Why Did Forever 21 File For Bankruptcy?


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.

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About the Author: Oren Garnes

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