The strategy that failed the business model of Forever 21

I remember my college days, stepping into the Forever 21 store just a week before our fest, only to see familiar faces already there. Looking through the shelves, in the long lines outside the trial room, or at the billing counter, the craze was real back then. And why wouldn’t it be? The shimmery club dresses, bright florals, graphic tees, and ripped denim were “the thing.”

Instagram influencers with their giveaways and hauls used to make it sound like a real deal. However, I vividly remember the last time I walked into the store- deserted, disorganized, with no one to assist, and the collection looking like one straight out of a flea market.

I was disappointed enough to explore H&M and Zara, and I haven’t looked back since then at Forever 21. As I start my B-School journey, I carry multiple perspectives while I analyze this anecdote of mine.

Introducing the protagonists

The leads of this story are South Korean immigrants, Jin Sook and Do Wan Chang along with a special appearance of Ariana Grande (if you were not planning on staying, here’s something to tilt the scales).

So yes, in 1984, these two to-be billionaires saved $11000 from their low-paying jobs to open up a 900 sq feet store in LA called Fashion 21 for their Korean-American clientele. HUGE HIT!! In just their first year, they recorded sales of $700,000. Here’s a quick success story of the couple (Do turn on the subtitles, unless you know Korean):

They knew their USP- Fast-Fashion. Turnaround designs that could be mass-produced at low costs swept the youth off their feet and into the big glass doors. This is exactly what their target audience wanted- a trendy look that doesn’t burn a hole in their already small pockets.

Well, it is right when they say there’s not a bigger motivator than success. The success reinforced their belief in this idea. They started opening stores every six months, initially from LA to California to Canada, and then slowly expanding its wings into the global market of Europe and Asia.

The trigonometric graph of Forever 21

For those of you expecting to see an e-to-the-power-x graph, sorry to disappoint, but it’s more of a sin graph here. And for those with numerophobia (math anxiety), high-five, and also, don’t bother decoding the previous sentence, what I simply meant was ups and downs.

Back to the story, so after opening the first international store in 2001, they launched their website in 2003 and their men’s line in 2006. By 2010, they had 500 stores globally, and the Changs featured in the Forbes list of richest Americans. So far, so good. In just 5 years, it had reached its apogee. 600 stores, sales worth $4.4 billion, and the Changs’ net worth reaching a whopping $6 billion, truly an American Dream!

Then came the retail apocalypse. Rising competition from other fast-fashion chains- H&M, Zara, and the Amazon era hit F21, where it hurt the most. By 2018, it struggled to stay afloat- closing its European stores, downsizing, and staffing fewer people. How Zara became the undisputed king of fast fashion?

Finally, in 2019, the worst was staring right in the eye. It had hit rock bottom and filed for bankruptcy under Chapter 11 and announced that it would cease operations in 40 countries, including Canada and Japan while closing 178 stores in the U.S. and 350 overall. It continued e-commerce on its website and operated stores in the U.S., Mexico, and Latin America.

In Jan’21, Forever 21 announced its strategic plans to grow e-commerce to capture the fast-fashion market in Canada, Asia, the Asia-Pacific region, and Latin America, in partnership with cross-border e-commerce platform Global-e.

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Ecommerce forms a large chunk of the profitable core of our operations and as part of our new global strategy, Forever 21 will leverage Global-e’s technology to offer international customers an outstanding online experience

Forever 21 President Alex Ok in a statement

The next question that pops up automatically is, what about the Indian stores? Well, Aditya Birla Fashion and Retail Limited (ABFRL) own the franchise of Forever 21 and are safe from bankruptcy woes. However, there are other things to freak about.

Zeroing in on the business model of Forever 21 and understand what went wrong

There is no denying the fact that Forever 21 was based on a brilliant business model in itself. Rather than importing at low costs, they decided to produce domestically, saving both time and effort. The low costs of the items were a hook to attract shoppers into buying in volumes.

Apart from this, their focus was primarily on retail locations and not advertising per se. For example, opening up a 90,000 sq feet store in the heart of New York at Times Square. But if you do not embrace the change or get caught up in controversies, the fall is inevitable.

The Times said e-commerce made up 16% of Forever 21’s sales in 2018, while overall revenue dropped to $3.3 billion that year, down from $4.4 billion in 2016. At a time when the world was going digital, they kept expanding their brick-and-mortar stores. The average size of an F21 showroom was 38,000 sq feet with 800+ stores by the end of 2018.

The impression of their clothes also degraded from being considered trendy to cheap. The cherry on the top was the various lawsuits it found itself entangled in. The labor disputes over minimum wage, overtime, and working conditions triggered a significant violation of federal laws. More than 50 privacy lawsuits were also filed for copyright infringement by various designers.

The brand was also accused of pushing religious agendas. The owners are Christians and it is said that they promoted religious phrases on their products such as Thank God, Holy, Jesus Loves You, and a biblical verse (John 3:16). But, is this what led to their demise? There’s more.

Marketing FTW?

A good brand is not just one that focuses on its products but also its consumers. The changing consumer preferences in different geographies coupled with little or no research was a deal-breaker. With super-specific GenZ brands like Shein or Fashion Nova making their way into the market, F21 did not really step up its game. The consumer attitudes were also changing

You will find more infographics at Statista

There was an increased awareness about the pressing issues of climate change. The audience wanted a change in the core values of their favorite brand. But sustainability was not visible in their campaigns, let alone the products. It was only the brand value sailing this ship, which was already being dented at various corners by the innumerable lawsuits. Sooner or later, it was bound to drown. And while drowning, it triggered a series of memes.

Forever 21’s business model of an ever-changing display of what’s new is being eclipsed by firms like Rent the Runway and thredUP with business models that promote sustainability

Dave Bernstein, SVP, Retail Lead, North America at Publicis Sapient

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Forever 21 dropped a whole Cheeto and Pepsi collection and is now wondering why they’re going bankrupt

— big nic energy (@nicdimitrakis) August 29, 2019

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The craziest thing that happened amidst this was Ariana Grande suing the company for $10 million for using a look-alike. Her top-chart, 7 rings, had just released around the corner when F21 used a look-alike carrying the same look as Ariana did in the video, with the caption, “Gee thanks, just bought it.” This triggered a series of memes on the internet. Here’s the tea:

The road ahead

Well, Forever 21 has learned its lessons the hard way. After closing, downsizing, and pruning 350 stores since 2019, they are channelizing their efforts in the right direction.

Focusing on selected profitable locations and injecting a lot of effort into their e-commerce operations, they’re working their way out. One of their most loved campaigns during the early days was their collaboration with Taco Bell. Their collection was brought to life on a ramp and did attract positive clout. In case you’d like to go through it:

Their beautifully designed yellow bag is also symbolic of good marketing. Expanding into accessories, footwear, and plus size were also carefully thought out strategies. This does indicate what F21 is capable of.

And when you hit rock bottom, the only way to go is up. As of now, their social media handles are frequently updated, the Instagram page boasts of some good summer collections, engaging DIY reels, and regularly roping in influencers.

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But one thing I loved the most was a video on Earth Day, 4 months back, urging people to save American forests. I can’t bet on whether it is a genuine change of attitude by raising awareness or just a gimmick. But, it did feel good to see them doing something for reasons other than profiteering. What remains to be seen is will Forever 21 bounce back or become just a chapter in history. I’ll leave it open to interpretation.

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