The Crown Prince Of Seventh Avenue - Company Business and Marketing

Industry Standard, The, Feb 12, 2001 by Ethan Smith

David Lauren wants to turn Polo Ralph Lauren into a multimedia empire. And he's got $200 million of somebody else's money to make it work.

MIDWAY THROUGH HIS SECOND YEAR at Duke University, David Lauren, younger son of fashion designer Ralph Lauren, came down with a case of existential vertigo. "I had a lot of questions," recalls Lauren, now 29. "Who was I? What was I going to do with my life?" Avoiding typical sophomore solutions like German poetry, French philosophy or good old American bong hits, Lauren aspired to something higher: to transform his identity crisis into a glossy magazine.

The result was Swing, a lifestyle periodical targeted at hipster twenty-somethings entering the work world. "We were a generation," Lauren recalls, "whose lives were in full swing." Launched with a school grant as seed money, the magazine went national after his 1993 graduation. It was his first job, but it proved that David had inherited his father's penchant for turning aspirational fantasies into a business model.

And it would become a guide for his second job: transforming his father's company from a respected mass market fashion firm into a multimedia powerhouse. It's not going to be easy. As creative director and marketing VP of Ralph Lauren Media, David steps into a fashion industry struggling with slowing retail sales and a recent spate of failed e-commerce plays.

Fashion houses have watched their stock prices sag in recent months. Donna Karan is in imminent need of rescue (LVMH has made a $645 million bid on the firm), while Tommy Hilfiger and Abercrombie & Fitch have struggled with declining revenues (though some analysts lately have recommended shares in the two companies to bargain hunters). Amid this retail upheaval, Polo is taking a different tack, positioning itself to become a lifestyle-media company spawning Polo-branded movies, television shows, books and magazines. The first step of this transformation is Polo.com.

Ambitious, elegantly designed and seven months in the making, the site sells thousands of Polo items amid screen after screen of "lifestyle content" - original articles and mini movies on the good life according to Polo.

On the face of it, this may seem like the worst-timed launch in the history of e-retailing. Polo.com comes on the heels of online retail sites such as Boo.com, Garden.com and Women.com, which all tried to combine content and commerce with no better than mixed results. But David Lauren may have stumbled into the most audacious play of its kind to date. Unlike its predecessors, Polo isn't risking a penny on the $200 million project.

The new twist is an old trick among upper-middlebrow clothiers - from Ralph to Calvin to Donna to Tommy: licensing. These companies generate the bulk of their revenues not by selling high-end frocks and three-piece suits, but by renting their names to lower-profile manufacturers of lower-margin but high-volume items like underwear, jeans, accessories and fragrances. The designers retain creative control over the goods, but they don't deal directly with the costly processes of manufacturing and distribution; in turn, they receive royalties of 5 percent to 10 percent on sales.

No company has been as eclectic as Polo in its ongoing quest for products to rent its name to. Where Calvin Klein has licensed a handful of scents, underwear and a few housewares, Ralph Lauren has rented his name to jewelry, sports gear, Western wear, sheets, even wall paint. Why not a Web site, vacation packages, movies, books or a magazine?

That's precisely the logic behind Ralph Lauren Media. Announced a year ago, the company is half owned by Polo Ralph Lauren and half owned by NBC and its affiliates. For its stake, NBC ponied up $50 million in cash through its home-shopping subsidiary, ValueVision, $110 million worth of television advertising and use of a ValueVision customer service center outside Minneapolis; NBCi kicked in $40 million worth of online distribution and promotion. And Polo's contribution? A generous agreement to sell Ralph Lauren goods to Ralph Lauren Media at cost, to accept returns at 35 of its 134 retail stores, and to add a Polo.com tag to the bottom of its print ads.

Just as Warnaco holds a license to manufacture the Chaps line for Ralph Lauren, Ralph Lauren Media essentially holds a license to run Polo.com. Royalties go back to Ralph Lauren on a schedule: Nothing on the first $75 million in sales via the Web site, 10 percent for $75 million to $200 million, 12 percent for $200 million to $250 million, and 15 percent after that. No matter how long it takes to hit these targets, the entire Polo operation will benefit from the ubiquitous Polo.com marketing campaign. No wonder many apparel-industry analysts consider the synergistic venture little more than a free advertising deal for Polo.

Even Polo's fashion-world competitors are impressed by the arrangement. Paul Blum, executive VP and COO of Kenneth Cole Productions, whose Web site has been selling shoes for four years, says the agreement is "very smart. I don't know anyone else who's done it."