American Apparel's unusual flotation is typical of Dov Charney, its founderThe Economist
January 4, 2007
Dov Charney courts controversy. The 37-year-old founder and chief executive of American Apparel, the largest T-shirt manufacturer in America, has been called a brilliant businessman, an amateur pornographer, a Jewish hustler and a man with a social mission. He is admired for single-handedly creating one of America's most successful fashion retailers, for devising his company's sexually suggestive approach to advertising and for treating his workers much better than his rivals. He is also envied, loathed and criticised for all of these things.
As he prepares to take his company public, Mr Charney is trying to strike a less provocative tone than he used to. Previously he emphasised his use of sex as a marketing tool and his tolerance of his workers' sexual preferences: he even posted a video of himself walking around in his underwear on his company's website. Today he prefers to talk about his belief in capitalism, self-interest and globalising markets. But true to form, Mr Charney is taking his firm public in an unusual way. On December 19th American Apparel announced its takeover by Endeavor Acquisition, a "special-purpose acquisition company" formed for the sole purpose of seeking out takeover targets. The deal, due to be completed this summer, will allow Mr Charney to go public without the scrutiny that attends most stockmarket listings.
American Apparel's rise is a striking success story. Mr Charney opened his first shop in 2003. Today he has 143 in 11 countries selling casual clothes for men, women and children. American Apparel's sales for 2006 were an estimated $300m. His company's 80% gross margin, an indicator of its profitability, is well above the industry average of 60%. Its unbranded, brightly coloured and moderately priced T-shirts, sweatshirts, underwear and jeans have become wildly popular among the young, well-travelled crowd that Mr Charney says represents the "world-metropolitan culture".
From American Apparel's inception Mr Charney has put great emphasis on making his workers happy. Pay is performance-related, and amounts to $12 an hour on average, far above California's minimum wage of $6.75. American Apparel staff can buy subsidised health insurance for $8 a week. They are entitled to free English lessons, subsidised meals and free parking. Their workspace is properly lit and ventilated. When the company goes public employees will receive an average of 500 shares, expected to be worth about $4,500.
Anti-sweatshop activists praise Mr Charney as a pioneer of the fair treatment of garment workers. The benefits he provides are expensive: subsidising health insurance costs his firm $4m-5m a year; subsidising meals costs another $500,000. Even so, Mr Charney says he has no plans to scale back these benefits. He considers his contented workers the reason for his success. Treating them well means they are less likely to leave, for one thing, which saves money. "American Apparel is not an altruistic company," says Mr Charney. "I believe in capitalism and self-interest. Self-interest can involve being generous with others."
Anti-globalisation activists like Mr Charney, too. Whereas Gap, another American fashion chain, outsources 83% of its production to factories in Asia, all of the 4,000 or so workers involved in American Apparel's manufacturing process work in the same factory in downtown Los Angeles. But this is not because Mr Charney is opposed to outsourcing or globalisation. His motive, once again, is self-interest: it gives him control over every stage of production, and enables him to monitor the fickle fashion market and respond quickly to new trends. In any case, he cannot outsource anything, he says, because he lacks the necessary infrastructure—and he has no plans to set it up.
Underneath the ethical clothing
Nor does Mr Charney intend to change his controversial approach to advertising. An amateur photographer since childhood, he takes the company's characteristic snapshots of young men and women in various states of undress himself. Half of his models are employees; the others are friends or strangers who send in photos. He pays them a small fee. But sex is more than a marketing tool at American Apparel, according to Mr Charney's critics. Four former employees have filed lawsuits against him alleging sexual harassment. Three of the suits have been settled and one is still pending. Mr Charney's accusers say he disgusted them with dirty talk and gestures, made their lives miserable and sacked them when they complained. He says they are exploiting California's lawsuit culture for personal gain, and they were fired for being bad at their jobs.
Mr Charney has also made enemies among liberals, who accuse him of overstating his firm's progressive credentials. Peter Dreier and Richard Appelbaum, two left-leaning academics, accused American Apparel of a "vicious intimidation effort" against Unite, a garment workers' union, and its supporters. Mr Appelbaum, who is co-author of a book called "Behind the Label: Inequality in the Los Angeles Apparel Industry", wants Mr Charney to submit to an unannounced audit to verify his claims about the treatment of his workers. Mr Charney responds that Unite has a history of corruption and racism, and denies anti-union campaigning, though none of his workers is a member of Unite. "I cannot placate the Left," he grumbles.
Having gone public, American Apparel plans to open another 650 shops across the world. This will not be possible without moving production to China, Mr Appelbaum predicts. Retail analysts also doubt that American Apparel will be able to expand without resorting to outsourcing. Mr Charney insists that China is too far away for his T-shirt production, even though moving textiles by ship from Hong Kong to Los Angeles takes just 11 days. But as his firm grows, he may have to decide whether he is more a capitalist or a maverick.
Link to Source (opens in a new window)
Made in Downtown LA—Vertically Integrated Manufacturing