median age of 32, some postgraduate education, and an annual household income above $62,000. 'I don't know if there are 20 people left in the country who are prime J. Crew prospects who haven't seen the catalog 10 or 20 times,' Cinader went on. 'So ... I think most increases will come from increased sales per person.' To bring this about, J. Crew broadened its line of merchandise even further, adding sleepwear, outerwear, working clothes, and versatile jackets. In this way, the company hoped to supplement its sales of low-priced items--such as its most offerings, T-shirts and socks--with higher-ticket purchases.

J. Crew saw revenues reach $400 million in 1990, but reported that its four existing stores had not yet started producing enough profits to cover their overheads. 'We're working on improving merchandise selection and we're working on strengthening the visual image,' J. Crew president Arnold Cohen told the New York Times. The next phase of store openings included outlets in Philadelphia, Cambridge, and Portland. The company scaled back its plans for opening retail stores from 45 stores to 30 or 35.

In early 1991 the company hired a director of new marketing development and began efforts to expand their sales across the Canadian border. In an effort to simplify the complications of doing business internationally, J. Crew 'Canadianized' its catalogs, including information on the payment of taxes and duties, the Canadian Goods and Services Tax, and customs requirements.

In April 1991, J. Crew mailed 75,000 J. Crew catalogs and 60,000 Clifford & Wills catalogs to potential customers in Ontario. Response rates to this effort were slightly lower than in the United States, but each order, on average, was higher. Clifford & Wills received an especially warm response, and a second mailing of 120,000 copies of this catalog took place in September 1991. The company benefitted from the relative paucity of catalog retailers in Canada, which made its brochure stand out better, but also made collecting names of potential customers much more difficult.

In the following year, J. Crew intensified its push into international markets by hiring a new vice-president for international development. The company already mailed hundreds of catalogs to customers in Japan and Europe, most of whom had become acquainted with J. Crew while traveling or living in the United States. In early 1992, J. Crew conducted a feasibility study to explore avenues for marketing its goods to customers overseas on a larger scale. In February 1993, the company completed an agreement with Japanese retailers ITOCHU and Renown, Inc., to open 46 stores in Japan, with estimated annual sales of $68 million.

Despite the economic recession at home, J. Crew racked up $70 million in retail sales in 1992, a strong increase from previous years. The company discovered that opening stores did not significantly hurt its catalog sales; in New York, in fact, opening a store increased catalog sales. But in 1993 the domestic retail expansion was once again curtailed because of a tougher retailing climate and the resignation of Cohen, who was the chief proponent of the retailing push. The following year, the head of the company's retail division, Gary Scheinbaum, resigned as well. Cohen's position as president was not filled for nearly a year, before Robert Bernard was named president in 1994.

Late 1990s: Texas Pacific Group and a Retailing Expansion

A turn of events came during 1994 when an increase in postal rates was soon followed by a sharp increase of 40 percent in paper costs. The catalog operations suddenly seemed quite vulnerable. A renewed retail push thereby emerged. In May 1995 David DeMattei was hired away from Banana Republic to head up J. Crew's retailing operations. At the time, there were fewer than 30 retail outlets in the United States. A dozen more were soon added, bringing the total to around 40 by late 1996. But J. Crew still lagged behind other cataloger-turned-retailers, such as Talbot's and Eddie Bauer, while the Gap, which perhaps had the product line most similar to J. Crew's, was operating 226 stores nationwide by the end of 1996. Even more troubling was the continued turnover among the company's most senior managers. Bernard resigned in 1996, with Cinader taking over his duties. Observers placed at least part of the blame for the management turmoil at the laps of Cinader and Woods, both of whom had reputations as micromanagers.

By mid-1997, with the company's retailing arm running 47 stores, J. Crew entered into negotiations with investment firm Texas Pacific Group Inc. regarding a leveraged buyout. The deal was completed in October 1997, with Texas Pacific emerging with about 85 percent of the company and Woods with the remaining 15 percent. Texas Pacific invested about $560 million in J. Crew to gain its stake, while the leveraged nature of the buyout increased J. Crew's debt from $86.8 million to $283.9 million. Texas Pacific planned to bolster J. Crew's retailing operations and eventually take the company public. The management situation was potentially improved following the retirement of Cinader. Woods became chairman, then in February 1998 the CEO slot was handed to Howard Socol, who was a former chairman of Burdines, a unit of Federated Department Stores. Meanwhile, J. Crew's mail-order operation felt a negative impact from the 1997 strike at United Parcel Service of America Inc., as customers curtailed their catalog purchasing. J. Crew laid off 100 employees in early 1998 as a consequence of the 1997 difficulties.

Also during 1998 J. Crew began to divest its noncore catalog operations, with the November sale of Popular Club Plan to Fingerhut Companies. Mid-year, Clifford & Wills was put on the block as well. The retail expansion continued in 1998 as 14 new stores opened their doors, bringing the total in the United States to 65. In January 1999, however, Socol resigned suddenly following ongoing disagreements with Woods over company strategy. Hired on as the new CEO was Mark Sarvary, who had headed up the frozen foods unit of Nestlé USA. By early 2000 Sarvary was given full day-to-day operational control over J. Crew, lessening the role of Woods and perhaps signaling an end to the management turnstile. As it prepared for a likely IPO in the early years of the 21st century, J. Crew continued expanding on the retail side, increasing the number of U.S. stores to 82 by early 2000. The company was also running 45 J. Crew factory outlets and had expanded into e-commerce backed by the company's first ever network television advertisements in December 1999. The retail expansion and the move into e-commerce was helping to reignite revenue growth but J. Crew's earnings were being hurt by high marketing costs and the burden of servicing still hefty debt.

Principal Subsidiaries: J. Crew Operating Corp.; J. Crew Inc.; Grace Holmes, Inc.; H.F.D. No. 55, Inc.; J. Crew International, Inc.; J. Crew Services, Inc.

Principal Divisions: J. Crew Mail Order; J. Crew Retail; J. Crew Factory Outlets.

Principal Competitors: AnnTaylor Stores Corporation; Benetton Group S.p.A.; Calvin Klein Inc.; Dillard's Inc.; Federated Department Stores, Inc.; The Gap, Inc.; Guess?, Inc.; Hartmarx Corporation; Intimate Brands, Inc.; J.C. Penney Company, Inc.; L.L. Bean, Inc.; Lands' End, Inc.; The Limited, Inc.; Liz Claiborne, Inc.; Loehmann's, Inc.; Marks & Spencer p.l.c.; The May Department Stores Company; The Men's Wearhouse, Inc.; Nautica Enterprises, Inc.; The Neiman Marcus Group, Inc.; Nordstrom, Inc.; Polo Ralph Lauren Corporation; Saks Incorporated; Sears, Roebuck and Co.; Spiegel, Inc.; The Talbots, Inc.; Target Corporation; Tommy Hilfiger Corporation.

Chronology

• Key Dates:

• 1947: Popular Merchandise, Inc. is founded by Mitchell Cinader and Saul Charles to sell low-priced women's clothing through in-home demonstrations.
• 1983: The first J. Crew catalog is mailed to customers.
• 1985: Clifford & Wills women's clothing catalog is launched.
• 1989: Company changes its name to J. Crew Group, Inc. The first J. Crew retail outlet opens; deal to sell Popular Club Plan falls through.
• 1991: Catalogs are sent to Canada for the first time.
• 1993: Through a joint venture, J. Crew retail stores begin appearing in Japan.
• 1997: Texas Pacific Group Inc. acquires a majority stake in the company.
• 1998: Popular Club Plan is sold to Fingerhut Companies.
• 2000: Clifford & Wills is sold to Spiegel Inc.