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Published Sep. 13, 2005

Not so long ago, the 501 defined what was cool about blue jeans: They were simple and rugged, and above all, they were yours. They took your shape, they frayed in all the right places, and they had that understated red tab that said "Levi's."

How suddenly cool can turn to cold. In the young, hip world of fashion, the 501 has become the brand of jeans your father wears.

And therein lies a problem for the nation's pre-eminent jeans manufacturer, Levi Strauss & Co.

The denim market is raging, but Levi Strauss has been losing ground to designers such as Calvin Klein, private-label brands such as J.C. Penney's "Arizona" and high-fashion niche players such as "Buffalo Jeans." Levi's sales dipped last year for the first time in more than a decade, its market share has slipped, and at the headquarters of this comfortable, family-run business there is a definite sense of urgency. Plants have been closed, employees have been let go, and everyone is talking about the need for change.

"I think our company was both blessed and cursed with our incredible success over the last 15 years," said Gordon D. Shank, president of the company's North and South American operations. "Success can also be seductive _ so seductive that we believed everything we were doing would serve us well forever."

Levi's rode the wave of baby-boomer demand for several decades and profited handsomely from that relationship _ first as the blue jean of choice and then, with the launch of Dockers in the mid-1980s, as the khaki pants of choice. But one day, this company that had always catered to youth and activity woke up to discover that that its core customers, the baby boomers, had become decidedly middle-aged.

Company executives agree about what they need to do _ create a hipper, younger image that can attract today's youthful shoppers. Thus the company is rolling out new styles for Dockers and Levi's, looking for hip new places to sell its products, working with a new advertising agency and, for the first time in its history, considering outsiders for senior management positions.

"The key to brand management is remaining relevant, contemporary and young," Shank said.

Breathing fresh life into a 145-year-old, family-owned company is like turning around a battleship. This, after all, is a giant retailer with $7-billion in sales and 38,000 employees. Yet moving quickly is critical if Levi's is to regain its edge in the fast-changing world of fashion.

Not only have styles changed, with flare-leg jeans and baggy pants setting the tone, but also a host of department and specialty stores that were once customers have become competitors. They have poured millions of dollars into the creation of mega-brands that compete head-to-head with Levi's and Dockers. Levi's may have invented jeans, but now it is playing catch-up.

"I think they're probably inebriating themselves with a belief that appealing to and succeeding in attracting the young crowd would solve all their problems," said Kurt Barnard, president of Barnard's Retail Trend Report. "The problem is oversupply, tremendous competition, pricing. Those are things they have to deal with. . . . Their problems are to a large extent outside of their control."

The people who run Levi's sprawling headquarters here insist that the company isn't becoming unzipped.

"We own jeans," asserted Robert Holloway, Levi's hip, hyper, jeans-clad vice president of global marketing, whose office walls are covered with Hollywood posters.

Like most marketing executives, Holloway has a way of distilling the task at hand into a few simple phrases, and he does the same for how the company went wrong. "We took our eye off the ball," he said _ the ball being the consumer. The company was spending too much time focusing on itself, its achievements and its retailers, while not worrying enough about how consumer dynamics were changing in the marketplace, he said.

But it wasn't easy to suggest new ideas, new styles or a new image when everything was going well. In Levi's risk-averse culture, developed through decades of dominance, no one was motivated to rock the boat.

But the boat began rocking without them.

As competition intensified last year from high-end designers and low-end mass merchants, Levi's sales slipped 4 percent, to $6.9-billion, from $7.1-billion a year earlier. According to Tactical Retail Monitor, an industry research firm, the company's market share for men's and women's jeans slipped a full percentage point to 18.7 percent.

Because it is a private company, Levi's does not release earnings figures. But company executives say they expect sales to slip again this year, and maybe next year, too.

Levi's took its first significant step to shore up its fortunes last fall, when it announced that it would close 11 U.S. plants and lay off 6,400 people, 34 percent of its North American manufacturing work force.

That decision was painful for a family-owned company _ chairman Bob Haas is the great-great-grandnephew of Levi Strauss _ that prides itself on its dedication to, and protection of, its employees. In fact, company executives say, Levi's paternalistic, warm-and-fuzzy culture probably delayed a decision that should have been made earlier.

At the merchandise level, executives are furiously churning out new styles, new lines and new ideas. Top managers think they are in a good position to dominate the newest fad in jeans: dark, unwashed denim with a big cuff.

The company is also trying to emphasize the authenticity of its jeans by mining its ample history in search of old styles or details that may have relevance today. Levi's historian Lynn Downey, hired as an archivist, said she has been working increasingly with company designers and marketers, she said.

But one strike against Levi's, say some fashion industry executives, is that it's primarily a pantsmaker. The hot trend in designer jeanswear lately _ typified by Tommy Hilfiger's _ is a total "look," in which jeans are simply part of the larger sportswear presentation, industry experts say.

"The trend has been toward branded resources _ providing a sportswear concept of which denim is an integral part, as opposed to a jeans concept only," said Eric Rothfeld, chairman of Sun Apparel, an El Paso, Texas, clothing manufacturer that has the license for Polo Jeans.

Dockers wants to create that kind of integrated fashion statement, and Dockers president James Capon is wearing it. He's outfitted top and bottom in Dockers' new premium line of casual apparel _ with looser-fitting pants than Dockers' traditional style and a comfortable, muted green checked shirt.

This new Dockers look is aimed at capturing a piece of the red-hot youth market, which has largely been claimed by brands such as Abercrombie & Fitch, Banana Republic and J. Crew while Dockers was outfitting the adults.

"When you're as successful as we have been, it's almost impossible to get away from a certain sense of complacency," Capon said.

But no more. Dockers still has a healthy 31 percent market share for 35- to 45-year-olds, Capon said, but its share of the younger market has been slipping. Hence a new line of hipper, younger, more stylish clothes, both for men and women.

To support this move, Dockers has delved into a new kind of marketing _ sponsoring independent film festivals and outfitting the indie-film stars, hoping the association with cutting-edge culture will help the brand. Its "Nice Pants" ad campaign also is an image-boosting effort, Capon said.

Getting its clothes to consumers has become a challenging issue for Levi's. The main problem has been retailers' success in establishing their own private-label brands _ such as Sears' Canyon River Blues _ as major competitors to Levi's. According to Tactical Retail Monitor, private-label brands captured 24 percent of the men's and women's jeans market last year, up from just 3.2 percent in 1990.

Levi's first encountered the transformation of customer into competitor back in the 1980s, when Gap introduced its own private-label jeans. The move chilled relations between the companies, but it was just the beginning of Levi's competitive problems.

J.C. Penney launched its Arizona denim brand 10 years ago; by the mid-1990s it was a billion-dollar business. Penney also happened to be Levi's biggest customer.

Levi's couldn't afford to leave that partnership, but critics say the company should at least have made more of a stink when Penney went big into private-label manufacturing.

"I don't think they thought this thing would ever happen," said Don Scaccia, vice president of corporate brand development for Penney. "I don't think they thought a private brand could be developed within a chain operation."

Arizona and Levi's are now sold side-by-side across the country. Scaccia said the two brands appeal to different consumers and even help each other. But the dynamic remains strange, especially when considering how sensitive the retailer-manufacturer relationship usually is. Bloomingdale's in New York, for example, stopped carrying Levi's when the company opened a stand-alone Levi's store across the street.

Levi's has a long history of bouncing back. In the late 1970s and early '80s, the company made an effort to diversify through the acquisition of other apparel brands. Once it refocused on its core products, the company enjoyed a decadelong growth spurt. At the least, Levi's has staying power.

"After all these fashion jeans are dead and buried, the wide legs and everything else, the 501 will still be here," said Samuel J. Gerson, chairman of Filene's Basement.

By then, though, Levi's executives hope the company will be about a lot more than just the 501. Levi's successful introduction of Slates, a dress pant that the company thinks fills a void in men's wardrobes, has emboldened the company to look further into the development of other brands. Shank predicted that five years from now, Levi's will have "a portfolio of brands."

The unit that produces Slates, which were introduced in 1996, should break even this year and become profitable next year, company officials say. But even more important is Slates' creation of a lean and responsive culture within an old and sometimes sluggish company.

"There's a key opportunity to learn from the experience with Slates," said Jann Westfall, president of the brand. When building her company within a company, she said, she made a point of hiring people "used to working in a fast-moving business and able to make changes quickly." What she created in the process was a flexible company with a sense of urgency _ very much what Levi's is striving to become.

But it won't happen quickly.

"Levi's would rather be slow and right than fast and wrong," Shank said. "We need to retool, re-energize, refocus _ all those "re' words _ and that takes time."