SBJ/March 26 - April 1, 2001/This Weeks Issue

Hatmaker Zephyr follows own path to top

If you want a better understanding of what went wrong with the licensed-product industry, there are two good places to look.

The first is the files of the U.S. Bankruptcy Court in Delaware, which detail the demise of Starter Corp., Pro Player Inc. and Logo Athletic Inc. after those companies paid too much money to the pro leagues, did not react well to market conditions and watched consumer demand dwindle.

The other is Loveland, Colo., where Zephyr Graf-X has emerged as the market's only major success story of the post-boom era. Underscoring just how backward the industry at-large had become, Zephyr found success by taking an approach that was polar opposite to virtually every method "perfected" by the big boys.

With an estimated $55 million in sales last year, Zephyr is now one of the top two licensed-apparel companies in the college market in which it specializes. It actually passed Nike Inc. and held the No. 1 spot in rankings compiled by Collegiate Licensing Co., which runs merchandise programs for 180 colleges, during CLC's fiscal first quarter.

Stressing design quality over all else and not afraid to take chances, Zephyr doesn't just focus on the major schools. It makes hats for the Western Michigan Broncos and the UC-Irvine Anteaters — more than 300 schools in all. Rather than coming up with a design and then using it for all the teams, it will customize caps for individual schools, no matter how obscure.

When importing goods from overseas, it uses air freight rather than sea, costing more money but allowing for immediate reaction to trends.

Manufacturing veterans might roll their eyes at the expense and manpower that requires, but there's another difference between Zephyr and the competition: Zephyr has made money every year since it was launched in late 1993.

"They are a different company," said Scott Bouyack, director of apparel marketing at Collegiate Licensing. "It's certainly not the same company culture that you see at a big licensed-product company."

Founder David Gormley, 39, owned four Pro Image licensed-product stores in the early 1990s, the industry's boom years, when he smelled an opportunity. At the time, manufacturers couldn't make professional sports apparel fast enough, and were topping it off with the likes of Michigan, North Carolina and Notre Dame. Gormley felt something was being left out.

"People weren't hitting all the schools," he said. "No one would ever make San Diego State, Fresno State."

Zephyr's niche early on was small schools with offbeat logos or nicknames, like the University of California at Santa Cruz Banana Slugs.

"A big thing about our company is we're really focused on kids and what they want, and kids want to be different and be cool," Gormley said.

Zephyr still makes lots of hats for schools that will never set foot near the NCAA men's basketball tournament, but it has also taken on the bigger schools and the volume they generate. North Carolina State and Michigan have become Zephyr's biggest sellers. Gormley said Zephyr is the University of North Carolina's biggest licensee, selling more product than even Nike, the brand that is practically synonymous with the Tar Heels and its most famous alumnus, Michael Jordan.

The transition from super niche player to collegiate headwear powerhouse was made possible by reaching exclusive manufacturing agreements with factories in the United States, Russia and Korea.

"Everybody else, whether it's Nike or Abercrombie, goes to the same giant factories in China or Bangladesh or Taiwan, and they're all competing with each other," Gormley said. "If Disney needs a big emergency run, then it knocks back Logo Athletic."

Even while passing most of the major brands on the way up the Collegiate Licensing rankings, Zephyr never lost its small-company flavor. It has 50 full-time employees at offices in Minnesota and Loveland, but Gormley and his partners still inspect and approve every single design.

Content with just the college market and a license from the NHL, Zephyr hasn't spent a lot of time pursuing an MLB or NBA license and can't get in the door at the NFL. You also won't find anything but hats in Zephyr's warehouse.

"If there's one thing they've been very smart about," said Jim Haskins, senior director of consumer product marketing at the NHL, "it's not getting away from their core competencies. With the bigger companies that are in the apparel business, the footwear business, the headwear business, it always gets diluted."

While Gormley spent endless hours thinking about ways to conquer the college headwear business, it took only about 12 seconds to come up with the company's name. The epiphany didn't arrive, though, until he was filling out his first license agreement and came upon the blank space that said "company name" underneath.

He looked up at a green hat on a shelf with a Z on it and decided the company name should start with the letter "Z." Mike Puccetti, who would eventually become the company's national sales manager, said "Why not call it Zephyr?" It wasn't until later they learned that zephyr means "divine wind from the west" — fitting, as the company was based in San Diego at the time. It moved to Colorado shortly thereafter.

During the most recent quarter, Zephyr fell behind Nike in the collegiate apparel sales ranking once again. The CLC's Bouyack described the race as "neck and neck."

But Zephyr's revenue grew by a robust 21 percent last year, Gormley said. If its 2001 growth level is even half that, Nike will have a difficult time keeping up.

Leaving bigger names in the dust has become standard practice in Loveland.

"If everybody else collapses, that's fine," Gormley said. "We're just real excited about what's going on here."

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