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Overseas expansion puts Forever 21 in a pickle

The Korean-born American founders of global retail chain Forever 21 known for their rags-to-riches story appear to be facing a crisis.

The New York Post reported late last month that Forever 21 was “late paying its bills,” which spooked business partners and banks as the company recently took the “unusual step of closing two massive California stores.”

A Forever 21 store in Beijing, China (Bloomberg)
A Forever 21 store in Beijing, China (Bloomberg)

The founders of Forever 21 are married couple Chang Do-won and Chang Jin-sook, who are often held up as a living witness to the American Dream. Emigrating to the United States in 1981, they worked odd jobs at gas stations, dry cleaners and in restaurant kitchens before opening a small clothing store in Koreatown, Los Angeles, in 1984 -- the start of Forever 21. Quickly recognizing consumer demand and incorporating consumer taste to the clothes available at the store, the Chang couple saw their revenue surge to $700,000 in a year after initial revenue of $35,000. Further expanding their business in the next 20 years by opening stores in Asia, Europe and Africa, Forever 21 recorded $4.5 billion in revenue last year.

The brand even at one point beat competitor brands such as ZARA, H&M and Uniqlo to ranked No. 1 in terms of market share among fast fashion brands.

With the success of Forever 21, the founders accumulated large profits and now have a net worth of $4.4 billion, according to Forbes.

However, the expansion into foreign markets proved to be a burden, as Forever 21 currently operates over 700 stores in the U.S. and abroad.

Craig Johnson, president of Customer Growth Partners, stated, “Even though Forever 21 posted a 15 percent increase in revenue last year, like many teen retailers, they overexpanded the store fleet both in terms of units and square feet -- with new stores averaging over 35,000 square feet (3,250 square meters) and some stores over 100,000 square feet (9,290 square feet).”

With such expansion strategies, the company’s financial standing downgraded. With cash flow problems worsening, company payments to subcontractors and stores were up to 30 days late. Pear-Vina Co., one of Forever 21’s major factories in China, pressured the company for payment.

Factoring and financial company Hilldun also recently withheld credit from Forever 21, as Hilldun was “unable to get timely financial disclosures from the company,” according to Hilldun chief executive Gary Wassner.

Moreover, industry insiders said that Forever 21 had to shut down two major stores in LA to pay back debt worth $150 million to Wells Fargo and TPG Capital.

Even though Forever 21 is known for its bargain prices ranging from $4 to $20, the company is going through tough times, as cheap clothing items are no longer “it” items. Consumer taste is changing toward higher quality items, and competition among fast fashion brands is fierce, which results in fewer customers visiting Forever 21 stores.

RBC Capital Markets analyst Brian Tunick said, “After having a great five- to 10-year run, they (Forever 21) probably don’t have the cash flow they had before when they were the ones taking market share.” He further added that the company was estimated to have had “negative same-store sales for the past several years.”

In an effort to recover from poor sales performance, Forever 21 recently launched a cheaper new concept store F21 Red that sells clothing items for dirt cheap prices of jeans at $8, camisoles for $1.50 and tank tops for under $5.

However, it is uncertain whether the new concept store will save Forever 21 from its trouble, as Forever 21 is already known for its bargain prices.

A retail consultant from A-Line Partners commented, “It’s crazy to think that people would want stuff cheaper than what Forever 21 sells.”

“Shoppers are tired of inexpensive tags, and consumers want clothing and accessories that are of good quality, even if it means paying more,” added the New York Post.

By The Korea Herald Superrich Team (seoyounglee@heraldcorp.com)
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Hong Seung-wan
Cheon Ye-seon
Seo Jee-yeon
Yoon Hyun-jong
Min Sang-seek
Lee Seo-young
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