Four lessons from American Apparel’s collapse

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Without doubt one of the best dressed wrecks on the road to business success belongs to American Apparel.

For a while the teen retailer was seen as the epitome of cool, reinventing the classic t-shirt and jeans for a millennial audience with its unique, sometimes contradictory, mix of raunchy advertising and workers’ rights championing.

The Los Angeles based firm bucked the offshoring trend by keeping manufacturing jobs in the US and (for a while) making a profit.

And it was not just fashionistas who took an interest: After listing in 2007, the company’s share price hit a high of almost $16, with the company valued at almost $1bn.

However, the fickle world of fashion has a habit of moving off down the catwalk and leaving all but the most innovative behind. Off the back of falling sales and substantial and sustained losses the company filed for bankruptcy protection in October 2015, with shares dropping to a value of 11 cents.

Controversial founder Dov Charney was forced out in 2014 by company bondholders after a string of harassment allegations from female staff, and this Monday a judge rejected a last ditch attempt from Charney to buy the company out of bankruptcy, choosing to side with the company’s current owners.

Charney may choose to continue to fight for control of the company or simply start again. Regardless of his choice, there are plenty of lessons both he and other business leaders can learn from the spectacular rise and fall of American Apparel.

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You can be a maverick leader, but only to a point

While business was booming company founder and CEO Dov Charney was lauded as a visionary leader. He was praised for doing things differently, his willingness to take a chance on American workers when his competitors were going abroad and his attention to detail.

However, the self-confessed philanderer and libertine divided opinion with his flamboyant nature and abrasive personality, and attracted criticism (and lawsuits) for his treatment of female employees.

When sales nosedived, Charney’s character began to work against him. Having the right leadership in a crisis can mean the difference between success and failure, and faced with allegations of sexual harassment the company’s board decided Charney was not the right person to turn the company around, and in December 2014 ousted him in favour of Paula Schneider.

Charney continued to fight his corner both in and out of the courts, and on Monday took to community content platform Medium to express his disappointment at the judge’s decision to reject his takeover bid, calling into question the company’s current management.

Commenting on the post Del Williams summed up the mood of many American Apparel fans: “Dov, what you built was great. The problem is you couldn’t keep it in your pants … You did this to your company due to your inability to be a real leader. Move on with your life, and build something else”.

Innovation is not just for start-ups

As Charney points out in his statement, at most stages in its development American Apparel was seen to be ‘ahead of the curve’, deploying RFID technology in its stores, fulfilling e-commerce orders direct from retail outlets and opening stores in emerging neighbourhoods.

However, dealing with the fallout from Charney’s various lawsuits and attempting to boost flagging sales have taken its toll on the company, and industry experts have accused them of taking their eye off the ball, allowing competitors to overtake them.

Marshal Cohen, chief industry analyst at NPD Group told the Guardian: “My biggest concern for the company is that a slew of competitors are ready to eat its lunch. Before they were the leaders to go after, now they are playing catch-up.”

In terms of innovation in a fast-moving industry, if you are standing still you are also going backwards.

Don’t drown in debt

According to Pearse McCabe, planning director at global design consultancy Fitch, American Apparel’s dramatic expansion and the subsequent level of debt incurred played a large part in the company’s demise. 

At one point the group operated 260 stores in 19 countries and employed 6,500 in its Los Angeles factory alone, and McCabe called the level of expansion “breathtaking”. According to McCabe the company’s rapid growth “puts a lot of pressure on what their USP was in the first place, which was to be a trendy niche brand.”

Although it is harsh on those who have worked hard to create value for the company, when times become tough it may be necessary for a business in such a position to revisit its budget and make cuts to unnecessary costs, prioritise debt payments and speak with creditors. Better to live to fight another day rather than drown in debt.

"It's the economy, Stupid"

Despite the bawdy branding that saw the company regularly hauled up by advertising standards regulators and the lewd behaviour of its owner, American Apparel’s downfall was due to money, not sex.

The company were unable to survive a collapse in sales following the credit crunch in 2008 and increased competition from the likes of H&M, Abercrombie & Fitch and Primark. American Apparel’s competitors were able to replicate the company’s style at a fraction of the cost thanks to reduced running costs.

At the height of his success Charney claimed to pay his skilled factory workers around $30,000 (£21,000) a year, compared with $600 (£420) a year for workers in south east Asian factories.

Howard Davidowitz, chief executive of retail consulting and investment banking firm Davidowitz & Associates put it best when he told the Guardian in August 2015 that although the company and its founder had survived numerous sex scandals in the past, “when the writing is really on the wall it comes down to economics.”

“If you can’t make money”, said Davidowitz, “you won’t survive.”

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I very much doubt that American Apparel is being run by its debtors.  (Hint: Ask an accountant!)

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@Brend201

Thanks for spotting that - correction made accordingly.

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If anything, it should be my apologies

TomHerbert wrote:

Thanks for spotting that - correction made accordingly.

I subbed the article. Thanks for picking up the correction, Brend201!

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