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Mexico Seeks Additional Input on NAFTA Renegotiation

June 30, 2017 Leave a comment

 

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[Editor’s note: This article originally appeared in the June 30, 2017, issue of the Advisor, a weekly publication of the ST&R Trade Analysis Program. Click here for more information or to subscribe.]

After holding several rounds of consultations with the Mexican private sector, educational institutions, and other stakeholders from Feb. 1 through May 3, the Mexican government is seeking additional input from interested parties by July 26 on the modernization of NAFTA. This effort is aimed at broadening Mexico’s NAFTA negotiating strategy by seeking comments from segments of the Mexican population that may not have had a chance to participate in the initial consultation process. Any input must be submitted online at http://www.economia-snci.gob.mx/tlcan/.

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The University of Fashion Trains on TUKAcad by the Thousands

June 30, 2017 Leave a comment

 

JUN 28

NEW YORK, NY – The world’s largest online fashion design video library introduces lessons on TUKAcad at fraction of the cost of traditional schools. The University of Fashion [UofF] partners with Tukatech to provide video training on TUKAcad, Tukatech’s flagship software for pattern making, grading and marker making. The video training is accessible to everyone, and over 50,000 UofF subscribers already have access to it.

The University of Fashion provides online lessons to teach every facet of fashion design and business. Lessons are taught exclusively by college professors and fashion industry professionals. The UofF subscribers have access to the full library of video tutorials through their website, www.universityoffashion.com.

“The UofF students have perfected their skills and now they want to learn the latest, most innovative design techniques on the most advanced equipment available. That’s why Tukatech is the perfect partner for the UofF. They’re constantly creating innovative new technology, assuring that designers both stay in tune with the times and ahead of their competition,” says Francesca Sterlacci, Founder and CEO, The University of Fashion.

“Education is a fundamental aspect of Tukatech’s philosophy. Partnering with the University of Fashion was an easy decision,” says Ram Sareen, Founder and CEO, Tukatech.

Tukatech has offered TUKAcad on subscription basis for many years. TUKAcad video lessons through the UofF is a perfect complement and will benefit many, from beginning fashion students to experienced, professional fashion designers or seasoned home sewers. Students and subscribers of the UofF can also enjoy a subscription to TUKAcad Learning Edition at $25 per month, like those registered as full-time students at traditional Universities. Startup companies can subscribe to TUKAcad Professional Edition at $200 per month and plot patterns and markers at FedEx Kinkos, as well as TUKAcenters worldwide. TUKAcad subscriptions are available at www.tukaweb.com.

Watch the TUKAcad intro video: http://www.universityoffashion.com/disciplines/cad-pattern-making

About University of Fashion: Founded and developed by Francesca Sterlacci, a New York fashion designer, educator and author. UofF offers unlimited, on-demand access to hundreds of video lessons via monthly subscription. Visit http://www.universityoffashion.com to learn more.

About Tukatech: Founded in 1995, Tukatech, Inc. is the apparel industry’s leading provider of fashion technology solutions, with teams of apparel industry expert engineers worldwide. Tukatech offers powerful software and hardware for every process from the pattern-room to the cutting-floor.

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 In Paris, They Do Start-Ups With Style

June 30, 2017 Leave a comment

The New York Times
The New York Times

Friday, June 30, 2017

An office in Station F that will be home to Daphni, a venture capital firm.
An office in Station F that will be home to Daphni, a venture capital firm. Roberto Frankenberg for The New York Times
In Paris, They Do Start-Ups With Style
In Silicon Valley, people famously work long hours. Do what it takes. Perfect that gadget or widget. Help your wealthy venture capital backer raise the money necessary to buy that sweet summer villa on Capri.
But in recent years, work-life balance has become a cause célèbre among tech workers, who are questioning whether a shot at the brass ring is really worth it if you don’t get to see your childrengrow up. The recent exaltation of parenthood by star executives like Facebook’s Mark Zuckerberg has amplified suspicions that you can work hard while living well.
Elsewhere, in countries like France, work-life balance is a matter of public policy and the 35-hour workweek is the norm — something that even the most earnest parents in California’s tech community consider wishful thinking.
Still, 1,000 start-ups housed in an old train station in Paris are trying to prove that the enviable French lifestyle can be conducive to tech industry success. As Liz Alderman, Benoît Morenne and Elian Peltier report, President Emmanuel Macron inaugurated the site Thursday in a push to make France “the leading country for hyperinnovation.”
The report, with striking photos by Roberto Frankenberg of the stylish Station F start-up incubator, shows both the challenges and opportunities facing entrepreneurs throughout the country.
— Jim Kerstetter
Read More

Why France Is Taking a Lesson in Culture From Silicon Valley

By LIZ ALDERMAN, BENOÎT MORENNE AND ELIAN PELTIER

A new start-up incubator in Paris symbolizes France’s tech ambitions, but can the land of the 35-hour workweek overcome its cultural and regulatory barriers to surpass London and other tech hubs?

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just-style Daily Newsletter

June 30, 2017 Leave a comment
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Making it in America

June 29, 2017 Leave a comment
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(See Blogmaster note: www.am4u.com)

By James Manyika, Gary Pinkus, Sree Ramaswamy, Katy George, John Warner, and Andrea Serafino

The United States needs to regain its competitive edge in manufacturing while also grappling with its two-tiered labor market and finding ways to make economic growth more inclusive.

The United States always assumed that its forward momentum would carry the next generation toward greater prosperity, just as it took for granted that its technical prowess in manufacturing would guarantee its global market share. But now those assumptions have been upended. Although unemployment is down and wages are finally ticking up again, these indicators can distract from the bigger picture. Tens of millions of workers are struggling to make it in America, and even a full-time job does not guarantee a decent standard of living.

Manufacturing is not the only sector with poor wage growth, nor is it the largest. But it was once the backbone of the middle class, and its erosion is symptomatic of broader shifts in the economy. Part 1 of this research preview looks at how this unfolded and outlines how the sector could exploit changes in technology and value chains to compete for new market opportunities. Part 2traces what has happened to wages across the economy more broadly and considers what caused these pressures. Finally, Part 3 starts a conversation about solutions that can lead to more inclusive growth.

 

US manufacturing needs to regain its competitive edge and retool for the 21st century

Manufacturing remains a pillar of the US economy and the primary industry in some 500 counties, of some 3,000, from coast to coast. The sector drives 30 percent of the nation’s productivity growth, 60 percent of its exports, and 70 percent of private-sector R&D spending—all factors that keep the nation’s innovation machine humming.

But manufacturing now accounts for just 9 percent of US employment, a much smaller share than two decades ago. Excluding computers and pharmaceuticals, value added in most other manufacturing industries is no higher today than it was in 1997. The United States has lost market share not only to low-cost countries in labor-intensive industries but also to other advanced economies in knowledge-intensive industries. Today there are 30 percent fewer US manufacturing firms than in 1997, and the sector has lost roughly a third of its jobs. Not only have plants closed, but fewer are opening. The United States remains the world’s second-largest manufacturing nation, and the diversity of its industrial base presents multiple opportunities for growth. But the nation cannot afford to let its manufacturing muscle continue to atrophy.

Today demand, global value chains, and technology are evolving in ways that play to US strengths. The United States can capitalize on these shifts to boost output and narrow its trade deficit, particularly in advanced manufacturing industries.

  • The first promising factor is rising consumption in emerging economies, combined with the fact that the United States itself remains one of the world’s largest and most lucrative markets.
  • Factor costs are changing, too. Wages are rising in emerging economies, automation weakens the case for labor arbitrage, and the shale boom has made energy cheap and abundant in the United States. More of the world’s production is up for grabs; global value chains are shifting as firms emphasize service-based business models and proximity to markets, suppliers, and innovation partners.
  • The new world of digital manufacturing (Exhibit 1) represents a profound shift toward higher productivity and the agility needed to meet fragmenting demand. Technologies such as the Internet of Thingsanalytics, advanced robotics, and 3-D printing are transforming factory floors into flexible, self-maintaining operations. Companies will soon be able to connect their entire value chain with a seamless flow of data, unlocking efficiencies and new service offerings.
Digital manufacturing will change the future of production.

The growth opportunities for US manufacturing are real, but it would be naïve to minimize the challenges of turning around two decades of negative trends.

  • This effort has to start with stimulating a wave of investment from both domestic and foreign sources—not just with tax incentives but through targeted strategies to bring the industries of the future to communities that have been left behind.
  • The second critical priority is revitalizing the domestic supplier base, which has been hollowed out in the past two decades. Most US manufacturing firms are small companies that need financial, technology, and advisory support; large firms can take a step toward building their own collaborative supplier networks by helping smaller firms modernize and become more innovative.
  • Third, the jobs at stake in 21st-century manufacturing may be service roles or positions requiring digital skills, which means that workforce training will be an important piece of the puzzle. Larger companies will have to do more to develop the capabilities they need by offering their own training, partnering with education providers and industry groups, or establishing workforce platforms.
  • Finally, the United States needs a comprehensive strategy to boost net exports and regain global market share—one that encourages more small firms to participate, bringing the benefits of globalization to more workers.

US manufacturing can achieve a turnaround if the public and private sectors treat it as a national priority. But it is important to recognize that a successful revitalization will not produce a return to 1960s-style manufacturing employment. For decades the sector provided economic mobility to workers with less education, and nothing else has emerged to take its place. Part 2 of this report looks at the broader trend of narrowing opportunities.

 

The United States is increasingly a two-tiered economy, with millions of workers struggling to get by

Previously published MGI research found that 81 percent of US households were in segments that experienced flat or declining market incomes from 2005 to 2014. This reflects what a powerful blow the Great Recession delivered. But a longer view shows that pressures had been building for more than three decades.

Declining household incomes are ultimately a wage story—and only workers at the top of the distribution have been bringing home bigger paychecks. The top quintile almost doubled its wages and benefits in real terms since 1983, but everyone else remains stuck at roughly the levels of the 1990s (Exhibit 2).

Labor incomes for everyone except the highest quintile are no higher in real terms than they were in the late 1990s.

There is now a yawning pay gap between workers with postsecondary education and those without it. While a small number of high-growth metropolitan areas have bounced back strongly in the recovery, real median household incomes remain below their pre-2000 peaks in almost two-thirds of US counties. Meanwhile, the costs of maintaining a middle-class life have continued to climb.

Multiple economic, technological, and societal forces have simultaneously contributed to pressures on incomes and wages.

  • Some are structural shifts, such as the changing sector mix of the economy and the declining share of national income going to labor. Productivity and wages have historically risen hand in hand, but now that relationship has been weakened. In the past two decades, the ongoing digitization of the economy has also made it possible to get more output from knowledge-intensive capital using less labor. There is a new premium on highly skilled workers who can make the most of technology.
  • These long-term forces were exacerbated when the Great Recession struck. It caused a massive loss of economic output and was followed by a weak and highly uneven recovery.
  • All of the forces above have played a role in depressing wages. In addition, we highlight another potential contributing factor that is often overlooked in discussions of US income inequality: the changing environment facing companies and industries. There has been an extraordinary escalation of competitive pressures—including foreign competition in tradable sectors as well as price competition and declining returns in many asset-heavy sectors. Furthermore, profits are shifting to asset-light sectors and a small number of superstar firms that employ relatively few people. Some struggling firms have responded with cost-cutting measures such as squeezing suppliers or opting for automation, offshoring, or contract work. In real terms, wages remain below their 1983 levels in some large, asset-heavy sectors such as retail, transportation, and construction (Exhibit 3). The trends in these sectors alone mean that at least one-fifth of the US workforce has not advanced in more than three decades.
Wages have taken a hit in many capital-intensive industries such as transportation, retail, and construction.
Our interactive data visualization shows changes in household income and employment for all US counties over a decade.

Learn more on Tableau Public

Workers now have fewer options when their pay stagnates. Rapidly falling costs of automation and the availability of lower-cost global labor have created more options for companies. As the nature of work has changed, the relationship between companies and workers has weakened. Temporary work arrangements and outsourcing are becoming more commonplace, and firms are better able to predict demand and schedule labor in smaller and more erratic increments. Workers now have decreased mobility, and the decline of unions has weakened their bargaining power. Large segments of the labor force lack the skills that the marketplace values.

Many of the trends we see today—including weak recoveries from recessions, a reweighting of the economy toward service sectors, and foreign competition—will persist into the future. Some appear to be accelerating, such as digital technologies reducing the need for low- and middle-skill workers. In the United States, some of the large and labor-intensive sectors that have already come under wage pressure (food service, manufacturing, and retail) appear to be most susceptible to automation in the future. The convergence of deepening income inequality and accelerating technological change increases the urgency to act.

 

Where do we go from here?

Disrupting current patterns in the labor market will require bolder interventions than what has worked in the past—and inaction itself would be a choice to accept the status quo of a two-tiered economy.

No single solution will be a silver bullet that will solve the problems of stagnant wage growth and growing disparities across the economy. These complex issues raise bigger questions than the usual economic debate, starting with how to address the deteriorating quality of jobs and where the approximately 45 million workers without post-secondary education fit into the economy. Some of the areas to explore include how to apply technology to improve the labor market for workers and whether incentives could boost private-sector investment in human capital. It’s also important to consider what kind of safety net will be needed in the future. If automation causes large-scale dislocation, we may have to debate measures such as a universal basic income or other types of redistribution.

Shifting the economy into higher gear is a critical first step. The United States has to jumpstart growth and move forward on long-recognized priorities such as restoring business dynamism, investing in infrastructure, improving productivity, and revamping education and training. And the nation will have to do a better job of executing on these goals.

More businesses need to start up, and more of them need to become fast-growing firms that create jobs. To accelerate productivity growth, more companies need to be encouraged to adopt the technologies and best practices of frontier firms. Small enterprises need assistance to seek out global market opportunities and foreign capital. US companies and investors need to recognize the long-term value of creating training pathways and better-quality jobs—not just out of social responsibility but to protect their own long-term interests.

Can the US economy return to dynamic and inclusive growth?Read the report

But economic growth alone may not be enough. Growth also has to be more inclusive. We see four priority areas: reinvesting, retraining, removing barriers, and re-imagining work.

  • Communities in distress need targeted investment from public, private, and foreign sources to bounce back.
  • Continuous technological change means that mid-career workers need systems of lifelong learning to adapt—and currently the United States spends far less than other countries on helping displaced workers transition into new roles.
  • It is possible to remove some of the barriers that keep workers from seeking out better opportunities, such as non-compete agreements, excessive occupational licensing requirements, inadequate child care and family support, and affordable housing shortages in booming job markets.
  • This is a moment to reimagine work with more flexible models, a more sustainable version of the gig economy, and more creative options for older workers.

The United States can do better, and there are many levers it has yet to pull. Workers are not just a pool of labor; they are citizens and potential consumers. Raising wages would juice a latent source of demand—and doing so could set off a virtuous cycle of growth. Lifting up the millions who have been left behind can elevate the broader economy in the process.

The full research preview on which this article is based is available for PDF download (PDF–1.9MB).

About the author(s)

James Manyika is a director of the McKinsey Global Institute, where Sree Ramaswamy is a partner. Gary Pinkus is a senior partner based in McKinsey’s San Francisco office. Katy George is a senior partner in the New Jersey office, where Andrea Serafino is a consultant; and John Warner is a senior partner in the Cleveland office.

 

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July 4th Weekend Specials

June 27, 2017 Leave a comment
Dell Kaby Lake i5 Quad 16″ Laptop w/ 4GB GPU for $784 + free shipping
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Vizio 65″ 4K HDR Smart Display, $350 Dell GC for $900 + free shipping
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Ozark Trail 30-oz. Tumbler 2-Pack for $9 + pickup at Walmart
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Refurb Dell OptiPlex 3010 Desktops from $159 + free shipping
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Refurb Surface 2 64GB 11″ Windows RT Tablet for $110 + free shipping
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Ecko Unltd Men’s Jackets for $10 + free shipping
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Refurb Linksys AC2600 802.11ac WiFi Router for $60 + free shipping
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Refurb HP Chromebook Exynos 1.7GHz 12″ Laptop for $95 + free shipping
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Laptop Magazine Latest Reviews

June 27, 2017 Leave a comment
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The $200 iRulu Walknbook laptop may have good Amazon reviews but it’s a terrible buy

June 27, 2017 Leave a comment
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Alliance of Artist Communities Residency Deadlines

June 27, 2017 Leave a comment
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Finding a strategic cybersecurity model

June 27, 2017 Leave a comment
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Protecting critical and sensitive information is of paramount importance in business and government, but plans must be in place to handle inevitable breaches too.

Cybersecurity has become one of the biggest priorities for businesses and governments, as practically all of life migrates its way to data centers and the cloud. In this episode of the McKinsey Podcast, recorded at the Yale Cyber Leadership Forum in March, Sam Palmisano, chairman of the Center for Global Enterprise and the retired chairman and CEO of IBM, and Nathaniel Gleicher, head of cybersecurity strategy at data-and-cloud-security company Illumio, speak with McKinsey about how governments and companies can vastly improve their cyberprotections.

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25:07

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Audio
Finding a strategic cybersecurity model

Podcast transcript

Roberta Fusaro: Cybersecurity has become one of the biggest priorities for businesses and governments, as practically all of life migrates its way to data centers and the cloud. In this episode of the McKinsey Podcast, recorded at the Yale Cyber Leadership Forum in March, we catch up with two leading thinkers on security issues. Sam Palmisano is the retired chairman and CEO of IBM, who served as vice chair of the US Commission on Enhancing National Cybersecurity. Nathaniel Gleicher is the head of cybersecurity strategy at Illumio, a data and cloud security company.

First up from the forum is Sam Palmisano, who, in this wide-ranging conversation with McKinsey’s Marc Sorel, makes the case that strong cybersecurity programs are critical for improved innovation and economic growth.

Sam, thank you for joining us today. I want to talk a little bit about your work on the Commission on Enhancing National Cybersecurity. What was the original mandate? What was the process by which you came up with your findings? And what were some of the most surprising results?

Sam Palmisano: Thank you, Roberta. The thing was that President Obama had reached the conclusion that the digital economy or the Internet is so fundamental now to economic growth and society that something needed to be done to make some recommendations to enhance it or strategically position it for the future. A great example is the Internet of Things, because it’s no longer just phones and desktop computers. It’s everything in life. It’s self-driving cars, it’s thermostats, it’s music players, it’s cameras.

Now you take this infrastructure and you’re making billions of things that are computers, which are smart devices. But that’s what they are, they’re chips with software with all the vulnerabilities, unless you design for security from the beginning. And you’ve taken this problem and you’ve put it on steroids.

The complexity there is one of getting consensus to go fast and address the issues prior to billions of things being out there that aren’t secure, which is the path we’re headed down.

Marc Sorel: How do you think about what the private sector, and to some extent the social sector, need to do now to be part of that?

Sam Palmisano: We need to form a private-public collaboration. The reason for it, the government doesn’t have the skills to do this themselves. We spent nine months crawling through their statements of skill. They can argue all they want. They don’t. That doesn’t mean that elements of government don’t have some skill. To take the intelligence agencies out of this discussion and get to that commercial side, it doesn’t have the capability. They need the capability, so they had to form a partnership. The skills exist in the academic community and in the research universities and in the technology community.

Marc Sorel: Did you all as a commission see a model in the market today for what that collaboration could look like?

Sam Palmisano: There are established entities within government that are a combination of academic, private sector, government, and technical. A lot of the technical communities come together.

General Keith Alexander ran the Cyber Command Center. There were probably 20 of us that met once a quarter for five, six years. The same guys that were running IBM, Google, Dell, Microsoft, HP, and Verizon, plus all the government appropriate people would meet quarterly. The technical people would meet even more often to tackle some of these issues, and it was self-funding. We solved problems just by pitching in because it was in the best interest of everyone to solve some of these issues, and in the best interest of the industry because you wanted to expand and grow.

To really do this, though, this was going to require funding, To solve the problem we’re talking about, it’s going to require some amount of money and research, like a DARPA or related fund, pick something like that as the funding source that government can coordinate, and then convene this body. Then do the work as we suggest. Now, the work is going to get complicated. Because there’s two pieces to it. One is, let’s say for example, to come up with a standard for the Internet of Things that you would put in this device, this object. Then within that object, you’d have this standard. Then you’d also have a nutrition label on the standard. We called it the Cyber Star. It’s like the health seal that says, “OK, if you’re the manufacturer and you’ve complied with these standards, you get the star.” You get the Cyber Star.

There were also guys that recommended a thing called secure, they call it clean pipes. With clean pipes, there are a lot of policy implications, a lot of criminal-justice-systems implications. But technically, you could create a clean path and you could have a secure path, and you could argue for certain areas where life is threatened.

In the autonomous vehicles or drones or things where people could actually be seriously injured or die, you’d want a secure, clean path. You don’t want this on the open Internet.

Marc Sorel: So you’re talking about creating a separate secure environment for these privileged parts of the ecosystem.

Sam Palmisano: Right. Think of it as a commercial virtual private network but beyond that. Put that on steroids from an encryption and security perspective. For all these Internet of Things devices. Health, heart monitor, things you’re putting in your body. Pacemakers, et cetera. Defibrillators. Those kinds of things. Not Fitbits that you wear on your wrist, but serious things that could do serious harm like stop your heart. You want to have that information flowing in a secure way. In an encrypted, secure way. That doesn’t mean everything should be that. If you’re sharing your photos with friends, I don’t think you need that level or cost associated with those kinds of technologies.

Marc Sorel: You’re basically saying at some level, there should be a tiering of Internets to acknowledge the degree of security required for different pieces of the ecosystem to communicate.

Sam Palmisano: That is a solution to the problem. Now you have to make it commercially viable, which gets you into things like net neutrality. But if you were to technically solve the problem, you would begin to architect portions of the Internet. You can’t go recreate the past. It’s just too old, it’s too cobbled together. Let that be what it is.

But anything that’s life-threatening or takes down the infrastructure or the world economy. Let’s just start there. The premise or the assumption is that you can’t solve this in the Internet as it exists today. It just was too complicated. It’s too convoluted. It’s too open by design. That’s why it was so successful, because it was an open architecture. We had all these debates, all of the technical guys. And said, “Look. We used to do this 40 years ago.” ATMs never got hacked. Money didn’t start spitting out on the curb and stuff because it was a secure connection. It was, it was a proprietary network. We know how to do it technically.

But there are people that did these things for years. We’ve moved onto an open innovative system which is terrific because it drives innovation at a much more rapid pace. It also gives people more economic opportunity to participate. That’s a big plus. But in certain areas where you’re dealing with, let’s say, major societal issues, we ought to go back to some of the classical approaches to how you design the systems.

Roberta Fusaro: Most people today would say, “If I had to place a bet on who’s going to gain ground on whom and put space between themselves, it’s the attackers that are going to continue to distance themselves in terms of capability from the defenders in terms of their capabilities.” Do you agree with that?

Sam Palmisano: Eighty percent of the cybersecurity issues that have occurred in the commercial world are internal process and people. It’s not the disgruntled employees who got fired and therefore they gave somebody their access codes. It’s also people who didn’t protect their access codes or they tape it to their computer. Or they leave it in the top drawer of their desk, and the cleaning people can go get the stuff. You would get rid of half of your problems as an enterprise if you just train your folks and put controls in place.

It’s a combination of monitoring, process training, audit people. Did you follow the process? So there’s an accountability in the system. That’ll clean up a lot of the stuff in the commercial world. Password authentication and end points. If the civilian side of government, .gov, did those things, they would clean up probably 95 percent of their problems and save a ton of money, too.

We also talked about this idea, which never got traction in the commission report, but we thought it was a good idea where you basically would create a national ID like a credit bureau. You could create this national ID foundry where you get your birth certificate. You also get your digital identity at birth, and that digital identity is secure and protected. Now, you can modify for simple things—sharing your photos on the Internet—or you can modify it for very sophisticated things like financial transactions, your health information.

Marc Sorel: Why didn’t it catch on?

Sam Palmisano: In the commission itself?

Marc Sorel: Yeah.

Sam Palmisano: What we did was said, further studies should take place, and we recommended that Treasury would look at, further look at creating this kind of an entity. We also looked at commercial insurance as well, and the purpose of commercial insurance.

The purpose of commercial insurance was that if you agreed on the standards, and therefore you complied with those standards, you should be able to get higher liability coverage at a lower rate than somebody who didn’t.

Our view was that would drive up the adoption rate because people are going to want to find an insurance policy for cyber. That’s going to happen. How do you get these companies to make the investments to move up the risk-protection curve? Well, you make it to their advantage by having insurance that says, “We could audit those standards. And if you’ve complied with those standards, like burglar alarm systems or fire alarms in your home, you’re going to get higher liability coverage at a lower rate.” That’s to make it an economic-based system versus a government-mandated system. The commission was very biased toward private-sector solutions versus government-mandated solutions. You need a private sector or an economically driven set of motivations to solve the problem.

Roberta Fusaro: This has been a fascinating conversation. Thank you, Sam, for taking the time to be with us today.

Sam Palmisano: Oh, thank you. It was great being with you.

Next up from the Forum, is Nathaniel Gleicher, who describes how businesses can learn a lot from the model of protection used by the US Secret Service.

Roberta Fusaro: Welcome, Nathaniel. Thank you for joining us today for the McKinsey Podcast.

Nathaniel Gleicher: No problem. Glad that I could join.

Roberta Fusaro: Your company has been providing cyber options for four or five years now, and I’m wondering how you’ve seen the market change over that time in terms of what customers are looking for or technologies that have emerged.

Nathaniel Gleicher: There used to be a perception that cybersecurity was black magic, particularly outside of the technical community, and that outside of that community, people would sort of say, “I don’t understand this. Just make it work.” As long as you don’t hear anything, no news is good news. The increasing scope and scale of breaches and the degree to which organizations are moving into these exposed environments has changed that. If you look at business leaders, I think they are focused on how do you quantify the risks that you face, and how do you measure the benefit that you’re getting from the solutions you invest in? It’s a much more quantification-driven industry than it used to be. I don’t know that we’re very good at quantification yet. But the desire to quantify is an important change.

Roberta Fusaro: Apart from quantification, are there other hot topics in cyber that you’re seeing or managing right now?

Nathaniel Gleicher: Sometimes I think we do cybersecurity like fourth graders play soccer. Chase the ball across the field, the whole group runs. There are always hot topics. What’s interesting to me is that we’ve known for a while there are a few steps that if you took them, environments would be much more secure.

If you think about encrypting data, using strong passwords, white-listing your applications, segmenting your environment, patching your vulnerabilities, and people generally haven’t done that because it’s been hard to figure out how to do that at scale across these large organizations.

One of the biggest challenges that we face in cybersecurity today is that we don’t really have a single, coherent strategic model to describe how to protect an environment. There are a lot of tactical models, so if you look at the SANS top 20, if you look at NIST, if you look at some of these other frameworks, they will tell you, you should be investing in encryption. You should be investing in segmentation. You should be investing in certain kinds of detection. They’ll tell you all the tools you should use and you can think about how to line them up, but it’s very tactical. It’s hard to find a model that lets you pull back and think about the threat as a whole.

I’m starting to see groups of companies trying to solve that problem, trying to think, how do you do these steps that don’t seem all that sexy, but that actually drive to security.

Roberta Fusaro: What are some of the potential remedies?

Nathaniel Gleicher: If you look at security disciplines through the ages, whether it’s law enforcement, executive protection, physical security for locations, military security, any of these sort of well-built disciplines, the foundation of every security discipline is understanding the environment you’re protecting and exerting control over that environment.

In cybersecurity, we are not good at understanding the environment we’re defending. Most organizations don’t understand the network. They don’t understand what’s connected and what’s communicating with what. Because of that, they have relatively few options to control that environment. I mentioned before a few simple things people could do to strengthen their environment. Those are all about control, and what I mean by control, people often think there’s prevention, keeping the bad guys out, and then there’s detection and response, catching them once they get in.

Those are both important components. In general today, people would tell you, you can’t invest all in one or the other, that prevention by itself isn’t enough. People are going to get in. What people miss in that debate is the reason detection and response works is because you understand your environment, and you control it.

If you don’t know where your high-value assets are, and if you don’t know what connects to them, how someone would access them, it’s incredibly hard to know what you need to protect. If you don’t have the resources to control that, you’re defending an open field. So you have hundreds and hundreds of paths you need to defend, potential connections you need to worry about, and the attacker gets to move first. On the flip side, if you invest to understand your environment first, and control your environment first, it actually makes detection and response better.

Roberta Fusaro: What are some ways to identify the crown jewels, the things that really do matter? I can imagine that that could be an incredibly difficult task, given all the assets that companies manage.

Nathaniel Gleicher: It’s different for every organization, to some degree, but it’s about understanding business risk. The question is, what are the assets that I defend, or that my business relies on, such that if they were exposed or compromised, it would fundamentally harm the way I do business?

Whether that’s health care data about your customers, or customer information, whether that’s the systems on which your business runs, whether that’s the exchanges across which you connect, every business has a different set of factors they need to judge. But often, if you think in terms of business risk, we’re pretty good at figuring that out because businesses have been measuring and concerned about risk for quite some time. It’s just a question of translating that and understanding the technical implications.

A model that I like to use when I think about this is the way the Secret Service protects the president. The president is a lot like a high-value asset in a data center, in that he’s very valuable, very targeted, and also very exposed. The Secret Service doesn’t get to take the president, put him in a box somewhere, and have him not talk to anyone. He’s constantly talking to people, so the job is really about managing risk, which is similar to the way we’re protecting assets in the data center.

When the Secret Service is protecting the president, if you imagine the president speaking in an auditorium, the Secret Service shows up months before the president is going to be there. The first thing they do is they map the auditorium to understand that if the president’s going to be here, speaking on this stage, here are all the attack vectors. Here are all the ways someone could reach the president. An auditorium is built for openness, so there are going to be a lot. The Secret Service tries to control that environment, to shrink the number of attack vectors. The reason they do this is, as we said before, if you have to watch a hundred attack vectors, it’s really expensive, and you’re really spread out thin. If you have to watch 20, you’re in much better shape as a defender. So you can say we don’t leave this doorway open, and no one’s going to sit in this portion of the auditorium. You can close things down to simplify your environment. That’s important for a lot of reasons, but the biggest reason is it makes detection much easier.

If there’s a section of the auditorium where no one is supposed to sit, that doesn’t necessarily mean no one will show up there. People always do strange things. But if someone does, you know they’ve broken a policy. It’s not a false positive. There’s no risk of confusion. You can simply react, and it lets the Secret Service act much more quickly because rather than basing their actions on uncertain analysis, they’re basing it, they create firm boundaries. When someone breaks a boundary, they know what to do. If the Secret Service wanted to, they have a lot of resources, they could put a metal detector at every seat in the auditorium.

They could put one at every single seat. They could get the best metal detector in the world. The problem is, they would never do that. They would get thousands and thousands of alerts and lots of them would be because someone had a particularly heavy watch on, or had change in their pocket. Whatever it might be. In order to test those alerts, they would have to send Secret Service agents out into the auditorium to check each one. And Secret Service agents are really expensive, and they’re rare. It takes a long time to train them. They’re hard to find. What you really want to do, is take your precious resource, your Secret Service agents, and you want to direct them at the hardest, smallest slice of the problem.

So take that and apply it to the data center. If you are detecting everything everywhere, and you don’t have control over the environment, you’re going to get a lot of alerts. The statistics we see right now back that up. Organizations get 500, 1,000 critical alerts a day, which is a huge number of alerts that supposedly you have to deal with.

On average, organizations say they have the capacity to investigate something like 1 percent of them. So you’re investigating 1 percent of all these critical alerts. Quickly you start to turn things off because that data is dirty. If you’re following the model, you would do the same thing the Secret Service does. You don’t put a metal detector everywhere. What you do is you control the environment. You limit the places people can be, the paths they can take, so you know where to watch. So you know if this is my high-value asset in my data center, then if anything strange happens there, obviously it should be my highest priority. If anything strange happens in something connected to it that might be a secondary priority. You can start to prioritize these alerts and focus on the problems that matter more.

Roberta Fusaro: What are some of the policies or regulations that are emerging that business executives need to concern themselves with?

Nathaniel Gleicher: In a lot of ways, 2017 will be a year of regulation in cybersecurity. Not exactly the regulation people think about. I don’t know that it’ll come from DC. SWIFT, the financial-transactions organization, recently put out controls that all of its members need to comply with to segment and protect their SWIFT application.

This is in response to all the criminal activity targeting SWIFT applications. That’s one. The New York DFS, the financial regulator, put out controls around cybersecurity quite recently. The European Union recently put out a new general data-protection regulation, which has a whole range of controls built into it, but there are specific pieces around where is data stored, and how is it stored, which raise serious concerns for companies.

There are a lot of pieces coming out from different places, that depending on what industry you sit on, you need to watch. The pattern that I’m seeing, though, is each of these has components that require organizations to do a better job exerting control over the data in their possession.

Organizations have said, “My data just pools in all these places. I don’t even know where it is. It moves through these systems too fast for me to follow.” It has been acceptable for companies not to know answers to these technical questions. You’re seeing these regulations start to come out that push back on that. There’s this increasing requirement on organizations to understand what’s happening in those systems, and where that data’s going.

Roberta Fusaro: How might this increased oversight affect companies’ ability to innovate? So many new business models are data- and analytics-driven.

Nathaniel Gleicher: There’s this old apocryphal joke that if we built cars like we built computers, cars would go 500 miles an hour, get 500 miles a gallon, and blow up once a week. We’ve made this choice, historically, around computer and Internet innovation that the consequences of unreliability aren’t all that high.

We’d rather have rapid innovation, but what’s happening now is more and more you see the technical world, the Internet world, colliding or reconnecting with the physical world, whether it’s autonomous cars, whether it’s health innovation like you’re seeing, whether it’s integrating smart solutions into the home, whether it’s integrating smart solutions into our transportation framework.

There are more and more opportunities integrating technology and smart solutions into the financial systems that our society runs on. There are more and more opportunities for surprisingly small bugs to cause very big chain effects in the physical world. The push and pull that you’re seeing is how do you maintain the pace of innovation that has been so valuable, and such an engine of economic growth, an engine of competitive edge for us, while still mitigating the risks of all of these autonomous systems, and more and more sophisticated systems that are impacting the physical world.

Roberta Fusaro: What are the opportunities for VCs and start-ups in this changing environment?

Nathaniel Gleicher: There are huge opportunities in pointing artificial intelligence solutions and orchestration solutions at problems that are incredibly hard to do at scale for large organizations. We tend to think of cybersecurity as a technology solution because that’s convenient.

The truth is, it’s really an organizational solution. If you only have one computer, obviously anyone can make a computer secure by turning it off. But if you have one computer, if you have one system, a sophisticated defender is going to be much better able to protect that than if you have a thousand systems and hundreds of employees, or 10,000 systems, and hundreds or thousands of employees.

The challenge is getting large organizations to operate in a coherent fashion, when large organizations are made up of people, and we aren’t always good at operating in a coherent fashion. What organizations really need, and where there’s real potential, is how do you make it so those things we talked about at the beginning, encryption, strong passwords, segmentation, white-listing applications, patching vulnerabilities can be done reliably, consistently and at scale because if we can do that, we would solve a large chunk of our security problem.

Roberta Fusaro: Nathaniel, thank you so much for joining us today.

Nathaniel Gleicher: Thank you for having me.

About the author(s)

Nathaniel Gleicher is the head of cybersecurity strategy at Illumio, and Sam Palmisano is chairman of the Center for Global Enterprise and retired chairman and CEO of IBM. Roberta Fusaro is a senior editor of McKinsey Publishing, and Marc Sorel is a consultant in McKinsey’s Washington, DC, office.

Categories: Uncategorized

The rise, fall and comeback of an apparel empire…Dov Charney’s American Dream

June 27, 2017 Leave a comment

 

download (1).png The Buisness of Fashion

JUNE 26, 2017 • By Daphne Howland

(Credit: Dov Charney)

Dov Charney has one hell of a story to tell. After losing American Apparel in a death spiral of debt, corporate intrigue and troubling sexual harassment allegations, Charney is starting over with a new venture that sounds a lot like his old one. But can he really build a new and improved American Apparel — and escape his past?

In the months after American Apparel was sold out of bankruptcy and its stores were shuttered worldwide, Charney spoke at considerable length with Retail Dive about his complicated history, the road ahead — and everything in between.

PROLOGUE

Dov Charney has a proposition. “Do you wanna FaceTime?”

The reporter he’s talking to this morning has just a few follow-up questions, but Charney has something more exciting in mind. As the video call fires up, he shows off his Los Angeles living space — the walls filled with taped-up papers, his clothes folded onto an Ikea bookshelf. Charney’s signature mutton chops and 80s-style aviator eyewear are nowhere to be seen. His dark hair and scant beard are flecked with grey. He’s smiling — grinning, really. There’s a fervor.

Then Charney gets to what he really wants to show… and for anyone thinking about the American Apparel founder’s checkered reputation, don’t worry: it’s more captivating — not to mention more wholesome — than you might think.

It turns out the bedroom is little more than a bivouac. It’s set up so that Charney can spend days and nights in this building. The real action is beyond the bedroom door, which opens onto a vast, light-filled space where massive, state-of-the-art machines hum with activity. The realization quickly sets in: This is a garment factory — specifically, it’s the home of Los Angeles Apparel, Charney’s new venture.

“This is from Europe. It’s the best,” Charney says of one machine, navigating among the workers moving across the factory floor. “A lot of these people I know, they worked for me at American Apparel.”

He approaches several workers. “Cuantos años en American Apparel?”

“Nueve,” one responds.

“Seven,” says another, followed by, “Twelve.”

One man flashes his palms twice, then makes the number-one sign with his index finger: “Twenty-one.”

TIMELINE (1989-2017)

  • 1989Dov Charney starts American Apparel
  • 1997American Apparel begins manufacturing in Los Angeles
  • 2003First retail stores open
  • 2005Former employees file three sexual harassment lawsuits against Charney
  • 2007American Apparel goes public
  • 2009Immigration agents investigate American Apparel
  • 2011The company receives bankruptcy waivers and installs John Luttrell to oversee its finances

    Five former employees sue Charney amid claims of sexual assault

  • 2014The company’s board ousts Charney as CEO and brings in Paula Schneider
  • 2015American Apparel files for Chapter 11 bankruptcy for the first time

    Charney makes a $300 million bid for control of the company, which is rejected

  • 2016American Apparel emerges from bankruptcy as a private company

    Charney starts a new venture called Los Angeles Apparel

    Schneider leaves American Apparel

    The company files for bankruptcy for a second time

  • 2017Gildan Activewear buys American Apparel’s intellectual property for $88 million

    American Apparel shutters its Los Angeles factory and retail stores worldwide

American Apparel, of course, is the apparel company Charney founded almost 30 years ago as a young Canadian carried away by a lifelong obsession with American-made cotton T-shirts. The company whose fledgling wholesale business he transformed into a trendsetting fashion brand and global retail empire with hundreds of millions of dollars in annual sales. The company that prided itself on its immigrant labor, domestic manufacturing and good wages.

But it was also the company whose sexually charged marketing — not to mention its CEO’s personal behavior — polarized the very public it wanted to buy its product. The company whose Shakespearean rise and fall became one of the biggest business stories for over a decade. The company that ultimately ousted Charney in 2014 amid accusations of financial improprieties and sexual harassment. And, ultimately, the company he watched stumble, fall into the ether and become just a shell of its former self — a brand in name only, its U.S. manufacturing base and retail stores effectively abandoned after Canadian T-shirt maker Gildan acquired the company at a January 2017 bankruptcy auction for a mere $88 million.

American Apparel is far from the only company to succumb to the mounting pressures facing so many apparel retailers, especially in recent months. The LimitedWet Seal and BCBG Max Azria all fell victim to changing consumer tastes and shopping patterns in the first quarter of 2017 alone. But American Apparel stands out. For nearly 30 years, the company provided a steady stream of high-quality basics and edgy styles to worldly urbanites who had no use for the logo-laden clothes favored by suburban teens. Charney’s unique approaches to fashion, manufacturing, marketing and retail drove the brand’s rapid ascent to the top of the apparel world in the mid-2000s.

The company eventually crumbled in spectacular fashion under the growing pressures of its precipitous rise, accelerated by the Great Recession and its own rather peculiar set of problems. And one cannot escape Charney’s personal troubles when talking about American Apparel’s downfall. Several ex-employees filed lawsuits over the years accusing him of sexual assault and harassment — lurid and disturbing accusations that would eventually underpin his removal as CEO.

The real story of who is to blame for American Apparel’s downfall — and whether there’s truth to the allegations against Charney — played out in a rather public tug of war. While the company’s management disparaged his behavior in the press and in courtrooms, Charney has always sought to be the master of his own narrative. He denies the accusations outright and insists they were merely a pretense for his ouster, noting the company’s board acted on them long after they were news. At the time of his firing, Charney believes, American Apparel was poised for a comeback; he just never got the chance to make it happen. American Apparel ultimately unraveled without him — and a dark cloud still lingers over his reputation.

[Los Angeles] is not the America that Donald Trump has in mind. This is the America that the Rainbow Coalition had in mind.

Dov Charney

Now Charney’s starting over. He has a new venture — Los Angeles Apparel. At first blush, the company continues right where American Apparel left off. Charney’s essential approach remains unchanged, and he maintains the same unwavering confidence that young urbanites represent a niche market that will translate into hundreds of millions in apparel sales.

But even the name of the company hints at some differences. “America” is now Donald Trump’s America — and for Charney, “Los Angeles” is an antidote to that: A diverse city of strivers and the birthplace of the gritty style that won Charney over decades ago.

“Los Angeles is one of the most exciting places in the country for manufacturing, for culture, and despite the higher costs, it’s doing fantastic,” says Charney. “This is not the America that Donald Trump has in mind. This is the America that the Rainbow Coalition had in mind.”

With American Apparel now firmly in his rearview mirror, Charney’s future holds possibilities. But can he build a new and improved American Apparel — and escape his past?

OH, CANADA! It’s not called American Apparel because it was made in America, says Dov’s father, Morris Charney. “It was called American Apparel because he was in Canada, and he really liked American cotton and the American T-shirt and the quality of the fabric.” (Credit: Dov Charney)

I. The Rise

(1989-2008)

THE EARLY DAYS

Dov Charney’s determination to move on from American Apparel by creating a new company that closely resembles it speaks to the preternatural determination that sometimes vexed his parents and teachers when he was just a small boy in Canada.

“Dov — he was a handful,” his father Morris Charney tells Retail Dive. “They didn’t understand him at school, but he had an entrepreneurial spirit. Dov was persistent.”

That spirit got him in trouble at an early age. Inspired by The Montreal Star, which he delivered in the mornings, 11-year-old Dov established a newspaper, the “What’s Up Newsletter,” assigning his friends stories to write and printing copies in the Charney family basement. The kids sold the papers lemonade stand-style, but Charney’s school accused him of encouraging them to panhandle.

WHIZ KID. As a child, Charney was free spirited and entrepreneurial. He courted controversy early on by creating the “What’s Up Newsletter” and selling it on the street, lemonade-stand style. His teachers shut it down, calling it panhandling.(Credit: Dov Charney)

A few years later, Charney became obsessed with the superior feel of American cotton T-shirts. While attending elite Connecticut boarding school Choate Rosemary Hall and later Massachusetts’ Tufts University, he would bring carloads of American-made merchandise home to Montreal and sell items on the street, at one point earning a $25 fine for bootlegging. But buying T-shirts at stateside Kmart stores and driving them across the border wasn’t exactly an enduring business enterprise. So Charney quit school, borrowed $10,000 from his parents and established American Apparel in South Carolina in 1989, exploiting his next-level geekery about fine-gauge jersey and baby rib shirts to produce his own line with the aid of facilities and workers from Hanes Brands.

WHISTLING DIXIE. Charney would learn a lot about apparel manufacturing from seasoned pros in South Carolina’s textile industry, which thrived from the early 20th century until production began moving overseas in the 1990s. (Credit: Dov Charney)

“It wasn’t called ‘American Apparel’ because he was manufacturing in Los Angeles or in South Carolina — not at all,” Morris recalls. “He started in the basement of my home. And it was called American Apparel because he was in Canada, and he really liked American cotton and the American T-shirt and the quality of the fabric.”

During American Apparel’s formative years, Charney’s manufacturing depended on contracts with South Carolina factories. He speaks fondly of his years in the American South, and credits local mentors for shaping his business acumen. But Los Angeles beckoned even then. As the 1990s unfolded, Charney established an increasing number of West Coast contracts while South Carolina’s manufacturing sector waned. After continuing to manufacture on both coasts for a while, Charney finally embraced American Apparel’s destiny, trucking seven loads of raw materials and inventory west — a move completed in October 1997.

Despite steeper costs like higher wages — outside the area’s notorious sweatshops, that is — and more stringent break and sick leave rules, Southern California fit Charney perfectly with its temperate climate and intemperate culture. Los Angeles’ Korean garment community was “vigorously supportive” of his ambitions. “Many suppliers extended me credit even after I bounced so many checks on them and continuously failed to pay them on time,” Charney wrote in his online autobiography in 2014. He quickly came to appreciate the willingness of Korean-American garment factories to produce smaller runs, an approach that has become key to his idea of “rapid reaction” manufacturing — a process he believes is critical now more than ever to respond to what’s selling in the market and ensure quality control.

MADE IN THE USA. Charney established American Apparel’s manufacturing base in Los Angeles. The company’s famous factory finally shut its doors for good in 2017.(Credit: Dov Charney)

“It’s rapid reaction, it’s rapid production to react to trends, not fast fashion,” he says in a conversation with Retail Dive. “To manufacture in one part of the world and sell in another is turning out to be inefficient.”

As if to make his point, Charney stops speaking for a moment to address a worker: “It’s too much rib, you have to control that. Make sure it’s not too loose, not too tight. Always flat, not too much, not too little.”

To manufacture in one part of the world and sell in another is turning out to be inefficient.

Dov Charney

“That’s the benefit of manufacturing in the U.S.,” he says, returning to our dialogue. “I can be in the factory while I’m on the phone talking with you and address a quality issue. If I’m on the phone in New York and the factory is in Bangladesh, it’s not so easy.”

“Of course there’s the argument that [domestic manufacturing is] ethical, but that’s a kind of social argument. I’m telling you that it’s cheaper too — that’s what retailers need to know,” he says. “What local manufacturing allows you to do in the fashion context is accelerate or decelerate production.”

The approach allowed American Apparel to experiment and quickly learn from its mistakes. “I learned a lot, we’ve learned from a lot,” Charney says. “But one of the things we did learn is that people will pay for predictable quality basics, and they’ll even pay more if it’s predictably available.”

JUST THE BASICS

American Apparel gained new traction as a wholesaler after relocating to L.A., earning particular notoriety in the music industry for its 4.3 oz. 100% fine ring-spun combed cotton jersey.

Charney’s manufacturing finesse wasn’t all that set American Apparel apart; he approached the business with a creativity and knack for garments that he and his parents say is in his blood. His paternal grandmother was an immigrant sewer in a knitting factory. His father Morris is an architect and his mother, Sylvia Safdie, is an artist. Her website sports a slogan that could have worked at American Apparel: “The body is the most personal place that you can express from.”

TAKING THE SHOTS. Charney, who was American Apparel’s main photographer, uses an old Canon 5C or his iPhone. “I could use a 110 Instamatic,” he says. “Low-tech is sometimes interesting. It’s not about the camera. I don’t think grain is bad; I don’t like to do a lot of Photoshop. I think having something that comes across as authentic and real is important.” (Credit: Getty Images)

Charney, of course, is a photographer, too — one who’s made quite a name for himself and his brand with a series of provocative marketing campaigns that both titillated and offended. Charney’s sexually charged photos of young women in various stages of undress are now synonymous with American Apparel’s brand and his own public persona. This troubles him because he believes his campaigns were varied and pushed important boundaries. In addition to young women and girls of diverse ethnicities and body types, Charney says, American Apparel ads depicted older women and older couples, interracial couples, older interracial couples and gay couples — a veritable checklist of in-your-face challenges to cultural norms.

“We produced an enormous amount of variety — we were producing in some cases 30 ads a week in different markets. I kept shooting till the end. I was shooting days before I was fired,” Charney says. “We were doing selfies before the age of selfies. I was buying cameras for women and said ‘Shoot yourself’ because what a selfie is, is a real moment, it makes the person look larger than life.”

We were doing selfies before the age of selfies.

Dov Charney

In his print ads — which have the sort of faded glow that suggests you’ve found a Polaroid hidden in a box of private snapshots — Charney was chasing one of his most prized attributes: authenticity.

“What made it special is that it wasn’t rehearsed, it wasn’t contrived, it was honest. It was real,” Charney says. “The people were real, and we challenged notions of beauty because we rarely used professional models. I understand that not everybody understands the marketing, or that the media has raised hay over aspects of the marketing. But the reason that this was one of the most recognizable fashion ad campaigns or any ad campaign — a huge element of what made it special and why people connected to it — was its authenticity and its realness.”

Charney defends the sexually charged images as superior to the airbrushed ideals presented by most apparel retailers, and believes the controversy was helpful to the brand. “I do think there’s something to be said for photography that challenges cultural norms, that challenges what people think are right and wrong,” he says. “People are going to buy into authenticity. It’s not like everybody likes ‘Walt Disney’ perfect. The imperfect is often more appreciated than the perfect.”

ALL TOO REAL? American Apparel was criticized for depicting underage girls in sexy poses. Charney argues they only looked young in contrast to most advertising, which makes very young models look older than they are. (Credit: Dov Charney)

And while it may be difficult for some to remember now, the shtick really did work.

“The basics were good and they had normal girls that were cool and cute as hell, and live photos and they looked fantastic,” says Lee Peterson, executive vice president of brand, strategy and design at WD Partners, a global retail design firm, who spent 11 years at The Limited when it was still owned by Les Wexner. “To me, it was a good [campaign].”

Charney’s company was more than good marketing. Especially when it came to basics, he had a well-honed instinct about style and quality, bucking trends to appeal to the sophisticated urban 20-something he saw as his customer.

The company zigged as others zagged. While retailers like Aeropostale, American Eagle Outfitters and Abercrombie & Fitch were churning out apparel emblazoned with their logos, American Apparel’s merchandise remained free and clear of any corporate insignia — the people who wore its clothing advertised it through their sense of style.

One of Charney’s innovations — using thinner fabric and cuts that many women find more comfortable and flattering — remains a contribution to women’s fashion basics. Inspired by the shirts worn by a South American girlfriend, he developed the “Classic Girl” in 1997, which took off in the rock-and-roll merchandise circles that were a large part of his wholesale clientele and has been copied by every other basics brand since. American Apparel also arguably launched the by now-ubiquitous trend of wearing leggings as pants. Charney seemed to understand that for women and men alike, “basics” mean more than just cotton T-shirts, hoodies and socks — an innovation highlighted by Racked in an elegy for the brand by the site’s editors.

It’s not like everybody likes ‘Walt Disney’ perfect. The imperfect is often more appreciated than the perfect.

Dov Charney

But for American Apparel, the path from innovative garment maker to fashion icon and global retailer was fast and furious. At the turn of the 21st century, it was still a startup wholesaler, a huge hit among the merchandisers supplying rock and roll bands. But retail — and growth — proved irresistible. Charney relishes detailing this speedy rise, but for the business, it may have been too much, too fast.

HIGH TIMES

Dov Charney turned a childhood obsession with American cotton T-shirts into an influential fashion brand with a burgeoning retail presence.

In 2003, the first store opened in L.A.’s Echo Park neighborhood, followed by one each in New York and Montreal. Within two years, the company was expanding to Europe and opening 65 new stores. By 2006, there were 140 total stores and by 2009, there were 281. The company was global. It was “the fastest retail roll-out in American history,” as Charney called it.

American Apparel store base (2003-2012)

American Apparel rapidly expanded its retail presence, going from zero to 281 stores in just six years.

Source: SEC Filing

The rapid retail expansion coincided with a rising fashion influence that seemed almost impossible for apparel basics. The Guardian called the brand “the fashion sensation of 2008” and “the basis for the signature look of the extremely fashionable brigade.” British GQ’s then-executive style editor Jodie Harrison told the New York Times, “I happen to wear American Apparel practically every day of the week.” Outfits detailed in fashion photographs, whether on celebrities, models or stylish young people on the street, often featured at least one garment from American Apparel.

But while Charney brought on young creative types to develop the company’s designs and marketing, he didn’t have a similar financial right hand to help steer the ship. That was fine as long as his suppliers were willing to take a chance on him, despite his financial setbacks and late checks. His ability to operate like a young entrepreneur dependent on a series of mentors and patient investors would eventually diminish. And his notion of ideal growth — bulk up profits by opening more retail locations — may have placed his fashion basics brainchild well beyond his expertise.

“My thing about them was — he had a really great idea, and it was in the name, ‘American Apparel,’” says Lee Peterson. “They had good stuff, and they had key locations, too, which was really smart. But it wasn’t an idea that could be 300 stores. If they could have stayed at 50 to 100 stores they would’ve been fine. Everything changes after you do over 100 stores — operations, marketing, everything. It requires huge changes, and speed bumps. You start going from having A+ stores to C stores, but you’re only profitable on your best stuff.”

There’s a niche market that’s growing that is the antithesis of fast fashion.

Dov Charney

One hundred stores is about what the company was running in 2007 when it went public via a sale — rather than an initial public offering — to Jonathan Ledecky’s Endeavor Acquisition Corporation, an investment firm known as a “blank check” company, for $382.5 million. (Blank check firms are publicly traded entities whose shareholders don’t know what acquisitions will be made before they invest.) This unusual but entirely legal way to go public avoids much of the due diligence that goes into preparing for an IPO.

At the time, the company was doing well: In its first quarter of 2008, it reported net sales of $111.6 million, a 51.9% increase over $73.5 million in the year-ago period, while same-store sales rose 36%. The company had conducted direct sales online since 2004, with localized storefronts in the United States, Canada, the United Kingdom, Continental Europe, Switzerland, Japan, Korea, and Australia. By the end of the third quarter that year — with the company boasting 228 stores worldwide — retail sales had overtaken its wholesale operations, with U.S. retail sales alone on par with its wholesale sales, according to an SEC filing.

FAST AND FURIOUS. American Apparel took the world by storm, undergoing a rapid global brick-and-mortar expansion that propelled the brand to stardom but ultimately contributed to its financial and logistical woes.(Credit: Dov Charney)

By the end of 2008, the company ran 260 stores in 19 countries, with a workforce of 10,000 in large metropolitan areas, emerging neighborhoods, and select university towns. Net sales had risen 40.8% to $545 million from $387 million the year before, and same-store sales continued to rise. Most of the company’s expenses went to expanding its manufacturing in order to fill up all those stores not just with its signature basics, but more stylish offerings and basics beyond shirts, including jeans.

The Great Recession was right around the corner, but Charney and Ledecky were transfixed by American Apparel’s potential. “We were shipping all over the world,” Charney says. “We had stores in 20 countries that were showcases of our brand, and almost all our stores were generating a profit. This isn’t a market of trillions. There was a niche market in New York, in Los Angeles and other parts of the world, even in Beijing. There’s a niche market that’s growing that is the antithesis of fast fashion — to buy basics that are ‘slow fashion.’ American Apparel had a static product line, we dropped things, we added things. What slow fashion is, is Converse All Stars, Levi’s 501 and the American Apparel basic tee.”

RETAIL SPACE AVAILABLE. Canadian T-shirt company Gildan bought the American Apparel brand earlier this year for $88 million, but that didn’t include its stores, which are now all closed.(Credit: Nan Copeland)

II. The Fall

(2008-2014)

THE BEGINNING OF THE END

In many ways, Dov Charney’s American Apparel lived and died by the sword.

Charney’s success was built on his own ethos: His marketing sprang from his philosophy of sexual liberty and gay and immigrant rights, his manufacturing was born from his vision of a borderless world with well-treated workers, and his business success came from his audacious ideas about apparel making. But there were stark contrasts to those big ideals, a yin to every yang — troubling allegations of sexual harassment, an investigation of his operations by immigration officials, questionable accounting practices that raised eyebrows, and some very expensive debt.

The first domino to fall was Charney’s workforce. In an industry notorious for cheaply manufacturing the vast majority of apparel outside the U.S., Charney’s “Made in the USA” philosophy relied on his hiring of immigrant workers — many of whom were undocumented. It’s well-known that Charney paid his workers well — far better than the area’s sweatshops — with benefits including health insurance, English lessons and shares in the company.

LEGALIZE L.A. In 2008, American Apparel initiated a campaign to ease work and naturalization regulations, staging protests and selling T-shirts emblazoned with rallying cries in Spanish and English.(Credit: Dov Charney)

An immigrant himself, Charney even took immigration rights on as a crusade: In 2008, long before it became a hot-button issue nationally, Charney and American Apparel initiated a “Legalize L.A.” campaign, staging a protest in the streets and selling T-shirts emblazoned with the slogan.

Some observers believe Charney’s pro-immigration stance made American Apparel an easy target for immigration officials. In 2009, the federal Immigration and Customs Enforcement (ICE) agency forced American Apparel to fire 1,800 workers — a quarter of its workforce — because of irregularities in their residency paperwork. The investigation severely hobbled American Apparel’s manufacturing, and it paid the price many times over: Production slowed while the company scrambled for replacement workers that it could ensure were legal, and severance packages, which included stock in the company, were expensive. The company was eventually cleared of any wrongdoing in the immigration case, but it took its toll regardless.

The production slowdown rippled to American Apparel stores: In March 2010, the company reported a sales dip that it said was due to difficulties producing inventory. Meanwhile, the recession was decimating both credit and consumer spending. The troubles created a perfect storm that led American Apparel to take on a debt load well beyond what even its massive growth would require — and at steep rates.

He lost 1,800 people in one day and half of them had warrants on his public offering that cost $30,000 each.

Ilse Metchek

“He got into financial difficulties that started with the [investigation by ICE],” Ilse Metchek, president of the California Fashion Association, told Retail Dive. “He lost 1,800 people in one day and half of them had warrants on his public offering that cost $30,000 each. That’s where the cash flow went. He needed a vast interim loan at 18%, and that’s what started that ball rolling.”

American Apparel was essentially a small company that had morphed almost overnight into a large, publicly traded one — and it was this rapid-fire growth and the sharp turn onto Wall Street that tested the limits of Charney’s abilities.

ADULT SUPERVISION

It was the beginning of the end for Dov Charney’s American Apparel.

In 2009, the worst recession since the Great Depression was seizing the economy, ravaging consumer spending and shrinking credit. American Apparel wasn’t in the best position to withstand that. When it needed an infusion of cash to meet impending debt obligations, private equity firm Lion Capital came to the rescue with a lifeline in the form of an $80 million investment. It was a grubstake that would prove fateful.

In 2010, with the company still scrambling to juggle the costs of its massive retail expansion and relieve its debt burden, American Apparel announced that its independent auditor Deloitte had resigned over “material weaknesses in internal control over financial reporting” — another sign that the company had grown too much, too fast and was now struggling to deal with the financial repercussions.

By early 2011, Lion Capital was back wearing a cape: The firm and Bank of America granted American Apparel waivers that would allow the company to avoid bankruptcy. At that time, John Luttrell, who had been CFO at Old Navy and Wet Seal, was installed as CFO at the company — a move characterized as the arrival of “adult supervision.”

American Apparel finances (2011-2014)

Despite American Apparel’s revenue and gross profit figures, the company’s expensive debt and high costs led to a negative operating income — a hole it was ultimately unable to pull itself out of.

In Millions of USD 2011 2012 2013 2014
Revenue 547.34 617.31 633.94 608.89
Gross profit 294.9 327.38 320.88 309.13
Operating Expenses 573.74 604.76 695.34 636.30
Operating income -27.41 12.55 -61.4 -26.41

“What ought to happen is that Lion and BofA should push Charney out of the CEO’s office and replace him with an experienced executive,” CBS financial columnist Jim Edwards wrote at the time. “Charney—who has a genuine talent for picking and marketing new clothes—could remain as creative director, but he’d have to come under the authority of an operations chief. That won’t happen because Charney owns a majority of the company. No one can tell him what to do, no matter how bad things get.”

Before Luttrell’s arrival, American Apparel was somewhat on the upswing: The company posted a 15% increase in same-store sales and a 12% increase in wholesale net sales for fiscal 2012. But the company was still mired in a pile of debt — and job one for Luttrell was coming to grips with it.

Not all was smooth sailing. In early 2013, American Apparel launched a $206 million bond that missed its target. Once again the company faced higher-than-anticipated rates and fees — and once again, it turned to Lion Capital for help.

Another Luttrell project — a much-delayed, high-tech distribution center that Charney opposed as too expensive and unnecessary — suffered months-long delays that prompted Charney to camp out there for three months until it was up and running. Like the immigration debacle in 2009, the project ultimately led to inventory snafus that disrupted retail sales in addition to millions of dollars of cost overruns, according to a lawsuit filed by Charney in June 2015 against his former company, its board and many of its executives, including Luttrell.

TAKING CARE OF BUSINESS. In addition to his chief executive and marketing roles, Charney regularly visited retail stores and kept tabs on manufacturing. “Dov is completely hands-on,” says his father, Morris Charney. (Credit: Dov Charney)

The appointment of Luttrell chafed on Charney. To Charney, the costs of Luttrell’s moves came as evidence that the money men in suits didn’t understand the company’s needs. “I was investigating him,” he says of that time, claiming that Luttrell “wasn’t doing a good job” and “his financial controls were poor.”

When reached by phone for this story, Luttrell declined to speak with Retail Dive. Luttrell rarely spoke to the press while at American Apparel, and he went dead silent after his departure in September 2015.

SEXUALLY CHARGED

Financial troubles weren’t American Apparel’s only problems. It’s impossible to tell the story of American Apparel and its ultimate downfall without talking about Charney’s sexually charged personal brand — and the disturbing accusations that would form the basis for his ouster.

American Apparel’s marketing certainly pushed the envelope. Among the artistic style, progressive ads and tame product shots were plenty of softcore and smutty images that angered children’s advocates, feminists, and advertising standards watchdogs. They lent material to comedians and became a common point of reference for journalists and bloggers, who began to routinely refer to Charney as “pervy,” “creepy” or — at the very least — “controversial.” Charney insists, as he always has, that American Apparel’s sophisticated urban customers weren’t among the haters and slams critics for their duplicity in sensationalizing the sexual aspects of his ads.

SEX SELLS. “Human sexuality is part of the reason that people wear clothes,” Charney says. “You’re not going to escape our sexuality from a narrative about a clothing company.” (Credit: Getty Images)

American Apparel, of course, is hardly the only brand whose ads have been criticized as exploitative, misogynistic or simply in poor taste. But Charney’s own behavior fed the narrative in ways that pushed the boundaries of good taste and labor laws — and ultimately became inextricably tied to the American Apparel brand.

In a 2000 New Yorker profile of Charney as a young garment geek, the author Malcolm Gladwell describes how he tested the fit of women’s shirts: at a strip club near his Los Angeles factory. The practice was helpful, Charney explained, because the women’s bodies were of all different sizes and shapes and, unlike run-of-the-mill models, they didn’t charge $100 an hour.

“At a strip bar, you get a cross-section of chicks. You’ve got big chicks, little chicks, big-assed chicks, little-assed chicks, chicks with big tits, and chicks with little tits,” Charney told Gladwell. “You couldn’t ask for a better place to fit a shirt.”

Then there was the infamous 2004 interview with a Jane magazine reporter, who — though she made clear that she didn’t object — detailed how Charney masturbated in front of her during interviews. The scandalous story sparked a media frenzy and heightened the public’s attention to Charney’s sexual habits. Charney, however, defended his habit of dating and cavorting with the women who worked or modeled for him, often saying that he worked so much that it was his only way of meeting anyone.

At a strip bar, you get a cross-section of chicks. … You couldn’t ask for a better place to fit a shirt.

Dov Charney

But Charney’s sexual behavior became a far greater concern for American Apparel once lawsuits started raining down on him. Ex-employees filed a series of three lawsuits against him in 2005, alleging sexual harassment in the workplace. Later, in 2011, even more serious accusations emerged in lawsuitsfiled by five former female employees, some of whom claimed Charney had sexually assaulted them.

According to media reports, one suit charged that nude photos of a woman given to Charney appeared online without her permission. Another accused Charney of sexually assaulting a woman while at his home for a purported job interview. Yet another said American Apparel employees were forced to sign arbitration agreements when hired by the company that would “keep employees from disclosing unlawful conduct.”

The suits inflicted a dark edge of criminality onto Charney’s already pervy reputation — and though Charney didn’t know it at the time, the accusations would later be weaponized by American Apparel’s board as they pursued his ouster.

Throughout it all, Charney has strenuously denied any wrongdoing in these cases, while admitting to several incidents detailed in the press unrelated to his legal troubles. No criminal charges were filed in these cases and civil litigation has either been dismissed or settled.

“I do support the laws to protect workers and to protect women and to protect minorities,” Charney insists. “If I was a victim of the system — that’s a by-product of the justice system and that’s fine. I’m fine with that.”

Although American Apparel’s board of directors would say otherwise, Charney maintains that the lawsuits had nothing to do with his ouster. “What happened was the CFO wasn’t doing a good job,” he says. “This a company that was sold for parts, stolen from its shareholders — all shareholders got wiped out — and stolen from its employees, who, by the way, were also shareholders. This is not a massive victory for Wall Street.”

WINNERS AND LOSERS

Charney’s unconventional approach to marketing, the noticeably high quality of his apparel and his global and urban — if not urbane — outlook all contributed to American Apparel’s success; they converged into a wave that the company could surf. But while Charney’s personal brand may have helped the company, it would also eventually underpin the argument to unseat him.

Ousting Charney as CEO may not have been American Apparel’s initial goal. Unbeknownst to Charney, Luttrell met with American Apparel bondholders weeks before Charney was fired, and listened while hedge fund Monarch Capital Management — the retailer’s biggest lender with a record of successfully pushing companies to sell themselves — lobbied for a sale, according to the New York Post.

Morris Charney told Retail Dive that Luttrell appealed to him and Dov’s mother, too, saying that there was a lot of money to be made. “John Luttrell is the opposite of Dov,” Morris said. “He’s connected to the financial world. He and Dov never got along. [Luttrell] came to see me here. He wasn’t a hands-on guy and Dov is completely hands on. He instigated behind his back. They were wearing him down; his mother got alarmed.”

It was a CFO-led coup … this wasn’t a shareholder revolt.

Dov Charney

While the bondholders may have found that Luttrell was all ears, Charney had no interest in the idea. “It was a CFO-led coup,” Charney says of the movement to unseat him. “The CFO wanted to cash out, he had stock, he would’ve made a couple million bucks, and this was the easiest path for him to accomplish that. The mistake I made at American Apparel was that I didn’t demand early enough for special control rights when I could have. I wanted to tell my shareholders that they could trust me. And my shareholders did trust me. What went wrong here — this wasn’t a shareholder revolt.”

For anyone planning a coup, Charney’s personal behavior would serve as ample ammunition. In June 2014, the board moved to unseat him as CEO, citing “new information” about inappropriate behavior and misuse of company funds that had “come to light.”

“They fired me 20 minutes after they were elected,” Charney says of that moment. “I made a speech, people clapped, I hugged everybody, then we went into a room, and they said, ‘Give us the voting rights of your shares, take $5 million bucks and hang around as a consultant.’”

The board launched an investigation into what they said was sexual misconduct and misuse of company funds. Their promised report has never officially materialized, but the media and a public well-versed in Charney’s behavior didn’t need the report to believe that the American Apparel founder had finally gone too far.

In court documents filed after his ouster, American Apparel accused Charney of causing “financial and reputational harm” to the brand as it dealt with the lawsuits. The filings said Charney “repeatedly engaged in conduct that violated the company’s sexual harassment and anti-discrimination policies, and created significant risks of liability on the part of the company.”

CAN WE TALK? Dov Charney doesn’t rely on public relations firms to shield him from the media or shape his communications. He can be blunt, coy, philosophical, geeky or apoplectic — all in one conversation. “Think of me as a Smurf,” he says. (Credit: Dov Charney)

Charney maintains that has yet to be resolved in court, where he’s still fighting what he says are the company’s damages to him. “The litigation will go on for years,” he said. “There were no sexual harassment accusations at the time [of my ouster]. When I look back on it, it was a complete media manipulation. Not everything is what it seems.”

It is the actions of American Apparel’s board that he finds disingenuous and unjust, and it galls him that they found religion at the same time he was resisting a sale. “This isn’t a board that lost its cool,” Charney says. “I had no idea that they were upset because they weren’t upset.”

In fact, Charney is willing to play a hypothetical — if the charges were the reason to dismiss him, shouldn’t the board have acted when the charges were first made, rather than years later?

When Charney was ousted in June 2014, newly appointed co-chairman Allan Mayer told the Los Angeles Times that the company didn’t move sooner because “a board can’t make decisions on the basis of rumors and stories in newspapers.”

But, Charney points out, the board had been grappling with accusations and even lawsuits against him for some time.

“If there was something going wrong they should have said something in 2011, or they should have been honest with shareholders in their disclosure statements of 2011, 2012, 2013 and 2014 when they supported me as CEO. In 2012, they gave me a handsome contract. In 2013 and 2014, nobody said, ‘Hey, you’re doing anything wrong.’ They were going back in a time machine, unearthing something that was resolved,” he says. “They had already said they were baseless.”

Charney thought he could make a comeback after discovering a new source of support in hedge fund Standard General. Just weeks before Charney’s firing, Standard General executives touted his talents and vision in a presentation, arguing that they were under-appreciated by analysts and that the company’s debt situation arose from discrete financial incidents that could be overcome. They recommended strategic store closures and openings as well as merchandising changes, but emphatically said the company required Charney’s vision.

“The performance of the company has been hampered by high cost debt and one-off operational issues that may have been less punitive with a better financial position,” according to a March 2014 internal analysis obtained by Retail Dive. “Wall Street consensus is that CEO Dov Charney is the problem and company would be better without him. We disagree. We believe he is the lifeblood/anchor of the brand which is the key value proposition of American Apparel. We see significant upside with a solid balance sheet and better financial discipline.”

What you’re seeing is the underbelly of Wall Street — what they wanted was to monetize and financialize the company.

Dov Charney

With Charney still on as a board member and a consultant — and now with Standard General in his corner — he believed he had a few moves to play. With the fund’s help, he boosted his stake to 43% from 27%, but their agreement entailed Charney ceding his authority.

That provision proved fatal for Charney, as the hedge fund quickly pivoted from supporting him to supporting the board. “[Standard General] progressively reneged on the bargain. It’s not because they unearthed new things; they did it because of financial greed,” Charney says. “The only reason that I’m involved with this is that they said I’d take control of the company. Instead they took control of the company.”

“Standard General used that opportunity, and the fact that the media perceived me in such a way,” he says. “They used that opportunity to empower themselves, and they fucked it up for themselves.”

Standard General declined to go on the record to Retail Dive. The hedge fund has since sued its partner investors alleging that they neglected the company’s turnaround and unfairly pocketed the spoils of its 2015 bankruptcy — accusations that sound remarkably like Charney’s own.

Charney clearly remains stung by his ouster. “I felt cheated and shortchanged,” he says of that time. “It wasn’t just me; this was a transfer of wealth from Main Street shareholders, artists, workers, suppliers to Wall Street hedge funds, Wall Street lawyers and Wall Street consultants — and rarely does that work out.”

“What you’re seeing is the underbelly of Wall Street — what they wanted was to monetize and financialize the company,” he says. “I believe I was successful at American Apparel. Its ending was abrupt, but I believe in what I’m doing.”

DON’T CALL IT FAST FASHION. Charney believes low-wage overseas manufacturing is a rip-off — for workers and retailers alike. He can often be found on the factory floor, pivoting production based on demand. (Credit: Dov Charney)

III. The Comeback

(2014-2017)

AMERICAN APPAREL UNRAVELS

While the board positioned Charney’s ouster as imperative to the company’s survival, American Apparel’s deterioration worsened after his departure.

The company briefly installed Luttrell as interim CEO and attempted to finesse its break with Charney by continuing to pay him as a consultant well into the fall of 2014. But that didn’t work for either of them.

“I began to realize that they were not going to give me back control, that they’re going to give me this $1.6 million salary with millions in bonus potential, but that I’m not going to be the boss,” he says. “But it’s critical for me to be the boss — that’s where my pleasure’s derived from. It’s not derived from money, I could sleep on the floor. What makes me excited is to build the business.”

It’s critical for me to be the boss — that’s where my pleasure’s derived from. It’s not derived from money.

Dov Charney

The board ousted him from the company altogether in December and brought in Paula Schneider as CEO. She had held a range of positions at apparel companies that mostly related to improving the bottom line. At American Apparel, cutting expenses — including slashes to employment and overtime at the company’s factories — were among her first moves. But efforts to undo the retailer’s nimble supply chain and merchandising approaches only exacerbated its struggles. And the sex-laced marketing that invited so much controversy and the debt levels that did so much harm saw little change.

Charney himself approved the choice of Schneider — in part because he had been assured that he would continue to serve, essentially, in an executive capacity. That was out the window once he was fired. The next year would be messy as Charney, shareholders and his brainchild traded lawsuits over how and why he was let go.

“She’s a salesperson. Where’s retail in her resume? She’s not involved in manufacturing. She negotiated prime real estate. She’s not even pretending to be a retailer,” he says of Schneider. “But the media. I was like a crazy. Think of me as a Smurf — think of me as a cartoon, going crazy over it. The workers were demonstrating; no one would listen. The Anglo-American reader doesn’t want to hear about the workers. The shareholders got crushed. But even the day of the last firing of the last workers — I was down there, downtown.”

THE FIXER. Charney favored the choice of Paula Schneider to replace him as CEO until he realized how diminished his own role would be. As she instituted money-saving job and overtime cuts, she faced a worker revolt and endured death threats. (Credit: Getty Images)

A spokesperson for Paula Schneider did not ultimately return Retail Dive’s multiple requests for an interview. But in a series of interviews early in her tenure, she emphasized expense cuts and restructuring the supply chain operations that she considered to be loose under Charney, turning instead to the old-school tradition of designing and making styles a year in advance. These moves would ultimately accelerate American Apparel’s undoing — not stem the bleeding.

At the same time, Charney was trying to scramble back into the driver’s seat. Along with a string of lawsuits fighting his termination, Charney pulled together financing to buy back control and continued the effort through much of 2015 — the first of two major takeback attempts after his ouster. “They kept stomping on my garden,” Charney says. “I tried to buy the company, I wasn’t allowed. I’ve never seen so much money spent on PR in connection to a fashion company. They spent $100 million on lawyers and consultants. They didn’t spend it on workers, they didn’t spend it on product development, they didn’t spend it on branding or technology or research and development.”

As Schneider’s cost-cutting efforts proved ineffectual, American Apparel faced one of its worst financial years ever. Net sales in the first quarter of 2015 dropped 9% and plummeted 17.2% in the second quarter as losses widened. Deep cuts of $30 million over 18 months were unveiled in August. But other changes made by Schneider failed to shore up the business as intended — and would instead prove fatal, according to Charney.

“I kind of know what they were doing. They collapsed the margin — the margin was over 50% for a decade. Suddenly it’s at 38% and 41%. They started lowering prices; they started having all these sales,” Charney says. “Prior to my getting fired I had very few sales because markdowns are expensive — and it depreciates the brand.”

American Apparel sales growth (2012-2015)

American Apparel sales unraveled in the wake of Dov Charney’s departure

Source: Factset

Under Schneider, American Apparel began to dismantle two of Charney’s key imperatives:

  1. make only just enough clothing that will sell in order to avoid discounting; and
  2. manage the just-right inventory through “rapid reaction” manufacturing — swiftly making and delivering more of what’s selling and shutting down production of what’s not.

This nimble rapid reaction approach was also innovated by fast fashion, but Charney avoids that term because he insists on high quality. Such rapid reaction garment-making is only enabled through domestic manufacturing, he says.

Instead, the retailer began designing collections out of season — a process that is increasingly being abandoned by even haute couture fashion today. “The problem is, they brought up a new collection, and they couldn’t make enough of the good stuff because the factory was all screwed up, and they got stuff they speculated on,” Charney claims. “They tried to produce in advance — I would produce in season.”

Under Charney, American Apparel could turn things around in a matter of weeks. “In January, I’d be in Miami hanging out by the pool testing out the bathing suits. I’d go to the store on Lincoln Road and we would see if the bathing suits would sell,” he says. “If we would sell three or nine of them, we’d know how many to make for when summer hits New York and when summer hits London. That’s how we did it, in season. Not the year before! So they dismantled all of my strategy.”

Schneider may have ripped up the Charney manufacturing and retail playbook, but interestingly she left the marketing approach mostly intact. She told Elle magazine that year that she was happy to see American Apparel on the National Center on Sexual Exploitation’s “top contributors to sexual exploitation” list: “I’m sorry if you’re offended by a girl wearing a thong, but we do sell thongs, so we have to show what it looks like.”

SÍ SE PUEDE. Once organized by Charney to agitate for fair wages and immigration laws, American Apparel workers returned the favor and took to the streets to shame hedge fund Standard General, condemn job cuts and demand Charney’s return as CEO.(Credit: Dov Charney)

While Charney’s and American Apparel’s lawyers traded papers and barbs in dark courtrooms, Schneider’s cost-cutting provided Charney with an opportunity to mix his legal battle with a few of his favorite things: agitation for workers rights, flamboyant behavior and sunny Los Angeles days. In support of Charney, The Coalition of American Apparel Factory Workers United to Save American Apparel was formed, and — employing the Cesar Chavez-Dolores Huerta-era union battle cry “Si, se puede!” — spent much of 2015 protesting outside American Apparel’s headquarters, calling for his reinstatement and protection of the workers’ jobs.

Sometimes things got ugly, like when protesters bashed a Paula Schneider piñata. The events ultimately went on for months and dragged into years. On the day those factory doors finally closed in January this year, Charney was right there — just as he has been all along.

NO TAKEBACKS

By October 2015, American Apparel had little to show for its manufacturing, human resources or merchandising changes, and faced delisting from the New York Stock Exchange. Surprising no one, the company filed for bankruptcy.

For Charney, it was time to move off the streets and into the courtroom for his second try at regaining control of American Apparel. In January 2016, he sat on the witness stand in United States Bankruptcy Court, District of Delaware, and beseeched U.S. Bankruptcy Judge Brendan Shannon to bless his reinstatement.

By all accounts, Charney’s dedication to his company was evident in his passionate testimony, but — ever the free spirit — he didn’t always conform to courtroom etiquette. The judge at times asked him to quit “free associating.” American Apparel’s attorney, Scott Greenberg, even opted not to cross-examine him, saying only that Charney’s rambling speeches showed why he wouldn’t be helpful to the company’s turnaround.

“It takes people who don’t always have the right resumes,” Charney says of the creative and intuitive people that he believes successful retailers need. “[Many financial firms] want to end the company — they’re looking to package it and sell it. But when you talk to retail people they want to live in their company. They love their companies — the private equity firms can’t wait to get out. They want a pay day. They’re not looking to hang around or create something unique, or win accolades for their creativity. They’re measured by how much money they can extract from the business. They’re not interested in the customer; it’s not about authenticity. It’s like someone going to school just to get grades and they’re not there to learn anything. They’re missing the point.”

The money’s not talented, that’s the problem.

Dov Charney

When it came to his takeover bid, Charney didn’t neglect to bring reinforcements in the form of $300 million from private equity firm Hagan Capital Group and hedge fund Silver Creek. That figure topped the value range — between $180 million and $270 million — that the investment bank hired by American Apparel had estimated in court documents. But the board rejected it. In refusing to approve it, the judge said that Charney’s argument boiled down to the idea — insufficient, in his view — that American Apparel couldn’t survive without him.

Hagan Capital Managing Partner Chadwick Hagan said American Apparel was simply playing a game of keep away. “There was a lack of dialogue and negotiation,” he told the New York Times. “In my opinion, there was a freeze-out of anyone involved with Dov. I think they were trying to scare us away.”

The takeback attempt was a dead end, and Charney believed the company would suffer without him. “I feared, with good reason, that the new management, not understanding what made American Apparel successful in the first place, would attempt to corporatize and conventionalize the company at the expense of its creativity and values,” he warned in January 2016 in the wake of the failed $300 million bid to buy back American Apparel. “The board and new management did not appreciate that a vertically integrated domestic manufacturer had to approach business in a fundamentally different fashion. I felt that the company’s future was in serious jeopardy if they proceeded to run it like a traditional retailer. The sad reality is that American Apparel, the largest garment manufacturer in the United States, will not survive at this pace and I don’t believe the current management has the talent to bring it back to health.”

But not even Charney could have foreseen American Apparel’s nosedive so soon after his departure. “The money’s not talented, that’s the problem,” Charney says. “The money doesn’t create the value. Basically the hedge funds and the private equity firms — and it’s not all of them — they hire these consulting firms. What these guys do, they just come in, they raid the company — basically, the suits take over. But it hasn’t worked out in fashion, as far as I can tell.”

THE NEW AMERICAN APPAREL

American Apparel emerged from bankruptcy in February 2016 as a private company, no longer required to post its financial results.

Soon enough, it became clear that the brand would in fact have trouble surviving without Charney at the helm. By September 2016, the retailer was reportedly seeking a sale. By October, Paula Schneider was gone. In November, the retailer filed for bankruptcy for the second time in a year and found itself back in Shannon’s court — a victim of a lack of leadership, according to GlobalRetail Data managing director Neil Saunders.

“On the management front the company seems to have stumbled from one crisis to the next, with the resignation of Paula Schneider as CEO leaving it rudderless at a time when it most needed direction,” Saunders wrote in an email to Retail Dive at the time. “While the bondholders, which took control deserve credit for rescuing the company, their intention appears to have been for American Apparel to tread water while they searched for a buyer. In a market as fast paced as fashion, this was always a risky option for a business that actually needed a long term turnaround plan.”

SNAP DECISION. Charney takes a selfie as a woman in the background works a sewing machine. “For me, the path is to pay workers $15 to $20 an hour and compete in the worldwide market,” he says. “It’s not the only business design; that’s my business design.”(Credit: Dov Charney)

Charney believes his arguments — about fashion, about manufacturing, about retail, even about his importance as CEO — were vindicated as American Apparel presented plans to pay its creditors pennies on the dollar and shutter all its retail stores. By early 2017, the company was entertaining bids for its intellectual property rights from the likes of Amazon and Forever 21 — but not, to many people’s surprise, Charney.

This time around, Charney was nowhere near the court in Delaware. Although he had always left the door open to regaining control of American Apparel, Charney seemed over and done with the whole affair, telling Retail Dive at the time that he’d have to see an asking price and assess considerations like inventory before even giving it serious thought.

By then he was teasing the press about his new venture. Charney’s resources — his time, energy and money from investors — were squarely focused on the city of Los Angeles, where he was starting up a new factory and making the same kind of basics that American Apparel is famous for. But it still clearly pains Charney that American Apparel’s board played hardball with him — only to abandon American Apparel’s customers, workers and shareholders after helping themselves.

“I couldn’t have imagined that they would go bankrupt as quickly as they did, and then after they went bankrupt, I could never have imagined that they would go bankrupt again,” he said in a conversation with Retail Dive about a month after Canadian T-shirt company Gildan Activewear Inc. bought American Apparel’s intellectual property for $88 million. “And when they started to go bankrupt again, I could never have imagined that they just would’ve sold the brand and walked away from the brand.”

While Gildan’s price paled in comparison with Charney’s bid from the year before, the transaction also meant a further dismantling of his vision. The purchase included no stores because Gildan had no interest in the company’s retail side. All of American Apparel’s stores are now closed — the end of an era for the brand.

END OF DAYS. When American Apparel’s factory doors finally closed in January this year, Charney was right there — just as he has been all along.(Credit: Dov Charney)

For the first time, a lot of American Apparel’s clothing won’t be made in the United States. After selling the company’s Los Angeles factory, final layoffs at the factory and its headquarters began in January. Charney was there for that, too.

In an email to Retail Dive, Gildan spokesman Garry Bell said that while the company is committed to continuing some manufacturing in the U.S., many American Apparel customers demand lower prices — which, Bell insists, requires leveraging Gildan’s cheaper operations abroad.

“It is clearly obvious that there exists a loyal American Apparel customer who loves the fabrics, great styles and the distinct marketing, but is looking for a better price to compete with the multiple other brands of similar products not manufactured in the USA,” he wrote in April. “It is to service these customers that we are launching a grouping of products that will leverage our existing manufacturing operations. The strategy is quite simply to offer the best of both worlds to each of those core customers.”

That’s not how Charney sees the loyal American Apparel customer. For him, the “American” of “American Apparel” is more than where it’s made. For an immigrant enamored with America’s multi-cultural ethos, American Apparel was not just an ethical garment maker, but a cultural ambassador. “This brand became part of the American culture, especially in larger cities, especially in New York or London or Tokyo, where people aren’t buying clothes just to survive, where people are thinking about issues, and how things are made and where they’re made,” he says.

LOS ANGELES APPAREL — THE REAL ‘AMERICAN APPAREL’ ?

These days, Charney is still busy with his camera, but now he’s pointing his lens at the city of Los Angeles itself — a place that Jack Kerouac in On the Road called “the loneliest and most brutal of American cities.”

For Charney, though, it’s a sunny place defined by its people, especially hard-working immigrants. In his eyes, it’s an urban streetscape uninterrupted by corporate America, dominated by low-slung buildings with hand-painted signs. In Charney’s L.A., featured in the photographs he’s taken to tease his new venture, there are pharmacîas and no CVS stores, hot pink mannequins on small lawns in front of mom-and-pop clothing stores — and no Macy’s.

The city is home to Charney’s new venture — the aptly named Los Angeles Apparel.

CHARNEY’S LOS ANGELES. The diverse and sprawling city that Charney — and his new venture — call home. “There’s people from everywhere here,” he says.(Credit: Dov Charney)

Not much is known about the company right now. In the early stages of his new enterprise, Charney is hesitant to talk too much about it. But he does say he has investors lined up, the factory is running, and there are 400 workers.

“Right now, my focus is on creating quality products that millennials, Gen Z, Gen X — even all of us — want,” he says. “I sold $5 billion of apparel from 2004 to 2014, and I intend to sell more in the next 10 years. I had to restart with a couple of sewing machines, and every day it’s wake up, grab the coffee, photography, web design, product design, strategy, marketing strategy, distribution strategy, technology, advanced manufacturing, recruiting, financing. This is my day.”

When talking to Retail Dive, he received word of a 5,000-unit order. “I’m like the marijuana industry,” he says with a laugh. “Some people want in and some people want out. We have supportive banks, too, we’re well financed. We’re able to borrow money, we have trade support, and we have equity.”

L.A. Apparel is already selling to TSC Apparel, which Charney says is one of the top three screen printers in the lucrative wholesale business that serves rock-and-roll, corporate and school merchandisers — the very business in which American Apparel began and always thrived. In fact, the upstart company’s premium shirts are already competing against Gildan’s American Apparel goods.

I sold $5 billion of apparel from 2004 to 2014 — and I intend to sell more in the next 10 years.

Dov Charney

Charney sees an opportunity for Los Angeles Apparel’s customized, small-scale production to meet the needs of e-commerce apparel retailers that value sustainably made, high quality, locally produced goods, but struggle with inventory and distribution. “We’re going to sell to retail partners that have a need for smaller-batch, artisanal garments,” he says.

To avoid over-production, some of those smaller players go as far as crowdfunding their inventory, waiting for a minimum order from their customers before they even contemplate production, he adds. “Because of the inventory risk, which is a big problem… We’re going to be in a position to produce anything and everything.”

“How many times does a company produce something ahead of time and they would have rather changed it at the last minute, but they couldn’t?” Charney says. “The next thing that domestic manufacturing allows for is testing and refinement. All of those cost savings or opportunity gains — or the avoidance of opportunity losses — is why domestic is better. You can’t do it all over the United States because we don’t have the workforce, but you can do it in Los Angeles.”

Charney wants to prove that he can manufacture in the U.S., pay good wages and still build an apparel empire. “Everybody’s relying on sweatshop labor — and I’m not. I’m not saying I’m an angel, but the entire foundation of my business doesn’t rely on 60 cents an hour,” he says. “I want to make Los Angeles proud. My goal is to disrupt the notion that we can’t make great products without relying on cheap labor.”

If American Apparel was the embodiment of America’s sophisticated, urban ideal, Los Angeles Apparel is the embodiment of that city’s ideals as Charney sees them — and a vestige of the best America.

“That’s why I named the company after the city — because we embrace its values,” Charney said. “There’s people from everywhere here.”

WORK IN PROGRESS

Given his skewering in the press in recent years, it may be surprising how many observers believe Charney’s prospects are good. “He’s going to be great again,” the California Fashion Association’s Metchek tells Retail Dive. “I have tremendous faith in him. Because he’s an innovator, and he knows his product.”

Such optimism springs from the high quality of his garments and the way American Apparel catapulted onto the fashion scene. But Charney’s troubles are never too far away.

PRODUCT AND PRODUCER. Charney believes that for a new generation of young consumers, there’s a meaningful connection between their clothing and the people who make it, and they are willing to pay more for it. (Credit: Dov Charney)

It’s hard to tell whether Charney himself believes his past could haunt his new company. “I had a controversial reputation,” he admits. “Some of the controversies were interesting, like promoting gay rights and immigrant rights or fighting for immigrants or fighting for authenticity and good wages.”

While Charney never wavers in his assertion that the sexual assault and harassment claims against him were baseless, he knows that the sexualized branding and the allegations against him fused into a perception that damaged him. “My advertising was so powerful and it elicited so much response that some of the power was reflected back on me in a negative way and that was caused by meritless lawsuits,” he says. “Unfortunately, the media has a financial interest in alleged scandal, too. The media loves it because they need sex. By the time it trickles down to the middle media — the Reader’s Digest version of the media — it’s already considered fact. And that’s what happened to me. But sex is also a driving force as to why individuals buy clothing. It’s not the only force, but it’s a force.”

You’re not going to escape our sexuality from a narrative about a clothing company.

Dov Charney

Charney won’t say much about the marketing approach for Los Angeles Apparel, except to say that it will broadly resemble American Apparel’s. “I’m not saying that it will have the same high temperature, but it will be authentic,” he says. “The workers are part of it, the culture of Los Angeles is part of it. But human sexuality is part of the reason that people wear clothes. You’re not going to escape our sexuality from a narrative about a clothing company.”

Whatever consumers choose to believe about Charney, there’s no doubt he has an outsized reputation at this point — and that’s something he’ll have to deal with one way or another.

There’s “always a fine line” when it comes to the personal behavior of visionary company founders, according to branding expert Martin Lindstrom. He compares Charney’s conflation of his personal life and brand with that of billionaire entrepreneur Richard Branson, whose hot air balloon crash imperiled his space flight ambitions. “At a certain point, people couldn’t separate those components anymore and they were disgusted rather than intrigued,” Lindstrom says. “The only thing Charney can do now is to change tack — and to change tack is incredibly difficult.”

MADE IN L.A. Los Angeles Apparel now employs 400 workers compared to 10,000 at American Apparel’s peak. “Still a good fighter like always, Dov, my boss,” one of his employees writes in Spanish on his Facebook page. (Credit: Dov Charney)

We’re now in an age where politically correct brands will suffer with many consumers when it comes to immigration policy, LGBTQ rights, feminism and the progressive ideals that the Trump administration stands against, according to Lindstrom. And that is on brand — and therefore a lucrative opportunity — for Charney.

“I think he will have a fantastic future if he comes out with very strong views, where he’s very unapologetic, where he speaks to communities that are aspirational,” Lindstrom says of Charney. “He will go through a political shit-storm, but if he can handle that storm, he will have a very bright future. He should stick with his core and what he believes in. Yes, he’s been hit, and people will bring out some of the old ads. But right now, there’s a need for people with strong opinions, and he should absolutely stick with that and he’ll do very well. At the end of the day — he could take Trump’s agenda and completely reverse it, and he will have 50% of the United States.”

When it comes to retail, Los Angeles Apparel’s eventual foray will come at a time of upheaval in apparel sales. Fast fashion has disrupted traditional apparel brands and retailers by imitating styles from the runway and getting them onto store racks well before designers themselves make new collections available. But Charney wants no part of fast fashion’s recipe for success — and believes that consumers will pay more for better, less disposable clothing.

A BORDERLESS WORLD. Charney’s affinity for immigrants goes back decades, according to his father. Many of the employees at his new venture also worked at American Apparel. (Credit: Dov Charney)

“Maybe you pay a few dollars more, but if you value it by the number of wears, fast fashion might be expensive,” he says. “I’m going to make my career purpose to confront fast fashion and to beat fast fashion.”

While Los Angeles Apparel is in many ways his answer to losing his first enterprise, he says there’s more to it than that. Charney believes Generation Z — the generation whose oldest members are just about now turning 20 — is ready for him. “These Gen Zs and millennials are kind of going through the rubble of the big business economy and asking, ‘Where did the personal economy go? Where did the florists go, where did the stationery store go, where did quality go? These are the things that they’re searching for as everyone got Walmart-ed out.”

“More and more young adults don’t want to be tricked by fast fashion. Especially Gen Z isn’t interested in overconsumption, and they don’t want to have brands on their clothing,” he says. “Of course they want a great pair of running shoes, they like a great bicycle, they like a very good smartphone. Functionality is critical. I’m wearing a sweatshirt today. It’s cold outside — makes sense — it’s just exactly what I need… I made it. But even if I hadn’t made it, I would still wear it. I love it.”

I can have a multi-billion dollar business if 1% of society appreciates what I do.

Dov Charney

It’s a chilly February morning in South Central Los Angeles as he talks to Retail Dive over Facetime, and the sunlight streaming into the cavernous Los Angeles Apparel factory behind him casts only a faint shadow. Dov Charney — as he has been for decades now — remains obsessed with superior yarn quality and manufacturing processes and dedicated to the meaningful connection between product and producer. As he always has, he’s betting his livelihood on the assumption that there are enough people in the world who will buy his product, his brand — and his story.

“I believe in my workers, I believe in domestic manufacturing. I believe in fair wages. I believe in quality and craftsmanship,” he says. “Like a Volvo 240, you know, something that lasts — I think that’s what an element of the market wants. I’m not looking to satisfy all buyers. Walmart or Target or Amazon has to appeal to everyone. I only have to appeal to a very small segment of society. I can have a multi-billion dollar business if 1% of society appreciates what I do.”download (1).png

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The Wizards of Indigo Denim

June 25, 2017 Leave a comment

Keep watching as these videos follow each other to tell an up-to-date tales of Jeans

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eMarketer Daily Week’s Top Articles

June 25, 2017 Leave a comment

 

June 25, 2017

Interview of the Week

Marketing in China: To Stretch Budgets, Take Global Content and Localize It

Francis Bea, general manager and marketing director of Zero Zero Robotics—creator of the flying Hover Camera—talks about the company’s localization strategy, which allows it to reach consumers around the world despite limited means. Read Interview
An interview with:
Francis Bea
General Manager and Marketing Director
Zero Zero Robotics

Chart of the Week

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eMarketer Roundup: Right Message, Right Time, Right TargetWith advanced marketing technologies comes a slew of data advertisers can use to grab the attention of their consumers at key moments in their path to purchase. This Roundup looks at how personalized messaging delivered at the right time is crucial in today’s fragmented customer journey.

Download now.

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Guaranteed to Shrink, Wrinkle,and Fade

June 25, 2017 Leave a comment

Your blogmaster’s book about Levi’s can be read at the following link:

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Reminder – Tilt Pro is shutting down in 48 hours (June 26, 2017)

June 25, 2017 Leave a comment

 

 

 

Only 48 hours remaining – Tilt Pro will be permanently shut down at Midnight PST on June 26, 2017.

Tilt Pro is shutting down

Just a friendly reminder that Tilt Pro will be permanently shut down at Midnight PST on June 26, 2017. We will continue to support existing campaigns, payments, refunds, and dashboard access until 6/26/2017.

If you are actively collecting payments, we recommend that you begin taking immediate steps to adopt a new platform for your e-commerce needs. We’ve prepared answers to the most pressing questions you may have below and we are standing by to help with any concerns you may have.

Answers to important questions:

How long will I be able to accept payments?
Active campaigns can accept payments until midnight June 26th, 2017.

For how long can I issue refunds?
You can issue refunds through your Tilt Pro dashboard until midnight June 26th, 2017. For those accounts with a direct Stripe relationship, you will be able to issue refunds directly through your Stripe interface even after Tilt Pro winds down.

How can I access my payment and customer data?
Login to the Tilt Pro dashboard at pro.tilt.com. If you created an account with your own Stripe account, Tilt Pro’s shut down will not affect your access to your Stripe payment data.

I still have funds in reserve. How can I receive a payout?
For a handful of legacy accounts, which have not completely fulfilled campaign obligations, we are still holding funds in reserve. Please reach out to us as these will be handled on a case-by-case basis.

What alternative platforms do you recommend?
We’ve put together a list here: https://docs.tilt.com/docs/platform-migration-options

I have more questions, where do I go?
We’ve prepared a thorough guide to the shut-down here. If you do not see your questions answered here, please reach out to us at questions@tilt.com

It has been a privilege to support such inspiring work and inspiring teams and we wish you the best in your future endeavors. We will continue to provide ongoing support until June 26th, 2017. If you have any questions at all, please don’t hesitate to reach out.

The Tilt Pro Team

 Tilt Pro was formerly called “Crowdtilt Open” and “Crowdhoster.”

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