Rags to riches: hip-hop moguls use groundbreaking designs and star power to challenge major clothing labels and become a force in the $164 billion fashion industry. (The Hip-Hop Economy: Part 4 Of A Series).

ON A MILD FEBRUARY EVENING, NEW YORK'S GLITTERATI ARE OUT IN FULL FORCE. GATHERED IN THE OPULENT catering hall of Cipriani's, a swank Italian restaurant in the heart of Manhattan, a mix of celebrities and business powerhouses mingle and sip champagne. They await one of the most talked-about events of Fashion Week--the industry's prestigious semiannual coming out party. Those in attendance represent a select group of luminaries who received invitations on an embroidered white linen handkerchief inside a velvet box, complete with a pair of silk-knot cuff links.

As Frank Sinatra tunes fill the room, a series of male models, dressed in natty three-piece suits, cashmere overcoats, and military style tuxedos, saunter up and down the runway. At the end of this sartorial display, the man responsible for the $1.2 million extravaganza emerge onto the catwalk. Scan Combs--better known as "Puff Daddy" or more recently "P. Diddy"--takes his bow. Al this event, he's not the multiplatinum-selling rap artist and producer. Combs is the designer-entrepreneur who just introduced Saville Row to the hip hop world. On this evening, the mogul unveils his classic men's line and, at the same time, comes closer to reaching the goal he set when he started his 3-year-old enterprise: "To bring entertainment to fashion."

In just a law short years. Combs has grabbed Seventh Avenue by the lapels. By building one of the hottest fashion houses, he has gained considerable clout. In fact, at the beginning of last February's Fashion Week, the audacious entrepreneur appeared with Terry Lundgren, president, chief operating officer, and chief merchandising officer of Federated Department Stores, one of the largest such chains in the world, to ring the opening bell at the New York Stock Exchange--an act typically performed by business heavyweights.

It's not surprising that he would be bestowed with such an honor. Scan John, the apparel arm of Comb's Bad Boy Entertainment, has rung up mammoth sales. Its 2001 estimated revenues: roughly $250 million.

The rise of Sean John represents a major shift in the world of fashion. Hip-hop moguls are creating new patterns in the industry and, consequently, sewing up market share. A decade ago, hip-hop artists were decked out in Timberland footwear or Tommy Hilfiger apparel, rapping about these brands in their lyrics. Just a few years ago, hip-hop entrepreneurs who produced their own lines were either shut out of major fashion shows or relegated to urban apparel ghettos within department stores.

Now, when models blaze runways at the make-or breaks Magic Marketplace fashion show--a major industry event held semi-annually in Las Vegas--styling a snazzy double-breasted, three button white dress suit from Sean John or a sporty V-neck velour two-piece stitched by rapper Jay-Z's Rocawear women's collection, they dominate the show. These hip-hop-inspired designs are also steadily capturing market share from such iconic labels a Ralph Lauren Polo and Donna Karan. By creating trendsetting brands, they're reaping huge financial rewards from the $164 billion domestic fashion industry.

Clothing companies launched over the past decade by Comb Jay-Z, and Godfather of Hip-Hop Russell Simmons have become dominant players in the so-called urban apparel niche. They're not alone: Other performers--Master P. Snoop Dogg, Fat Joe Busta Rhymes, Outkast, and Jennifer Lopez--have either developed apparel outfits or lent their names to marketing and [Unreadable text in original source.] efforts of new and existing lines. And that doesn't include scores of companies run by businesspeople who never picked up a mic.

These entrepreneurs are selling large. The urban apparel segment of the industry alone grosses a whopping $58 billion in annual sales, according to Marshal Cohen, co-president of NPD Fashion World, a consulting firm that tracks the nation's apparel and footwear industry. By 2007, urban apparel sales are expected to increase by another 48.28% to about $86 billion.

Such phenomenal growth explains why apparel manufacturing and licensing have become one of the fastest-growing sectors of the Hip-Hop Economy. Consider: Simmons' Rush Communications Inc. (No. 16 on the BE INDUSTRIAL/SERVICE 100 list) racked up $192 million in sales last year, 85% of which are derived from his men's, women's, and children's apparel lines.

Karl Kani, CEO of Karl Kani Infinity Inc. (No. 41 on the BE INDUSTRIAL/SERVICE 100 list with gross sales of $76.9 million) and the self-proclaimed Godfather of Hip-Hop Fashion, says the urban clothing market is not even in spitting distance of its peak. He's confident that urban fashion companies, already generating hundreds of millions of dollars in annual sales, will "easily become multibillion-dollar businesses within five years if they can sustain their current growth rate."

In this fourth--and final--installment on the Hip-Hop Economy, we reveal a new breed of hip-hop magnate, who is creating thriving businesses through sartorial innovation, marketing savvy, and star power. The leaders of these empires have taken the fashion industry by storm and, in some cases, have emerged as the next generation of BE 100s CEOs.

DOMINATING THE INDUSTRY

Through their connections to the entertainment and the latest youth trends, hip-hop artists know precisely what consumers--particularly those between the ages of 14 and 30--want. As a result, they have mined the urban community for the latest fashions and trends and showcased them to the rest of the world. Through videos on MTV and BET, suburban America caught on, and the hip-hop community struck gold. "We've been just thrilled with the sales and partnerships that these companies have brought to the table for us," says Kevin darter, men's fashion director at New York City-based Bloomingdale's, with 25 stores nationally in cities such as Los Angeles and Chicago. "It's a very important business for us, and one of our fastest growing in what we call our `urban sportswear market.'"

In fact, the $15.7 billion (as of January 2002) department store powerhouse Federated Department Stores Inc., which owns Bloomingdale's and Macy's, is giving hip-hop brands premium shelf space at its stores. Bloomingdale's, the nation's first department store to sell Sean John items and to flaunt leading urban labels such as Akademiks, Enyce, and Triple Five Soul began carrying Rocawear's line this spring. And Macy's offers FUBU's line for women, a denim-heavy trendy brand for juniors.

Department store buyers and consumers alike have been attracted to the trendy styling. Today's fashions include large, tunic-length T-shirts and sweatshirts, huge zip-front warm-up jackets, and ultrawide pants in any material. But the hottest-selling item is blue denim, a classic hip hop look now debuting at the high-fashion level, says David Wolfe, creative director for the Doneger Group, a New York City-based fashion-forecasting group. The "low-rise" classic hip-hop look can be traced back to the jeans first donned by rap artists over a decade ago. "The newness and excitement generated by the hip-hop music world has infused fashion with the most influential energy level of the last couple of decades," Wolfe says. "There is no limit to the success or influence ... if the designers and companies realize that they must coexist within the big market and not limit themselves to thinking they are `niche' suppliers for specialized urban retailers."

These entrepreneurs have no intentions of being pigeonholed and have made a major foray into the fashion mainstream. The so-called hip-hop consumer market has matured, and African American designers have developed new designs to meet its needs. Says Mark-Evan Blackman, chairman of the menswear design program for the New York City-based Fashion Institute of Technology: "What's happening now in the hip-hop market is that many [designers] are trying to cross over into established traditional menswear."

Leading the runway: Sean John.

CREATING BRANDS WITH BROAD APPEAL

Sean John doesn't want consumers or the industry to think its apparel caters to just the hip-hop crowd. To Combs & Co., all companies in the fashion universe are potential rivals. Sean John Executive Vice President Jeff Tweedy defines the line as "global sophisticated urban"--clothes tied to lifestyle, not to any specific age or ethnic demographic. Think hip-hop goes upscale. "We try to use as a blueprint what Tommy [Hilfiger], Ralph Lauren, or Levi's has done," explains Tweedy. "Those are global brands that have been around for years."

For instance, in terms of menswear, Tweedy says his main clientele would be men between ages 25 and 45 who choose clothing based on their lifestyles. "We want the cat wearing jeans to school during the day or a nice outfit to the club at night," he says. On average, Sean John menswear retails anywhere from $32 for a T-shirt to as high as $6,000 for a shearling topcoat or pair of mink pants. To give Sean John attire a classic and timeless look, the designers pay attention to every detail such as keeping the logo small on each item.

The company, which is expected to gross $325 million in 2002, is in expansion mode. Sean John unveiled boy's wear a year and a half ago, men's underwear about-eight months ago, and outer garments such as topcoats and leather jackets over the past few months. The fastest-growing business, however, has been its Big and Tall offerings--men's clothing up to size 60. Since launching Big and Tall about 18 months ago, the line has generated about $8 million in sales. It's projected to gross $22 million in 2002, and as much as $36 million in 2003. Asserts Tweedy: "It's been an under-looked business that other designers have treated like a stepchild, so we're bringing it to the forefront."

PROFITING FROM THE NEXT WAVE

Sean John is not the only hip-hop fashion house targeting mainstream consumers. Designers have realized that their customers want to now dress more mature, but still want a bit of flava. For entrepreneurs such as Karl Kani (a.k.a. Carl Williams), among the first to enter the business when he opened a small Los Angeles-based storefront boutique in 1989, the hot-selling trend means new opportunities--and a bevy of new competitors.

After merging with Carl Jones and T.J. Walker of Cross Colours, the pioneering hip-hop designer clothing company, Kani became part of one of the world's largest black-owned companies with sales hitting $89 million in 1992. (BLACK ENTERPRISE named Cross Colours the 1993 Company of the Year.) Kani then stepped out on his own after Cross Colours went belly up when it couldn't keep up with demand. Today, Kani is credited with helping to spawn the urban wear revolution. "At first, we were just used as models ... We didn't have our own stores, [were] not in major stores, and didn't even have our own companies," Kani says. "It was my vision to see the business blossom like this ... The growth has been, and will continue to be, phenomenal."

Kani's own company, which was BE's 1996 Company of the Year, is fending off competitors by introducing new lines. He recently launched Life by Karl Kani, a European-styled men's line that includes denim pants, suits, and T-shirts. And next spring, he will unveil Ikki B, a women's apparel collection of suits and stretch garments. His investment in these new additions: $10 million.

He's already seeing dividends: Kani projects that Life will produce $25 million in sales in 2002 and hit $50 million by next year. He expects overall revenues to surpass the $100 million mark this year, and currently plans to expand into home furnishings, fragrances, and music recording by late 2003. "These lines (Life by Karl Kani and Ikki B) are particularly designed to compete in today's marketplace," he said. "The customers we had 14 years ago have changed, and we're trying to maintain ties to meet their current needs and lifestyles."

POWER OF CELEBRITY

Developing new products takes money and marketing. For the most part, hip-hop entrepreneurs have effectively used their roster of rap artists, music videos, and movies as a way to promote their brands. To gain this competitive edge, one apparel company has developed an entertainment venture as a revenue source and cross-promotion vehicle. In 2000, 10-year-old FUBU (which stands for "For Us, By Us"), the clothing manufacturer that has grown as a major competitor of Donna Karan, launched a record division through a joint venture with Universal Records. At the time of the deal, Carl Brown, FUBU Records president and one of the founders of the clothing company, said, "The synergy between [FUBU and Universal] will undoubtedly open new avenues for us to explore in the fashion and music industries."

The marriage enabled them to develop innovative ways to market their products. For example, when it released its first CD, The Good-life--featuring rapper and company pitchman LL Cool J--a red baseball cap with the FUBU logo graced its cover. At the time of the release, Macy's devoted window space to the company to promote the new album, as well as unveiled its new women's line, "Fatty Girl," the name of a cut on the CD.

Other companies, however, will rely on the ubiquitous presence of their founders. For instance, the entertainment-oriented cable network E! developed a two-hour special on Combs, complete with a live taping of Sean John's annual grand fashion show. As a result, the clothing line was exposed to 85 million viewers daily for four weeks, increasing awareness of the line in households that never heard of Sean John. Of course, the company engages in traditional marketing--promoting its annual fashion show and increasing advertising--an effort that has been budgeted at $7 million to $8 million this year, up from $4 million to $5 million last year. But having a CEO who is a superstar that "kicks it" with other big-time celebrities does not hurt Sean John's fortunes. In fact, Combs regularly sends items to Hollywood stars like Leonardo DiCaprio, Will Smith, and Denzel Washington, who can possibly generate greater exposure for the line.

Combs and others have demonstrated that marketing, music, movies, and fashion will continue to be strong threads that bind the Hip-Hop Economy. And judging by the acumen and tenacity of these empire builders, hip-hop will not only be a part of the fabric of black entrepreneurship for decades to come but also tie African American participation in the business mainstream as well.

Dressed for Success

Whether it's baggy jeans or men's couture, hip-hop designers are making their presence known on runways from New York to Milan. They are demonstrating that, like movies and music, fashion is a strong thread that binds the Hip-Hop Economy. Who are the leaders of urban fashion? Who's creating the hottest urban styles and trends? Here are a few of the bigger players in the apparel industry.

--Compiled by Christina Morgan

SOURCE B.E. RESEARCH, HOOVERS.COM, DOW JONES & CO.

FUBU

CEO Daymond John

Year founded 1992

Gross sales 2001 $380 million

Apparel & accessories Men's, women's, and children's sportswear, footwear, outerwear, swimwear, watches, suits

Outlets Nordstrom, Macy's, Dillard's, Foot Locker, Dr. Jay's

Sean John

CEO Sean "P. Diddy" Combs

Year founded 1998

Gross sales 2001 $250 million

Apparel & accessories

Men and boy's sportswear, suits, hats, underwear, outerwear Big and Tall menswear

Outlets

Bloomingdale's, Macy's, Dr. Jay's

Phat Farm

CEO Russell Simmons

Year founded 1992

Gross sales 2001 $175 million

Apparel & accessories

Men's sportswear, cologne, deodorant, sneakers, outerwear, hats, underwear, women's sportswear, dresses, outerwear, lingerie, children's sportswear, outerwear, hats

Outlets

Macy's, Bloomingdale's, Phat Farm NYC/Montreal

Rocawear

CEO Damon Dash

Year founded 1999

Gross sales 2001 $150 million

Apparel & accessories

Men's, women's, and children's sportswear, outerwear, hats

Outlets

Macy's, Dr. Jay's. Available in Canada, Germany Austria, England, France, and Japan

Karl Kani Infinity Inc.

CEO Karl Kani

Year founded 1989

Gross sales 2001 $77 million

Apparel & accessories

Men's sportswear, loungewear, footwear, women's sportswear, loungewear

Outlets

Macy's, Dr. Jay's

RELATED ARTICLE: Competing with celebrity lines is a hard sell.

Urban fashion has never been an easy market to break into. And with celebrity-attached clothing lines such as Sean John, Rocawear, and Phat Farm dominating the industry, it may be harder now more than ever. But while the average entrepreneur doesn't have the financial backing of music mogul Sean "P. Diddy" Combs, a number of savvy individuals have found a way to capitalize on the urban apparel explosion.

"We rely heavily on a grassroots campaign," says Gerard Murray, who along with his wife, Carol, created the apparel company School of Hard Knocks (SOHK). The Murrays came up with the clothing line in 1996 after developing a T-shirt imprinted with the words "Queens 7, "which paid homage to their local Queens neighborhood. "We have a good sense of what people want because, as retailers, we get opinions when our customers come into our store."

Since SOHK's inception, the Murrays have expanded their family-owned store and entered into a licensing agreement, making the company's array of men's and boys' sportswear available nationwide. SOHK earned an estimated $22 million in sales last year.

"A celebrity line is only as popular as the celebrity," says Murray.

Grassroots marketing is key for urban clothing entrepreneurs seeking success. Dwayne Lewis, CEO of the apparel company DADA, and his partner, Michael Cherry, began their business in 1995 with only a polo-style hat. The two men, who were living in the Washington, D.C. area at the time of the Million Man March in 1995, took advantage of the event to promote their product.

"We took a cardboard box, put the hats on the back, and sold [them] to people from all over the world. We realized that it wasn't a fad," says Lewis, whose company now features footwear, sportswear, accessories, and another fashion line, DAMANI DADA. Last year, DADA earned an estimated $50 million in sales.

Creativity and an idea can sometimes substitute for a lack of venture capital for those interested in launching an apparel company. Founders of PNB Nation started their company with $300 in 1987 while still in high school. Roger McHayle, Isaac Rubinstein, and Kahlil Williams, all former graffiti artists, began designing silk-screened T-shirts, selling them to friends. Since then, PNB Nation has been commissioned to design everything from movie sets to jackets for Lauryn Hill's "Miseducation" world tour.

Companies such as PNB have definitely tasted success, but to stay competitive, entrepreneurs must constantly update their product. Ralph Reynolds began his clothing company, RP55, by designing a flashy logo for oversized T-shirts (see "Takin' it to the Street," Enterprise, March 2001). Today Reynolds has launched two new companies: Azzure Denim and Indigo Red, which feature sleeker designs. RP55 earned an estimated $50 million in sales last year.

"You have to not just be trendy but also track your consumer through a number of lifestyle changes," says David Rice, founder of the Organization of Black Designers. "Ralph Lauren has something for every age group. He is selling adventure and activity, not just going out and partying."

--Christina Morgan