How Hollister Co. Stole Surf: Eight Years After Abercrombie & Fitch Invaded The Surf Market, What Can be Done To Defend Against Them?

In the latest issue of Transworld Business I wrote a feature about the impact Hollister has made on the surf industry and ways that the endemic market can defend itself against the fugazi “surf brand”/mega mall-based retail chain. We usually don’t publish such lengthy articles online--it’s around 4,000 words plus a sidebar--but having seen it referenced on more than one surf-related message board online, I decided to post it in its entirety. So here it is.

It's no secret that Hollister Co.--the "surf-inspired" mall-based retail chain and brainchild of Abercrombie & Fitch CEO Michael Jeffries--is a threat to the surf market. While the surf industry has matured significantly since Hollister's launch in July 2000, current economic factors such as a weak domestic retail environment have the biggest players in both the endemic and non-endemic market racing to build an international platform for their brands, and Hollister's distribution network and deep pockets pose a much greater threat than ever. With international expansion of its own well underway, the stakes in the race for global brand recognition may be much higher than merely jockeying for position; the race could determine how the world defines "authentic surf company."

What's more, on the domestic front, Hollister's success in the malls has directly affected the corporate strategies of its competitors, and PacSun--perhaps the surf industry's most lucrative retail partner--is no exception.

So what is Hollister? Where did it come from? How much of a threat is it to the endemic market? Who is at risk? And what can the industry do to defend itself?

Sometimes Truth Is Stranger Than Fiction

Over the first few years of the new millennium, growing interest in surfing helped perpetuate mainstream attention though Blue Crush and MTV's Surf Girls. The interest from mainstream America offered a significant up tick for manufacturers and retailers in the industry, but also gained the attention of outsiders looking to tap in to the trend. Where most failed, Hollister developed a concept that translated into rapid success.

"Everybody tried to knock off the surf lifestyle at all distribution channels--from Costco to Kohl's to JC Penney," recalls Dick Baker, Chairman Emeritus of the Surf Industry Manufacturers Association (SIMA). "Generally speaking most were not successful. Why? They didn't have the consumer, the kids didn't shop in there, it wasn't cool, and they didn't have any of the brands. What's changed is that along comes Hollister and it does vertical surf better than most surf companies. To the average consumer that's not a core kid, from a product and price perspective, and as an environment to shop, it has become a brand unto itself."

Abercrombie & Fitch CEO Michael Jeffries

The concept for Hollister was built around a fictional background story created by Jeffries (Shown here) to provide a more "authentic" atmosphere for the Hollister shopper. The fictitious story claims J.M. Hollister founded the company in 1922 as a "Pacific merchant in SoCal." On its Web site, the company defines itself as "Inspired by the sun-drenched spirit of California, and the surf and soul of the Pacific Ocean, Hollister is a laid-back, aspirational lifestyle destination." In reality, it was launched in 2000 out of Columbus, Ohio by Abercrombie & Fitch, which was struggling at the time to reach a younger customer.

"First they dreamed up this West Coast lifestyle concept, explains Mitch Kummetz, senior retail analyst at Robert Baird. "If you go back to 2000, surf was pretty strong and these guys wanted to play in that market. So they just dreamed up this business out of thin air. As far as a mall store goes, and who their customer is, which is the aspirational consumer, they couldn't do a better job building stores that appeal to that consumer. If you compare them to a PacSun, a lot of it is contrived and pretentious to someone who is of the industry and participates in the sports, but to somebody who is in the mainstream and is aspirational, their stores are going to look more like the real deal than a PacSun or a Zumiez, or a core shop for that matter. Zumiez would never do that because that's not who their customer is. Their customers would see through that in a heartbeat. But if you're just some mainstream kid living in Ohio, or wherever, this seems as authentic as anything."

When Hollister opened its first store in the Easton Town Center in Columbus, Ohio in July 2000, American teens immediately began to take the bait of the fugazi surf-lifestyle brand. Much of the store's success is credited to its in-store experience; Hollister has invested millions into providing a "SoCal surf" atmosphere to both the interior and exterior design of its stores. The stores are meant to look like beach shacks. The interior is dimly lit with spotlights above the merchandise, and divided into two sections: "Dudes" and "Betties." The company spent ten million dollars in 2007 outfitting its stores with flat screen TVs that play a live feed of the surf conditions at Huntington Beach pier. Stores are scented with the company's signature SoCal fragrance, and there's a corporate policy in place to play a controlled mix of licensed music--available for purchase at the register, of course--between 80-85 decibels. (OSHA requires employers to provide ear protection to employees exposed to decibel levels 90 and over.) In the middle of the store there's a lounge area with chairs, surf magazines, and potted palm trees.

"They get an A in the romance," says Quiksilver's Executive Vice President of Strategic Brand Development Tom Holbrook, who recently returned from a retail tour in the Midwest. "I heard people outside the store asking if it was a restaurant. It doesn't look like a typical store, and when you walk into a store everything is controlled--the smell, the lighting, the look of the kids that are working there. They've packaged the environment better than anybody, and I think that's a lesson that a lot of people have learned ever since they launched.

"When you can sit in Michigan and look at the north and south side of Huntington Beach pier to check the surf, they're basically connecting the dots to convey that they are pretty authentic."

Holbrook says the company also executes well with its product offering. "They do a really good job on color, merchandising, and price points," he says. "So the only thing they really don't have is the real authenticity, but they do a really good job of convincing people that don't know any better that they are the shit."
Kummetz agrees, saying the store is able to use its product to further perpetuate its own false authenticity: "The concept has only been around for seven or eight years, but they don't just roll out a concept called Hollister, they dream up this whole history behind it. They have shirts with a graphic that has something about a surf contest in San Onofre in 1962 or something. They make stuff up because their customer buys into it. They do a phenomenal job developing merchandise around the imagery of the stores and the history that they've basically invented."

Some would say they've been too convincing in the past. In fact, Hollister's parent company has overstepped the boundaries of what is legally acceptable on at least two occasions while trying to portray its authenticity to customers. (CLICK HERE to read the sidebar for more details.)

Merriam-Webster defines authentic in two ways: 1. Being fully trustworthy as according with fact; 2. It can also stress painstaking or faithful imitation of an original. Hollister has built its brand around the latter, and to say it's been successful is a gross understatement.

Threat Assessment

In 2007 Hollister Co. did 1.6 billion dollars in sales with 450 stores open across the United States, and its popularity amongst its target customers has grown undeniably strong. According to a study by US Bancorp Piper Jaffray, the brand ranked first for four consecutive seasons as Teens' Top Clothing Brand since 2007.

In eight years the store has been able to win over an entire demographic of American teen shoppers. How? By creating a retail concept around a fictitious brand history, manufacturing quality product, and selling an aspirational lifestyle. "To me it's the most amazing record that exists in U.S. retailing, period," A.G. Edwards analyst Robert Buchanan told reporters at the end of last year.

Perhaps what Buchanan refers to is the store's strong retail performance. Although it has not entirely escaped the symptoms of the current economic conditions--Hollister comparable store sales dipped seven percent in May and eight percent in June--it is performing extremely well given the current retail climate according to analysts.

"There are typically two measures that we look at in terms of retail performance," explains Kummetz. "One is productivity, which is just another way of saying sales per square-foot. They [Hollister] did 531-dollars a foot last year. That was actually a little bit down from the year before, but anything over 500-dollars a foot is pretty darned successful. [Chart shows comparision in productivity between PSUN. ZUMZ, and Hollister. PSUN numbers include demo stores.]

"The second thing is comparable-store sales performance. Last year they were actually down a little bit with a negative two comp for the year. I think that's the function of a few things. We're looking at a pretty difficult retail environment in general, so we're not seeing a lot of the teen retailers comp positively," he continues. "I think as they open up stores and kind of back-fill existing markets, some of the new stores cannibalize the business at existing stores, which also brings down their comp performance. Once you're at a level where you're doing over 500 dollars per square-foot it's pretty hard to continue to generate same-store-sales increases because you're already so successful. The way some retailers try to do it is to try and tweak the mix that they're selling and they focus more on accessories because accessories tend to be a more productive category in terms of being able to jam a lot of goods into a small amount of real estate. Abercrombie is doing a little bit if that with Hollister on the fragrance side, but I don't think that's enough to really move the needle."

Hollister Article Charts

Something that everyone seems to be able to agree on is that Hollister isn't going away anytime soon. In fact, according to Kummetz its growth is accelerating at an alarming rate. "The scary thing about Hollister is that they were at 450 stores last year, and they're talking about [expanding to] 1,200 stores," explains Kummetz. "They already have three stores in Canada, and they're going to have four stores in the UK by the end of this year. That 1,200-store count will probably consist of 700 to 800 stores in the U.S., which would mean 400-500 stores globally. Considering that as a chain with 450 stores they did 1.6 billion in sales last year, seven to ten years down the road it could be a five billion dollar business globally. That's not all incremental business, that's sales that are being pulled from somewhere."

In early May Mike Kramer chief financial officer for Hollister's parent company, Abercrombie & Fitch, discussed the company's international expansion plans in its Q1 conference call. According to Kramer, factors such as the brand's international direct-to-consumer business growing 78 percent over last year substantiate the need to expand. "We are benefiting from international tourists traveling to the U.S. to take advantage of a weak U.S. dollar. We were able to realize this benefit because of our global brand recognition," Kramer says. "This is additional proof that there is global demand for our brand and it gives us further confidence that we can be successful with our international expansion initiatives. It also demonstrates the importance of owning a global brand during a difficult selling environment in the United States."

While Hollister's global expansion announcement may be the most recent, its parent company Abercrombie & Fitch is aggressively allocating resources to grow the brand's recognition domestically as well. Out of the total capital expenditures for fiscal 2008 of A&F Co. (up to 445 million dollars), approximately 300 million dollars will be spent on new store construction and remodeling. This accounts for 67 new stores in the U.S. by the end of '08, including Hollister's first flagship store to be opened in New York's SoHo district in early 2009. Thomas D. Lennox, vice president of corporate communications at A&F Co. says the company believes the multi-level flagship location will be "a memorable and unique experience to customers, as well as an important step for the brand."

The Effects On The Market

Hollister's success hasn't gone unnoticed by the endemic surf market. Mall-based competitors like PacSun have been directly affected by the store's vertical approach and the appeal of Hollister's in-store atmosphere. "I think Hollister is a threat to other mall-based retailers," Kummetz explains. "It's a major threat to PacSun and to a lesser degree to Zumiez. If you look at PacSun, everything they are doing as a company from a strategic standpoint is to try to steal market share away from Hollister," Kummetz continues. "It's funny, you would think that PacSun is the more legitimate action sports retailer in the mall and yet they are doing things to change their business to make it look more like Hollister because Hollister is the mall-based retailer that the average mainstream consumer would think is the more legitimate store."
Kummetz also suggests that PacSun's decisions to increase private label in its stores, walk away from its closed-toed footwear business, and refresh its in-store designs are all based on going head-to-head with Hollister. "Hollister is competing on fashion and price and PacSun is trying to compete against them," he says.

PacSun CEO Sally Frame Kasaks chose not to comment for this article. Kasaks, who served as President and CEO of Abercrombie & Fitch from 1989-1992 says that she has made it a practice to never speak about competitive businesses that are not directly related to PacSun. "It is tough for me to speak to the strategy of PacSun in the context of an article on another brand or competitor," she says. However, in a Q4 2007 conference call recorded on March 13, 2008 she offered this statement about PacSun's strategy: "Our efforts have been focused on four key objectives; growing our juniors business, reconnecting with our customer, improving our customer shopping experience, and investing in the company to improve operating efficiencies. Each of these objectives supports our overarching goal of achieving results through improved store productivity ... To put this in perspective, we achieved sales per square foot of approximately 350 dollars in 2007. This level of productivity is significantly below our competitive peer set that on average exceeds sales of $500 per square foot."

Kummetz says the pressure from Hollister on other retailers hurts the brands that are selling through PacSun and department stores like Nordstrom and Macy's West, and the top executives in the industry have taken notice.

"I think the environment that PacSun needed to upgrade was really manifested by the success of Hollister," Holbrook explains. "I know they [PacSun] were compared to them [Hollister] a lot because they were luring the kid away, and their whole store is private label, and yet PacSun had all these brands. Unfortunately the brands got swashed by a lot of the private label that PacSun did. So they [Hollister] have helped influence a lot of the market both big and small, and I don't think there's a retailer out there that isn't really aware of them."

Volcom Chairman and CEO Richard Woolcott also identifies Hollister as a threat, and says the company is a serious competitor. "The reality is that they [Hollister] have the infrastructure, the muscle, and the financial backing to look at it on a global level," Woolcott says. "I think their stores look really good inside, they're well merchandized, and they make good product. They're a good competitor. There's no way to get around that."

It seems certain that mall-based retailers and manufacturers are affected, but how much of an affect does Hollister have on specialty stores? According to Kummetz, it's not as severe.

"I don't think Hollister is a threat to the core guy," he says. "If you're Jack's or HSS or Active then your customer for the most part is a participant in the sport, or at least a little bit more hard-core kid, and that kid probably isn't shopping at Hollister."

George Leichtweis owns Modern Skate and Surf, a five-store chain with two indoor skate parks located all over Michigan. He says that despite being in the Midwest, he doesn't view Hollister as an immediate threat. "My customer wouldn't shop at a Hollister," says Leichtweis. "Being a core retailer, the thought of Hollister gives us a laugh. It doesn't affect my sales, as my customers tend not to be mall shoppers."

Leichtweis, however, believes Hollister has made an impact in other ways. "I realize that Billabong and Quiksilver opened vertical stores--as well as DC, Burton, and others--in order to compete against the Hollisters of the world. They didn't do it to compete with core retailers, but this is a byproduct of that move," he says.

Surfside Sports Owner Duke Edukas also attributed the increase in company owned stores and direct online sales to the impact of Hollister. "They are exploiting what we've built, and our lifestyles, and are forcing legit surf manufactures to open company stores in malls throughout the U.S. to compete for the dollars they are sucking away from our industry," he says. "While the rest of us are bickering and arguing about which vendors are opening company stores, and which vendors are selling on line direct, or if a vendor is opening another retailer close to them, Hollister is not so quietly taking a huge part of our market.

"Don't get me wrong, I'm not saying that the Hollisters of the world give the legit surf manufactures the right to open company stores at will, but, in an area where there aren't quality surf, skate, or snow specialty retailer's, and Hollister is getting a lion's share of our pie, then I'm all for it."

Self Defense Tactics

How can the endemic market defend itself against such a powerful opponent? The question generates an incredibly similar, simplistic response from manufacturers and specialty retailers alike. The general consensus: Work together and do a better job.

"These people [Hollister] are attacking our business," says Bobby Abdel, an owner of Jack's Surfboards. "We need to stand behind the surf business and sport and keep supporting the brands because these guys [Hollister] are jumping in and are having a free ride on our back.

Abdel says it's vital for specialty stores to step up their in-store presentations as well. "We are really trying to keep our shops a notch higher than mall stores so that we can keep up with them. We are spending so much money to open our shops because we are the ones representing the surf market to the outside world, and if we don't keep up with everyone then the surf market will be hurt," he adds.

Edukas agrees, and says that aside from offering core customers the best in-store atmosphere possible, customer service is essential. "We have to compete with them at every level," he says. " Hollister, in my opinion, has some of the worst customer service. Customer service will set us apart. Long gone should be the time of 'vibey' shop kids at our front counters or doors. Long gone are the times when parents or insecure kids would feel uncomfortable coming into our stores. This is the new day and age of specialty retail."

Holbrook says that from a manufacturer's point of view it's key to work closely with core accounts to make sure the message of the brands are reaching core customers. "The reason that most of our retailer partners got into this business wasn't to make a buck. It was because they loved it, and they wanted to have a surf shop," he says. "At the end of the day, that passion is something the Hollister's of the world don't understand. I think the people that really improve the service and really tell the story in the store for the brands will clearly be successful."

He also thinks that there is a need for more specialty shops and company stores in areas that are not exposed to authentic action sports brands. "When you go into the heartland and really see the Hollister's, you realize that we need some Surfside's and some Jack's and some Sun Diego's out in the Midwest to tell the real story. There are a couple of guys out there that are really good, but there's not enough of them," he explains. "I wish we had more Quiksilver stores out in the Midwest. If we had a few more out there it'd be great to help tell the story."

Woolcott says that strong competitors like Hollister should motivate the industry to collectively reevaluate how it does business and focus on improvements in all areas. "We've got to do a better job; we meaning our industry--from our retailers to our manufacturers," he says. "We're all in it together, and both groups have to raise the bar in order to compete with what's going on out there. Whether it's Hollister or somebody else. There are a lot of good people out there that know what they are doing from a retail end, a merchandizing end, and a product end. We've grown up. We're at a different level now. We're not a little cottage industry anymore, so we've got to compete with the best of them out there. I think that's exciting, and we can."