1. Does American Apparel have a problem?

2. What should Carney do in terms of his overall marketing and company strategy? Why?

Richard Ivey School of Business The University of Western Ontario IVEY W12134 AMERICAN APPAREL: UNWRAPPING ETHICS' Brittany Schuette and Professors Seung Hwan (Mark) Lee and June Cotte wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, clo Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e- mail: cases@ivey.uwo.ca. Copyright @ 2012, Richard Ivey School of Business Foundation Version: 2012-08-13 American Apparel will live beyond my lifetime. We'll be a heritage brand. It's like liberty, property, pursuit of happiness for every man worldwide. That's my America. American Apparel CEO Dov Charney In 2012, after three years of losing money, American Apparel forecast a turnaround by 2015. There appeared to be a disconnect, however, between the company's socially responsible initiatives in the labour and environmental realms versus its increasingly controversial advertising strategies. If Chief Executive Officer (CEO) Dov Charney really wanted to build a lasting brand, some observers suggested this disconnect should be addressed. COMPANY BACKGROUND In 1998, Charney launched American Apparel in Los Angeles, California. As a publicly traded, unisex clothing manufacturer, American Apparel became best known for its knitwear, such as T-shirts and underwear. The organization's downtown L.A., seven-story, pink warehouse looked like something straight out of the 1940s, while its sexy ad campaigns embodied style from the 1970s. American Apparel's marketing campaign was unique from other businesses in that it targeted 20+ young adult consumers who sought natural beauty through their fashion; it did not push consumers to idolize photo- This case has been written on the basis of published secondary sources. Consequently, the interpretation and perspectives presented in this case are not necessarily those of American Apparel or any of its employees. 2 Quoted in ABCNews article "American Apparel CEO Dov Charney: A Tamished Here?" http://abcnews.go.com/Business/american-apparel-ceo-dov-charney-tamished- hero/story?id=16229958&page=2#. UBLBcY7va-8, accessed July 25, 2012. Ibid., ABCNews. Polly Vernon, "Label of the Year: American Apparel," The Guardian, 2008, http://www.americanapparel.net/presscenter/articles/20081 130guardian.html, accessed: May 08, 2012. 5 Linda Baker, "Made in the U.S. of A.," Salon.com, 2004. http://www.americanapparel.net/presscenter/articles/2004021 1salon.html, accessed: May 08, 2012.Page 2 9B 12A032 shopped models. To that end, American Apparel used real, non-photo-shopped, airbrush-free models in its advertising campaigns, symbolizing the raw beauty and natural elegance in its fashion. Within several years of its inception, American Apparel became well known for its slim-fitting, moderately priced, logo- free clothes. By 2012, American Apparel employed approximately 10,000 people globally and operated more than 253 retail stores in 20 different countries, with 50 additional stores expected to open by 2015. American Apparel was favourably known for its stance on pro-labour practices involving immigrants." The company enforced a vertically integrated business model, minimizing the use of labour outsourced from the United States. All manufacturing activities - such as knitting, sewing, dying, distribution, marketing, and design - occurred locally, and the company was proud of its made-in-USA ideal. American Apparel's Los Angeles-based factory employees, who were primarily legal immigrants, were paid nearly double California's minimum wage and received very generous benefits, including free English language classes, subsidized lunches and transport, free onsite massages, and employee stock options. American Apparel's manufacturing facilities also featured an onsite medical clinic that offered a variety of care (primary care, urgent care, and preventive care) for workers. Importantly, American Apparel guaranteed job security and full-time employment for its employees, which constituted a highly uncommon practice in the garment industry. When it was discovered that American Apparel employed approximately 2,000 illegal immigrants in its factories, Dov Charney laid off these workers to comply with immigration laws, but he promised them that once their papers were in order, he would rehire them." For Charney, the "sweatshop free" concept was never about criticizing other businesses; rather, it was about building relationships with company employees and providing them with a fair wage. 12 Moreover, American Apparel prided itself on being an environmentally conscientious firm. Several of its products were made from organic cotton and recycled fabric scraps, and this practice seemed to be increasing over time. Additionally, American Apparel used solar power, thereby promoting environmentally friendly practices in its production methods." The company also supported a variety of charitable causes, such as raising money and providing aid (through donating clothes) for non-profit organizations. Recent examples included donating hundreds and thousands of garments to those affected by Hurricane Katrina and the Haiti earthquake. "Overall, many consumers applauded American Apparel for the ethical initiatives contained in its corporate business model. Amy Odell, "American Apparel Defends Against Allegations that It Hires Real Models," New York Fashion, 2010. , Accessed: May 08, 2012. Christopher Palmeri, "Living on the Edge at American Apparel," Businessweek Bloomberg, 2005, www.businessweek.com/magazine/content/05_26/b3939108_mz017.htm, accessed: May 08, 2012. American Apparel Press Release, July 5, 2012, American Apparel, Inc. Announces Preliminary June and Second Quarter Sales, http://investors. americanapparel.net/releases.cfm, accessed July 26, 2012. 9 Baker, 2004. American Apparel, "Our Workers," American Apparel - About Us section of the company website, 2012, www.americanapparel.net/contact/ourworkers.html, accessed May 08, 2012. "Meredith Lehore, "The Heartbreaking Story of How American Apparel Unraveled in Less Than a Decade," Business Insider, 2011, www.businessinsider.com/american-apparel-collapse-2011-2?op=1, accessed May 08, 2012. 2 American Apparel, 2012. Danny Bradbury, "Updated: American Apparel Stumbles Upon Organic Cotton Purchase," BusinessGreen, 2008, www.businessgreen.com/bgews/1806827/updated-american-apparel-stumbles-organic-cotton-purchase, accessed May 08, 2012. Sharon Margolis, "It's OK to Like American Apparel," Beanstockdnews, 2008 www.americanapparel.net/presscenter/articles/20080718beanstockd.html, accessed May 08, 2012. LA Garment & Citizen, "How American Apparel Distributed 80,000 Pieces of Clothing to Victims in Wake of Hurricane Katrina," Los Angeles Garment & Citizen, 2005, www.americanapparel.net/presscenter/articles/20051012lagarment.html, accessed May 08, 2012.Page 3 9B 124032 Despite these positive elements of American Apparel's business, all of which appeared to be popular with consumers, the company's marketing campaign often fell under heavy public scrutiny and stood at odds with the positive elements of its business strategy. American Apparel appeared to design its promotional plan based on a belief that consumers do not mind being marketed to, as long as the images match their own casual views about sex. The company's signature advertisements typically featured women in various states of undress, aka "saucy snaps," often photographed by CEO Dov Charney himself." These models were sometimes recruited by Charney on the streets of Los Angeles; other times, they were employees in his firm. 17 As a brand that had become recognized in a positive light for its pro-labour support and its anti-sweatshop commitment, American Apparel stood out as a company that advocated fostering a positive community." 18 Yet in spite of American Apparel's reputation for socially responsible business practices, some consumers would say that, in its advertising, the company took sexual appeals to an extreme level. Advertisements showing young adults in little to no clothing were not uncommon for American Apparel. Charney claimed that this approach represented the company's way of marketing to the millennial generation, but certainly some consumers protested that the ads were borderline pornographic. "For example, in 2007, a billboard featuring a topless woman wearing only tights and bent over against a wall was vandalized with written graffiti stating, "Gee, I wonder why women get raped." In response, the company replied that its photographs were produced in a way that was original and natural. "In support of this claim, Charney expressed that American Apparel's advertising strategy targeted contemporary adults who desired sexual freedom. Despite heavy criticism in the media for these provocative ads, Charney believed that American Apparel's campaigns fought against the pressures imposed on women to achieve an impossible level of perfection. American Apparel praised women for their natural beauty, stating that the company's portrayal of women was "natural and seductive in a very human way." American Apparel's unique practices extended to other areas of its business, well beyond its ad campaigns. Upon hiring, employees were required to provide full-length, self-portrait photographs to CEO Charney." Around the office, Charney typically used foul language and behaviour that was inappropriate for the workplace (e.g., walking around in his underwear, flirting with employees)." Over time, these actions caught up to Charney. In August 2011, Charney faced a $250 million-dollar sexual harassment lawsuit - a case regarding a 17-year-old girl who claimed that Charney had pressured her to have sex with him when she turned 18. Charney was also accused of sexual harassment by several other employees (allegations 16 Anna North, "Dov Charney Case Complicated by "Saucy' Photo Shoot," Jezebel, 2011, jezebel.com/5786299/dov- charney-case-complicated-by-saucy-photo-shoot, accessed May 08, 2012. Safe, Georgina "Sex (and Simplicity) Sells," The Australian, 2008, www.americanapparel.net/presscenter/articles/20080806australian.html, accessed: May 08, 2012. Maryam Sanati, "Last Stand at American Apparel," The Globe and Mail, 2010, www.theglobeandmail.com/report-on- business/rob-magazine/last-stand-at-american-apparel/article 1775161/singlepage/, accessed May 08, 2012. Jessica Emerson, "A Former American Apparel Employee Speaks Out about Looks Discrimination," The Gloss, 2010, thegloss.com/fashion/a-former-american-apparel-employee-speaks-out-about-looks-discrimination, accessed May 08, 2012. " Leslie Goldman, "Gee, I Wonder Why Women Get Raped," Huffington Post, 2007, www.huffingtonpost.com/leslie- goldman/gee-i-wonder-why-women-ge_b_72214.html, accessed May 08, 2012. 21 Leslie Goldman, 2007. 22 Georgina Safe, 2008. 23 Sarah Menkedick, "End American Apparel's Policy of Hiring Based on Photos," Change.org, 2010, news.change.org/stories/end-american-apparel-s-policy-of-hiring-based-on-photos, accessed May 08, 2012. Josh Mankiewicz, "Sexy Marketing or Sexual Harassment," Dateline NBC, 2006, www.msnbc.msn.com/id/14082498s/dateline_nbc/t/sexy-marketing-or-sexual-harassment/#. T6n59usV2Jg, accessed May 08, 2012. 25 Hollie Mckay, "American Apparel CEO Could Face More Legal Woes by Selling Sexually Suggestive T-shirts, Experts Say," Fox News, 2011, www.foxnews.com/entertainment/201 1/08/12/american-apparel-ceo-could-face-more-legal-woes-by- selling-sexually-suggestive, accessed May 08, 2012.that he kept nude photos of his employees and also of American Apparel models), of creating a hostile working environment, and of wrongful job terminations. .All cases were terminated or settled outside of court. In June 2010, the company experienced challenges repaying its debts, and the financial analysts who were covering the American Apparel story predicted that the entire company was on the brink of collapse."By 2011, the company had pushed its debt to $120 million dollars. A TYPICAL CONSUMER EXPERIENCE WITH AMERICAN APPAREL 30 Teenage girls these days seem to be too caught up in the world of sex and body image. As a mother, I try to teach my kids about ethics, self-esteem, inner beauty, and confidence. Whether I am effective or not ... that's another question .... My daughter Anna, who is turning 14, loves shopping for clothes and going to the beach. It was only few years ago when Anna seemed so childlike. But now, fashion is becoming central to her character. American Apparel is one of the most popular clothing stores in Los Angeles. Originally, when my daughter asked me to go, I was thrilled! I thought this was a great way to pick out a nice outfit for her 14" birthday. Also, I secretly wanted to go there for the longest time. However, when we arrived at the store, I instantly became bewildered. Originally, this was a company I admired for its stance on "sweatshop free" policies. I am a big supporter of the local economy, and I have always tried to buy products that were "made in USA." In addition, American Apparel uses organic cotton in its products, supporting my environmentally friendly stance. However, upon walking into the store, I was shocked by the huge posters, some of which featured young models in sexually suggestive positions. I was shocked. Anna walked straight over to the deeper end of the store, ignoring these images. As Anna proceeded to try on multiple outfits, I became curious. I couldn't connect the dots in my head. While I admired American Apparel's ethical and altruistic initiatives, the company reeked of sexual sin. My excitement for American Apparel faded. I didn't know it would be so sexual. Anna walked out of the dressing room with a pair of reasonably priced jeans, a few T-shirts, and a new leotard. What was I supposed to do? After all, it was Anna's birthday. My husband and I spent the past decade teaching our daughter about respect, beauty, and confidence. While the clothes that she picked out were cute, a couple of the things she picked out were suggestive enough to make me a bit uncomfortable. I wanted to buy my daughter an outfit that was reasonably priced and cute, but could I support American Apparel? 2 Laura Holson, "Chief of American Apparel Faces 2nd Harassment Suit," The New York Times, 2011, www.nytimes.com/2011/03/24/business/24bias.html, accessed May 08, 2012. 27 Mankiewicz, 2006. " Jennifer Madison, "American Apparel pushes boundaries of taste AGAIN with risque new swimwear ad featuring topless model," Daily Mail, 2011, www.dailymail.co.uk/femail/article-1359968/American-Apparel-pushes-boundaries-taste-AGAIN- risqu-new-swimwear-ad-featuring-topless-model.html, accessed May 08, 2012. Jennifer Madison, 2011. " This is a fictitious example, based on several consumer experiences and the case writers' experiences.Page 5 9313032 By 2012, with consumer complaints and controversy growing, it was time for American Apparel to decide whether continuing a sexually based advertising campaign made sense alongside the company's commitment to positive labour and other socially responsible business practices. Should American Apparel try to better align all the elements of its marketing strategy, or would continuing to generate this sort of controversy actually benet the company by drawing more attention to its products