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The Men's Wearhouse Growth in a Declining Market

July 1, 2000
Related Topics: Growth, Featured Article
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If someone gave you the history of George Zimmer and The Men's Wearhouse, would you have predicted its success? After all, Zimmer is a counter-culture guy who got his start selling raincoats and founded his company with a $7,000 stake. The chain's sales strategy involves avoiding shopping malls downplaying print advertising. The company's philosophy focuses on people, giving employees with flawed backgrounds second and third chances (even when they've ripped off a pair of socks). With all that, you might have forecast failure for The Men's Wearhouse. And you would have been wrong, wrong, wrong.

An idea exists, propagated by the literature on business strategy, that a company must be in a "good" industry in order to achieve outstanding business results.

A good industry is one with substantial barriers to entry, perhaps provided by some technological advantage, trademark, or brand; market power with respect to suppliers and customers; and limited rivalry.

However, the existing evidence shows that industry growth rates are largely unrelated to a specific company's ability to produce outstanding shareholder returns and even to the company's own growth rate. These aggregate statistical results are nicely illustrated by the example of the Men's Wearhouse.

The company, one of the largest off-price retailers of men's tailored business attire, achieved a five-year compounded annual growth rate of 26 percent in revenues and 29 percent in net income during the period from 1995 through 1999.

"The retail worker in the United States is somebody who often came from a dysfunctional home, like a lot of us…who basically told their teachers in one way or another to go to hell."

The Men's Wearhouse achieved these outstanding financial results in an industry that, to put it mildly, presents some substantial business challenges. It is an industry facing little or no growth and intense rivalry. In a report in 1995, Needham & Company noted:

The men's tailored clothing market has been consolidating. Men have been spending less on tailored clothing.…The decline in the men's tailored clothing market has squeezed independent operators and has caused department stores to shrink the space dedicated to this merchandise category.

In April 1996, Robertson Stephens published a report on the industry that included a table listing "some of the chains that have closed or consolidated their stores or are in financial distress."

The list included C & R Clothiers, Today's Man, Barney's, Kuppenheimer's, Hart, Shaffner and Marx, Hastings, Gentry's, Anderson Little, and several others. The first mystery for us to consider, therefore, is how this company has succeeded in a declining industry beset with intense rivalry, one in which many of its competitors have been forced into bankruptcy.

There is another mystery, perhaps even more intriguing. It's one thing to talk about achieving success through people and leveraging a company's human assets in businesses where intellectual capital is critical and the workforce is highly educated and skilled.

For instance, many high-technology companies, recognizing the importance of their people, have added all sorts of amenities (such as health clubs, concierge services to run errands, and fancy food) in an effort to attract and retain the people essential to business success.

But the Men's Wearhouse has achieved competitive advantage by leveraging a workforce that many managers would characterize as less than desirable. Charlie Bresler, one of the top four executives in the company and the person responsible for overseeing the human resources function, commented,

"The retail worker in the United States is somebody who often came from a dysfunctional home, like a lot of us…somebody who didn't do well in school, who basically told their teachers in one way or another to go to hell."

Most people don't start out with the goal of working and remaining in retailing, simply because it is not a very desirable employment destination. So those who work in the industry are often young people, immigrants, or those who for whatever reason have difficulty obtaining better work.

Retailing in the United States is the largest industry in terms of employment. About 16 percent of the workforce, more than 20 million people, work in retailing. In 1995, some 66 percent of the retailing workforce was female, compared with 46 percent for the economy as a whole.

It is a very low wage and, for the most part, low skilled industry. Real wages for retail trade declined from 91 percent to 62 percent of the national average between 1948 and 1992. Turnover is endemic and the percent of part-time workers is extremely high. Health care coverage tends to be minimal and ratio of skilled to non-skilled workers dismal.

The Men's Wearhouse has succeeded in this industry by breaking all of these rules of low pay, little training, and lots of part-time work and actually treating its people as well as, if not better than, some professional service firms treat theirs. The second mystery is how and why the company has done this, and why this strategy, which would seem to raise labor costs, has worked.

If we can understand the mysteries of how the Men's Wearhouse has succeeded in such a hostile competitive environment and how it has built a culture and workforce that provides it an advantage even though it operates in a difficult labor market, we will gain some important insight into how great companies achieve truly extraordinary results from ordinary people. If this company can succeed given the challenges it faces, think of what you can do by applying its lessons in more favorable environments.

History of The Men's Wearhouse

George Zimmer, the founder of the Men's Wearhouse, opened the first store in Houston, Texas, in 1973, when he was 24 years old, with an initial investment of $7,000. Zimmer's father had been in the retailing business and had subsequently manufactured raincoats.

George's first full-time sales experience was living in Dallas and selling his father's raincoats to stores as a manufacturer's representative in several western states. In the early 1980s, Zimmer opened his first stores in the San Francisco Bay Area. At the time, the firm's offices were in his house.

The company developed a headquarters in an office park in Fremont, California, and currently has part of its headquarters functions (mostly finance, information systems, warehousing, and distribution) in Houston and the rest (focusing on employee relations, store operations, merchandising and advertising, purchasing, and training) in Fremont.

The company initially grew slowly, opening stores mostly in Texas and California. When the company went public in 1991, it had 85 stores. Since that time, the pace of expansion has increased dramatically. By October 1999, the company operated more than 600 stores in about 35 states and Canada. This included 437 stores in its flagship chain, 52 stores that were part of a newer, Value Priced Clothing business that offered clothing at lower prices with much less service and restricted hours of operation, and 113 stores, mostly in Canada, that it had recently acquired when it purchased Moores Retail Group.

Selected Financial Information for The Men's Wearhouse

1994

1995

1996

1997

1998

Net sales
(in millions)

317.1

406.3

483.6

631.1

767.9

Net earnings (in millions)

12.1

16.5

21.1

28.9

40.9

Total assets (in millions)

160.5

204.1

295.5

379.4

403.7

Shareholders equity
(in millions)

89.4

137.0

159.1

220.0

298.2

Earnings per share ($)

.43

.55

.67

.89

1.21

Number of stores

231

278

345

396

431

Sales per square ft. ($)

406

416

413

420

437

Strategy

The Men's Wearhouse stores target middle to upper middle-income men, and offer designer brand name and private label merchandise at prices…[that] are typically 20 percent to 30 percent below the regular retail prices of traditional department and specialty stores. . . . [M]erchandise…includes suits, sport coats, slacks, business casual, sportswear, outerwear, dress shirts, shoes, and accessories.

The company believes that men do not like to shop and structures its approach on that assumption. So, for instance, there is only one sale each year, in January. Consequently, the customers don't have to pay attention to when a sale or special is running -- they can shop when they need something and not worry that they are paying too much.

Zimmer calls this an "every day low pricing strategy." It is an approach that also helps build profits and margins, because you don't train the customer to wait for sales. Zimmer explained that lowering prices is "almost like committing suicide in a very slow way." Eventually, he said, the only way you can do business is to give the clothes away. "There are no gross profit dollars even when there is volume.…By using our strategy of running only one promotional event a year and the rest of the year selling everything at the ticketed price and relying on our people to drive the traffic, (we create) a much different margin story."

In the 1998 fiscal year, the Men's Wearhouse generated about $100 million cash on about $800 million sales, and had a pretax operating income of about 10 percent, at least double the historical industry average.

The stores are typically small, 4,000 to 7,000 square feet, and are located in shopping centers or in storefronts rather than regional malls. This permits the customer to drive right to the store and not have to walk through a big mall for access. The locations also typically offer lower rents than large regional malls.

Because the stores are relatively small, when customers enter they are immediately seen, thus allowing someone to approach and wait on them. Pressing and tailoring can be and are done on the premises, and free pressing is offered for any garment purchased at any Men's Wearhouse store. The store price for a garment does not include any tailoring, including finishing the cuffs on pants, so all alterations cost extra, though once the seam has been touched, subsequent alterations are free.

The company uses almost no print advertising, instead relying on radio and television. Zimmer believes that there are several problems with print advertising. First, people can easily ignore it. Second, the only thing you can really display in a print advertisement is the item, perhaps with a picture and description, and its price.

However, the Men's Wearhouse differentiates itself not on price but on the basis of a shopping experience that affords outstanding customer care. In order to describe that experience (for instance, using customer testimonials), you need an approach that permits more of a story line, such as you can get with radio or television.

In the fiscal year ending January 1998, the company spent $38 million on its advertising. Part of its growth strategy is to target larger metropolitan areas, where the company can locate a greater number of stores (there are 35, for instance, in the San Francisco area) and thereby leverage its media purchases over a larger number of locations.

The core of the company's strategy is to offer superior customer service, delivered by knowledgeable, caring salespeople, called wardrobe consultants. George Zimmer's trademark phrase, "I guarantee it," represents the company's position that it stands behind what it sells and will, for instance, provide free some alterations and pressing for the life of a garment and will take back merchandise if there is a problem of any kind.

The Men's Wearhouse seeks to build a long-term relationship with its customers -- customer loyalty is considered to be very important -- and to become the preferred place for them to shop for all of their clothing needs for items that it carries.

The phrase "wardrobe consultant" was chosen intentionally. Charlie Bresler, executive vice president for human development, commented:

"We talk about a clerk, a consultant, and a slammer. A clerk is somebody who will meet your initial request. A slammer is somebody who'll sell anything they can get you into or sell you regardless of what your interests are, for their benefit. And a consultant is like a physician or an attorney, a professional."

Unlike most other retailers, where merchandising is the center of power, the Men's Wearhouse emphasizes store operations and the sales process. George Zimmer explained:

"When you get down to what really happens in the retail world, it's a customer who wanders into the store and there's an employee there. And as they walk up to greet the customer, the question is 'what type of energy, what type of feeling, does that employee have as they begin to engage the customer?'…[I]s it genuine feeling or is it something that has been hammered into them through fear and intimidation?"

Values and Philosophy

George Zimmer believes strongly that the company's strategy and how it operates come from a philosophy or worldview:

"I think where this really emanates from … is your worldview. The way your parents and your community and your extended family informed you about how the world operates.…It all comes down to whether you believe that the world is basically, as we teach in economics, the allocation of scarce resources, or is the world filled with infinite love and compassion."

Zimmer has said, "We're in the people business, not the suit business." Charlie Bresler says that this means the company's job is to help people understand others, listen better, and develop excitement about helping themselves and their teammates reach their potential as persons. Realizing their potential is not just about selling men's clothing, but also about becoming a better spouse, a better parent, and personally more self-fulfilled.

George Zimmer believes in the power of untapped human potential, in creating abundance rather than allocating scarce resources, and in a win-win-win philosophy, where the customer, the wardrobe consultant, and the company all do well. Considering the idea of untapped human potential, Zimmer has remarked:

"What creates longevity in a company is whether you look at the assets of your company as the untapped human potential that is dormant within thousands of employees, or is it the plant and equipment? Or the trademarks? And I'll tell you the last thing most…MBAs probably think is of value is the untapped human potential.…The culture says, It's got to be quantifiable…don't talk about human potential. How do I measure human potential?"

The company's mission statement reflects Zimmer's humanistic philosophy, developed in part because he came of age and attended college during the Vietnam War and developed a counter-cultural perspective:

"Our mission at the Men's Wearhouse is to maximize sales, provide value to our customers, and give quality customer service while having fun and maintaining our values. These values include nurturing creativity, growing together, admitting to our mistakes, promoting a happy, healthy lifestyle, enhancing our sense of community, and striving to become self-actualized people."

Zimmer has recognized the connection between customer loyalty -- important for building profits -- and employee loyalty, which is why he puts the employees first. As Frederick Reichheld wrote, "Employees who are not loyal are unlikely to build an inventory of customers who are." Focusing on the customer makes good business sense, because "raising customer retention rates by five percentage points [can] increase the value of an average customer by 25 to 100 percent."

Providing outstanding customer service and building loyal customers is enhanced by great vendor relations. Employees can more easily offer quality service to the extent that they can remedy problems. They will feel freer to accept customer returns if the vendor, in turn, is more willing to take back defective or unwanted merchandise. Therefore, great relations with vendors and strong bonds between the company and its employees are both part and parcel of a value-added service strategy.

Because the Men's Wearhouse draws on a labor pool that is not always the best, recruiting people who have had problems and difficulties in their lives and jobs, and because the company believes that its job is to develop untapped human potential, the firm will not necessarily fire people for the first instance of stealing from the company. The company also loans money at no interest to employees who are having financial difficulties -- for instance, so an employee can get his or her car repaired.

This philosophy about people and the need -- indeed the obligation -- to develop them to be the best they can be is very much at odds with the prevailing view of employees at most other retailers. For that matter, the Men's Wearhouse's philosophy about people differs from that found in most other industries and companies. These values and the perspective on people they reflect make the Men's Wearhouse's operations difficult to copy. Charlie Bresler, executive vice president for human development and store operations, said:

"Most people who are executives or managers in retail…look at human beings who work with them -- and they perceive it as for them -- and see people who are supposed to do tasks and don't do them very well.…[W]hat the typical retailer sees are a bunch of people who are stuck there and if they could get a better job, they would.

"And I think what George has seen…are people who have never been treated particularly well, and that when you treat them well and give them a second and sometimes a third chance, even when they've ripped off a pair of socks, even when they've taken a deposit and put it in their pocket and not returned it for several days…you try to re-educate the person.…We've looked at how to help ourselves and other people get better than most of the world thought we could ever be."

An important part of the company's philosophy is the idea of interdependence and the consequent importance of teamwork and helping others. The company emphasizes "team selling" and a person's responsibility to others. As part of the training at Suits University provided to wardrobe consultants, Bresler told the group:

"[As] a wardrobe consultant, you are expected to define your success in part as only achieved when your teammates…are also successful…and that you will, over time, define your success not only in terms of your own goals, but also the goals and aspirations of the other people in your store. And that you will really come to care about them as human beings."

This article was reprinted with permission of Harvard Business School Press. Excerpt of Hidden Value: How Great Companies Achieve Extraordinary Results with Ordinary People by Charles A. O'Reilly III and Jeffrey Pfeffer. Copyright 2000 President and fellows of Harvard College; All Rights Reserved.

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