CHAPTER 17

DKNY—A New Brand, a Diffusion Line

The first seven easy pieces comprising the Donna Karan New York collection line debuted in 1985. Donna and I knew the company was heading in the right direction, but it was hard to convince others when the bottom line seemed to sink deeper into the red. All of my peers thought the company would go broke, and I would lose everything I had earned at the Anne Klein Company. Accountants, lawyers, and many businesspersons struggled to find proper valuations for the many intangibles on the company’s balance sheet. Donna’s talent was perhaps the most nebulous of all. After two and half years of bleeding, Donna Karan New York reached a precipice: Revenues were on track to grow larger than operating expenses, and we would reach the black. However, much like the Anne Klein Collection, Donna Karan New York was catering to a wealthy demographic, and we needed to branch out to increase our top and bottom lines.

The concept of the bridge line as we applied it at the Anne Klein Company didn’t seem to fit with Donna’s new design. A diffusion line is quite different from a bridge line. Diffusion lines do not necessarily offer similar products at different price points and, thus, different manufacturing processes and fabrics. On the other hand, a diffusion line functions as a proxy to the original line, a kind of extension into another area of one’s lifestyle. The Donna Karan diffusion line was started to offer the same consumers a new spin and a broader line of goods, which consequently had a much wider price range. Discussing the emergence of this concept into a reality begins with a bit more information on the growth of the Donna Karan Company as well as a deeper comparison between Anne Klein II and the concepts premising DKNY.

The inaugurating seasons of Donna Karan New York offered a new look with a classic flair. Donna created a fantastic line with focus. This direction gave the Donna Karan New York corporate image some room to breathe. As management, we could step back and take a look at where the opportunity would be for us. Donna and I used Anne Klein II as a launching pad for new ideas. The timing for Anne Klein II was perfect. The market conditions could not have been better. The perception of the Anne Klein II brand was aligned with the collection line nearly at half the price. Of course, major concessions were made to meet that criteria regarding materials and manufacturing methods, but the look was the same between the parent and diffusion lines.

Donna and I knew we couldn’t re-create a less expensive Donna Karan New York. Anne Klein had a long history of providing the working, metropolitan women of the world with business attire. Long before I partnered with Anne and Chip Rubenstein, Anne Klein began to amass a following. Donna Karan New York, however, was new. The image we created had its own space in the fashion world and re-creating a line of only seven pieces at a lower price point could lead to more trouble than we could have bargained for. Unlike Anne Klein II, a less expensive Donna Karan New York line would confuse the brand’s image. However, because the collection was so focused, we saw opportunity in creating another brand with a different public persona. Other than death and taxes, the only other certainty in life is that women want to look beautiful, confident, and sophisticated, but no one wants to be dressed up all of the time.

From this view came the concept for a secondary diffusion line. We wanted to create a new brand and line geared to a similar consumer but with a more casual approach. The Donna Karan New York collection is meant to be comfortable but not meant to be worn on the weekends, on vacation, or at home. We reasoned if there were a more casual line with a nexus in the design room, we could capture a far larger market and diversify the company with a new brand of products.

We went back to Peter Arnell to discuss the concept for the new line. We wanted to continue focusing on New York as the center of our image, but we wanted to capture the city from a much different angle. The secondary brand needed to be institutional. I learned that at Anne Klein, when Anne died, the brand name was negatively affected. It was difficult publicizing someone’s name who was no longer alive, and the challenge emerged again when creating Anne Klein II. Branding a person’s name eternally requires a lot of time, money, and energy. I was more interested in a brand that wasn’t Donna’s name but had some proximity to the collection.

Peter came up with the name, some revolutionary design concepts for our advertisements, and some additional accessories.1 The first logo Peter created was in bold, black capital letters in stark contrast to Donna Karan New York’s femininity. However, the font was too strong, with too much contrast. We asked him to come up with a solution.

He responded by placing an aerial shot of the Statue of Liberty with Manhattan in the background within the text DKNY on a black background. Other than merely addressing the overwhelming nature of the thickness of the logo’s font, this approach provided consistency with the image we wanted to promote. This particular photo manipulation was painted on the side of a building on West Houston Street in New York City to welcome passersby into one of the city’s largest shopping areas, SoHo. This advertisement boosted Arnell’s fame as an advertiser as it was the first of its kind. The ad remained on the building for nearly 20 years.

In this period, Donna Karan became a household name. All the money we had spent to start the company paid off in brand recognition. From then on, we had a more marketable brand. This advantage made selling merchandise easier with the big department stores and gave us an edge over our competition. In one of the earlier chapters, I wrote about my basketball coach, Mr. Taketomi. With Anne Klein II and Donna Karan, I took his words of wisdom to heart and believed in my conviction. Taketomi stated the three most important elements to being successful reside in good preparation, knowing the competition, and realizing you have little room for negativity once the first two have been taken into account. Spending the extra effort to reconsider how to approach a diffusion line with Anne Klein II and DKNY gave both ventures a considerable moat around the businesses.

Anne Klein II offered a wider demographic, a palatable design concept at an affordable price while maintaining the original collection through slight modifications of the lines and dramatic price differentials. Although DKNY was geared to a similar demographic, other socioeconomic classes took part in our sales because the concept and perception had changed. Instead of the eveningwear promoted in the collection line, DKNY was more casual, opening the door to new design fronts as well as a lower price point due to the nature of materials used and manufacturing processes. A more casual jacket should be less expensive than a formal one. However, these two ventures came with a mixed blessing.

Although Anne Klein II was successful at first, with some time the company and its brands lost their edge. There was a considerable movement toward a polarity in fashion between high-end designer collections and casual wear. More people wanted to dress one way or the other, and the Anne Klein image started to fade as new fashion trends emerged. Perhaps the consumer has always been fickle. If something goes out of style, revenues can be slammed as a result. If a celebrity says something is out, the brand image and business suffer. Moreover, Anne Klein was no longer minting money the way it had been after I took Donna out of the design room.

At first, everything was fine at Anne Klein, but that was because a number of seasons had been designed in advance with Donna’s oversight. After those few seasons, Louis Dell’Olio had full control. With his first seasons as the chief designer, the product had changed, with less direction and more confusion. Other than a change in market conditions, Anne Klein and Anne Klein II became less attractive to the mainstream. We fired Louis Dell’Olio and hired one designer after another. None of them were up to snuff. Finding another Donna was proving difficult. Shortly thereafter, we learned of Arthur Levine, who used to work for us at Takihyo, Inc. and owned a firm called Kaspar.

Arthur understood we were having trouble and was interested in taking on the challenge of revamping the collection and the diffusion line. He believed in the company and wanted a well-known company under Kaspar’s umbrella. I had been so preoccupied with Donna Karan New York and DKNY that I couldn’t offer Anne Klein the much needed attention. Additionally, since revenues had started to decline, it seemed like the right time to exit. After a series of conversations and negotiations, Takihyo sold Anne Klein to Kaspar. Unfortunately, Kaspar could not continue holding for too long. Arthur was unable to turn the line around and soon resold the business to the publicly traded Jones Apparel New York. While Frank and I left with golden parachutes from the Anne Klein sale, it was unfortunate the brand couldn’t be resuscitated.

At Donna Karan New York, we had a series of challenges. When we started the business, the company was only Donna and me. We had to build the executive team from the bottom up. We put some Anne Klein employees temporarily into executive positions. Not until Donna and I found Steve Ruzo through a headhunter did we have a president for the company. Though we would have preferred to find someone within the existing circle, Ruzo was a natural match. He got along with Donna and Donna liked him. Since the operational executive and the designer would have to communicate frequently, getting along was essential to the company’s future or at least Ruzo’s future with the company.

Unlike the Anne Klein II line, DKNY was a wider reaching vision. Anne Klein II catered to office-wear for women. DKNY catered to men, women, and eventually children, filling the gap between office-casual wear and at-home clothing. The possibilities within this perception shift were larger than our previous incarnation. Additionally, new issues arose at the workplace: Steve Weiss, Donna’s new husband, wanted more responsibility at the company. With so much money coming into the company, Donna justified placing him in an executive position. Steve had been in and out of our corporate offices. He was an artist and didn’t have a full-time position anywhere, and Donna had him stick around because he convinced her he could help out. From time to time, we needed his assistance as well. Free help is something hard to back away from. Somewhere along the line Donna gave or sold Steve Weiss 10 percent of her share of the company. At that point, Donna Karan had become a household name, and the image didn’t seem to be fading. Donna may have justified he could do little to damage the company considering the increasing revenues and profit margins. However, Steve’s equity position sullied any chance for us as management to engage in direct and transparent communication. Because Steve was Donna’s husband, either party could use the other to play both sides of the equation. With a subtle form of manipulation, the Donna-said-Steve-said game emerged as a point of frequent conversation. Needless to say, I became worried.

At times, Donna would come to me with certain questions or ask direct subordinates to do certain tasks that Steve Ruzo or I believed not to be in the company’s best interest. Steve Weiss would do the same when Donna wasn’t around. In both cases, the interlocutors brought an issue to the table that supposedly wasn’t their own. Exacerbating matters, Donna and I trusted each other when we started the company. Neither she nor I saw any reason to set up the partnership any differently than split down the center. I would offer her capital and executive oversight while she was running the design room. When the company started to grow, and DKNY became a household name, everything changed. Donna had as much say as I did in the boardroom. If we disagreed, Donna still had the authority and the right to fulfill her own or Steve’s desires. In either case, we could do little to nothing to stop her.

These disagreements brought the end of my half ownership of the Donna Karan Company. Before Donna gave or sold her husband an equity position, Steve Weiss was an aspiring painter and a sculptor. I do not know his other credentials; I only knew that Donna loved him. Since I trusted Donna and had worked with her for years, I never thought things would become so complicated. The first disagreement arose with the launch of the company’s first fragrance.

Donna and Steve must have talked about it at length. Other designers were releasing fragrance lines, but Donna Karan New York did not have one. The beauty of the perfume business is the link between the price and brand image. If a company has a strong brand image, the product will do well provided the company did not bottle skunk spray. Since fragrances are made with little scent solute and a lot of solvent, mostly alcohol, the material cost of the perfume is little, leaving high profit margins. The primary cost of the product is not the perfume but the bottles in which it is sold. Research and development costs occur, but with a fragrance marketed to a large consumer base, those figures disappear off the balance sheet. Selling a fragrance, though, requires spending outside of the product to build adequate emotional value within the product.

Most design houses never take the challenge of starting their own fragrance lines in-house because of the added costs, not of the product, but building the emotional value. Companies like Estée Lauder, for example, have relationships with sales forces at major magazines allowing for discounted rates on volume of advertising pages. A one-off advertisement in a magazine could be as much or more than $30,000, depending on the magazine and its circulation. However, if Estée Lauder, or some other licensee, needed to advertise consistently for different brands, even if one brand fails, the host of other brands would offer the licensee enough diversification to offset associated losses. Moreover, Estée Lauder does not tend to make its money at the first launch of a new fragrance. In fact, most of the money to be made in the fragrance business is after a few years. Estée Lauder has significant channels for secondary distribution. After the fragrance leaves the department stores, chain stores pick them up. Estée Lauder profits mostly from its wholesaling of the original fragrance a year or two down the line rather than during the launch and first sales. In the United States, approximately 2,000 department stores exist with few new locations opening up. Adding up all of the Walgreens, CVSs, and Walmarts, you’re looking at a distribution channel that may be wider than 200,000 stores and growing. As discussed previously, the dynamics of building a chain-store company vis-à-vis a department-store company have more differences than similarities with respect to budget guidelines and business models.

Frank Mori and I wanted to dissuade Donna and Steve from entering a new business without having tested the waters with licensing. Bringing a fragrance in-house when most other accouterments remained outside of our daily routine encroached on our operating capital. We had a certain amount of money allocated for future investments, but how it was invested should have remained within the bounds of the executive branch of the company. Donna and Steve, however, had their own plan.

Steve sculpted the bottle and Donna worked with others to come up with the perfume. Everyone argued against them, stating these kinds of operations should remain with those who know the field and handle the distribution on their own. I thought the bottle was innovative but impractical. Innovative because this bottle might have been the first for which you could not see the actual fragrance. The bottle was black and dark, colors in line with our advertising brands. The branding was strong. The spray mechanism, however, never functioned properly. It hadn’t been properly engineered to fit the bottle. Donna went forward with launching the new product. Needless to say, the fragrance division didn’t last long within the Donna Karan Company.

The next major dispute between everyone else and me had been the hiring of a president for DKNY when the company first launched. Donna, Steve, and Frank thought Michael Lichtenstein should take the position. Lichtenstein had spent some time in the fashion world as the president of a women’s shoe company, far from managing a garment company. I personally liked Lichtenstein, but he was not the right candidate for the job—he had no real experience, and considering the growing size of the operations, it’s difficult to hit the ground running.

Frank, though, put Donna Karan New York and Anne Klein on the same plane with Lichtenstein. Because Frank had little experience when I hired him, he thought Lichtenstein’s greater experience in another leg of the business would suffice. Frank, though, disregarded the stage at which he was hired to run Anne Klein. Anne Klein was a small company when he joined. After years of working with others, Frank filled his shoes. Lichtenstein, however, did not have the same advantage of running the company from a small operation to a bigger one. He came from a small, niche operation to a much larger broader position. DKNY was growing at a tremendous pace and if he couldn’t hack it, we would be the ones losing.

I argued fervently against hiring Lichtenstein, but Donna, Steve, and Frank overlooked my advice. After Lichtenstein was hired, I sat down with him and told him what I thought. I had nothing against him as a person, but I didn’t think he fit the job. Maybe I shot myself in the foot for not believing in him or he didn’t know what he was getting into, but in four months, Donna and Steve fired him. Later on, Lichtenstein turned against us. He opened a civil case against the company for breaking his contract. Making matters stranger, Lichtenstein asked me to testify for him because I told the other executives he was the wrong man for the job. I was summoned, and of course, I couldn’t testify against my own company, so I commenced settlement negotiations with his lawyers.

Both of these anecdotes highlight one central point: Never give up too much equity to people with minimal to no management experience. Being a manager is akin to being a psychologist: You must remain vigilant of your feelings as much as your thinking. More practically, equity equates with the determination of a profit/loss structure as well as a power hierarchy. Equity changes business relationships much like money can muddy a family’s dynamic. More equity means more power in the corporate world, and sometimes more power does not result in greater margins or success. Alternatively, an equity split among numerous partners can obscure the vision initiating a project. When Donna and Steve started the fragrance line, they did something out of character for the Donna Karan Company as well as out of character with management. However, when management only owns half and not a share more, little can be done at an impasse. I believe in listening to everyone’s opinions to help form my own, but straying too far from an original venture is neither a productive nor lucrative task. This one lesson was perhaps the most expensive one of my entire career.

1 Peter designed buttons to look like New York City manhole covers and he designed fire hydrants as belt buckles and clasps.