Why Forever 21 heralds what is wrong with family businesses

What family businesses can learn from the failure of Forever 21

Published: Dec 3, 2019 03:56:43 PM IST

Updated: Dec 3, 2019 04:02:30 PM IST

Why Forever 21 heralds what is wrong with family businesses

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Privately held Forever 21 was founded by South Korean immigrant husband and wife team, Do Won and Jin Sook Chang in 1984. It started small, as most family businesses do, as a single store in Los Angeles, becaming a multibillion dollar operation in over 40 countries before it filed for bankruptcy in September 2019.

Rise to Success:
Forever 21 specialised in the fast fashion principle as it made outfits for young teenager girls, who wanted to dress like their favourite celebrities. Forever 21 helped them by providing these fast and at affordable rates, with USD5 tops and USD20 dresses.

This made them the favourite amongst their customers, who would form huge lines for the new store openings. The company also became an attractive tenant for most malls, usually becoming the anchor tenant with its huge sized stores (averaging 38,000 as per the company website), which drew huge footfalls. The company became a trendsetter, selling rapidly changing styles in young women’s dresses, tops, jeans, other apparel and accessories as a part of its fast fashion strategy. The brand sold hope and aspiration to the millions of teens who aspired to dress like their celebrities. The store catered to teenagers and young adults, along with some slightly older customers who refused to grow over 21.

The Changs were religious Christians with a reference to a verse from the Bible printed on the bottom of very bag (John 3:16).

The huge success, the fast growth fuelled its 800 plus stores worldwide, most of them though in the US, giving it about 4 billion dollars in sales. And the Changs were counted amongst billionaires with a combined net worth of USD5.9 billion in 2015. Nothing could seem to go wrong. And then it did.

It filed for bankruptcy in September 2019.

So what went wrong?

What were the reasons for the downfall?
Losing focus: The fashion chain had become successful due to its coolness factor, and its ability to identify the needs of its customers. But these same customers started to move to online and other retailers. Forever 21 tried to respond by addressing a more broader segment of shoppers, selling clothes and other merchandise towards a more larger range of customers. This included menswear, children’s clothing, maternity and plus-sized apparel and cosmetics. Another reason for this expansion was that the company kept on opening larger physical stores while the other chains were shrinking. And Forever 21 did not have merchandise before it opened the newer stores, which were twice to three times larger than the older stores. To fill these stores, it expanded into various other categories mentioned above.

Soon the dip in sales forced the company to renegotiate leases with its landlords and shrink its bigger stores. But this was not enough to meet the lower sales and cash crunch. The company was focussed on just growing the stores and this diverted its attention, distracting it from producing the designs their customers wanted.

This dilution of the sharp focus they earlier had, lead to their diminishing sales, as their core customers started to look elsewhere for their needs. Shoppers were hunting for something unique and not the cookie-cutter designs offered in the mass market. Other brands quickly stepped in to take the place that Forever 21 had vacated while other fast fashion brands like H&M and Zara continued to pull in crowds. The brand was also under threat by online brands like Fashion Nova and Asos, who did not have the high rentals from stores in malls.

Additionally, even though Forever 21 was an extremely popular trendsetter with the millennials, the brand failed to inspire the subsequent Generation Z’s, who were seeking other brands. This led to the downfall, following the brands before them, including the likes of Aeropostale, American Apparel, and BCBG Max Azria.

The move to online retail was something that Forever 21 did not pay attention to. What was its unique selling point, a wider and more affordable selection of apparel, soon was replaced by online stores who were able to offer even wider variety of goods. I have been told that some of the newer influencer led online stores had gone a step further, by only manufacturing after getting orders after posting their designs online, thus taking the concept of exclusivity and fast fashion a step further!

In another case of its inability to sense the customer needs, Forever 21 sent Atkins diet bars free with all online purchases. This step invited the wrath of their plus size customers who took offence at this act, questioning if the company was suggesting that they needed to lose weight. The company quickly clarified it wasn’t, but the damage was done.

The recent bankruptcy is expected to help Forever 21 focus on the key markets in the US where it is still doing well, and hopefully reinvent itself by focusing on its customers better.

The Dark Side of Fast fashion: There were reports in various sections of the press, that the company’s goods were made in California by workers who were paid wages of USD4 per hour, when the minimum wage was USD10 per hour. This apparent worker exploitation and unethical practices were disturbing to its customers. The low selling prices also had another side effect, that of low quality goods which ensured that most items were unwearable after about three washes. This played into the fast fashion concept where the customers were encouraged to buy more frequently, to wear items currently in fashion, and being forced to discard their earlier bought items.

However, with the new Generation Z, there was a shift to sustainable fashion, where the customers sought to buy timeless items, which stay in fashion for many years. They realised that the disposable fashion had an increased cost on the environment, by pollution caused by the increased production. Gen Z also moved to the more individualistic and personalised curated fashion, which was moving away from the mass production of fast fashion. (this is a paradox, as fast fashion was itself a move away from the bulk manufacturing of style changes 2-3 times a year!) Generation Z is more aware, and is more environmentally and ethically conscious, with an increased interest for resale and designer wear, thus causing a dip in the market for lower cost apparel. Forever 21 missed this change in the customer preferences, which is now forcing other companies to adapt or go bankrupt.

Another thought was that the customers usually posted pictures of themselves in trial rooms on social media, and did not actually buy anything!

Additionally the changes in the consumer tastes and shopping preferences have been impacting all the players in the industry. This is surprising, as Forever21 was itself a product of the “fast fashion” movement, which heralded the rise of brands like Zara, H&M and Forever 21, disrupting the existing brands with their fast design changes and low costs.

In fact, Forever 21 was named due to its founder Do Won Chang regarding 21 as the most enviable age. He built the brand on the idea of identifying brands, and then working closely with the suppliers to supply low-price products fast to the retail stores.

A family business management style: Interviews quoted in the press of employees and experts cite many reasons for the failure, pre-dominantly lack of oversight, the inward-looking management style, ruinous real estate deals, and mistakes in the merchandising strategies.

Another challenge was the fact that they were successful over a sustained period of time, and the absence of a Board of Directors or independent observers who could question the management, who thought its every move would be a success, based on the past.

The company was headed by Do Won Chang, who was the CEO and he handled the vendors and landlords. Jin Sook Chang was the design and merchandising head. Do Won Chang kept a tight fisted control on the expenses, personally looking into the employee expenses, questioning lunch and Uber receipts. He also personally signed every lease, even when the company reached 500 store mark, and himself designed every store.

Their daughters, Linda was the executive vice president, and was tipped to be the next in line for the top position. The younger sister, Esther was the vice president of merchandising. The two daughters were responsible for Riley Rose, the company’s newer beauty brand. The Changs did not want to take the company public and owned 99% within the family. The private nature of the company prevented them from publicly disclosing any financial or operational information.

The company could not hire more experienced people as the family distrusted the external employees. This lead to the family being unable to hire experts from outside and for those that were hired, the family ignored all their recommendations. Additionally the employees were given jobs and encouraged them to know only about their immediate scope of work. Employees were often hired due to religion, and other factors, besides qualifications.

What are the lessons family businesses from Forever 21?

Keep growth under control: Most managers and entrepreneurs think that all growth is good. But the successful companies grow steadily, building up teams and processes as they grow, so that the fast growth does not overwhelm them. The backend of the firm has to also grow, in line with the rapid sales.

Have good advisors in Management and listen to them: I have heard of many family-run companies who do not want to have any independent thought on the Board. This is a disastrous choice as the best entrepreneurs can also make mistakes. And having someone who can question decisions, helps to avoid mistakes early on, from being committed.

Family is good, but have qualified professionals also. There is really no substitute for having a qualified and competent professional from running the show. This frees up the entrepreneur for other strategic decisions. Think about it, do you really need to sign every one of those 500 leases? Usually family business owners pride themselves on micromanaging everything, but usually forget to ask, is this really the best use of their time? Or is this something which they can delegate and do more value added activities?

Profits matter: This is self-explanatory. The world is now realizing after the euphoria of pursuing rapid growth for marketshare, that profits do matter after all.

Keep an eye on your customers and where they are buying Businesses have to realise that the customers needs change over time, and that one needs to be on top of this, else they wlll shift out to the competition and most businesses will not be even aware.

Monitor the environment for changes in the buying patterns: This is a concern that is there in most successful businesses, where the sales department becomes sluggish, and reduces itself to being just order takers. At times like these it is easy to forget about the dis-satisfied customers or the non-consumers, who may be buying from the competitors, hence slowly reducing sales. Very often, the incumbent companies do not realise this until it is too late.

Forever 21 may have filed for bankruptcy, and the future of the company may be uncertain. But the reasons for its failure, are not new and have been affecting companies over the years. It is a good case study for Indian businesses to learn from this bankruptcy as it offers rich lessons for most entrepreneurs and family business owners.

What Family Businesses can learn from the Failure of Forever 21 - by Dr.Rajiv Agarwal, Professor - Strategy and Family Business at Bhartiya Vidya Bhavan's SPJIMR.

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