Marketing January 22, 2007, 11:48AM EST

Riding Hip Jeans into New Luxury Markets

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Premium-denim jeans makers such as 7 for All Mankind have seen skyrocketing sales. Here, a pair of men's 7 jeans, featuring the company's signature back-pocket stitching.

The latest trend among premium-denim companies: expanding into clothing. Here's a full, Fall 2007 outfit from jeans-maker Citizens for Humanity.

Rock & Republic is now offering upscale accessories, like these sunglasses, to compliment its upscale jeans.

Rock & Republic is also branching into footwear, seen here, and plans on launching cosmetics and even a hotel in the future to build its brand.

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NPD Group data indicate that department store sales for women's premium denim jeans priced at $100 and more grew the most among all women's denim categories in the year ending November, 2006. Jeans priced at $100 and above saw a 23% sales increase, from $165 million to $203 million. Jeans priced $75 to $99.99 grew 16.9%, to $55 million.

Jumping-Off Place

Even denim stalwarts such as Levi Strauss and Guess (GES) sell premium styles to keep up with consumers' demand for higher-end jeans. Levi Strauss sells $250 jeans in its Capital E line, launched last year.

The line is characterized by more elegant craftsmanship and refined materials—such as 100% organic cotton—than its core line of Red Tab, lower-priced jeans that sell for around $40. And the average price of women's jeans at Guess stores in the U.S. (see BusinessWeek.com, 12/18/06, "How Guess Got Its Groove Back") is now $103, reflective of higher-end cottons and more sophisticated styling. That's double the average cost of women's Guess jeans a few years ago.

Although Guess did follow a similar path in the 1980s, starting with denim and then growing into a larger lifestyle brand offering apparel and accessories (including a higher-end line, known as Marciano and named after the company's founding brothers), only recently has it entered the higher-end market for jeans.

The business strategy behind denim's new use as a brand springboard is simple: the product doesn't require much risk, in terms of audience demand, design complexity, or even startup costs.

A Design Yardstick

"The longstanding success of the blue-jeans business is that it's a relatively easy market to get into," observes James Sullivan. "It's a proven category. There's low overhead. The design, for example, is a classic fashion staple. You start with the standard Levi's 501 and add distinguishing traits, such as back pocket stitching or seams."

Seven for All Mankind jeans, for example, feature characteristic—and much imitated—swoosh embroidery on back pockets. (The downside is that such details are easily knocked off by lower-market brands. In addition, there's intense competition among increasing numbers of companies with similar products.)

In any case, compared to launching a full clothing line, countless design hours can be saved. The silhouette and construction of jeans change slightly, yes, from lower waistbands to skinnier legs, but the basic construction of pant legs, pockets, belt-loops, and fly generally stays the same. Not to mention that cotton denim pants are less expensive for a young brand to produce than, say, a handbag made of buttery leather.

But not all premium denim labels are moving upmarket as a strategy for business growth. Paper Denim + Cloth, a maker of exclusive jeans once in the $100-plus range, is maneuvering in the opposite direction.

In mid-2006 the company began focusing on mass-market sales in the $80 to $90 range, taking it out of the "premium" category. At first, says CEO Chris Gilbert, he was interested in developing a low-priced second line—think Isaac Mizrahi for Target (TGT).

But keeping the Paper Denim + Cloth name "kept us from doubling our overhead and bringing in a second design team," says Gilbert. "Plus we realized we'd have instant recognition if we kept the same brand. We wanted to build on the cachet we've built over six years in business."

Mass-Market Direction

Gilbert says that the high quality of the jeans hasn't changed, the same premium cottons are used, but that they can offer the lower price-point by shifting manufacturing from Kentucky to the Dominican Republic, where all of the company's jeans will be made.

Paper Denim + Cloth now has a distribution deal, which started in June, 2006, with Federated Department Stores (FD), the largest conglomerate of department stores in the U.S. and operator of Macy's, Bloomingdale's, and other chains. The move broadens the range of customers from a boutique audience to a wider demographic.

And although the company is going downmarket, it is also following the lifestyle trend among its competitors by launching outerwear, sweaters, shirts, and other items targeted to a more mass-market audience.

Critics might see lowering price points and a larger distribution as brand dilution, but Paper Denim + Cloth's strategy reflects one of the realities of the denim marketplace: Although lower-priced women's jeans saw dips in department store sales in the year ending in November, 2006 (according to NPD Group), these lower price points still generate more overall revenue than their higher-end rivals. Jeans selling for $25 to $49.99, for instance, saw the biggest dip in annual department store sales, down 22.9% to $283 million, but that's still $80 million more than the total sales of $100-plus jeans.

The key for Paper Denim + Cloth and the more expensive premium-denim labels alike as they expand will be to keep their brands consistent and distinctive. As they translate their casual-chic brand identities into numerous new products and begin to compete with more established lifestyle brands such as Polo Ralph Lauren (RL), these premium-denim companies face a design and marketing challenge that will require more than just fancy stitching on back pockets.

Jana is a writer with BusinessWeek.com in New York.