Levis at Wal-Mart DARDEN叁 UVA-M-0711 BUSINESS PUBLISHI.docx

Levi's at Wal-Mart?
DARDEN叁 UVA-M-0711
BUSINESS PUBLISHING Rev. Oct. 12, 2010
UNIVERSITY: 矿VIRGINIA
LEVI'S AT WAL-MART?
Introduction
In early 2002, Phil Marineau, CEO of Levi Strauss & Co., was
thinking about whether he
should direct his company to sell its product in the world's
largest retail store, Wal-Mart. Levi
Strauss had posted a decrease in sales for the past five years,
and Marineau was eager to stem the
decline. Since joining the company in 1999, Marineau had
embarked on an aggressive plan to
tum the company around by implementing new business
strategies that included shuttering 16
North American manufacturing plants and moving the
production to cheaper offshore sources. In
the marketing area, Marineau had worked to revive the brand
image by launching a series of new
advertisements and product placements to broaden the appeal
beyond the 15-to-19-year-old
segment.
Marineau and his management team sensed that the Levi's brand
was being challenged at
all points along the spectrum. The high-end segment was

dominated by trendy brands such as
Tommy Hilfiger, Calvin Klein, Ralph Lauren Polo, and Diesel.
In the middle segment, Levi
Strauss competed with vertically integrated retailers such as the
Gap, American Eagle Outfitters,
and Abercrombie & Fitch. Meanwhile, retailers such as Wal-
Mart, Target, JCPenney, and Sears
had built their own private-label brands, offering comparable
designs at significantly reduced
prices. With Levi's selling in several chain and department
stores, the company often found itself
being used as a loss leader , with Levi's heavily discounted to
the end consumer. Now Marineau
and his management team had to decide whether to sell Levi's in
Wal-Mart and, if so, what
approach to use.
The company had maintained a 10-year relationship with Wal-
Mart during the 1980s and
1990s by selling them a value brand called Britannia. Wal-Mart
stopped dealing with Levi
Strauss in 1994, however, after a dispute in Canada, when Levi
Strauss executives refused to
maintain a supply of Levi's Orange Tab jeans in Wal-Mart's
newly purchased Canadian stores
(previously Woolco stores).'With sales of Britannia dropping
drastically thereafter, Levi Strauss
sold the Britannia brand to a competitor, VF Corporation, in the
mid- l 990s.
1 Louis Trager, "Wal-Mart, Levi's in Battle Over Jeans," Los
Angeles Daily News, September 9, 1994, B2.
This case was prepared by Jordan Mitchell under the
supervision of Paul W. Farris, Landmark Communications
Professor of Business Administration, and Ervin Shames,

Instructor. It was written as a basis for class discussion
rather than to illustrate effective or ineffective handling of an
administrative situation. Copyright © 2005 by the
University of Virginia Darden School Foundation,
Charlottesville, VA. All rights reserved. To order cop比s, send
an
e-mail to sales(aldardebusinesspublishing.com. No part of this
publication may be reproduced, stored in a retrieval
system, used in a spreadsheet, or transmitted in any form or by
any means—electronic, mechanical, photocopying,
recording, or otherwise—without the permission of the Darden
School Foundation. 0
Business Policy and Strategic Management
-2- UVA-M-0711
As of early 2002, Levi Strauss was considering rekindling the
Wal-Mart relationship by
offering it a new value brand. Marineau and his management
team had one central question:
How should the brand be developed to preserve sales with
existing customers in other channels?
"There are 50 million pairs of jeans sold in discount stores,"
Marineau said, "and we are in the
business of making pants. We would be crazy not to be looking
at other Levi's brands that could
be sold in those channels."2
Apparel and Jeans Market in the United States
Approximately 569 million pairs of all types of jeans were sold
in the United States in
2001, throughout all consumer segments, which represented an

increase of 2.7% over 2000.3
Total jeans sales were estimated to be $1 1. 7 billion4 out of a
total apparel market of $166 billion.
The apparel market had been steadily growing since 1998, but
experienced its first decline in
2001, dropping 5.7% in dollars from the prior year.5 As an
expert tracking the apparel industry
stated, "2002 will be a very interesting year for the apparel
industry and will see a slow road to
recovery. Certain categories and consumer segments are
expected to see slight increases, while
most categories are expected to remain flat or decline in dollar
sales."6 Exhibit 1 shows the
market size of the entire apparel market and the breakdown of
apparel sales by retail channel.
Within the apparel market, several categories of pants existed
with casual pants, dress
pants, and jeans being the largest. During the late 1990s,jean
sales had leveled off as consumers'
tastes shifted to khaki, cargo, and other types of techno-fabric
pants. By 2001, however, denim
sales were rising as consumers migrated back to jeans. They
were attracted by several
innovations in fabric and in style. The jeans market was
expected to grow by 2% to 3% in 2002.
The average price for a pair of jeans hovered around the $20
mark for both men and
women, with over 40% being sold (either as original or marked-
down price) below $20.7 The
average price of jeans had dropped over the previous 10 years
due to the proliferation of off-
pricing and private-label brands. One study by Cotton
Incorporated showed that none of the top-
19 brands of jeans in both the women's and men's segments was

able to increase its brand
premium when compared to the average price of j eans in an
eight-year period. In the men's jeans
segment, 11 of the 19 brands lost their premiums, and in the
women's segment, 14 of the 19
brands lost their premiums over the market's average.8 The
same study suggested the following
to avoid losing price premiums:
2 Sarah Butler, "Levi's Rules Out Red Tab Sales to Value
Sector," Drapers Record, March 30, 2002, 3.
VF Corporation annual report, 2001.
VF Corporation annual report, 2003.
5 "Reports 2001 U.S. Apparel Industry Down for First Time in
Three Years," April 29, 2002,
http://www.fashionworld.com (accessed March 3, 2005).
Three Years."
7 Scott Malone, "Retail Revolution—Levi's Considers Selling to
Wal-Mart as Sales Slump," Women 's Wear
Daily, January 17, 2002, I.
8 "Does Branding Combat Price Deflation?" Cotton
Incorporated, Winter 2003, http://www.cottoninc.com
rrextileConsumerffextileConsumerVolume31/?Pg=2 (accessed
February 2, 2010).
Levi's at Wal-Mart?
-3- UVA-M-0711

One [solution] is for a brand to resist diluting its premium
through discounting or
marketing in too many different retail channels. Once
consumers see a brand
offered simultaneously at different channels, such as department
stores and mass
merchants, the ability to maintain a positive brand premium may
be fatally
compromised. A better strategy is to introduce a different brand
name, perhaps
affiliated with the original brand, but with enough independent
brand identity so
that consumers and retailers can differentiate products. Without
differentiation,
apparel products will compete largely on the basis of price.
Another strategy for
preserving brand premium focuses on emphasizing the non-price
attributes of the
brand. Attributes such as packaging, labeling, and customer
service can enhance a
brand image without compromising the brand's retail price.9
The largest and fastest-growing retail channel for jeans and
apparel was the mass
merchants channel made up of Wal-Mart, Target, Kmart, and
several other smaller retailers. In
January 2002, Kmart filed for bankruptcy protection after a soft
holiday season and intense
competition left it in a precarious financial situation.10 An
industry analyst talked about the
increasingly blurred lines separating the channels:
Retailers will be challenged in 2002 with the need to distinguish
themselves from
one another. With the melding of channels, department, chain,
specialty, and mass

merchant, retailers are looking for more of the same with
similar merchandise.
This allows the consumer to be able to switch channels for
apparel shopping and
seek the value experience, and fmd fashion value at lower
prices. Department and
specialty stores will really need to work hard to make
themselves what they once
were: special and different.11
Jeans Consumers
Jeans were garments worn in a variety of settings—by people as
diverse as manual
laborers and models on the haute couture catwalks in London,
Paris, and Milan. Denim jeans
were considered truly egalitarian. As one academic wrote,
"Jeans have the ability to conceal
class distinction. When a person wears blue jeans—be it
President Bill Clinton or a truck
driver—the viewer is nebulous about the beholder's status."12
Styles varied as much as settings. Jeans were inextricably
linked with music, given that
certain styles of jeans were often part of a group's costume—
tight black jeans were an essential
wardrobe item for Goth dressers, no-nonsense straight-leg blue j
eans were worn by country and
western musicians, and oversized, baggy styles were adopted by
hip-hop artists. In younger age
9 "Does Branding Combat Price Deflation?"
10 "VF Corp. sees no material impact from Kmart," Reuters,
January 22, 2002.
Three Years," April 29, 2002.

12 C. Magocsi, "The Gentrification of Blue Jeans," University
of Toronto, http://www.chass.utoronto.ca
加story/material_culture/cynth/index.html (accessed February 2,
2010).
-4- UVA-M-0711
groups such as 15- to-19-year-olds, it was normal to own
between five and eig?t pairs of jeans of
a variety of brands. Men and women over 35 had between three
and five pairs of two to three
brands卫 In general, men and women over 35 spent half as much
on jeans each year as members
of the 15-to-19-year-old group. The over-35 group purchased
fewer pairs per year, and they
spent less on these purchases. The 15-to-19-year-old set
purchased the more expensive brand
names, while consumers over 35 preferred inexpensive brands
and the availability oflarger sizes
and private labels.
Levi Strauss & Co. History
Levi Strauss was born in Buttenheim, Bavaria (modem-day
Germany), in 1829, and
moved to the United States in the 1847. After initially teaming
up with his two half-brothers to
run a dry goods business in New York, he relocated to San
Francisco and started his own dry
goods business in 1853. Nineteen years later, Strauss received a
letter from Jacob Davis

proposing that the two of them apply for a patent on a new
invention: riveted denim pants. On
May 20, 1873, the two men received U.S. patent no. 139,121 for
men's riveted work pants and
immediately started producing what were at that time called
"waist overalls." They soon realized
that they were filling an important niche with their sturdy,
durable garment. By around 1890, "lot
number 501" was being used to designate the copper-riveted
overalls later known as jeans.
After the death of Levi Strauss in 1902, family members
continued to run the business
and developed Koveralls, one-piece play suits for children, in
1912, and Freedom-Alls, one-piece
work suits for women. Around this time, the company
established a relationship with Cone Mills
to supply denim for key products—a relationship that still
existed in 2002.
During the Great Depression of the 1930s, Levi Strauss avoided
layoffs by giving
workers shorter workweeks or assigning nonmanufacturing
activities such as maintenance and
improvement of the facilities to employees. Near the end of the
decade, Levi 's jeans were
popularized by actor John Wayne's appearance in the movie
Stagecoach—the jeans were a vital
component of his wardrobe—and they became a common sight
at dude ranches throughout the
country. In the 1940s, Levi Strauss & Co. took the leadership
position on social issues by being
one of the first companies in the United States to promote
integrated factories, with individuals
from several cultures working side by side. The company also
advertised in a number of

languages to reach the burgeoning immigrant market within the
United States.
Levi's took another marketing turn in the 1950s, when teenagers
became the central focus
in advertising for the brand. With movies such as The Wild
One, featuring Marlon Brando in
Levi's 501 jeans, the brand became associated with the
rebellious "Beat Generation," the
precursor of the 1960s countercultural revolution. Levi's jeans
were becoming branded with the
key attributes of rebellion and originality. (The "Right for
School" campaign, however, drew
responses to the contrary.) When Marilyn Monroe appeared in
Levi's jeans in a photo shoot, the
brand became sexier and appealing an alternative to skirts and
other types of pants for women.
13 "Does Branding Combat Price Deflation?"
Levi's at Wal-Mart?
-5- UVA-M-0711
The company worked to expand the Levi's brand by moving into
product lines such as Lighter
Blues, Denim Family, and Casuals, the latter of which was
adapted to meet the style of the 1960s
with polyester blends and greater color variety.
Levi's expanded into international markets in the 1950s. In
1969, the brand received
further recognition through a famous photograph of the jeans
being worn at the legendary

Woodstock music festival. The company set up a European
division in 1965 and during the next
decade expanded throughout the world and into Asia, with Japan
becoming the fi订st Asian
affiliate in 1971.
The company's ability to create relevant and "cool" products for
the teenage set as well
as its progressive working conditions—such as being the fi江st
to offer benefits to the unmarried
partners of their employees and one of the first companies to
offer support to AIDS victims—
made Levi Strauss a heralded and well-respected Fortune 500
enterprise.
By the 1980s, the company had several diverse interests ranging
from dress-suit
production to owning part of a hat manufacturer. In 1984, the
company went through a major
refocusing when it shed many of its noncore subsidiaries and
based its marketing efforts on its
star product—501 Levi' s. The timing was ideal—the company
rode the wave of Bruce
Springsteen's multiplatinum album "Born in the USA," the
cover of which showed Springsteen' s
backside clad in a trusty pair of 501s. The refocusing effort led
by Strauss descendent Robert
Haas put the company back on track as a profitable and focused
organization.
Seeing an opportunity to open up a new segment in the pants
market, the company
launched Dockers pants in 1986, as a casual alternative to dress
pants and jeans. The success of
Dockers was unabated. From its launch in 1986 to 2002, when
Dockers introduced a line of pants

for women, the overall brand grew to over $1 billion in annual
sales卫 The company decided to
offer styles for the discerning young consumer and launched its
Silvertab jeans in 1988. By
1996, Levi Strauss was at the top of its game~ it had built a
truly global brand with efforts such
as "Clayman," the company's fi江st global commercial, and its
iconic 501 jeans continued to
grow. The company had become the world's largest apparel
manufacturer, with sales reaching a
record $7.1 billion. Exhibit 2 shows a sample of Levi Strauss &
Co.'s historical advertising
1.tnages.
Levi Strauss & Co.: 1997 to 2002
Coming off a record year of sales in 1996, the company's sales
began to decline from
$7.1 billion and net income of $465 million in 1996, to $5.1
billion and net income of $5 million
in 1999. By the close of the 2001 fiscal year, the company's
sales had eroded further to
$4.3 billion. During the same period, Levi Strauss restored net
income to $151 million. The
company was carrying debt of $2 billion, with some of the notes
being graded as one category
14 Levi Strauss annual report, 2002.
-6- UVA-M-0711
away from junk status as of early 2002.15 Exhibit 3 shows

financial highlights from 1997
through 2001.
Levi's brand market share in men's and women's jeans fell from
18.7% in 1997 to 12.1 %
in early 2002.16 In the men's jeans market, the company's
mainstay category, the brand held 48%
market share in 1990, but had decreased to approximately 20%
by 2002.17
Levi Strauss's decline was attributed to several factors, such as
increased competition in
both the high- and low-end segments of the market. On the high
end, image-conscious
consumers were reaching for designer brands such as Tommy
Hilfiger, Ralph Lauren Polo, and
Calvin Klein. Other smaller premium brands such as Miss Sixty,
Diesel, and Guess were all
gaining momentum by offering fashion-foiward designs,
finishes, fabrics, and fits. On the
opposite end of the spectrum, major retailers such as JCPenney,
Sears, Wal-Mart, Target, and
Kmart were all realizing major market-share gains offering
private-label jeans at under $20
apa江．
Competing head-to-head in the same price category with Levi's
jeans were vertical
retailers such as the Gap, American Eagle Outfitters,
Abercrombie & Fitch, J. Crew, and Eddie
Bauer. These vertically integrated specialty stores controlled all
aspects of product design, store
design, and store operation. The Gap even had an in-house
advertising department. These chains
were credited with offering a consistent image across all
formats and having the advantage of

placing products directly in the stores instead of having to sell
to independently owned retailers.
After being criticized for not being up to date with the shop-
within-shop concept, the
company invested heavily in education to learn more about in-
store merchandising. One outcome
was more than a dozen stores owned and operated by Levi
Strauss & Co. in high-profile
locations such as New York City. The company had a total of
3,300 retail customers at more
than 20,000 locations.
Observers felt that the Levi ' s brand was caught in the middle.
Priced between $30 and
$50 a pair, the jeans did not offer the same image or design as
the high-end brands or the
complete wardrobe selection of the vertically integrated
retailers. Also, they did not offer the
inexpensive alternatives found through private labels. To offer
the lower price points, pundits
suggested that the company eliminate its costly overhead of
maintaining its North American-
based production sources. In 1997, the company started closing
its North American production
facilities and further developed offshore sources of production
with third parties in Asia, the
Caribbean basin, and Latin America. 18 While it provided lower
cost per unit, the company
struggled to cover the costs of its restructuring charges for both
manufacturing and non-
16 Lo山se Lee, "Why Levi's Still Look Faded," Business Week,
July 22, 2002.
17 Ralph T. 灼ng Jr., "Infighting 沁ses, Productivity Falls,

Employees Miss Piecework System," Wall Street
Journal, May 20, 1998. Note: The 2002 share derives from a
case writer estimate.
18 The company had used offshore suppliers since the 1980s
and had created a groundbreaking Supplier Code of
Conduct in 1991.
Levi's at Wal-Mart?
-7- UVA-M-0711
manufacturing staff. From 1996, the company reduced
headcount by 33%, moving from a
worldwide total of over 25,000 employees to 16,700 by the end
of the 2001 fiscal year.19
In 1999 Robert Haas stepped down from the CEO post, handing
control over to the
second nonfamily leader in the company's history—Phil
Marineau. Marineau had over 25 years
of experience in consumer packaged goods companies, working
for 23 years and later holding
the president and COO positions at Quaker Oats. There, he was
credited with leading the global
growth of Gatorade. Later, Marineau worked for a short time at
Dean Foods and then moved to
Pepsi-Cola North America for two years before being recruited
to head Levi Strauss & Co.
Levi's Product Lines
In 2002, Levi's brand represented 74% of the company's

worldwide sales and 65% of
sales in the Americas, with the remaining 9% derived from the
Dockers brand and other smaller
offshoots四 The brand comprised several product lines for men
and women (see Table 1).
Industry observers frequently talked about Levi's product lines
being arranged in a
pyramid, with fashion-forward designs such as Levi's Vintage
Line, Levi's Red, and Levi's
Premium at the top, followed in order by Levi's Engineered
Jeans, Levi's Silvertab, and Levi's
Red Tab. The product lines at the top of the pyramid were
intended to create a halo effect on the
overall brand, enhancing its image and fashion relevance. The
company did not allow all its
retailers access to higher-image brands. For examples JCPenney
was not offered Levi's Vintage
or Levi's Red, but was instead presented with the full range of
Levi's Red Tab and Silvertab
products. Each product line had a target consumer—the higher-
end brands were aimed at trend-
conscious buyers in the 15- to 24-year-old range, whereas the
Levi' s Red Tab line had jeans
suitable for more than 10 to 12 different body shapes and styles
that included straight-leg,
relaxed, baggy, boot cut, and slim. The company used the
combination of fit, fabric , and finish as
key differentiators for its target consumer and price point.
Prices for Levi's Red Tab line had
historically been double the price of the average jean. In the
past five years, the average price
paid at retail for Levi's jeans had been dropping, and was
approximately 1.5 to 1.75 times the
market average. 21

19 Levi Strauss annual report, 200 I .
21 C -ase wnter estimates.
-8-
Table 1. Levi's product lines.22
Product line Description
Levi's Vintage Clothing Small group of premium tops and
and Levi's Red bottoms that were based on key
heritage styles with premium fabncs.
Levi's Engineered Jeans Group of tops and bottoms that were
engineered for special mobility
Levi's Premium Red Tab Variations of Levi's Red Tab products
with changes to fabrics and finishes
Levi's Red Tab The core of the Levi's brand including
Levi's Silvertab the classic 501 button-fly jean, as well
as a series of models from the 505
through 579, featuring shm, baggy,
straight-leg, boot-cut and superlow fits.
The line also included tops and jackets.
Urban-inspired denim fits and techno-
fabrics such as slick cotton and nylon-
blends

Other Levi's products Included all other products such as
additional tops, jackets, outwear and
licensed products such as hats, bags,
belts, socks, underwear, and footwear
Source: Created by case writer.
Distribution Channel
High-end specialty stores
Independent shops
Specialty stores
Independent shops
Original Levi's stores
Specialty stores
Independent shops
Department stores
Chain stores
Independent shops
Department stores
Chain stores
Department stores
Chain stores
Independent shops
UVA-M-0711
Retail Price Point

Bottoms: over $100
Bottoms: between
$50 and $80
Bottoms: between
$50 and $100
Bottoms: between
$30 and $50
Bottoms: between
$25 and $50
All price ranges
depending on product
category
Levi Strauss & Co. was constantly releasing new products that
fell somewhere within the
pyramid structure. For example, a r efreshed design of Levi' s
501 jeans was in process with a
release date p lanned for 2003. Also scheduled to h i t stores in
2003 was Levi's Type 1, a new
product line, which accentuated the trademark Arcuate23
stitching design.
Levi's new product releases had mixed results. For example, the
release of Levi's
Engineered Jeans in 2000 was highly successful in Europe and
Asia but failed to prove v iable in
the United States. The design direction for Levi's Engineered

Jeans was to start from zero and
recreate a new jeans blueprint. The result of the new design was
a reconstructed and re-
engineered jean that had a twisted and bent pant leg for greater
mobility . Fashion commentators
believed that it was a breakthrough and soon many top-end
brands such as G-Star and Diesel
began their own designs based loosely on the Levi's pattern for
Engineered Jeans. Despite this
success with high-end brands, however , consumers of U.S.
jeans did not adopt the innovation en
masse.
22 Compiled by case writer based on information at retail
locations and Levi Strauss annual report, 2001 .
23 Arcuate was the name given by Levi Strauss to the Levi's
trademarked "V-like" stitching on the back pockets
of a pair of Levi's jeans.
Levi's at Wal-Mart?
-9- UVA-M-0711
Advertising and Promotion
The Levi's brand was rated as the number-one apparel brand for
brand awareness and

brand retention.24 U .S. advertising and marketing for the
Levi's brand in 2002 was estimated at
$139 million. This budget included outlays for television
advertising, billboard, print, and other
media events and sponsorships.25 By comparison, Nike, a
company more than double the size of
Levi Strauss & Co., invested $998.2 million (10.5% in
revenues) in advertising in 2001, and
$974.1 million (10.8% ofrevenues) in 2000.26
As part of an integrated marketing approach, the company
frequently promoted music
and theatrical productions in exchange for brand advertising at
the venue as well as product
placement on the artists. Sponsored artists included tours by
Lauryn Hill, Massive Attack,
Jamiroquai, Christina Aguilera, Mariah Carey, De La Soul, Ben
Folds Five, and the White
Stripes. It used star talent such as Christina Aguilera and
Mariah Carey in coordination with the
release of Levi's Superlow jeans. For 2002, the brand was
planning to tie in product with the
World Cup soccer event in Korea by sponsoring Korean soccer
star Song Chong Gug.27 To
augment traditional approaches, the Levi's brand also worked to
get product placement on
television shows, feature films, music videos, and on the pages
of top fashion magazines.
Channels of Distribution
Jeans channels could be grouped into six main categories within
the U.S. denim
landscape:
1. Chain and department stores such as JCPenney, Macy's,

Sears, May Department Stores
Co., and Kohl's
2. Image department stores such as Bloomingdale's, Nordstrom,
Neiman Marcus, and Saks
International
3. Independent shops or "jeaneries"
4. Specialty stores such as the Gap, Old Navy, Abercrombie &
Fitch, American Eagle
Outfitters, and Original Levi's Stores (the only one of these to
stock Levi's)
5. Mass merchants such as Wal-Mart, Target, and Kmart
6. Off-price channels such as Costco, Levi's Outlets, and TJ
Maxx
24 Levi Strauss annual report, 2002. Note: Brand retention was
defmed as the percentage of all past-12-month
purchasers who planned on buying the brand in the future.
25 The 2001 annual report indicated approximately 7% of sales
was spent on various media. This figure was
derived by multiplying 7.4% times $4.1 billion in sales times
65% domestic sales times 74% of domestic sales for
Levi's brand.
26 Nike, Inc., annual report, 2002.
27 Levi Strauss annual report, 200 I.

-10- UVA-M-0711
The mass channel sold an estimated 31 % of all jeans in the
United States.28 The
breakdown of total jean sales and Levi's brand sales by channel
is shown in Tables 2 and 3.
Table 2. Jean sales in the United States by channel (percent).
Mass 31
Specialty 二 23
Chain 18
Department stores 16
Other 12
Total 100
Data source: Levi Strauss annual report, 2001.
Table 3. Levi's brand sales in the United States by channel
(percent).
Chain and department stores 58
Independent 8
Specialty 3
—-Image department stores 2
Mass 0
Other 29
Total 100
Data source: Levi Strauss annual report, 2001.
The Levi's brand was not present in the mass merchant channel
in the United States. The
single largest customer for Levi's brand sales was JCPenney,
which accounted for over 10% of

the company's overall sales.29 In 2002, along with JCPenney,
the top 10 customers in
alphabetical order were Costco, Casual Male Retail Group
(formerly Designs, Inc.), Dillard's,
Federated Department Stores (owners of Macy's and
Bloomingdales), Goody's, JCPenney,
Kohl's, May Department Stores Co., the Mervyn's unit of Target
Corporation, and Sears.30
Competition
Given the fragmented nature of the fashion industry and the
jeans market, the Levi's
brand competed across a wide spectrum of brands. Competitors
chose to either fight for market
share based on price or sought consumers willing to pay a
premium for image, design, fit, and
finish. The frrst category was dominated by mass-market private
labels from Wal-Mart, Target,
Kmart, Sears, JCPenney, and Macy's. The second category was
rife with examples from high-
Levi's at Wal-Mart?
-11- UVA-M-0711
end brands such as Ralph Lauren Polo, Calvin Klein, and Guess,
through to fashion-forward
styles such as Fubu, L.E.I., Mudd, and Diesel. One consistent
competitor in the last 50 years had

been Wrangler and Lee Jeans, both of which were owned by VF
Corporation.
VF Corporation: Wrangler, Lee, and Rustler
VF Corporation, established in 1899, produced and marketed a
large portfolio of brands
including outdoor names such as JanSport, The North Face, and
Eastpak as well as intimates
labels such as Vanity Fair, Vassarette, and Bestform. VF's
largest customer was Wal-Mart,
which made up 15.1 % of VF's total sales in 2001 and 14.8% of
VF's sales in 2000.31 Total
advertising for all VF brands was $244 million (4.4% of sales)
in 2001, $252 million (4.4% of
sales) in 2000, and $258 million (4.6% of sales) in 1999.32
VF Corporation jeanswear brands included Riders, Chic,
Britannia, and Rustler, and a
number of product-line offshoots from the江 stable of Wrangler
and Lee offerings. Riders, Chic,
Britannia, and Rustler were sold in the mass channel at stores
like Wal-Mart, Target, and Kmart
and were typically priced between $9.99 and $19.99. All three
of the brands were targeted
largely at value-conscious mothers who made buying decisions
for the rest of the family.
Wrangler jeans were also available at the mass-merchant
channel with some product
extensions being available at chain and department stores.
Wrangler jeans retailed between
$14.99 and $24.99, and were designed for durability, reliability,
and fit. Wrangler imaging
revolved around western-inspired themes and the spirit of the
American cowboy. Its consumer

base was mostly males ages 25 to 50 and appealed largely to
men seeking comfortable jeans for
work or pleasure activities.
Lee Jeans were largely a chain and department store brand,
commanding price points
between $29.99 and $49.99, depending on the style, cut, and
finish. In promotions, Lee Jeans
used a character called Buddy Lee, a miniature cowboy doll that
had gained a cult following in
the United States. Lee Jeans were targeted toward the 15-to-25
age group, although the company
did offer the Lee brand to children. The brand image projected
original fits with up-to-date
variations on vintage offerings.
Designer and fashion-forward jeans
Hundreds of brands competed in the designer and fashion-
forward denim market. While
the majority of brands commanded small market share, each
attempted to find a niche with its
style. The larger designer labels such as Ralph Lauren Polo,
Calvin Klein, and Tommy Hilfiger
were supported by ready-to-wear collections shown regularl~in
fashion havens such as New
York, London, Paris, and Milan. All three brands had distinct
Jean collections, which they sold at
high-end and regular department stores. All three brands
invested heavily in in-store displays at
31 VF Corporation annual report, 2003.
32 VF Corporation annual report, 1999 through 2001 (see
Exhibit 13).

-12- UVA-M-0711
department stores, refreshing the design and refurbishing every
three years. The average price of
jeans for these three labels was between $49.99 and $99.99.
Other brands such as Guess ($49.99 to $79.99) and Diesel
($69.99 to over $100) had built
a strong image using provocative out-of-home advertising.
Guess chose to sell at a combination
of department, independent, and Guess stores. Diesel products
were found at higher-end
department stores, image-conscious independents, and a small
worldwide network of corporate-
owned locations in select urban centers. Guess chose to control
all of its advertising efforts in-
house and spent $17.5 million (2.6% of total revenues) in 2001,
$29.7 million (3.8% of total
revenues) in 2000, and $24.5 million (4.0% of total revenues)
on advertising in 1999.33
A number of other brands such as LE.I. (Life Energy
Intelligence), Mudd, FUBU, and
Lucky all attempted to establish a niche in the jean marketplace
whether it be with quirky
designs or baggy fits that responded to America's rap idiom.
These brands were located at a
combination of department stores and independent shops at
price points ranging from $39.99 to
$89.99.
Vertically integrated specialty-store brands

The Gap sprung up in 1969 in San Francisco and carried Levi's
jeans until the company
began focusing on building its own jeans brand in the late 1980s
and early 1990s. The Gap
offered a wide range of casual products with a penchant for
offering fashion-relevant basics
supplemented by seasonal changes in colors, fits, and fabrics.
An average pair of Gap jeans cost
between $35.99 and $59.99, although the Gap frequently
discounted its seasonal line of goods
every eight weeks as new products were released into the stores.
The Gap controlled all aspects
of product and store design as well as consumer
communications, which in recent years had
featured a mix of well-known and unknown individuals involved
in either music or dance.
Notable TV spots for the 2001 holiday season included musical
stars such as Dwight Yoakum,
Macy Gray, Sheryl Crow, Shaggy, and Alanis Morissette. The
Gap's target audience was fairly
broad, although industry observers generally felt that the store
was targeted to individuals in their
20s. The Gap also owned and operated Old Navy, which offered
lower price points aimed at
teenagers. An average pair of jeans at Old Navy cost between
$19.99 and $29.99.
Abercrombie & Fitch, American Eagle Outfitters, and J. Crew
all competed for wardrobe
dollars, offering a complete line of casual clothing for men,
women, and children. They targeted
consumers between 15 and 25 years of age, with each brand
saluting the American classic styles
frequently associated with campus and country club images.
Prices points for a pair of jeans
varied between $39.99 and $69.99.

Private-label brands
Private labels were developed by retailers to offer consumers a
similar product to branded
alternatives at 50% to 60% of the retail price. JCPenney had
developed the Arizona brand, which
33 Guess Inc. annual report, 200 I .
Levi's at Wal-Mart?
-13- UVA-M-0711
commanded about 7% of the men's jeans market, and Sears had
a similar share of the market
with their Canyon River Blues private label.
Mass merchants had realized tremendous growth in private-label
sales. Wal-Mart ,with
its Faded Glory and No Boundaries private labels, had gained
nearly 6% of the overall jeans
market, while Kmart retained approximately 5% of the overall
market. Target had taken a
different approach by licensing the Cherokee brand, which
became its captive label. With
Cherokee jeans, Target had posted yearly growth to command
nearly 8% of the overall jeans
market in units. All private-label offerings by mass merchants
were priced below $20.
Wal-Mart
Founded in 1962 in Arkansas, Wal-Mart became the world's

largest retailer. For the year
ending January 31 , 2002, Wal-Mart posted revenues of $220
billion and net income of
$6.7 billion.34 Exhibit 5 shows Wal-Mart's financials. It had
over 2,700 U.S. outlets, split
between its regular discount stores and supercenters that sold
groceries and offered additional
services. The company also operated another 500 discount
outlets under the Sam's Club name
and controlled nearly 1,200 outlets on international soil under
names such as ASDA in the
United Kingdom. Exhibit 6 indicates the growth of Wal-Mart' s
discount stores and supercenters.
Wal-Mart's average store size ranged from 90,000 square feet to
over 200,000 square feet
for supercenters. The company's slogan was, "Everyday low
prices," and it guaranteed
maximum selection at the lowest prices. Wal-Mart carried a mix
of both private-label and
branded merchandise with private-label sales accounting for
approximately 20% of overall sales
(in contrast, Target's private-label sales represented 50%).35
34
Table 4. Wal-Mart sales categories (percent).
22 Grocery, candy, and tobacco
21 Hard goods
18 Soft goods/ domestics
9 Pharmaceuticals
9 Electronics
7 Sporting goods and toys
7 Health and beauty aids
3 Stationery

2 One-hour photo
1 Jewehy
1 Shoes
100 Total
Data source: Wal-Mart annual report, 2002.
Wal-Mart annual report, 2002.
35 Pankaj Ghemawat, Ken A. Mark, and Stephen P. Bradley,
"Wal-Mart Stores in 2003," 9-704-430
(Cambridge, MA: Harvard Business School Publishing, 2004).
-14- UVA-M-0711
Apparel sales were included in soft goods/domestics and
represented approximately
$23 billion in sales, or 11 % of Wal-Mart's total revenues.36 It
was estimated that Wal-Mart held
12.6% of the entire apparel market compared with the 3.6% held
by rival Target.37 Wal-Mart's
most successful apparel categories were in the ladies'plus sizes
and men's work wear with both
consumer sets typically being 35 to 60 years old. Unlike higher-
end designer brands that did not
come in large sizes, Wal-Mart offered a range of sizes in men's
pants with waist sizes that went
as large as 48 inches. The predominant positioning for the Wal-
Mart private labels was a focus
on offering the basics at everyday low prices. As one analyst
commented, "The only thing Wal-

Mart really develops is low prices."38 Another analyst
explained that Wal-Mart used a low-risk
strategy in its apparel division by playing down disposable
fashion. "They can usually hold
pricing at fairly stable and comfortable levels. They do some
markdowns, but you won't see a
whole category on sale," he said. 39
Some onlookers believed that Wal-Mart had substantial room in
which to grow their
apparel line and cited the retailer's attempt to develop one of its
star brands, George, as well as
other fashion-forward brands such as No Boundaries, Organize
Your Life, and Mary-Kate &
Ashley that were aimed at junior customers.40 As a Wal-Mart
spokesperson said, "Over the past
five years we've stepped up our efforts to focus on apparel, in
terms of fashion and quality.
George demonstrates that commitment. It offers high quality,
great value and styling at everyday
low prices."41
While looking to grow its own brands, Wal-Mart also purchased
a specially designed
assortment from work wear marketer Dickies, which developed
a line specifically for Wal-Mart.
Other branded apparel manufacturers such as VF Corporation
sold Wal-Mart multiple lines,
including the Wrangler, Riders, and Rustler brands. The
president of VF Jeanswear, Mass
Market, said:
The potential for Wal-Mart's apparel is endless. They already
turn merchandise
well, but the numbers of people who walk into stores and don't
buy apparel or

only buy a small percentage is huge. It comes back to what
products they
showcase and how they customize the assortment.42
Wal-Mart organized its offerings along the good, better, and
best spectrum, with private
labels filling the good position and national brands occupying
the best spot. VF's Wrangler jeans
were priced from $14.99 to $24.99, while Wal-Mart' s Faded
Glory brand was priced regularly at
36 Debby Garbato Stankevich, "Expanding Upon a Basic
Appeal: 汕cromarketing and Other Initiatives Are
Likely to Drive Wal-Mart's Clothing Sales to New Heights,"
Retail Merchandiser, March 1, 2002: 34.
37 Emily Scardino, "Is Target's Wardrobe in Wal-Mart's Sights?
The Mossimoization of Mass Catches On,"
Discount Store News, April 7, 2003, Sl.
38 Stankevich.
39 Stankevich.
40 Stankevich.
41 A. Scott Walton, "Low-Cost, High-Fashion," Cox News
Service, November 25, 2002.
42 Stankevich.
Levi's at Wal-Mart?
-15- UVA-M-0711
$10.77.43 In women's jeans, the main national brand was Riders
jeans, which sold between
$14.99 and $24.99; No Boundaries, Faded Glory, and White

Stag carrying price tags between $9
and $20. Wal-Mart's No Boundaries brand offered greater
variation in styles and coloring. The
collection was largely based on prevailing fashions such as
capri pants and low-rise jeans for
girls, as well as carpenter pants and baggy fit for boys. Faded
Glory offered customers a sturdy
and relaxed basic jean. One fashion source even claimed that
Faded Glory jeans were one of the
most comfortable jeans in the U.S. market.44 Exhibit 7 shows a
list of Wal-Mart's main brands
by consumer category.
The central incident involving the weakening of the Levi
Strauss & Co. and Wal-Mart
relationship was the dispute over selling Levi's Orange Tab
jeans (a line of products that was
phased out in the United States but still existed in Canada) to
Wal-Mart stores in 1994, when it
purchased the Woolco chain in Canada. Levi's decision to not
sell Orange Tab at Wal-Mart in
Canada cost the U.S. business the entire Wal-Mart sales of the
Britannia brand—approximately
1.2 million units, or $10 million in revenue, for the Levi's
brand.45
The Question for Levi's: What to Do and How to Do It?
Levi Strauss & Co. management believed that its competitive
advantage was based on the
worldwide recognition of the Levi's brand name, its
commitment to ethical conduct and social
responsibility, and its focus on product innovation, quality, and
value. Management thought that
the Levi's brand was able to work across several channels of
distribution because of its long-

standing relationships with top retailers.46
To remain competitive, Phil Marineau realized the company
needed to continue
innovating fits, fmishes, fabrics, and other product features. The
necessity of maintaining strong
brand imaging and advertising was believed to help Levi's
maintain the number-one position as
the most recognized jeans brand in the world. To strengthen
retail partnerships, Marineau had to
provide products for retailers to reach their overall blended
margin, while backing up all brand
extensions with strong consumer messaging and the necessary
investment to create an in-store
experience complementary to the brand and the retail space.
In mid-January 2002, Marineau told the press:
One point where we don't sell is obviously the mass merchants:
Wal-Mart,
Kmart, Target. We'd be crazy not to be studying that and trying
to understand
what the opportunities are in the marketplace. We've talked to
these people,
we've tried to understand how they do business, what they do.
We have studies
43 "Retail Industry Update," Credit Suisse F江st Boston, July
18, 2003, I.
44 "Cheap Jeans Beat Designer Once Again,"
http://www.fashionunited.eo.uk/news/archive/jeansl.htm
(accessed February 2, 2010).
45 Trager.

-16- UVA-M-0711
going on about what their consumers want. But we have no
announcement to
make about any plans or any approach that we have fmalized or
decided on. The
first person we will tell ifwe do this is our current customers.47
Marineau was well aware of the P?tential reaction from
customers. In its past, Levi's had
upset existing customers on a few occas10ns when it made the
decision to withdraw a product
line or to sell to other customers. One such incident was in
1982, when Levi' s made the decision
to sell to chain stores JC Penney and Sears, which caused a
dearth of orders from department
stores such as Macy' s.48 Eleven years later, Macy's began
purchasing Levi' s jeans again.
The Decision
While some insiders were convinced that selling a brand to Wal-
Mart was necessary,
many executives within the company were divided on the
subject. One article from an apparel
industry magazine read:
According to sources, there are intense disagreements within
Levi's as to whether
the company should make a move toward the mass market. In
particular, the
executives who have worked to build the company's profile in

the premium jeans
market---on the strength of directional lines including Levi's
Red Tab and Levi's
Vintage Clothing, which carry triple-digit price tags—are said
to be reluctant to
see the brand sold in Wal-Mart.49
Marineau and his executive team needed to decide on whether—
and if so, how—to sell
to Wal-Mart. Levi's formidable competitor VF maintained the
top spot among national
competitors at Wal-Mart—Wrangler in men's jeans and Riders
in women's jeans. One analyst
said Levi Strauss & Co. was going to have "a tough time taking
on the presence that Wrangler
has in this niche."50 The other main pressure was explaining the
rationale to existing customers.
47
An industry insider said:
[Selling to Wal-Mart] creates more pressure for the Kohl's and
Penney 's of the
world. What are they going to do—just roll over and play dead?
[Some retailers
may say] "You have mass distribution now, we can't make
money on you, you're
gone." [Levi Strauss & Co. has not] had one effective strategy
yet. This one will
prop up short-term earnings, but it's a bad long-term strategy.51
Scott Malone, "Retail Revolution—Levi's Considers Selling
Wal-Mart as Sales Slump," Women's Wear
Daily, January 17, 2002, I.

48 Malone.
49 Malone.
50 Thomas Cunningham, "Levi Strauss Rolls the Dice ... ,"
Daily News Record, November 4, 2002.
51 Cunningham.
Levi's at Wal-Mart?
-17- UVA-M-0711
On the other hand, another analyst said, "The total volume of
traditional department
stores is so insufficient right now that if Levi Strauss was
totally dependent on department stores,
they would go out ofbusiness."52
Marineau wondered about how he could leverage the celebrated
Levi's brand name while
remaining competitive and not affecting consumers' propensity
to purchase other Levi's product
lines at higher price points. "Around the world," Marineau said,
"we' re making sure we have the
opportunity to sell at the right price point, from the $250 level
to the $25 level. That' s a unique
opportunity for the Levi's brand, and it's one we' ll continue to
explore as we move forward." 53
52 Cunningham.
53 Malone.

-1 8-
Exhibit 1
LEVI'S AT WAL-MART?
Apparel M arket Information
U.S. Annual Apparel Dollar Sales (1998-2001)
1998
168
1999
173
3.0%
2000
176
1.7%
2001
166
-5.7%
2001 U.S. Apparel Sales by Market Segment (billions)
Total Apparel
Men's
Women's
Boys'
Girls'
Infants'& Toddlers'

Dollar Volume % Chg 00/01 Dollar Share %
166 -5.9% 100.0%
51 -7.0% 30.7%
89.3 -6.7% 53.9%
7.3 -5.6% 4.4%
7.5 -4.1 % 4.5%
10.6 5.7% 6.4%
2001 U.S. Apparel Sales by Channel Distribution (billions)
Channel
All Channels
Department Stores
National Chain
Mass Merchants
Specialty Stores
All Other
Dollar Volume 2 % Chg 00/01 Dollar Share %
166 -5.9% 100.0%
32.7 -6.3% 19.7%
22.4 -10.2% 13.5%
34.9 -0.6% 21.0%
41.2 -6.4% 24.9%
34.5 -7.0% 20.8%
Data source: "Reports 2001 U.S. Apparel Industry Down for
First Time in
Three Years," April 29, 2002, http://www.npdfashionworld.com
(accessed
March 3, 2005).

UVA-M-0711
-19-
Exhibit 2
LEVI'S AT WAL-MART?
Images of Levi's throughout the Ages
UVA-M-0711
t
•• 身,·······~ 等........ w •••
uvrrs鳍伊HS/Im,
主王幸圭幸宝宝兰 1J
k叩妇片est'slacksand fashion _______ ,. 需
己志已于莘辛廷兰王之－
Levi's Ad: 1966 Levi's Sta-Prest Ad: 1970 Levi' s for Women:
1992
Source: Levi Strauss and Co. Used with permission.
Levi
' s
at
Wa
l,M

art?
Business Po licy and Strategic Management
-20-
Exhib it 3
LEVI'S AT WAL-MART?
L evi Strauss & Co. Financial Hig hlights
Nov30 Nov29 Nov28
1997 1998 1999
Statement of Income Data :
Net Sales 6,861,482 5,958,635 5,139,458
Cost of goods sold 3,962,719 3,433,081 3,180,845
Gross profit 2,898,763 2,525,554 1,958,613
Marketing, general and administ「ativ1 2,045,938 1,834,058
1,629,845
Other operating (income) (26,769) (25,310) (24,387)
Excess capacity/restructuring charge 386,792 250,658 497,683
Global Success Sharing Plan 114,833 90,564 (343,873)
Operating income 377,969 375,584 199,345
Interest expense 212,358 178,035 182,978
Other (income) expense, net (18,670) 34,849 7,868
Income before taxes 184,281 162,700 8,499
Income tax expense 46,070 60,198 3,144
Net income 138,211 102,502 5,355

Statement of cash flow:
Cash flows from operating activities 573,890 223,769 (173,772)
Cash flows from investing activities (76,895) (82,707) 62,357
Cash flows from financing activities (530,302) (194,489)
224,219
Balance Sheet Data:
Cash and cash equivalents 144,484 84,565 192,816
Working capital 701,535 637,801 770,130
Total assets 4,012,314 3,867,757 3,670,014
Total debt 2,631 ,696 2,415,330 2,664,609
Stockholders'deficit (1,370,262) (1,313,747) (1,288,562)
Data source: Levi Strauss & Co. annual report, 2001.
UVA-M-0711
Nov26 Nov25
2000 2001
4,645,126 4,258,67•
2,690,170 2,461,191
1,954,956 1,797,471
1,481,718 1,355,88!
(32,380) (33,421
(33,144) (4,281
538,762 479,29
234,098 230,77:
(39,016) 8,831
343,680 239,68°
120,288 88,68!

223,392 151,00·
305,926 141,901
154,223 (17,231
(527,062) (139,891
117,058 102,83
555,062 651,251
3,205,728 2,983,481
2,126,430 1,958,43:
(1,098,573) (935,94
Explanation of Stockholders' Deficit from annual report: "The
stockholders'deficit resulted from a 1996
transaction in which the company' s stockholders created new
long-term governance arrangements,
including a voting trust and stockholders'agreement. As a result,
sh ares of stock of a former parent
company, Levi Strauss Associates Inc., including shares held
under several employee benefit and
compensation plans, were converted into the right to receive
cash. Th e funding for the cash payments in
this transaction was provided in part by cash on hand and in
part from proceeds of approximately $3.3
billion of borrowings under bank credit facilities. The
company's ability to satisfy its obligations and to
reduce its total debt depends on the company's future operating
performance and on economic, fmancial,
competitive, and other factors, many of which are b eyond the
company's control."1

Levi's at Wal-Mart?
-21-
Exhibit4
LEVI'S AT WAL-MART?
Pictures of Lev i 's Product L in es
UVA-M-0711
Levi's Superlow: 2002
Levi's Silvertab: 2002
Levi's Red Tab Cords: 2000
LEVI
·S
ENGINEERED
JEANS
/Sf
Pllr
AUX
YOLONT(S
l1J
COR~

iA
-
Levi's Engineered Jeans: 2002
Source: Levi Strauss and Co. Used with permission.
-22-
Exhibit 5
LEVI'S AT WAL-MART?
Wal-Mart Financials
(dollars in billions)
2000
Net Sales
Net sales increase
Domestic comparative store sales increase
Other income net
Cost of sales
Operating, selling and general and admin expenses
Interest costs:
Debt
Capital Leases
Provision for income taxes
Mino「ity interest and equity in unconsolidate subsidiam

Cumulative effect of accounting change, net of tax
Net income
Per share of common stock:
Basic net income
Diluted net income
Dividends
Current Assets
Inventories at replacement cost
Less LIFO reserve
Inventories at LIFO cost
Net property, plant and equipment and capital leases
Total assets
Current liabilities
Long-term debt
Long-term obligations under capital leases
Shareholders'equity
Current ratio
Inventories/working capital
Return on assets•
Return on shareholde「s'equity••
Number of U.S. Wal-Mart stores
Number of U.S. Supercentres
Number of U.S. SAM'S CLUBS
Number of U.S. Neighborhood Markets
International Units
Number of Associates
Number of Shareholders of reco「d (as of Ma「ch 31)
165,013
20.0%
8.0%

1,796
129,664
27,040
756
266
3,338
(170)
(198)
5,377
1.21
1.20
0.20
24,356
20,171
378
19,793
35,969
70,349
25,803
13,672
3,002
25,834
0.9
-13.7
9.5%
22.9%

1,801
721
463
7
1,004
1,140,000
307,000
2001
191 ,329
16.0%
5.0%
1,966
150,255
31,550
1,095
279
3,692
(129)
6,295
1.41
1.40
0.24
26,555
21 ,644

202
21,442
40,934
78,130
28,949
12,501
3,154
31 ,343
0.9
-9
8.7%
22.0%
1,736
888
475
19
1,071
1,244,000
317,000
* Net income before mino「ity interest, equity in unconsolidated
subsidiaries and cumulative
effect of accounting change/average assets
** Net income/average shareholders•'equity
*** Calculated giving effect to the amount by which a lawsuit
settlement exceeded
UVA-M-0711

200~
217,799
14.0o/c
6.0o/c
2,013
171,562
36,173
1,052
274
3,897
(183:
6,671
1.49
1.49
0.28
28,246
22,749
135
22,614
45,750
83,451
27,282
15,687
3,045
35,102
1

23.~
8.5o/c
20.1 o/c
1,647
1,066
500
31
1,170
1,383,000
324,000
established reserves. If this settlement were not considered, the
return would have been 9.8%
for 2000 Return on Assets.
Levi's at Wal-Mart?
-23-
Exhibit 6
LEVI'S AT WAL-MART?
Wal-Mart Number of Doors
UVA-M-0711
STORE COUNT
Year Ending January 31 Wal-Mart Discount Stores

Opened Closed Conversions
Balance Forward
1997
1998
1999
2000
2001
2002
59
37
37
29
41
33
2
lll
2l
92
75
88
96
104
121
tal95602169013647
T
o-1
尥
尥

凶
顶
口
顶
Wal-Mart Supercenters
Opened Total
239
344
441
564
721
888
1,066
105
97
123
157
167
178
Source: Wal-Mart annual report, 2002.
-24-
Exhib it 7
LEVI'S AT WAL-M ART?

Wal-Mart Jeans Selection in 2002
(retail price in dollars)
Wal-Mart's private label/ National brands
captive brands available
Men No Boundaries $15- 20 Wrangler $15- 20
Faded Glory 9- 11 Rustler 9- 15
George 15- 20 Dickies 15- 25
Women White Stag 15- 20 Riders 15- 20
Faded Glory 9- 11
George 15- 25
Juniors No Boundaries 10-20 Jordache 15- 20
Girls Faded Glory 8- 11
mary-kate and 15- 25
ashley
No Boundaries 15- 20 Riders 15- 20
Boys Faded Glory 8- 11 Wrangler $15- 20
No Boundaries 15- 20
George $15- 25
Source: Created by case w巾er.
UVA-M -07 11

Walt Disney Co.: The Entertainment King
帘 HARVARD I sus1NEssiscHOOL
9-701-035
REV, JANU ARY 5, 2009
MICHAEL G. RUKSTAD
DAVID COLLIS
The Walt Disney Company: The Entertainment King
I only hope that we never lose sight of one thing—that it was all
started by a mouse.
- Walt Disney
The Walt Disney Company's rebirth under Michael Eisner was
w idely considered to be one of the
great turnaround stories of the late twentieth century. When
Eisner arrived in 1984, Disney was
languishing and had narrowly avoided takeover and
dismemberment. By the end of 2000, however,
revenues had climbed from $1.65 billion to $25 billion, while
net earnings had risen from $0.1 billion
to $1.2 billion (see Exhibit 1). During those 15 years, Disney
generated a 27% annual total return to
shareholders.1
Analysts gave Eisner much of the credit for Disney's
resurrection. Described as "more hands on
than Mother Teresa," Eisner had a reputation for toughness.2 "If
you aren' t tough," he said, "you just

don't get quality. If you're soft and fuzzy, like our characters,
you become the skinny kid on the
beach, and people in this business don't mind kicking sand in
your face."3
Disney's later performance, however, had been well below
Eisner's 20% growth target. Return on
equity which had averaged 20% through the first 10 years of the
Eisner era began dropping after the
ABC merger in 1996 and fell below 10% in 1999. Analysts
attributed the decline to heavy investment
in n ew enterprises (such as cruise ships and a new Anaheim
theme park) and the third-place
performance of the ABC television network. W血e profits in
2000 had rebounded from a 28% d ecline
in 1999, this increase was largely due to the turnaround at ABC,
which itself stemmed from the
success of a single show: Who Wants To Be a Millionaire.
Analysts were starting to ask: Had the Disney
magic begun to fade?
The Walt Disney Years, 1923-1966
At 16, the Missouri farm boy, Walter Elias Disney, falsified the
age on his p assport so he could
serve in the Red Cross during World War I. He returned at war's
end, age 17, determined to be an
artist. When his Kansas City-based cartoon business failed after
only one year,4 Walt moved to
Hollywood in 1923 w here he founded Disney Brothers Studio5
with his older brother Roy (see
Exhibit 2). Walt was the creative force, while Roy handled the
money . Quickly concluding that he
would never be a great animator, Walt focused on overseeing
the story work.6

A series of shorts starring "Oswald, the Lucky Rabbit" became
Disney Brothers'first m ajor hit in
1927. But within a year, Walt was outmaneuvered by his
distributor, which hired away most of
Professor Michael G. Rukstad, Professor David Collis of the
Yale School of Management, and Research Associate Tyrrell
Levine prepared this
case. This case was developed from published sources. HBS
cases are developed solely as the basis for class 如cussion.
Cases are not intended to
serve as endorsements, sources of primary data, or illustrations
of effective or ineffective management.
Copyright ©2001, 2005, 2009 President and Fellows of Harvard
College. To order copies or request per皿ssion to reproduce
materials, call 1-
800-545-7685, write Harvard Business School Publis血g,
Boston, MA 02163, or go to http:/ / www.hbsp.harvard.edu. No
part of this publication
may be reproduced, stored in a retrieval system, used in a
spreadsheet, or transmitted in any form or by any mea沁-
€lectronic, mechanical,
photocopying, recording, or otherwise-without the permission of
Harvard Business School.
701-035 The Walt Disney Company: The Entertainment King
Disney's animators in a bid to shut Disney out of the Oswald
franchise.7 Walt initially thought he
could continue making Oswald shorts with new animators and a
new distributor, but after reading

the fine print of his contract, he was devastated to learn that his
distributor owned the copyright.
Desperate to create a new character, Walt modified Oswald's
ears and made some additional
minor changes to the rabbit's appearance. The result was
Mickey Mouse. When Mickey failed to elic廿
much interest, Walt tried to attract a distributor by adding
synchronized sound—something that had
never been attempted in a cartoon砂 His gamble paid off
handsomely with the release of Steamboat
Willie in 1928.10 Overnight, Mickey Mouse became an
international sensation known variously as
"Topolino" (Italy), "Raton Mickey" (Spain), and "Musse Pigg"
(Sweden). However, the company was
still strapped for cash, so it licensed Mickey Mouse for the
cover of a pencil tablet—the first of many
such licensing agreements. Over time, as short-term cash
problems subsided, Disney began to worry
about brand equity and thus licensed its name only to "the best
companies."11
The Disney brothers ran their company as a flat, nonhierarchical
organization, in which everyone,
including Walt, used their first names and no one had titles.
"You don't have to have a title," said
Walt. "If you're important to the company, you'll know 让卢
Although a taskmaster driven to
achieve creativity and quality, Walt emphasized teamwork,
communication, and cooperation. He
pushed himself and his staff so hard that he suffered a nervous
breakdown in 1931.13 However, many
workers were fiercely committed to the company.
Despite winning six Academy Awards and successfully
introducing new characters such as Goofy

and Donald Duck, Walt realized that cartoon shorts could not
sustain the studio indefinitely . The real
money, he felt, lay in full-length feature films.14 In 1937,
Disney released Snow White and the Seven
Dwarfs, the world's first full-length, full-color animated feature
and the highest-grossing animated
movie of all time.15 In a move that would later become a
Disney trademark, a few Snow White
products stocked the shelves of Sears and Woolworth's the day
of the release.
With the success of Snow White, the company set a goal of
releasing two feature films per year,
plus a large number of shorts. Next, the company scaled up. The
employee base grew sevenfold, a
new studio was built in Burbank, and the company went public
in 1940 to finance the strategy.
Disney survived the lean years of World War II and the failure
of costly films like Fantasia (1940)
by producing training and educational cartoons for the
government, such as How Disease Travels.16
Disney made no new full-length features during the war, but re-
released Snow White for the first time
in 1944, accounting for a substantial portion of that year's
income.17 Subsequently, reissuing cartoon
classics to new generations of children became an important
source of profits for Disney.
After the war, the company was again in difficult financial
straits. It would take several years to
make the next full-length animated film18 (Cinderella, 1950),
so Walt decided to generate some quick
income by making movies such as Song of the South (1946) that
mixed live action with animation.19
Further diversification included the creation of the Walt Disney

Music Company to control Disney' s
music copyrights and recruit top artists. In 1950, Disney's first
TV special, One Hour in Wonderland,
reached 20 million viewers at a time when there were only 10.5
million TV sets in the U.S.20
With the release of Treasure Island in 1950, Disney entered
live-action movie production and, by
1965, was averaging three films per year. Most were live-action
titles, such as the hits Old Yeller
(1957), Swiss Family Robinson (1960), and Mary P叩pins
(1964), but a few animated films like 101
Dalmatians (1961) were also made. To bolster the fihn business,
Disney created Buena Vista
Distribution in 1953, ending a 16-year-old distribution
agreement with RKO. By eliminating
distribution fees, Disney could save one-third of a film's gross
revenues. And to further improve the
bottom line, Disney avoided paying exorbitant salaries by
developing the studio's own pool of talent.
2
The Walt Disney Company: The Entertainment King 701-035
Observed one writer: "Disney himself became the box office
attraction—as a producer of a
predictable family style and the father of a family of lovable
animals."21
Disney expanded its television presence in 1954 with the ABC-
produced television program

肋sneyland (followed the next year by the very popular Mickey
Mouse Club, a show featuring pre-teen
"Mouseketeers" as hosts). Walt hoped Disneyland would both
generate financing and stimulate public
interest in the huge outdoor entertainment park of the same
name, which he had started designing
two years earlier at WED Enterprises (WED being Walt's
initials). This was kept separate from
Disney Productions to provide an environment where Walt and
his "Imagineers" could design and
build the park free of pressure from film unions and
stockholders.
The park was a huge risk for the company, as Disney had taken
out millions of dollars in bank
loans to build it. But the bet paid off. The enormous success of
Disneyland, which opened in 1955,
was a product of both technically advanced attractions and
Walt's commitment to excellence in all
facets of park operation. His goal had been to build a park for
the entire family, since he believed that
traditional parks were "neither amusing nor clean, and offered
nothing for Daddy心 Corporate
sponsorship was exploited to minimize the cost of upgrading
attractions and adding exhibits.23 To
conserve capital, Disney also licensed the food and
merchandising concessions. Once the park had
generated sufficient revenue, the company bought back v江tually
all operations within the park.24
Disneyland's success finally put the company on solid 加ancial
footing.25
With Disneyland still in its infancy, Walt dreamed of starting
another theme park. In 1965, he
secretly purchased over 27,000 acres of land near Orlando,
Florida on which he planned to build Walt

Disney World and EPCOT—an "experimental prototype
community of tomorrow." However, Walt
was never able to see his dream come to fruition; he died just
before Christmas 1966. "He touched a
common chord in all humanity," said former President Dwight
Eise咄ower. "We shall not soon see
his like again."26
Walt Disney's philosophy was to create universal timeless
family entertainment. A strong believer
in the importance of family life, the company was always
oriented to fostering an experience that
fam认ies could enjoy together. As Walt Disney said, "You 're
dead if you aim only for kids. Adults are
only kids grown up, anyway."
The huge number of "firsts" that the company could claim were
a tribute to the success of this
philosophy, but Disney recognized that they were not without
risk. "We cannot hit a home run with
the bases loaded every time we go to the plate. We also know
the only way we can ever get to first
base is by constantly going to bat and continuing to swing."
Disney attempted to retain control over the complete
entertainment experience. Cartoon
characters, unlike actors, could be perfectly controlled to avoid
any negative imagery. Disneyland
had been constructed so that once inside, visitors could never
see anything but Disneyland.
According to Walt, "The one thing I learned from Disneyland
[is] to control the environment.
Without that we get blamed for 如ngs that someone else does. I
feel a responsibility to the public that
we must control this so-called world and take blame for what
goes on."27

The Post-Walt Disney Years, 1967-1984
The realization of Walt Disney World and EPCOT consumed
Roy 0. Disney, who succeeded his
brother as chairman and lived just long enough to witness the
opening of Walt Disney World in 1971.
The theme park almost instantly became the top-grossing park
in the world, pulling in $139 million
from nearly 11 million visitors in its first year. Its two on-site
resort hotels were the first hotels
operated by Disney. To generate traffic in the park, Disney
opened an in-house travel company to
3
work with travel agencies, airlines, and tours. Disney also
started bringing live shows, such as
"Disney on Parade" and "Disney on Ice," to major cities all over
the world.
The next major expansion was Tokyo Disneyland, announced in
1976. Although wholly owned by
its Japanese partner, it was designed by WED Enterprises to
look just like the U.S. parks. Disney
received 10% of the gate receipts, 5% of other sales, and
ongoing consulting fees.
Film output during the years of theme park construction
declined substantially. Creativity in the

film division seemed stifled. Rather than push new ideas,
managers were often heard asking, "What
would Walt have done?" The result was more sequels rather
than new productions. To help stem the
decline in its filin division in the late 1970s and early 1980s,
Disney introduced a new label,
Touchstone, to target the teen/adult market, where film-going
remained strong.
From 1980 to 1983, the company's financial performance
deteriorated. Disney was incurring heavy
costs at the time in order to finish EPCOT, which opened in
1982. It was also investing in the
development of a new cable venture, The Disney Channel,
launched in 1983. Filin division
performance remained erratic. As corporate earnings stagnated,
Roy E. Disney (son of Roy 0. Disney)
resigned from the board of directors in March 1984. In the
following months, corporate raiders Saul
Steinberg and Irwin Jacobs each made tender offers for Disney
with the intention of selling off the
separate assets. However, oil tycoon Sid Bass invested $365
million, rescuing the company,
reinstating Roy E. Disney to the board, and ending all hostile
takeover attempts.28
Eisner's Turnaround, 1984-1993
Eisner takes the helm Backed by the Bass group, Eisner, 42, was
named Disney's chairman
and chief executive officer, and Frank Wells was named
president and chief operating officer in
October 1984.29 Eisner, a former president and chief operating
officer of Paramount Pictures, had
been associated with such successful films and television shows
as Raiders of the Lost Ark and Happy

Days. Wells, a former entertainment lawyer and vice chairman
of Warner Brothers, was known for his
business acumen and operating management skills. Roy E.
Disney was named vice chairman. Eisner
subsequently recruited Paramount executives Jeffrey
Katzenberg and Rich Frank to be chairman and
president, respectively, of Disney's motion pictures and
television division.
Eisner committed himself to maximizing shareholder wealth
through an annual revenue growth
target and return on stockholder equity exceeding 20%. His plan
was to build the Disney brand
while preserving the corporate values of quality, creativity,
entrepreneurship, and teamwork.
Concerns that the new managers would neither understand nor
maintain Disney's culture faded
rapidly. The history and culture of the company and the legacy
of Walt Disney were inculcated in a
three-day training program at Disney's corporate university. As
part of the training, all new
employees, including executives, were required to spend a day
dressed as characters at the theme
parks as a way to develop pride in the Disney tradition.
Eisner viewed "managing creativity" as Disney's most
distinctive corporate skill. He deliberately
fostered tension between creative and financial forces as each
business aggressively developed its
market position. On the one hand, he encouraged expansive and
innovative ideas and was protective
of creative efforts in the concept-generation phase of a project.
On the other hand, businesses were
expected to deliver against well-defined strategic and financial
objectives. All businesses (see Exhibit
3), including individual 出ms and TV shows, were expected to

have the potential for long-run
profitability. Nevertheless, spending was readily approved if
necessary to achieve creativity.
Revitalizing TV and movies One of the new management's top
priorities was to rebuild
Disney's TV and movie business. Disney had stopped producing
shows for network television out of
4
concern that it would reduce demand for the recently launched
Disney Channel. But Eisner and
Wells believed that a network show would help create demand
by highlighting Disney's renewed
commitment to quality programming. In early 1986, The Disney
Sunday Movie premiered on ABC.
According to Eisner, the show "helped to demonstrate that
Disney could be inventive and
contemporary. . . . It put us back on the map空 During this time,
Disney produced the NBC hit
sitcom Golden Girls and the syndicated non-network shows
Siske/ & Ebert at the Movies and Live with
R~ 炉s & Kathie Lee. Eisner also created a syndication
operation to sell to independent TV stations some
of the TV programming that Disney had accumulated over 30
years.
Disney's movie division was nearly as moribund when Eisner
and Wells took over. Disney's share

of box office had fallen to 4% in 1984, lowest among the major
studios, and Eisner contended that not
one of the live-action movies that Disney had in development
seemed worth making. However, in
Eisner's first week at Disney, an agent called him with the script
to what would become Down and
Out in Beverly Hills, Touchstone's first R-rated movie. While
Disney had risked alienating its core
audience with the film, no backlash materialized.
Beginning with that movie, 27 of Disney's next 33 movies were
profitable, and six earned more
than $50 million each, including Three Men and a Baby and
Good Morning Vietnam. For the industry as
a whole, an estimated 60% of all movies lost money. By 1988,
Disney Studios'film division held a
19% share of the total U.S. box office, making it the market
leader. "Nearly overnight," said Eisner,
"Disney went from nerdy outcast to leader of the popular
crowd."31 During this run, Disney began
releasing 15 to 18 new films per year, up from two new releases
in 1984. Releases under the
Touchstone label were primarily comedies, with sex and
violence kept to a minimum. Live-action
releases under the Walt Disney label were designed for a
contemporary audience but had to be
wholesome and well plotted.
Katzenberg, who was known for h is ability to identify good
scripts, for his grueling work ethic
(scheduling staff meetings for 10 p.m.), and for his dogged
pursuit of actors and directors for Disney
projects, convinced some of Hollywood's best talent to sign
multideal contracts with Disney. Under
Katzenberg, Disney pursued strong scripts from less established
writers and well-known actors in

career slumps and TV actors rather than the highest-paid movie
stars. The emphasis was on
producing moderately budgeted films rather than big-budget,
special effects-laden blockbusters.
Management held movie budgets to certain target ranges that
acted as a "financial box" within which
the creative talent had to operate. Films were closely managed
to ensure that they would come in on
time and near their target budgets, which were set below the
industry average.32
Disney's animation division was slower to tum around, in part
because animated movies took so
long to produce. Disney decided to expand its an订nation staff
and to accelerate production by
releasing a new animated feature every 12 to 18 months, instead
of every 4 to 5 years. Disney also
invested $30 m曲on in a computer animated production system
(CAPS) that digitized the animation
process, dramatically reducing the need for animators to draw
each frame by hand. In 1988, Disney
spent $45 million on Who Framed Roger Rabbit, a technically
dazzling movie that combined animation
w ith live action. The movie was uncharacteristically expensive
for Disney, but the gamble paid off
with the top earnings at the box office in 1988 ($220 million).
Additional profits came from the
merchandise, as the movie was Disney's first major effort at
cross-promotion. By the time of the
premiere, Disney had licensing agreements for over 500 Roger
Rabbit products, ranging from jewelry
to dolls to computer games. McDonald's and Coca-Cola also did
promotional tie-ins.
Maximizing theme park profitability Unlike Disney's television
and movie business,

Disney's theme parks had remained popular and profitable after
the deaths of Walt and Roy Disney.
However, the new management team updated and expanded
attractions at the parks. Disney spent
tens of millions of dollars on new attractions such as "Captain
EO" (1986) starring Michael Jackson.
5
Investments in the parks were offset by attendance-building
strategies designed to generate rapid
revenue and profit growth (see Exhibit 4). These included for
the first time national television ads, as
well as special events, retail tie-ins, and media broadcast
events. Disney also lifted restrictions on the
numbers of visitors permitted into its parks, opened Disneyland
on Mondays when it had previously
been closed for maintenance, and raised ticket prices (see
Exhibits 5 and 6). Despite the ticket hikes,
market research showed that guests felt they received value for
their money.
The Disney Development Company was established to develop
Disney's unused acreage,
primarily in Orlando, where only 15% of the 43 square miles
had been exploited. It proceeded to
aggressively expand its activities, which included a several-
thousand-room hotel expansion at Disney
World (and the company's first moderately priced hotel) and a
$375 million convention center.

Coordination among businesses As the business units expanded
after 1984, overlaps among
them began to emerge. Promotional campaigns with corporate
sponsors in one business needed to be
coordinated with similar initiatives by other Disney businesses.
It was also unclear how, for example,
to allocate the minute of free advertising granted to Disney
during The Disney Sunday Movie.
Like many diversified companies, Disney employed negotiated
internal transfer prices for any
activity performed by one division for another. Transfer prices
were charged, for example, on the use
of any Disney film library material by the various divisions.
W血e Eisner and Wells encouraged
division executives to resolve conflicts among themselves, they
made it clear that they were available
to arbitrate difficult issues. Senior management's position was
that disputes should be settled quickly
and decisively so that business unit management could get on
with their jobs.
Nevertheless, in 1987, a corporate marketing function was
installed to stimulate and coordinate
companywide marketing activities. A marketing calendar was
introduced listing the next six months
of planned promotional activities by every U.S. division. A
monthly meeting of 20 divisional
marketing and promotion executives was initiated to discuss
interdivisional issues. A library
committee was set up that met quarterly to allocate the Disney
film library among the theatrical,
video, Disney Channel, and TV syndication groups. An in-house
media buying group was also
established to coordinate media buying for the entire company.

Management also jointly coordinated important events, such as
Snow Wh亚s 50th anniversary in
1987 and Mickey's 60th birthday the following year. A meeting
of all divisions generated novel ideas,
coordinated schedules, and built commitment and excitement for
the year's theme. Plans were then
coordinated by the five-person corporate events department. "I
think our biggest achievement to
date," said Eisner in 1987, "has been bringing back to life an
inherent Disney synergy that enables
each part of our business to draw from, build upon, and bolster
the others."33
Expanding into new businesses, regions, and audiences In the
consumer products division,
the Disney Stores (launched in 1987) pioneered the "retail-as-
entertairunent" concept, generating
sales per square foot at twice the average rate for retail. The
stores were designed to evoke a sense of
having stepped onto a Disney soundstage. W血e children were
the target consumers, the stores'
merchandise mix of toys and apparel also included high-end
collectors'items for Disney's grown-up
fans. The consumer products division also entered book,
magazine, and record publishing.
Hollywood Records, a pop music label, was founded in 1989 for
less than $20 million, the cost of
making a single Hollywood movie. In 1990, Disney established
Disney Press, which published
children's books, and in 1991, the company launched Hyperion
Books, an adult publishing label that
printed, among others, Ross Perot's biography. Disney also
established new channels of distribution
through direct-mail and catalog marketing.

6
In its theme parks division, Disney's major project was Euro
Disney, which opened in 1992 on
4,800 acres outside Paris. W血e Disney designed and developed
the entire resort, it did not have
majority ownership of the business. About 51 % of Euro Disney
S.C.A. shares had been sold on
several European exchanges, leaving Disney a 49% ownership
stake. Infrastructure, attractive
financing, and other incentives from the French government, as
well as a heavily leveraged financial
structure, kept Disney's initial investment cost to $200 million
on the $4.4 billion park. In return for
operating Euro Disney, the company received 10% from ticket
sales and 5% from merchandise sales,
regardless of whether or not the park turned a profit.
The company was adamant about maintaining its adherence to
the Disney formula for family
recreation, pointing to Tokyo Disneyland as evidence of the
formula's universal appeal. Despite
important cultural differences, Tokyo Disneyland had defied its
critics and performed well,
welcoming its 100 millionth guest in 1992. The French were
more suspicious, warning of a potential
"Cultural Chemobyl,"34 so Eisner enlisted a former professor of
French literature to be Euro Disney
president and oversee the park's development according to both
Disney's specifications and French

sensitivities. The project required compromise by the staff as
well as the guests. French cast members
were required to shave, for example,35 while Disney gave in on
the issue of alcohol in the park,
making wine available in its restaurants.
The company had set its attendance target at 11 million visitors
in the first year. During the
summer, attendance was above the projected rate, but the park
suffered a downturn as colder
weather set in. Although Disney officials publicly emphasized
their satisfaction with Euro Disney, the
project required considerable fine-tuning. The company slashed
hotel and admission prices, laid off
workers, and deferred its management fees for two years.
At its other parks, Disney added attractions and stepped up
expansion of its hotels and resorts to
encourage longer stays and attract major conferences such that
hotel occupancy rates at the resorts in
Anaheim, Orlando, Tokyo, and Paris averaged well over 90%
year-round.36 In addition to the
creation of the nightlife complex Pleasure Island37 and a new
water-based attraction, Typhoon
Lagoon, Disney World grew with the construction of Splash
Mountain and the expansion of the
Disney-MGM Studios Theme Park. In California, Disneyland
opened Toontown, a new section based
on the Roger Rabbit movie. Between 1988 and 1994, the
company spent over $1 billion on theme park
expansion.
In movies, Disney began to release a series of highly profitable
and critically successful animated
features (see Exhibit 7). The Little Mermaid (1989) was
followed by Beauty and the Beast (1991)—the

first animated film ever nominated for a Best Picture Oscar—
and by Aladdin (1992). In live action,
having once felt the need to apologize publicly for the partial
nudity in Splash (1984), Disney settled
comfortably into the industry mainstream, releasing films like
Pretty Woman through its Touchstone
studio. Hollywood Pictures was then established in 1990 as the
third studio under the Disney
umbrella, and in 1993, the company acquired Miramax, an
independent production studio making
low-budget art films such as Pulp Fiction (1994). Disney
increased its volume of movie output from 18
films a year in 1988—the most in Disney's history—to an
ambitious 68 new films in 1994 (see Exhibit
8). However, between 1989 and 1994, fewer than half of the
company's films grossed more than $20
million, and many earned less than half that amount.
As the home video industry grew, Buena Vista Home Video
(BVHV) pioneered the "sell through"
approach, marketing videos at low prices (under $30) for
purchase by the consumer (instead of
charging $75 and selling primarily to video rental stores). At 30
m诅ion copies, Aladdin in 1993
became the best-selling video of all血e (followed by Beauty and
the Beast). BVHV achieved the same
market leadership role overseas, with marketing and distribution
in all major foreign markets.
7

In 1992, Disney spent $50 million to acquire a National Hockey
League expansion team based a
few miles from Disneyland in Anaheim. Inspired by the box
office popularity of a Disney movie,
Eisner named the team The Mighty Ducks, the name of the team
in the movie. Shortly thereafter
came the sequel, D2: The C加mpions, featuring a soundtrack by
Queen, produced by Disney's
Hollywood Records label. The Mighty Ducks had a natural
partner in Disney-owned KCAL-TV,38
following a trend among media companies toward purchasing
sports teams as a source of
programming. Nor did the Ducks'prospects end with traditional
sports marketing, given the
potential for other cross-marketing opportunities. In 1993, 80%
of the money spent on NHL
merchandise went for "Duckwear."39
Late in 1993, Disney unveiled its first Broadway-bound theater
production一a stage version of
Beauty and the Beast. The $10 million show was a hit on
Broadway. Although notoriously risky,
Disney quickly recouped its estimated $400,000-per-week
operating costs. Eisner and Katzenberg
were directly involved in the production's development—
offering creative guidance, calling for
rewrites, and restaging scenes.40 The following year, Disney
made a $29 million deal to restore the
New Amsterdam Theater on West 42nd Street in New York,
giving a substantial boost to the city's
beleaguered efforts to revive the district and giving Disney a
home on Broadway. Eisner regarded
theater as a long-term stand-alone business: "Our plans for the
New Amsterdam Theater mark our
expanding li commitment to ve enterta江订nent."41

Turmoil and Transition, 1994-1995
At the beginning of 1994, Disney's projects seemed to be
progressing satisfactorily. Disney's
newest animated feature, The Lion King, would break box
office records by year's end. Film revenues
and related merchandise sales for The Lion King would
eventually total more than $2 billion, with net
income reaching $700 million. At the same time, Euro Disney
(renamed Disneyland Paris in 1994)
was finally getting on track after a Saudi prince and a number
of European banks worked out a deal
with the company by midyear to refinance the park, which had
lost over $1 billion since 1992. Yet, a
series of upheavals would rock the foundations of the company
during the course of 1994.
On April 4, 1994, Disney President Wells was killed in a
helicopter crash in Nevada. The loss of
Wells created a void within the company that could not
immediately be filled. As one observer put it,
"[Wells] was a practical Sancho Panza to Eisner's mercurial
Quixote, a tough-as-nails negotiator and
lawyer-cum-numbers guy who freed Eisner to do what he does
best- think creatively about
everything from movies to international theme parks."42 Eisner
assumed the combined title of
president and chairman while redistributing Wells's former
responsibilities selectively among
members of Disney's top management. Just weeks after Wells's
death, Eisner, 52, underwent
quadruple bypass heart surgery. Although Eisner barely let up
following the surgery (running the
company by phone wit血 days after the procedure), the
jockeying to replace Wells gained

momentum. At the center of this was Katzenberg.
Katzenberg openly aspired to build on his success as head of the
film division by assuming
Wells's position as Disney president. Within Disney,
Katzenberg reportedly was seen as a highly
effective studio operative but not a corporate strategist, where
he was at odds with Eisner about
Disney's direction on such issues as music business expansion
and theme park development.43 After
his bid for a corporate role was rebuffed by Eisner, Katzenberg
left the company—the second step in
dismantling the triumvirate widely considered to be responsible
for Disney's resurgence after 1984.
Katzenberg soon joined forces with d江ector/producer Steven
Spielberg and David Geffen of Geffen
Records to form the entertainment company Dreamworks.
Shortly after Katzenberg's departure, a
series of key executives either left the company or changed
roles.
8
Acquisition of ABC
In July 1995, Disney announced it was buying CapCities/ ABC
to own a programming distribution
channel.44 Without the input of investment bankers, Disney
bought ABC for $19 billion in the second-
largest acquisition in U.S. history. The acquisition made Disney

the largest entertainment company in
the U.S. and provided it with worldwide distribution outlets for
its creative content. ABC included
the ABC Television Network (distributing to 224 affiliated
stations) and 10 television stations, the
ABC Radio Networks (distributing to 3,400 radio outlets) and
21 radio stations, cable networks such
as the sports channels ESPN and ESPN2, several newspapers,
and over 100 periodicals.45 The deal
also transformed Disney from a company with a 20% debt ratio
to one with a 34% debt ratio ($12.5
billion) after the takeover.
The merger was likened to a marriage between King Kong and
Godzilla. Barry Diller observed
that while Disney and CapCities/ ABC were ideal partners, "the
only negative [was] size. It's a big
enterprise, and big enterprises are troublesome." Michael Ovitz,
then chairman of talent firm Creative
Artists Agency, said the merger gave Disney global access. But
despite "synergy euphoria" in
Hollywood and on Wall Street, some observers were skeptical
about the merger due to the maturity
of the network television business, the purchase price (22 funes
its esfunated 1995 earnings), and the
difficulties of creating synergy through vertical integration.
Some suggested that synergy would be
better "accomplished through nonexclusive strategic alliances
between the companies."46
A year after the merger, there were press reports of a culture
clash between executives at ABC and
Disney. "Insiders say Disney's 皿cro-management has left many
at ABC unh~ppy and anxious,"
wrote one Wall Street Journal reporter. "The congenial
atmosphere that once dommated the network's

top ranks is gone; in its place is the high-pressure culture of
Disney, which often pits executives
against each other."47 In addition, some ABC executives were
uncomfortable with how ABC was
being used to cross-promote Disney brands. ABC, for example,
had aired a special on the making of
the animated film, The Hunchback of Notre Dame, after the film
opened to disappointing ticket sales.48
According to The Wall Street Journal, the initiative came from
ABC executives.49 "The ABC people are
a part of our team and they are interested in the well-being of
the entire organization," said a Disney
spokesman. "I think we'd have been faulted for not using that
kind of synergy."50
ABC had also struck several deals with Disney rivals before the
merger to develop programming.
ABC and Dreamworks, for example, had agreed to finance
jointly the cost of developing new TV
shows. "We needed access to production talent," said one ABC
executive of the deal.51 Disney felt
that such arrangements were no longer economical after the
merger because Disney had its own
production studio, and therefore terminated such agreements.52
Disney Slumps to the End of the Century
After acquiring ABC, Disney's financial performance began to
deteriorate, particularly in 1998 and
1999. "It's impossible to predict the day that growth will be
back," said Eisner. "I think it's corning,
but it's not corning tomorrow. We have not given up our goal of
20% annual growth."53 Disney's
board of directors voted to cut Eisner's bonus from $9.9 million
in 1997 to $5 million in 1998 and to $0
the following year. But growth returned in 2000---sooner than

most analysts expected—on the
strength of the company's broadcast and cable operations and its
theme parks division.
ABC had been the top-rated network at the fune of the merger
but had fallen to third place.
However, ABC returned to the top in 2000, largely due to the
success of the prime-time game show,
Who Wants To Be a Millionaire, which was broadcast three
funes a week and which raised the ratings
of the shows airing immediately afterwards (see Exhibit 9).
"Television networks have fixed costs,"
said one analyst. "So when the revenues begin to materialize, all
that flows to the bottom line and
9
that's great news for profits五 Furthermore, the cable operations
were estimated, by 1999, to be
worth more than the $19 billion Disney paid for the entire
CapCities/ ABC acquisition.55 ESPN had
become the most profitable TV network in the world, more
profitable in absolute terms than the
major broadcast networks. However, profitab血y was hurt by the
rising cost of programming,
especially sports. In 1998, ABC and ESPN paid $9 billion for
the right to air NFL games through 2005.
In live-action films, Disney's approach to filmmaking had
changed dramatically. Joe Roth, who

replaced Katzenberg as head of Disney's live-action movies in
1994, began putting out big-budget,
star-driven "event" movies such as Con Air (1997) and
Armageddon (1998). "This is not a commodity
business," said Roth. "The [movies] people will want to watch
need to stand out空 He had also
argued that the change was necessary because of the growing
impact of international audiences, who
were attracted to movies with big-name stars and with
expensive special effects that transcended
language barriers. In 1999, however, several costly box-office
bombs led Roth to scale back budgets.
When Roth had taken over in 1994, the average budget for a
live-action Disney movie was $22 million
(versus an industry average of $30 million).57 That figure had
risen to $55 million by 1999 (and an
industry average of $52 m且lion).58 The cost of producing
artlmated films had also risen rapidly in
recent years.59 Tarzan (1999) cost an estimated $170 m诅ion.
These figures did not include marketing
and distribution costs, which typically totaled over $50 million
for a Disney animated film.60
Disney's home video division had been a major driver of growth
during the 1990s, largely as a
result of the decision to release its animated classics on video.
By the end of the decade, however,
revenues were dropping. Disney decided to make all but 10 of
its animated films permanently
available. The remaining 10—Disney's most popular artlmated
titles—would follow the old rotation
schedule. Only one would be on the shelves each year, and its
release would be promoted by a
companywide marketing campaign. Disney also expected the
growing market for digital video discs
(DVDs) to boost its home video division as consumers switched

from VCRs to DVD players and
repurchased the classic Disney titles on DVD.
Through 2000, Disney maintained its position as market leader
in theme parks. The strategy in the
theme park division was to tum all of its parks into destination
resorts—places where tourists would
spend more than one day. As of 2000, only Walt Disney World
qualified. The average tourist spent
three days at Walt Disney World but only one d ay at
Disneyland, Disneyland Paris, and Tokyo
Disneyland. The company believed that the key to turning a
park into a destination resort was to
build more than one park at a site. Walt Disney World, for
example, included EPCOT, Disney-MGM
Studios, and Disney's A响al Kingdom (each with separate
admission gates). By 2002, Disney
planned to open second parks at Disneyland (California
Adventure in 2001), Tokyo Disneyland
(DisneySea in 2001), and Disneyland Paris (Disney Studios in
2002). In November 1999, Disney
announced that it was also forming a partnership with Hong
Kong's goverrunent to build a new $3.6
billion theme park on an island six m让es west of central Hong
Kong, scheduled to open in 2005.
Disney also made a major push onto the Internet, with uneven
results. In 1996, Disney began
selling its products online, but in 1997 it failed in its launch of
a subscription service called the Daily
Blast. In 1999, Disney merged its Internet assets with the search
engine Infoseek.61 This entity
operated Disney's Web sites (including Disney.com, ESPN.com,
and ABCNews.com) and set up a
portal called the GO Network (www.go.com), which was a
gateway to the Web similar to Yahoo.62

W比le Disney had planned to compete with the major portals,
traffic at Go.com lagged behind that of
its rivals. In response, Disney shut down the Go.com portal in
2001, laying off 20% of its 2,000
Internet employees. Disney said it would focus on e-commerce
and on providing news and
entertainment content through its individual Web sites. "You
can view this as a strategy change,"
said one Disney executive. " [Go.com] did not have a leadership
position. On the other hand, we have
been extremely successful with our commerce and content
sites."63
10
During the slump, Eisner concluded that Disney needed to pare
back operations that had become
bloated during the company's long run of success.64 In 1999,
Disney began a cost-cutting plan that
was projected to save $500 million a year starting in 2001.
Eisner refocused attention on the leaner
marketing of products, reduced film budgets and output, and
tightened cost control in its TV
production unit矩 He also conducted a major review of capital
spending, with an eye toward
eliminating businesses that could not show a healthy return.
Club Disney, a chain of shopping mall
play centers, was closed as a result, as were the ESPN Stores.
Disney also began selling "non-
strategic" assets such as Fairchild Publications, a magazine

subsidiary acquired in the ABC deal.
Eisner's Strategic Challenges
Managing Synergies
Eisner believed that Disney's ability to leverage its brand and
create value depended on corporate
synergy. According to Eisner, the key to Disney's synergy was
Disney Dimensions, a program held
every few months for 25 senior executives from every business.
As of 2000, over 300 people had been
through the program, which Eisner described as a "synergy boot
camp." Participants traveled to
corporate headquarters in Burbank, Walt Disney World, and
ABC in New York to learn about the
company. They cleaned bathrooms, cut hedges, and played
characters in the park. From 7 a.m. to 11
p.m. for eight days, participants were not allowed to handle
their regular duties. Eisner explained:
Everyone starts off dreading it. But by the th江d day, they love
it. By the end of the eighth
day, they have totally bonded . . .. When they go back to their
jobs, what happens is synergy,
naturally. When you want the stores to promote Tarzan, instead
of the head of animation for
Tarzan calling me, and me calling the head of the Disney
Stores, what happens is the head of
Tarzan calls the head of the stores directly.
Disney also had a synergy group, reporting directly to Eisner,
with representatives in each
business unit. The group's purpose was to "maximize synergy
throughout the company . . . serve as a
liaison to all areas, [and] keep all businesses informed of

Levis at Wal-Mart DARDEN叁 UVA-M-0711 BUSINESS PUBLISHI.docx

Levis at Wal-Mart DARDEN叁 UVA-M-0711 BUSINESS PUBLISHI.docx

Recommended

Recommended

More Related Content

Similar to Levis at Wal-Mart DARDEN叁 UVA-M-0711 BUSINESS PUBLISHI.docx

Similar to Levis at Wal-Mart DARDEN叁 UVA-M-0711 BUSINESS PUBLISHI.docx (12)

More from smile790243

More from smile790243 (20)

Recently uploaded

Recently uploaded (20)

Levis at Wal-Mart DARDEN叁 UVA-M-0711 BUSINESS PUBLISHI.docx