The Rebirth of Cool REEBOK HAS GIVEN UP ON TRYING TO BEAT NIKE AT THE HARD-CORE SPORTS GAME. INSTEAD, IT WANTS TO BECOME THE SHOE BRAND FOR HIP-HOPPERS, HIPSTERS, AND OTHER FASHION-FORWARD URBANITES.
(Business 2.0) – One day in September--no one knows exactly when--1,500 pairs of candy-colored sneakers, adorned with dollar signs and packaged in faux ice-cream cartons, will land in high-end shoe emporiums nationwide. The moment will be advertised only by word of mouth. But if all goes according to plan, that buzz alone will cause the legions of voracious, influential shoe collectors known as sneakerheads to line up around the block to score a pair. And Reebok, once the biggest player in the $8 billion U.S. athletic footwear market but now a distant second to the juggernaut that is Nike, might be on its way back in the game.
The most curious part is the unlikely duo who created the sneakers: an American hip-hop star named Pharrell Williams and an obscure but wildly successful Japanese clothing designer known only as Nigo. Neither of them, it should be noted, plays a sport--and that's precisely the point. This quiet event may herald the largest shift in the athletic-shoe business since Michael Jordan and his Nikes first soared across TV screens in 1985.
By spoon-feeding the $200 Ice Creams to the multicultural, predominantly urban sneakerheads, Reebok hopes to change the rules of sneaker marketing, eschewing high-priced celebrity-athlete endorsements in favor of the harder-to-control world of high fashion. But first, a company that was once decidedly unhip must convince consumers that the marriage of hip-hop and Japanese fashion is indeed the pinnacle of cool--far more desirable than a thumbs-up from a sports god.
Are athletes losing their sneaker-pitching prowess? Reebok's experience during the past few years offers tantalizing evidence that this may be the case. The Ice Creams are the newest addition to the company's fastest-growing division, a streetwear-centric line called RBK that's proving rap stars like Williams can rake in profits. (Today RBK represents 15 percent of Reebok's total revenue, and it was the key driver of last year's 11 percent rise in sales.) The lean, strapping frontman of N.E.R.D. and hip-hop production team the Neptunes, Williams is part of a crew of next-generation RBK endorsers dominated by rappers.
But hip-hop can go only so far. That's where the Ice Creams, high fashion, and the whole crazy sneaker-consuming ecosystem come in: If U.S. sneaker collectors buy the shoes, the thinking goes, so will skateboarders, then the fashionable city dwellers, and finally the kids in the suburbs looking for a cool pair to wear for a night on the town. And if young American, Japanese, and European sneakerheads go for the shoes, that could open up opportunities in South Korea, China, and an international sneaker market worth $19 billion. To that end, Reebok hopes that Nigo, the designer behind Japan's cult-hit streetwear label A Bathing Ape (abbreviated as BAPE), will give the company a chance to piggyback on the Japanese design trend that's currently stirring up the high-fashion world.
Clearly, the risks are enormous. Hip-hop is edgy, and the street style tries to effect a certain danger. Nigo's more playful Japanese approach to fashion could easily alienate U.S. kids by dulling the hip-hop edge.
It's also an unprecedented gamble for a mainstream apparel giant. Though street style has been successful on a smaller scale, Reebok's $3.5 billion in revenue outpaces that of such industry heavyweights as Tommy Hilfiger and Timberland. And it's by far the biggest company competing in the urban-fashion market, topping the combined annual sales of the four major brands in that space (Ecko, Phat Farm, Roc-A-Fella, and Sean John). But the risk could be key to setting Reebok apart from its $12.3 billion archrival, Nike, which currently dominates 36 percent of the U.S. sneaker market--more than the next three players combined.
"For a number of years, Reebok lost its way," says Jim Duffy, a vice president for research at Thomas Weisel Partners. "But if you're going to be the No. 2 player, you need a way to differentiate. That's what Reebok has done."
As recently as the late 1980s, Reebok was running neck and neck with Nike in the sneakers race. And in fact, Reebok is really the grandfather of the athletic-shoe industry: Its English parent, J.W. Foster & Sons, invented the first track spikes more than 100 years ago. CEO Paul Fireman arrived on the scene in 1979 as the U.S. licensee, and in 1991 the American company bought out its British partner. But the Canton, Mass., business really took off in 1982, when it released the now-classic Freestyle, a simple women's aerobics shoe. That allowed Reebok to ride the dance-fitness craze and even pull ahead of Nike between 1987 and 1989.
In 1987, Reebok's board asked Fireman to step out of his hands-on role as president and into the title of non-executive chairman. And thanks in part to two deft marketing coups--signing Michael Jordan and Tiger Woods as endorsers--Nike stole the match by the end of the 1990s. Nike's revenue climbed steadily between 1994 and 1998, while Reebok's sales were flat and new products turned out to be duds. It didn't help that Reebok's endorsers were considered lame by comparison. A huge Olympic campaign featuring decathletes "Dan and Dave" stumbled when Dan failed to qualify for the U.S. team and Dave came in third. Even signing then-rising star Shaquille O'Neal to a reported $15 million deal in 1992 didn't do the job for Reebok; his sneakers failed to soar like Air Jordans.
By 1999, after two years of double-digit sales declines, Reebok's stock was approaching its historic low of $6.94, down from $52.16 two and a half years earlier. In response, Fireman returned to the helm and immediately began slashing costs, as the idea of shelling out big money to athletes began to lose its luster. By 2001 the company's only certified celebrity--aside from tennis star Venus Williams--was Allen Iverson, the explosive, tattooed point guard for the Philadelphia 76ers. Otherwise, Reebok "was basically done" as a cool brand, says Ryan Berger, a strategic trendspotter for Euro RSCG Worldwide. "Every athlete they signed went bust."
But Iverson's appeal hinted at a new direction. It turned out, Berger recalls, that the player "had gotten a little too street" and had released a rap album. "So Reebok said, 'Let's go completely street.'"
In early 2001, Fireman called a series of cross-departmental meetings to plot a new course for the company, working under the assumption that Reebok was completely out of touch with the youth market. "We realized we really weren't relevant with young consumers," says Reebok chief marketing officer Dennis Baldwin. "We did a lot of brainstorming; we decided that sports mattered, but so did fashion, and we wanted to look at the market through the lens of youth culture rather than sports culture."
So Reebok assigned a team of executives to figure out how to reconnect with the kids through fashion. The company also hired ad agency Arnell Group to develop the brand that would become RBK and craft its first marketing campaign, "Sounds and Rhythm of Sport." Besides running the usual print and TV ads, Reebok arranged for its shoes to be displayed next to CDs at music stores, where RBK's core 18- to 29-year-old customers were likely to shop.
In January 2002, Reebok kicked off its attempted rebirth with a New York party that packed in rappers like Sean "P. Diddy" Combs and Jay-Z. Both were living proof that the next apparel empires would be built on the backs of hip-hop stars--Combs's Sean John fashion label saw $325 million in sales that year, while rapper-turned-entrepreneur Jay-Z is a principal in the $500 million entertainment and apparel company Roc-A-Fella. That got Reebok thinking: If the shoe business was now as much about fashion as it was about athletics--and if Iverson's draw depended as much on his street cred as on his court talent--then why not sign a rapper outright instead of an NBA star moonlighting as one?
Reebok did just that in the spring of 2002, striking a deal with Jay-Z, a.k.a. Shawn Carter, to launch his own lifestyle line. Upon release in 2003, the first batch of his $100 shoes, the S. Carters, sold out almost immediately. Reebok shipped 500,000 pairs last year alone. A second shoe, the casual S. Carter tennis sneaker, was unveiled this summer at a kickoff party in the Hamptons. So far, the line is doing well and earning high marks from analysts.
Reebok didn't waste time signing its second star, rising hip-hopster 50 Cent, whose street credentials include scars from nine bullet wounds. His G-Unit line debuted with the G6 sneaker, added a cross-trainer this summer, and will unveil a Timberland-like boot in the next few months. That line, coupled with S. Carter, helped RBK sales grow 48 percent in 2003.
"We didn't know it would be an entire business," Baldwin confesses. "We just thought it was a way to shake up the market. Only afterward did we realize we had created a viable division that had a life of its own."
Yet, faced with Reebok's healthiest profits in almost a decade, analysts had a question: If hip-hop stars were doing so much for Reebok's bottom line, why wasn't the company signing more of them?
Toward the end of 2002, an unlikely partnership sprang up that promised to open even more markets to Reebok. That's when Williams met Nigo in a manner befitting a world-class hip-hop producer and an eccentric fashion designer--through their jeweler. That would be Jacob the Jeweler, the merchant of bling to hip-hop royalty. He passed along word to Nigo, a big Pharrell fan, that the artist was recording in Tokyo. Nigo dropped by the studio and introduced himself. "He took me to meet his buddies, and all the people who worked for him, and he showed me his clothing," Williams remembers. "I told him I had potential [as a designer]. The next thing I knew, we had a deal."
The pair formed a new shoe and apparel partnership, dubbed Billionaire Boys Club, in which Pharrell would sketch a few ideas, Nigo's team would design the product, and Pharrell would promote the clothes simply by wearing them. Reebok execs swooped in, offering to license BBC's budding brands and handle manufacturing for both the BBC apparel and Ice Cream shoe lines. Today, BBC is essentially a three-man operation, composed of Nigo, Williams, and their brand director, a 30-year-old former Nike executive named Astor Chambers.
"Billionaire Boys Club is a brand that speaks authentically to an urban and skater audience," Chambers says. This gives Reebok "a tier within its business that it didn't have before."
Showing off the brands' opening lineup--a trio of sneaker varieties, a couple of T-shirts, and a zippered hooded sweatshirt--Chambers had as much praise for the ice-cream-carton packaging as he did for the product. After all, Ice Creams "are a collector's shoe," Chambers says. Sneakerheads will likely store their Ice Creams in the cartons and then talk them up in online chat rooms and sneaker boutiques, stirring up mainstream demand.
BBC's partnership with Reebok represents the convergence of two equally important trends in the sneaker world: the rise of the urban consumer and the arrival of high-fashion designers creating collectible shoes. With RBK, Reebok nailed the first trend, though other sneaker companies are trying to get a piece of the action: Adidas's Respect ME line, backed by hip-hop artist Missy Elliott, is due out this month. The second is also being grasped at by rivals. This fall Puma will launch a line of shoes by Philippe Starck, known more for product and furniture design than for fashion.
Embedded in the high-fashion frenzy is the added infusion of cool from Japan. In 2002, Adidas formed an alliance with Japanese designer Yohji Yamamoto, who twice a year produces a high-end line under the label Y-3. And consider the hysteria last year surrounding Louis Vuitton's technicolor handbags designed by Japanese artist Takashi Murakami. The company sold at least $350 million worth of Murakami bags alone, helping boost Louis Vuitton's U.S. revenue by 38 percent.
The Asian influence is even more powerful outside the United States, so Reebok's alliance with Nigo could make the brand a bigger player in the global market. Now in his 30s but still dressing like a teenager, Nigo is rumored to be the richest designer in Japan. His secret, and that of his BAPE empire, is releasing staples like T-shirts, jeans, sneakers, and jackets in a near infinite number of limited editions. BAPE usually produces just a few hundred copies of any T-shirt, and Nigo's customers respond by lining up outside on Saturday mornings to score the latest duds.
Chambers, who spent his spring shuttling between home base in New York and BAPE headquarters in Tokyo, was obviously taking notes. "We are taking a similar path [with BBC]," he says. "It's all limited-edition--only for one season, and if you miss, you miss." After the launch, new products will appear in specialty sneaker shops and high-end boutiques like Los Angeles's Fred Segal every 60 days, creating a short shelf life of cool.
Along the way, Reebok hopes to transform those buzz-building outlets into high-volume sales channels for other RBK products. Though the specialty shops favored by sneakerheads may never rival Foot Locker in terms of volume, they are seen by the industry as a stage on which to build brands and test mainstream sales tactics. So Reebok hired a new VP whose only job is the care and feeding of that channel. The company is even releasing limited-edition RBK and Reebok shoes at mall-based chains like Foot Locker and Finish Line. "You're going to see a lot more Reebok limited editions," Baldwin confirms. "One tactic is targeting key consumers--musicians and athletes--who know that it was made just for them."
The limited-edition strategy is only one way Reebok is using RBK as an incubator for new products throughout the corporation. Though the rap-inspired RBK shoes began as small lifestyle brands, they're spawning performance-based counterparts. 50 Cent's G-Unit line unveiled a cross-trainer this summer, and Jay-Z's S. Carter division recently debuted a basketball shoe, with new colors coming out this fall. And those successes are forging the way for 2005's biggest release, the revival of Reebok's squeeze-action classic, the Pump. In November, when fewer than 10,000 pairs of the Pump 2.0 become available worldwide, Reebok will release 1,989 pairs of the original 1989 model in its honor, at the original price of $175. Next spring, as Pump technology begins migrating to mainstream product lines, the limited-distribution Pump Opus will be introduced to keep the brand simmering. "A product that was obsolete will be dusted off and given heat again," Baldwin vows.
Consumers will also be seeing a lot more of the Ice Cream line--at least, its downmarket successor--in the next year or two. In fact, Reebok hopes to extend the brand with mass-market releases well into 2005. But first the company has to worry about the pending approval of the Ice Creams by the mercurial sneakerheads. A sneak peek at the new kicks was recently held at Dave's Quality Meats, a butcher shop-cum-sneaker emporium in Manhattan's East Village, where the hottest shoes are served up from old-fashioned meat coolers. A pair of Ice Creams was kept under glass here for a while, and customers "either liked it or they hated it," says co-owner Dave Ortiz. "Some of them thought it was too toylike. Others were, like, 'Whoa, that's Pharrell's new shoe!'"
No one really knows, of course, whether Reebok's RBK strategy is ultimately sustainable. One analyst described its rapper signings as "unprecedented," while others worry about the danger of brand burnout. The fickleness of 50 Cent's musical audience--not to mention his ongoing infatuation with the "thug life"--could hurt his performance as an endorser. "Media-star footwear brands have about a two-year shelf life," says Dave Turner, senior vice president at BB&T Capital Markets. "An album can bomb, and a company like Reebok is then left with unwanted product, confused marketing messages, or both."
So what happens if Reebok's Ice Creams and the rest of its fashion-forward approach ultimately fall flat? Well, even as it's been placing this big wager, Reebok has also been hedging its bets. It's releasing a new Iverson sneaker this summer, as well as renewing its focus on running shoes. And while Nike is pinning its hopes on 19-year-old Cleveland Cavaliers phenom LeBron James, Reebok has countered with a new endorser who could well become the next Jordan on a global scale: 7-foot-5 Houston Rockets star and China native Yao Ming. He may not have a chart-topping hip-hop album, but among young sports fans in Asia, he's as cool as an athlete gets.