Forever 21's $10 club dresses, tank tops, glittery graphic tees and ripped
denim shorts have been closet staples for young women across the country
for years. The name is practically synonymous with fast fashion and
Forever 21's massive stores have become common fixtures in America
shopping malls. But the retailer is in trouble.
Forever 21 filed for bankruptcy in September 2019.
And now it's closing hundreds of stores as its clothes become more
interchangeable with cheap rather than trendy.
At its peak, Forever 21 was a household name in fast fashion, bringing in
more than $4 billion in annual sales and much of that thanks to a strong
business on its home turf, which was born out of the Los Angeles fashion
scene. The real problem is that Forever 21 just isn't all that popular
outside the U.S..
It failed to localize and understand fashion taste in other countries as
it built stores too big and too fast.
Forever 21's international business has been hemorrhaging cash, burning
through more than $100 million annually since 2014.
And it hasn't been making enough back in America to recuperate those
losses. Yet hungry for growth forever 21's owners, the Chang family, just
kept on expanding its international footprint.
Between 2005 and 2015, the company opened more than 200 stores globally as
part of its bankruptcy proceedings, Forever 21 says it plans to exit most
of its international locations in Asia and Europe closing dozens of shops
globally. The company hasn't pegged an exact number on those plans as
conversations with landlords remain ongoing and Forever 21 is still
fighting for rent reductions.
When it filed for bankruptcy, Forever 21 had 785 stores, and analysts
argue that was far too many.
Now, Forever 21 is the story of a failed global retailer that's still
trying to bounce back.
In 1981, 22 year old Jin Sook and Do Won Chang touched down in L.A.
from South Korea. In 1984, the couple opened a 900 square foot store
called Fashion 21 in Los Angeles.
It sold 700000 dollars worth of merchandise in its first year in business.
In 1987, the family renamed the business to Forever 21 and that's also
about the time the Chang started calling on their family members to help
them open additional stores outside of L.A..
They started in Houston and in Northern California, and it worked.
Soon they were opening a new Forever 21 store almost every six months.
By 2001, Forever 21 had 122 stores and it opened its first store outside
of the U.S. that year in Canada.
It had 370 by 2005 and seven of those were overseas.
International growth really picked up from there.
It entered China in 2012, Brazil came in 2014, by 2015, Forever 21 had 251
locations outside of the U.S.,
spanning 40 countries across five continents.
This was also about the time that fast fashion was really heating up.
Retailers were making clothes faster than ever at affordable prices, all
while offering mainstream consumers budget versions of runway looks.
Shoppers worldwide weren't buying clothes like they used to, and companies
weren't making them like they used to.
Clothing production globally doubled from 2000 to 2014.
The number of garments produced annually topped $100 billion for the first
time in 2014, and the number of garments bought by the average shopper
worldwide jumped by 60 percent from 2000 to 2014.
Meanwhile, across most categories of apparel, shoppers by 2014 were
keeping their close about half as long as they did at the turn of the 21st
century. The ability to now capture on the runway within seconds.
Take the picture, mock stuff up, duplicate, go back to the design team,
create a fabric that is reasonable that we we can afford to do price of
the X. Launch it.
And that's what happened.
So that the entire digital landscape has contributed because of the ease
of technology, the use of technology as fast fashion retailers expanded
their reach within the US.
They took bites out of Forever 21's business.
Forever 21 lost its share of the apparel and shoe market in the US in 2016
as Zara H&M.
slightly gained share.
Where as Zara and H&M being able to be successful is they create a
foothold here and then the scale of the market creates that chimney effect
where it really allows them to take off rather quickly.
And once they have established a foothold here and establish the logistics
and merchandising capability of the way that they're able to very quickly
start to add to that base of business without having to recreate a lot of
a lot of new infrastructure.
As of 2018, H&M and Zara are the top two apparel and footwear retailers
globally, while Forever 21 ranks 17th forever ended 2018 with a 0.3%
share of the clothing and footwear industry.
While Japan's Uniqlo, which entered the US in 2005, had 1.1
percent, xorra had one point two percent and H&M had 1.6
percent share. But while these rivals found fans in the US, Forever 21
wasn't as warmly embraced outside of its home country.
The Chang's probably didn't realize back in 2015 that their business was
about to go downhill fast.
At the time, Forever 21 had 43000 employees and was doing $4.1
billion in sales globally in 2014.
American Eagle, which Forever 21 calls a similarly inexpensive peer, did
3.2 $8 billion that year.
Urban Outfitters, another so-called peer, did 3.32
billion that same year.
The Chang's were also crowned one of America's wealthiest couples with a
combined net worth reaching an estimated $5.9
billion. The couple had said it wanted to double its company sales by 2017
and open hundreds of new stores by then.
But those dreams would never be realized forever.
21's international business was in shambles.
Its styles weren't resonating in markets where it failed to dig in and
understand the kinds of clothes local consumers wanted.
The sizing was off, too.
I think that's such a huge issue for all brands.
When when any brand, so many American brass items for anyone come overseas
and just say, well, hey, you know, it works at home or just plunk it down
or walk them to the consumer will call.
And that's just brought us safe from the truth in reality.
The company also appeared not to do enough market research into the
shopping habits of international consumers.
A 2019 report from The New York Times cited employees who told the paper
that Forever 21 sometimes didn't understand local labor laws.
One worker told the Times that Forever 21 moved into Germany without
realizing stores in the country were typically closed on Sundays.
Employees also told the paper that Forever 21 made mistakes, like not
recognizing that customers in some European countries shopped for winter
merchandise earlier in the year than American consumers.
Understanding the market share is probably the biggest challenge that
retailers over war.
The second one is just the complications of local rules and local legal
contracts involving products in our countries is is different even if your
insides might be free.
And lastly the labor markets in these in these countries are also very
different. In 2015, the company admitted the majority of the international
stores were unprofitable because of high labor costs and the fact that
it's close weren't resonating with customers in Europe and Asia.
It said sales back in the states were actually relatively strong, but its
global operations were becoming a huge drag and a bigger burden than a
blessing. Matters became worse when Word of Forever 21's poor financial
standing started to leak.
Factory operators in China were pressuring the clothing retailer for money
payments to subcontractors and stores where as much as 30 days late.
Forever 21 declined to give comment to CNBC about each of these reports.
Global sales would fall from $4.1
billion in 2014 to 3.1
billion in the 12 months into July 31, 2019.
The company said its stores in Canada, Europe and Asia have been losing
roughly $10 million per month on average over the 12 months from September
2018 to September 2019.
Big stores, both overseas and in the U.S.
have become a burden for Forever 21.
It used to be the bigger the store, the more and all customers would be
when they walked in. Without the Internet, retailers needed aisles of
shelves, thousands of square feet to be able to showcase all their
merchandise. After the Great Recession rocked some American retailers in
2008 and 2009, Forever 21 said it jumped at the chance to scoop up vacant
stores at cheaper prices.
It bought locations from some of America's largest retailers Forever 21
ahead by 2015, opened in 90000 square foot store in Times Square, New
York, a 94000 square foot store in San Bernardino, California, and a
127,000 square foot store in Las Vegas to name a few examples.
The average H&M. store is closer to just 20000 square feet,.
Forever 21 setup shops overseas in prime retail destinations like on
London's Oxford Street.
That store was closer to 30000 square feet in China along Shanghai's east
Nanjing Road. The city's bustling commercial district, Forever 21, had a
roughly 75000 square foot flagship shop.
Now e-commerce has changed the need for such great size and scale.
Clothing is moving online, but Forever 21 admits compared to its peers,
Forever 21's online sales as a proportion of its overall sales are low.
Forever 21 launched its Web site in 2005 and has said only about 16
percent of its total sales come from the Web today.
Analysts would argue the same.
They've been focused on their stores and late to the online game.
In 2017, only adding to its glut of real estate, Forever 21 launched a
standalone beauty concept store called Riley Rose to rival Ulta and
Sephora. But that could be written off as just another distraction in
bankruptcy proceedings all stand alone, Riley Rose stores are set to
close. Another issue has been the overall strain that such rabid real
estate expansion put on Forever 21's supply chain.
Bankruptcy documents say the large format stores forced Forever 21 to
create complicated assortment strategies and triggered inventory
management challenges.
It became more difficult for the company to get close quickly to stores,
something known as speed to market.
The company said its European and Asian stores undermined Forever 21's
ability to nimbly bring inventory to market and by extension hurt its
worldwide profitability while distracting the management team.
Forever 21 admitted, it ended up not buying enough inventory in twenty
seventeen and then bought too much in 2018.
It would end up with duplicates of the same styles when it didn't need
them. That led to another big problem, Forever 21 stores across the world
felt too cluttered.
With the physical presence, when you got to a Forever
21, whether it's in Jakarta, whether it's in Shanghai or whether it's New
York, the stores look to disheveled.
Shoppers also increasingly started calling out Frevert 21's clothing as
cheap, and Zora's was seen as a higher end, but still affordable option.
The Chang's finally fell from Forbes billionaire ranks in July of 2019, a
final prelude to Forever 21 heading to bankruptcy court.
The bankruptcy shows just how difficult it can be to go global.
The failures often come when companies aren't prepared to invest in the
local markets, to build out a local supply chain and to understand what
shoppers there are looking for.
One bright spot has been Latin America, which Forever 21 says is its
strongest outside of North America, with roughly 96 percent of its stores
there generating positive cash contribution from September 2018 to
September 2019.
Analysts say for average 21's clothing has resonated more in that market
from a style and price perspective.
The Latin American market also has seen less of an influx of competitive
fashion players compared with parts of Europe and Asia.
You know, the question is not so much going watch what you
saw, but what you get along with customers.
Certainly we already knows that they really care.
They care when you go into your store and it's not merchandise.
I that just going back to a rational watch because the customer
can be very unforgiving.
Forever 21 has said in bankruptcy documents about its future: "In an ever
shifting retail landscape that has seen dozens of casualties over the last
several years. The traits that initially led to the success of Forever 21
collaboration, grit and creativity are the same traits that will propel
Forever 21 through these Chapter 11 cases successfully..."
Forever 21 declined to participate in this video when asked by CNBC.
Now, as it looks to right, the ship Forever 21 says it will try to refocus
its product assortment, streamline its supply chain and grow sales online.
It says it will try to get better at being trend right.
It learned what didn't work in Asia and Europe, and it will try to apply
those lessons as it fights to win back American shoppers.