Abercrombie & Fitch says it isn’t racist. Do its marketing and hiring tell a different story?

In early 2002, Abercrombie & Fitch CEO Mike Jeffries gave a rare interview to The Times of London. The reporter was granted the run of A&F’s leafy, bucolic campus in New Albany, Ohio. The story, printed that April, was mostly a puff piece. A&F was an “extraordinary success,” the article gushed, and Jeffries was “remarkably adept” at marketing youth trends.

But buried in the profile were a few red flags: A&F’s staffers—breathlessly enthusiastic 25-year-olds, several of whom declared, “Mike is such a great leader!”—seemed to be in lockstep conformity. The corporate culture was described as “weird.” And other sources who had visited told the paper that A&F’s headquarters were “kinda Stepford.”

“What is this,” the writer wondered, “the Fourth Reich in flip-flops?”

The digs at A&F for its lack of diversity seemingly went unnoticed. That same month, the company stocked a series of faux-vintage T-shirts that depicted Asians in vulgar ways. “Wong Brothers Laundry Service: Two Wongs Can Make It White,” said one shirt, which featured two slant-eyed caricatures in coolie hats. “Wok-N-Bowl,” said another, touting a fictitious Chinese restaurant-cum-bowling alley.

“We personally thought Asians would love this T-shirt,” said Hampton Carney, an A&F representative, at the time. However, a backlash quickly forced A&F to pull the products from shelves.

This summer, A&F again made headlines for its fumbling of racial issues. The company was sued by a handful of Asian and Mexican store employees—”brand representatives,” in company parlance—who alleged that A&F generally refuses to hire Asians and Latinos and banishes African Americans to behind-the-scenes jobs in the stock room so that its staff mirrors that of the models in its quarterly catalog: overwhelmingly white. Six of the nine plaintiffs claim they were fired because management believed there were “too many” minority brand reps in their stores; the other three claim their job applications were turned down because they weren’t white.

On one level, the lawsuit can be seen as yet another legal shakedown of the type that large corporations routinely attract. But a closer examination reveals a company in a grinding crisis: one whose business has matured; whose same-store sales are in a two-year decline; whose dirty laundry is being aired in court; and which is struggling, amid new questions about its advertising, to reassure the public that it is not racist. In short, A&F’s troubles are a tangled mess of staffing policies, marketing issues and old-fashioned hubris—all of which threaten to unravel the “classic American” brand image it has worked so hard to preserve.

According to former employees and industry observers, A&F is so caught up in its own aspirational mantra that it appears not to understand that it is needlessly alienating some of its customers. While Jeffries declined to be interviewed, he did touch upon his company’s attitude toward appearance in a November 2002 conference call with Wall Street analysts. One analyst asked whether the chain’s dependence on tight shirts and low-riding jeans might be unnecessarily exclusionary. Jeffries was uncompromising: “If I exclude people, absolutely, [I’m] delighted to do so,” he said.

A&F denies the allegations of racism. Its lawyers argue that the company pays close attention to the style and dress of its brand reps, but not to their race. “The company truly is color-blind. We do not discriminate for race, sexual orientation, creed or any of those things,” says Carney.

The case may already be creating ripples among other marketers. While almost all of the models in A&F’s current catalog appear to be white, J. Crew, which celebrates rural middle America in a similar way to A&F, albeit for older customers, will feature at least two black models on its catalog covers this year, even though its core customers are Caucasians. That is not an aberration, insists J. Crew’s marketing and public relations chief, Margot Brunelle. J. Crew has always used minority models, she says, “consistent with J. Crew being an overall universal brand, and that is something of great importance to our new CEO, Mr. [Mickey] Drexler.”

Marketers are right to keep a close eye on the legal developments. A&F’s argument that “style” guides its hiring and marketing decisions could backfire, according to lawyers who specialize in defending corporations from such lawsuits.

“Anytime your hiring is based on looks, you can run into problems in a number of different areas of discrimination, most notably race,” says Albert Solecki Jr., a partner at New York law firm Goodwin Procter.

Thus, any marketer for whom workforce looks are important—which includes many apparel, entertainment and media companies—could have a potential scandal on its hands. If style guidelines for staffers have even an unintended impact on employee demographics, Solecki says, courts tend to rule against the company.

While it is illegal to make race-based hiring decisions, it is perfectly legitimate to enforce employee clothing rules and run homogenous advertising. If it weren’t, marketers with strong ethnic heritages, such as urban apparel label Fubu, might also face a crisis. The issue, therefore, is not whether A&F or any brand has the “right” to market itself to any ethnic audience it wants to—it does—but whether that marketing has encouraged a corporate culture that is oblivious to racial discrimination. If the courts say it has, then A&F may be forced to rethink how it uses its store employees as brand ambassadors. And, ultimately, its entire approach to marketing.

The worst-case scenario? Damages and legal bills running into the millions, sacks of complaint letters from customers and the humiliation of watching your CEO squirm under the lights on 60 Minutes.

Sam Shahid, an A&F board member and its de facto advertising chief, adamantly defends the company. “Mike Jeffries is proud of what he does, and he stands behind it, and that’s the end of it,” Shahid says. “He knows what these [protest] groups are about. … It’s easy to find anything to complain about.”

Shahid was the man behind Calvin Klein’s rec-room kiddie-porn ads and Banana Republic work that featured gay families as far back as 1992. His firm, Shahid & Co. in New York, parted with women’s shoe marketer Naturalizer last year after Shahid shot a campaign that featured a naked man standing in a hot tub, an effort Footwear News described as “shoe porn.” “I’ve never pulled back,” he insists.

Except once. After 9/11, A&F canceled Shahid’s winter edition of its $7 magalog because its frivolous nature was deemed out of step with the somber mood of the nation. “I was very much against not doing that [catalog],” Shahid says. The money budgeted for the shoot was instead donated to victims’ families. “I understand why Abercrombie & Fitch did that, but I felt the kids were not in the same place, and they needed to see some of the entertainment and excitement about themselves.”

Founded in 1892, A&F was immortalized in 1950 by an article in The New Yorker that described it as the place where Ernest Hemingway bought his hunting gear. Today, its outlets are still furnished in the dark wood of Victorian houses and feature mounted moose heads and wooden canoes, and sell T-shirts with legends like “Hardcore Prep” and the names of posh Connecticut suburbs. In the 1980s, A&F was sold and resold, and it devolved into a tiny chain that sold guns, sporting goods and, occasionally, clothes.

By the time Jeffries and Shahid arrived in the mid ’90s, it was clear that the brand had lost its way. Immediately, Shahid started placing ads in upscale magazines such as Vanity Fair and Marie Claire, as Jeffries expanded the chain into suburban shopping malls. Shahid created the magalog, filled with blond, blue-eyed, scantily dressed models, and the brand morphed into its new, hip self.

That one piece of collateral has been, and continues to be, the lightning rod for much of the controversy. Its layouts take the form of stills from nonexistent films with titles such as In the House of Love and The Forbidden Warriors. Models are “cast” by Shahid to fit the roles in the movies.

“You have to have the right cast,” Shahid says. “It’s got to feel natural, and it’s got to fit. … We just go with what’s beautiful.”

The summer 2003 edition features 67 models, all of whom are white, except for one woman whose features are racially ambiguous. The back-to-school edition, which came out after the suit was filed, shows about 100 models; all but four appear to be white. In one exception, a black couple is shown at the window of an old house. They are outside looking in—a fitting metaphor, critics would say, for the company’s treatment of minorities.

Shahid defends his creative choices. “It’s not for one ethnic group; there’s a big mix there. There’s Chinese people in there,” he says. “We have anybody and everybody, if they fit the story line.” Since A&F’s style is not an urban one, he adds, models that might communicate urban stereotypes are less visible. “They’re not rappers, so you might not see it as much.”

The nine workers who filed the suit, however, say A&F has constructed a circular, self-fulfilling policy that links its hiring to its marketing. In court documents, A&F admits it enforces an “Appearance/Look” policy for new hires—based on their style, not their race—and has a “Look Book” to explain that policy to store managers. Those managers are even required to send mug shots of their employees to company headquarters for approval. In turn, A&F’s models—such as those who appear in movies on its Web site—are drawn from its stores. Generally, A&F seeks young, attractive, mainstream athletic types and the cheerleaders who might be their girlfriends.

This loop reached its zenith, the lawsuit claims, when an A&F executive visiting a Costa Mesa, Calif., store pointed to a poster of a white male model and told the staff: “This is the ‘A&F Look’—you need to make your store look more like this.” A month later, according to the suit, five Asian brand reps at the store were fired, and a black employee was transfered to the stock room.

Two former A&F brand reps interviewed for this story (both white, neither linked to the suit) confirm that general picture. “Ninety-nine percent of us were white,” says Laina Pinella, who worked at a Staten Island store and is now an account executive at The Coastal Group, a PR firm in New York. But Pinella says style, not skin color, would discourage stores from hiring minorities since the “A&F Look” discounts the urban style of dress and general appearance that many black youths favor.

Those who are hired can expect to be objectified for their physical appearance, Pinella says. Store managers would set up photo shoots that used brand reps as models. “Nine times out of 10, you had to go to the South Street Seaport store [in New York],” Pinella says. “They had height, weight and bust-size requirements for women.”

Another former employee, Stephanie Weaber, who spent four and a half years at A&F stores in Charlotte and Raleigh-Durham, N.C., is now a fashion student at the Art Institute of Charlotte. At those stores, she said, “I could count on one hand the number of people of races other than Caucasian.”

According to Weaber, managers mostly hired “hot” customers they approached in the store. Customers who looked like the staff got falling-over-you service, she says, while black kids dressed like “thugs” would get no help. “The same target market, the same hires,” Weaber says.

Attorney Solecki says if there are only a few black people on the company’s payroll, the courts will tend to assume that A&F’s “style” argument is merely a cover for a policy that discriminates against minorities. And, he says, courts will look at the marketing. The fact that the plaintiffs are pointing to Shahid’s advertising is a “very creative” strategy, Solecki says. “It will be a useful piece of evidence.”

Marketing experts, too, agree that A&F needs to shift gears if it is to put the racism issue behind it. “They have to back off on that,” says David Martin, president of Interbrand in New York. “If your issue is brushing up against a world that believes you’re racially discriminating, you need to do something to show that you’re not.”

The discrimination allegations are not A&F’s only problems. Prior to the lawsuit, A&F’s board gave CEO Jeffries a compensation package worth $31.6 million and the use of a private plane. That package raised the eyebrows of stock analysts, who wanted to know why A&F’s same-store sales were down and why his marketing didn’t seem to be working.

A&F’s strategy is to do virtually no advertising and very little promotions. Jeffries doesn’t like discounts; he says they don’t work and that they undermine the aspirational nature of the brand. A&F’s main marketing efforts consist of the in-store design and the quarterly. The intent is to present A&F as an elite brand that attracts the beautiful people, not a label that looks for the masses.

Indeed, the masses have been staying away. In August, same-store sales were down 11 percent compared with August 2002. The company remains profitable—it earns about $32 million per quarter on monthly sales of about $190 million—but has seen only one month of same-store growth since April 2001.

In his last four earnings conference calls, Jeffries has been asked repeatedly whether he will increase his marketing efforts. Every time, he has said no. “I don’t look to marketing as the driver of the business,” he said last November.

On Aug. 12, however, Jeffries got an unusually long grilling about his refusal to engage in discount promotions. “Mike, there seems to be a lot fewer 14- or 15-year-olds running around in your Abercrombie & Fitch stores versus a couple of years ago,” noted Joseph Teklits of Wachovia Securities.

“Are you ruling out any direct mail promotions?” asked Janet Kloppenberg of JJK Research.

Jeffries wouldn’t budge. “I just believe that being on this promotional merry-go-round over time deteriorates the brand.”

That conference call was the first time in months that Jeffries had engaged in any level of introspection over his yearlong inability to goose the numbers. Answering a question about menswear, he said: “We’re just not able to improve the trend. We’re just in this kind of cycle that God determined what level the business was going to be, and regardless of what I do, I’m not able to make a difference.”

In fact, A&F’s business is close to topping out. Jeffries says he will not expand beyond 400 stores, from the current 346. “As an aspirational brand, we want to keep it that way, and we don’t want to be on every street corner,” he said in February.

That makes A&F’s sister brand, the beach-bum-oriented Hollister, the more promising part of the company’s business. There are currently 112 Hollister stores, but Jeffries believes Hollister will grow to become twice the size of A&F. Significantly, Hollister’s clothes are priced about 30 percent less than those at A&F.

A&F will continue to be closely scrutinized for signs of diversity in its next round of store and catalog layouts. Martin of Interbrand says A&F could learn something from Ralph Lauren. Lauren’s use of black models hasn’t diluted the brand’s Waspiness a bit, Martin argues.

Meanwhile, Myrna Marofsky, president of workplace diversity consultancy ProGroup in Minneapolis, believes A&F is courting disaster by not moving more aggressively on the staffing issue. “If they hadn’t been involved in this previous situation with the Asian community [over the T-shirts], I would give them the benefit of the doubt,” she says. “You can only be naive once, and then you either don’t care or you perpetrate an idea.”

There are things A&F can do. In 2001, Marofsky guided Saks Fifth Avenue through a training program designed to divest Saks’ sales associates of their assumptions about who was a Saks shopper and who wasn’t. They were “as snooty as anybody” when they started, Marofsky recalls. “They were leaving money on the table by having this narrow focus.”

By tackling the problem early on, Saks avoided the fate of Denny’s, the restaurant chain that was accused in the early 1990s of refusing to serve black customers. It took years of soul-searching and community outreach for Denny’s to shake off its status as a national pariah.

But reform is not easy. “The whole system has to commit to turn this around and look under every nook and cranny,” says Marofsky. “Often it means firing people. Leadership has to say, ‘I have to hold people accountable.’ ”

There are no signs of that at A&F. In its response to the suit last month, the company denied it discriminated, although it admitted to enforcing a policy on looks. When asked whether he would change the catalog shoots in future to address criticisms, Shahid replied: “No. No. We’re addressing 18- to 24-year-old college kids. If they change, we change.”

Jeffries, meanwhile, is searching for something to move sales. “We keep pushing for some change that would stimulate some more business, but we haven’t been able to find it yet,” he told analysts in August. “And none of our research tells us that we’re missing where we should be.”

Could diversity be what’s missing? Jeffries isn’t saying. But Merrill Lynch analyst Mark Friedman had this to say to the CEO: “Good luck, Mike, on finding that next thing.”