Think back to being a teenager. Do you remember what was cool? I remember my plaid flannel shirts and seeing a lot of crimped hair. Whatever image comes up, it's probably not what you think is cool now.
Few trends stay in place after those teenagers grow up. In fact, being cool when one generation is young can almost guarantee the subsequent generations will think a trend is pretty lame. A good example is how proudly members of Generation X displayed the brands they wore, from Abercrombie & Fitch (ANF -0.94%) to Ralph Lauren (RL -0.97%). Gen-Z is the exact opposite. They typically dislike any logos and have a fashion sense that has been called "chaotic." That's why it's surprising that an old-school brand like Levi Strauss (LEVI -1.60%) is so popular among the cohort. It took a lot of effort. And it's investing to strengthen the relationship.
The power of youth
Gen-Z is now about as large a part of the U.S. population as any other generation. And according to Forbes, it has about $360 billion in disposable annual income. That has drastic implications for companies selling consumer products. What's important to this youngest generation is proving to be very different from previous ones. And it goes far beyond an aversion to the Abercrombie moose or the Ralph Lauren Polo horse. Many believe traditional marketing simply doesn't work on them.
One possible reason is that more than 60% believe they will never be able to afford the things they want in life. That's depressing. And it makes them much less likely to splurge than previous generations. They are more frugal, do more research, and are less likely to be loyal to one brand unless it aligns with their beliefs and values. Often those values revolve around sustainability -- things like conservation and climate change. Levi's has been able to tap into that idea and make a compelling case that its products and corporate values are just what Gen-Z is looking for.
A case study in embracing change
In 2021, Chris Jackman, vice-president of global brand marketing at Levi's, said, "This is a celebration of the next generation of changemakers." He was talking about a new ad campaign with the tagline "Buy Better, Wear Longer." It featured various members of Gen-Z who were known for activism around sustainability. The message was that jeans could be worn longer without washing, reducing the environmental impact of every customer.
According to the ad, global apparel consumption had doubled between 2006 and 2021.The message resonated. The company even launched a buyback and resale program for used jeans, called Levi's SecondHand. The strategy paid off. This year, sales of its iconic 501 brand are anticipated to be about 70% higher than before the pandemic.
Despite the success of that brand, the company as a whole hasn't been immune to the uncertain economic environment. Revenue climbed just 6% for the first quarter of 2023. And the $6.3 billion in sales over the past 12 months is only 9% higher than in the full year 2021.
But Levi's is playing the long game to connect with younger customers and build a direct relationship, much the way Nike (NKE -0.68%) has with its customers since 2017. That relationship is a flywheel, where the company gets data about people buying its products because it's selling directly to them. That allows it to build a more tailored customer experience, which leads to higher conversion on its ad spending, generating even more valuable data.
Levi's now has 25 global stores, grew online sales 14% in the most recent quarter compared to the prior year, and expanded its loyalty program to 25 million members globally -- up 40% from 2022. Since 2011, direct-to-consumer (DTC) sales have climbed from 22% of revenue to 36%. Management wants that to hit 55% by 2027. By comparison, Nike has grown that number from 26% in 2017 to 43% in its latest quarter. Nike have been rewarded with a stock that's up 120% over that span.
Image source: Levi Strauss.
With Levi's stock down 32% this year and almost 60% from its 2021 high, CEO Chip Bergh is doubling down, this time by targeting another well-known idiosyncrasy of Gen-Z: their attraction to nostalgia. The company's latest ad campaign is called "The Greatest Story Ever Worn." It follows amazing stories gathered from the 150 years of the 501 jean. The company is hoping the stories inspire a new generation of buyers to imagine their own personal adventures in a pair of Levi's.
Shareholders are hoping the success spills over into other Levi's brands to duplicate Nike's success in executing its own DTC strategy. It's a tough ask. But trading at less than one-fourth the price-to-sales ratio of Nike means Levi's has a lot of upside if it can deliver.
