Synopsis and Position in the Course - True Religion Brand Jeans

Synopsis and Position in the Course

True Religion Brand Jeans, a startup in 2002, became a major force in the premium segment - jeans retailing for $100 or more -- of the US denim market in just three years. By 2007, the company had the second largest premium denim brand in the US behind segment pioneer Seven For All Mankind. This made True Religion far larger than jeans stalwarts Levi's, Lee, and Wrangler in the high end of the denim market. Although not the first entrant to the premium jeans segment, True Religion was successful in capitalizing on some substantial early mover advantages - namely, brand establishment in the heady days of huge industry growth and excellent placement in key retail outlets - Nordstrom, Neiman-Marcus, and trend-setting boutiques in Los Angeles. Despite the inherent fickleness of core True Religion jeans consumers, the company's reputation for "cutting edge", "hot" jeans designs had proven difficult for competitors to overcome. The company's exceptionally strong financial performance from 2002-2006 reflected those early mover advantages.

Nevertheless, several issues plagued True Religion management. Premium denim market growth slowed in 2006, and the industry experienced a drop in sales in 2007. In the difficult US economic environment, management's growth plans faced increasing scrutiny from investors. After an enormous drop in sales in Japan for True Religion in 2007, investor attention was focused on the potential for long-term above-average growth in the US market. With 8 pairs of jeans in the average American woman's closet and the ever-present possibility that fashion trends would change dramatically and make premium denim passé, investors wondered if True Religion could both survive the industry downturn and continue to grow its brand in the US. Although caught flat-footed by first-mover Seven For All Mankind from about 2000-2004, lower priced denim brands such as Levi's copied the many of the company's innovations in fit, pocket stitching, back pocket placement, fabric and finishes by 2006. The lucrative premium jeans segment accounted for an estimated 15% of women's jeans dollar sales and about 9% of total jeans industry sales. VF Corporation (Lee jeans and recently-acquired Seven For All Mankind) in particular was determined to bring premium jeans innovations to its lower-priced brands. With the economic downturn, consumers might trade down and stick with these newly improved lower-priced brands when the economy rebounded.

True Religion's Chairman and Founder, Jeff Lubell publicly announced his intention to grow sales from about $173 million in 2007 to $1 billion. The new "professional" management team he installed during 2006 and 2007 hoped to achieve Lubell's goal by using a two-pronged strategy. The two elements of the company's strategy were 1. expansion of True Religion's brand into a global "lifestyle" brand a la Diesel and Ralph Lauren; and 2. forward vertical integration into company-owned mono-brand stores. However, failed attempts to significantly broaden the company's product mix a caused bears on the company to question the long-term viability of the True Religion brand. Only 10% of revenues were derived from sales of non-denim products at the end of 2008. Bulls pointed to the company's adroit reading of fashion trends and survival of the early phases of industry shakeout along with substantial growth in some international markets as signs the brand would not only survive but would also continue to thrive as it became a fashion icon worldwide.

Growth questions coupled with Lubell's significant insider stock sales, the restatement of financials for 2004-2006 due to accounting irregularities, and management's discovery of "material weakness" in internal controls in 2005-2007 were significant issues for True Religion in 2008.

Objectives

1. Review industry structure concepts in a rapidly maturing market subject to changes in fashion trends. Students can use both Porter's Five Forces and value chain analysis in this exercise.

2. Evaluate the sources of True Religion's competitive advantage and determine whether or not the company can sustain its advantage given the similarities between both its strategy and its products to its four largest competitors'.

3. Discuss product differentiation as a source of competitive advantage.

Study Questions

1. Is the premium jeans industry an attractive market? Develop an understanding of the industry structure and market dynamics.

2. Does True Religion enjoy a competitive advantage in the segment? If so, is its advantage sustainable? Discuss the sources of competitive advantage and use the VRIO framework to evaluate True Religion and its major competitors.

Teaching Plan

This case is designed to be used as an industry case, but works very well as a case on internal analysis also. I like to use the case to bring together concepts from Chapters 2 and 3 - analysis of the external environment, and evaluation of internal resources and capabilities. In addition, the case serves as a good discussion platform for Chapter 5's concepts on product differentiation. Students like this case, because they usually are very familiar with the product line and premium jeans in general. There are a number of productive ways to open the case discussion. Here are some suggestions:

1. Enlist the aid of 1-3 graduate students to pretend to be potential jeans entrepreneurs. The capital costs are so low that students could, in fact, start a premium denim business fairly easily. I like to read a fake "disclosure" note "mandated" by the University that says I will not benefit financially from the case discussion. I ask the students to discuss the industry dynamics with special emphasis on Porter's Five Forces and value chain analysis so that we can "help" the budding entrepreneurs. Be sure to tell the class at the end of the period that the graduate students were actors.

2. Survey the class either beforehand or at the beginning of the period on the amount each student spent on his/her last pair of jeans. Discuss why consumers perceive some jeans are worth $25 and some are worth $250 per pair. Usually, the responses will split along gender lines with women purchasing far higher priced jeans than men on average, but you are likely to find a few male students who also pay premium prices for jeans. This leads into an evaluation of