J.Crew Needs to Make Big Changes to Survive Post-Bankruptcy
J.Crew Group’s bankruptcy filing in early May, the first of a national retailer since widespread store closures related to the coronavirus pandemic took effect, comes after years of challenges battered the company.
The parent company of the J.Crew and Madewell brands operates in a sector of the retail economy that simply isn’t what it was years ago. Apparel used to be 7% of overall consumer spending; it’s now down to only 2.4%. It’s still a $300 billion market, but J.Crew has been punished by shifts from specialty apparel to off-price and athleisure. The company tried to battle from within a shrinking boat as a classic prep-with-a-twist brand, a look that represented about 12% of the market a decade ago but is now down to only about 7%. Even within prep, J.Crew is seen as a “yesterday” brand, supplanted by hotter brands like Peter Millar (owned by Richemont), J.McLaughlin, Faherty, Rodd & Gunn, Rhone, and Rails.
J.Crew’s Chapter 11 filing will give it the chance to correct its biggest issues. It must reduce its cost structure and footprint because, like almost all specialty apparel retailers, J.Crew is over capacity in terms of supply versus demand. Historically, the company has tried to maintain an upmarket pricing position, and it has met price resistance from the consumer. There’s also the value of scarcity: If you can find something at every mall or outlet mall, it detracts from the brand’s value and prestige. Trimming the fleet makes sense. A key item in Chapter 11 is to reduce not just corporate overheads but also occupancy costs, which include about $23 million a month of rent.
J.Crew has about 180 frontline stores and 170 outlet or factory stores and about 140 Madewell stores. Before it entered Chapter 11, the company might have had conversations with landlords about exiting leases before their expiration and other steps to reduce its occupancy costs. Now, it can use the powers of Chapter 11 as a cudgel to exact rent concessions from its landlords even in locations it wants to stay in.
To its credit, J.Crew has shrunk its fleet over the past couple of years. But the company should shutter another 30 stores to get to around 150. J.Crew is in almost every outlet mall in the country, and those locations can be cut by about 40. Madewell is a different animal; for the short term, 140 stores is fine. The company won’t be able to spend much money to build up Madewell by 20 to 25 units a year. But over the next year or so, its store count could reach 150. In the long run, Madewell may be optimally sized at about 180 or even 200 if it expands to a true lifestyle offering, like Anthropologie, with home, decor, beauty, and some tech.
J.Crew also must take costs out of the system at the buying and merchandising line and optimize its marketing, promotion, and advertising. It needs to refocus marketing spending on social media, which tends to be less costly, especially when a retailer knows a lot about the customer.
Most important, however, is that J.Crew must rethink its consumer value proposition. Being just an overpriced prep brand is simply not a compelling value proposition today. Some years back, J.Crew tried going upmarket and into Williamsburg hipster style, but it didn’t work.
J.Crew has experienced longtime tension between serving its loyalists, the women who entered the brand in their 20s and stayed with it into their 40s, and bringing in younger customers. Young women in their early 20s into their 30s tend to view J.Crew as a brand where their older sister used to shop or, worse, where their mother used to shop. That’s a killer.
Even in terms of serving its loyalists, it ran into two problems: Their best customers were spending less while J.Crew had a pricing problem. It was viewed even by loyalists as too pricey versus anywhere else in the mall or online. The other problem that crept in was quality.
To pull through, J.Crew must revitalize the front end of the customer acquisition pipeline and create a point of view that appeals to younger customers entering their peak spending years. It could keep some of its classics, such as its blazers, and maintain the men’s side. CEO Jan Singer should bring in a team that will create a new look, the same way that Madewell has: something relatively simple but still lending it some style.
Over time, the company must employ a shrink-to-grow strategy. By working its pricing levers more appropriately, J.Crew can develop more profitability from everything it sells. The company won’t be burdened by as big an occupancy cost anchor around its neck. There’s a way back for J.Crew with all these steps, but the full fix may well take two years.
About Craig Johnson
Since 2001, Craig Johnson has been the President of Customer Growth Partners (CGP), a consulting and research firm serving the retail sector. He has over 35 years of senior corporate and consulting experience in marketing, customer service, demand forecasting, and consumer insight, for many of the nation’s largest retail and service companies. Mr. Johnson has been a regular guest columnist at Chain Store Age and Barron’s, and speaks on retail issues worldwide. He also appears on major electronic media, such as the CBS Evening News, Bloomberg, and in the Financial Times, New York Times, Wall Street Journal, and Women’s Wear Daily..
This article is adapted from the May 7, 2020, GLG teleconference “J.Crew Distressed Retail COVID-19 Spotlight.” If you would like access to this teleconference or would like to speak with Craig Johnson or any of our more than 700,000 experts, contact us.