How Does Abercrombie And Fitch Need To Implement A New Strategy?
Date and time received by the instructor/office
_______________________________
(Leave blank)
ADMINISTRATIVE POLICY
GMGT 4010
STUDENT NUMBER: 7672599
WORD COUNT: 2736
Dr. Victor Cui
GMGT 4010-A02
Tuesday 2:30-5:15pm Drake 539
TAKE-HOME MID-TERM WINTER 2015
Consulting Letter
Dear Mr. Jefferies, After considering the company’s internal and external analysis, it is clear that Abercrombie and Fitch need to implement a new strategy for future success. Considering consumer trends, and the company’s current outlook, changes need to be made. The strategies I recommend are to market the company as a more receptive brand in the United States as well as looking to penetrate international markets while closing down underperforming …show more content…
US stores. With consumer trends of online shopping being on the rise, Abercrombie and Fitch can look to close down those stores who are not meeting sales quotas. Your firm is already considered one of the first-movers in the online sphere, but now is the time to fully take advantage of that. It is time for Abercrombie to look to penetrate the foreign market even further. Stores in the diverse cities, such as New York, are receiving tremendous international customers. Furthermore, competitors are already looking to expand internationally as well. For my second part of my strategy, you need to realize the company is alienating a major part of its market with a strategy to only focus on those who fit “the look.” Different cities and countries have different values and would not be receptive of this if you continue to alienate them. Continuing strong philanthropic work and international celebrity endorsement can help mitigate these downfalls. Financing can be issuance of debt or equity, it is crucial to pay attention to the returns and the return on investments of these strategies. Considering that international expansion incurs lots of capital costs, it is a strategy that you should slowly implement and keep taking note on the returns of investment. The benefits the company will receive include sustainable profit growth, increase market penetration and improvement of your brand’s reputation.
Key Issues Abercrombie and Fitch Co. is a men and women’s clothing company which is built on the philosophy of not trying to be all things of all people, meaning, not everyone is able to identify themselves and relate to the brand. Their current CEO, Mike Jefferies, is faced with the issue to decide whether the firm should expand its direct-to-consumer and international sales. By doing so, he would be looking to close down domestic stores in the United States. This issue have appeared due to the company missing Wall Street’s estimates in 2011, thus experiencing a drop in shares. Although sales have increased domestically, the company had to use price discounts in order to drive those sales, thus lower gross profit, and creating an unsustainable strategy for the future. As a result, he ponders whether to close down the lower-yielding domestic stores and concentrating on online and international expansion. External Assessment The retail clothing industry involves the manufacturing and sale of clothing goods around the world. Different sales channels are available such as retail stores and online which firms typically sell through.
Opportunity: Emergence of International Interest With less than 10% of Abercrombie and Fitch stores being outside of the United States, focusing more on international expansion can be a highly lucrative opportunity for the company. The company’s domestic stores in major cities, such as New York, experience an influx of international customers. The interest of foreign markets is present for the company however; there are certain success factors that are essential. For instance, they would have to market their product in a manner that fits the foreign countries values, and be able to overcome competition of already-established brands.
Threat: Emergence of Online Shopping Over the years, the prevalence of the internet and online shopping amongst consumers has grown dramatically.
Customers no longer need to visit stores to purchase goods and are able to make purchases from their home. This trend poses a serious threat to retail stores in the United States. Furthermore, strictly online sellers may arise (Exhibit 1) who don’t require a store at all. Domestic stores are not gaining enough traffic in order to produce sales and are not maintaining high levels of dollar per square foot. In order to mitigate this threat, creating an online sales strategy and eliminating stores with lower traffic will help with profit restoration.
Threat: Perception of the Brand The brand has faced public scrutiny as far as its current practices are concerned. With previous lawsuits and negative perceptions, it can create a threat to the firm’s ability of expansion and profitability. Marketing the firm in a manner which highlights its improvements and philanthropy as well as conforming to the community’s values can help relieve this threat.
Internal …show more content…
Assessment
Abercrombie and Fitch is a “casual luxury” clothing band based in the United States. They have 3 distinct brands (Gilly Hicks, Hollister, abercrombie kids) that relate to a specific segment of the market with each having their own marketing story. Discussed further below is an analysis of the firm’s key strengths and weaknesses.
Temporary Competitive Advantage: Marketing and Sales Strategy Abercrombie and Fitch’s marketing strategy is a strength and key competitive advantage (Exhibit 2).
They utilize fictional stories and unique store decorations in order to propel sales. Their sales force is often trained in a manner which fit the company’s look and the stores design. For instance, the Hollister store differentiates itself with its California-like store display. Furthermore, the store attracts customers with their usage of pop music and cologne scents. Their sales representatives greet customers with a specific tagline which aids in the creation of a unique store experience. This strategy is valuable since it has given the firm the opportunity to relate to consumers more efficiently than other brands.
Strengths: E-Commerce and Online Presence Direct-to-consumer strategies have been a key strength for Abercrombie and Fitch’s sales goals. They have a strong presence, notably their website, which facilitates in-store and online sales. It is valuable to them as it allows consumers to shop at their convenience and can browse selection easier. Next, with the increase in online shopping, having a presence online is valuable for future growth.
Weakness: Hiring and Human Resource
Practices Abercrombie and Fitch has been subject of lawsuit cases where they have engaged in unfair hiring practices. They seek employees who fit the “look” of the company and hire “good-looking people.” Hiring solely a specific segment of the population is a weakness for the firm since it will hinder their ability to expand internationally. Furthermore, the company believes that employees must wear clothes similar to their products and have engaged in unfair practices to those who were not consistent.
Financial Diagnosis In comparison to their competitors, Abercrombie and Fitch’s profitability ratios, notably their Return on Assets, are significantly lower than their competitors. They do have an outlier in 2010 with less than 1%, as they only net $254,000 with $2.82 billion in assets (Exhibit 3). Their profits were low in 2010 because they discontinued the operations of the RUEHL brand with attributed in a $78,699 (in 000s) loss. Abercrombie and Fitch needs to manage their assets better in order to become more competitive. For instance, The Gap, who is the sales leader of the group, attained an average of 15.5% while Abercrombie has an average of 4.89%. Aeropostale is extremely efficient at managing their assets as well and has seen increasing profits each year. If Abercrombie is looking to expand into new markets, asset management is essential if they are looking for a strong return on their investments. Looking at their inventory turnover, Abercrombie also has significant lower inventory turnover numbers in comparison to the other firms listed. Lower turnover indicates lower efficiency with regards to inventory management. Abercrombie might have poor sales in comparison to their inventory numbers. Looking at other companies, Aeropostale poses a threat as they have high inventory turnover, meaning inventory is being sold quick. Lastly, while looking at the liquidity ratios, Abercrombie is quite comparable to its competitors with only American Eagle faring better. This means that the firm is able to pay off creditors and debt quicker than other firms. Their quick ratio is more comparable to the other firms due to their influx of inventory levels. For future concerns, this could create issues with paying off creditors if they are unable to sell their merchandise inventory on hand.
Current Strategies Abercrombie’s current strategy is based around creating a differential product. They used a focus-based approach where they attempt to market their products to people who fit their look. The way they strategies they use to convey this message include, hiring representatives that fit with the look, creation of fictional stories to aid marketing tactics and the overall creation of a casual luxury product line. Marketing is Abercrombie’s greatest business function. It is the manner in which the company conveys their product across consumers. A key to Abercrombie’s success is that there customers are able to relate to the clothing and the overall brand. The organization supports their marketing strategies with the people they hire, the store’s decorations and location. Marketing will play a major role in international expansion as well. Being able to adapt to foreign countries view and values will be key in Abercrombie’s future growth. The way they conduct business in the United States will be different for when they penetrate countries in Asia or Europe. Therefore, being able to diminish the bad press they have received in the past and communicating they are a respectable brand will be crucial for future success. Abercrombie’s current strategy is also in the midst of a transition into a greater emphasis on direct-to-consumer sales. Having formulated an online strategy early in the 1990s gives them a competitive edge. With consumer trends indicating more internet use and an increase in online shopping, the online presence that the firm has will bode well in future growth as well. However, with a greater emphasis on direct-to-consumer sales, the organization, particularly CEO Mike Jefferies, has to come to a decision how to maximize profitability with this strategy. Considering the trend of high online activity and a pursuit of international expansion, the company has to realize what holds in store for domestic outlets.
Implementable Strategic Alternatives
• Alternative #1: Focus on changing customer’s brand perception in the domestic market Abercrombie and Fitch’s brand reputation has been hurt over the years with numerous lawsuits over the brand’s hiring practices and their sexual marketing. This could be a reason why their sales have been falling in the United States. Reworking their image in the eyes of consumers can benefit the brands and revamp their sales. This can be done through corporate social responsibility actions, endorsement partnerships and overall marketing.
• Alternative #2: Retract domestic stores and penetrate international markets further
The demand for Abercrombie and Fitch has been increasing amongst international consumers. This has been made evident by the traffic flow of international customers in the higher-end malls in the United States. Over the years, they have expanded overseas while still maintaining their domestic presence. However, with the increase in direct-to-consumer sales, Abercrombie can look to retract its underperforming outlets from the United States and concentrate on their online offerings. While expanding internationally, the firm has to consider remaining consistent with the foreign countries values in order to succeed.
• Alternative #3: Introduce an executive line which penetrates the older generation of consumers
Abercrombie previously had an executive line that was meant from the older generation of consumers, but due to the recession in the late 2000’s, it was forced to close its doors. They currently penetrate all segments of the market except the upscale and older generation (25+). Their main competitor, Gap Inc., has penetrated this market with the brand Banana Republic with great success. Perhaps Abercrombie can implement a brand of similar stature in the upcoming years as well.
Criteria and Evaluation of Alternatives by Criteria In order to implement a successful decision, the company must consider three decision criteria. To start, their decision must be able to increase long-term profitability for the firm. Their decision must be sustainable in the long run and improve overall profitability without lowering perceived brand value. Secondly, the decision must improve the brand reputation. Many people still hold the company in a negative light, thus improving their perception will be helpful for long-term success. Lastly, the company must increase market share via penetration of new market segments or increased product line.
To start, alternative one seeks to concentrate on changing the view of consumers in the US market. Methods of doing this can include, celebrity endorsements, increase in marketing and corporate social responsibility work. Engaging in more equitable practices and more of a receptive stores atmosphere will aid tremendously in this alternatives as well. This method meets the criteria of increasing brand reputation, increasing sales, however, it could fall short in long-term profitability if more expenditures need to be done in terms of marketing. By ignoring aggressive international expansion, Abercrombie can minimize its risk of failure and its risk of not garnishing returns on investment. They would need to monitor their returns on marketing expenses in order to evaluate how effective their marketing actions are.
Next, alternative two seeks to penetrating the international market further, while evaluating and limiting under-performing domestic stores. This method would require research on which markets to penetrate first and which stores to close down. The firm does not have much presence in the Asian countries, thus creating a store there can be valuable. Penetrating an international market would require the company adhering to the foreign countries values in terms of hiring and marketing techniques. The brand’s reputation would definitely increase with this since they are no longer being sold to just the people who fit their “look” but to all market segments. Furthermore, they have seen success amongst international consumers in the domestic market. Lastly, by closing down US stores, they can concentrate on online sales. Eliminating stores would lower their domestic building and hiring costs, while transferring them to the new foreign country.
The last alternative looks to reintroduce an executive product line tailored to the older generation of consumers (ages 25+). Their competitors are selling products in this segment yet Abercrombie currently does not compete in it. Their previous line, RUEHL NO. 925, was forced to close due to the economic recession, however they do have potential in this space. For instance, their loyal followers who relate to the “look” and the stores atmosphere will be getting older and look for clothing alternatives that fit their lifestyle. As Abercrombie’s consumer’s age, their products can age along with them. This alternative meets the criteria of penetrating a new market segment and seeks to increase sales and profitability. The risk involved with it is the increase of brand reputation; they would have to change their marketing tactics to become more premium and respectable in order to attract this audience. By doing so, they will garner respect from an older generation of consumers.
Recommendation and its Implementation Based on the criteria and environmental factors, Abercrombie should consider options #1 and #2 for implementation. The company’s image in the US has been hurt due to their unfair practices, and their revenue has been sporadic due to their domestic sales. Thus, increasing marketing and penetrating a new market will help rejuvenate the company’s overall success. These two options meet the criteria of, recreating the brand’s image, increasing overall profitability in the long run (Exhibit 5 & 6), and penetrating a new market. Implementing these alternatives will be difficult early on. The company is going to have to rebrand their image of being an exclusive brand to certain segments into a more receptive brand. At the same time, they would have to conduct research of underperforming stores and close them down. From 2012-2014 they will see an increase in capital expenditures as they open new stores abroad (Exhibit 4, 5 & 6), and then continue to see growth in sales with an online domestic strategy and their new international strategy.
Limitations and Critique of Recommendation Penetrating the international market will be extremely difficult. Different countries hold different values than what Abercrombie portrays and may not be receptive to the brand. Thus, recreating their image and conducting research on where demand is located will help mitigate these risks of failure. Furthermore, if the company does not see a return on their international investments, the project can be considered a failure. Thus, expanding slowly to demanding countries and adhering to the foreign countries values will help alleviate these risks.
Exhibits
Exhibit 1: External Assessment: Six Forces Model
Risk of new entrants • Low-medium risk
• Low cost inputs and raw materials
• Hard to gain market share in clothing market
• Rise of online shopping might create online-only venders
Intensity of Rivalry of Competition • Highly competitive market
• Well-established firms already adopting strategic plans to expand (ex: Gap)
• Hard to expand into different segments with already-established firms.
Bargaining Power of Buyers • High bargaining power
• Numerous companies offer clothing options
Bargaining Power of Suppliers • Quality suppliers offer a low-medium risk
• Suppliers who aim for fair practices are rare
• The company has a global sourcing strategy with many suppliers
Substitutes of Product • Medium-high risk
• Consumers can easily purchase clothing from elsewhere
• Consumers might not be able to relate to substitute products
• Fashion trends are always changing
Complement Products • Many complement products exist for clothing industry
• Examples: Watches, earrings, footwear
• Demand for clothing does not depend on complements
Exhibit 2: Internal Assessment (VRIO Analysis) Company uses a unique marketing strategy to differentiate from competitors and create a special customer experience. The use of a sales force with a distinct look helps customers relate to the product being sold. Continuing to diversify hiring practices and philanthropy will diminish negative brand image.
Exhibit 3: Financial Ratios
Exhibit 4: Assumptions and Justifications
Alternative 1:
The discount factor was estimated using the weighted average cost of capital. This was calculated by the total cost of company shares and debt, and cost of debt stated in the financial statements. For revenue growth, we used the year to year growth of 18.4% from 2012-2014, then 10% thereafter. Stores and distribution expenses remained consistent with the historical growth of 18% for the first two years, then half of that thereafter. Marketing expense was calculated using the firm`s marketing returns in 2011 (4,158,058/437,120) for the first 2 years, then the average of 2010 and 2011 after. Tax rates remained the same (34.25%) through all alternatives.
Alternative 2: Used the company`s one year direct-to-consumer growth for 2012 (36.8%), then half of it for the next 4 years. For international growth, we used the one year international growth rate (73%), then a third of it for the next 4 years. Capital expenditures increased from the years of 2012 and 2013 with more retail stores being opened internationally, and then leveled off afterwards. Stores and distribution expense did the same as well. Marketing will increase due to marketing expenditures in new countries
Alternative 3: We looked at RUEHL`s first year of sales and included an increase of 16% for the first year of implementation to account for the increase in online sales activity. Sales double the year after then increase by 30% (RUEHL`s average growth from 2006-2008). Marketing and working capital (inventories) increased due to the promotion and merchandise of the new line as well.
Exhibit 5: Alternative 1: Increase Brand Reputation Through Marketing in US (in 000`s of US dollars) Exhibit 6: Retract From the US and Penetrate the International Market (in 000`s of US dollars)
Exhibit 7: Introduce Executive Line(in 000`s of US dollars)
Exhibit 8: Action Plan
2012 - Close down domestic stores that are not meeting sales quota $/sq. foot
- Target international locations that are able to maintain $2000-$2500 square foot
- High capital expenditure costs
- Market Abercrombie as corporate social responsible brand through philanthropic work or international endorsers
2013 - Continue to conduct research on market demand
- Continue penetrating international market, such as Asia
- Review on how well smaller stores do prior to more expansion
- Increase direct-to-consumer (example: online) sales in US
2014 - Market international stores heavy and fit stores to foreign countries values
- Continue penetrating international market
2015 - Same as 2014
- Partner up with online distributers for quicker deliveries to consumers
2016 - Review Returns on Assets on international expansion to measure success
- If ROA has improved, continue to implement the strategy until it stalls again
_______________________________
(Leave blank)
ADMINISTRATIVE POLICY
GMGT 4010
STUDENT NUMBER: 7672599
WORD COUNT: 2736
Dr. Victor Cui
GMGT 4010-A02
Tuesday 2:30-5:15pm Drake 539
TAKE-HOME MID-TERM WINTER 2015
Consulting Letter
Dear Mr. Jefferies, After considering the company’s internal and external analysis, it is clear that Abercrombie and Fitch need to implement a new strategy for future success. Considering consumer trends, and the company’s current outlook, changes need to be made. The strategies I recommend are to market the company as a more receptive brand in the United States as well as looking to penetrate international markets while closing down underperforming …show more content…
US stores. With consumer trends of online shopping being on the rise, Abercrombie and Fitch can look to close down those stores who are not meeting sales quotas. Your firm is already considered one of the first-movers in the online sphere, but now is the time to fully take advantage of that. It is time for Abercrombie to look to penetrate the foreign market even further. Stores in the diverse cities, such as New York, are receiving tremendous international customers. Furthermore, competitors are already looking to expand internationally as well. For my second part of my strategy, you need to realize the company is alienating a major part of its market with a strategy to only focus on those who fit “the look.” Different cities and countries have different values and would not be receptive of this if you continue to alienate them. Continuing strong philanthropic work and international celebrity endorsement can help mitigate these downfalls. Financing can be issuance of debt or equity, it is crucial to pay attention to the returns and the return on investments of these strategies. Considering that international expansion incurs lots of capital costs, it is a strategy that you should slowly implement and keep taking note on the returns of investment. The benefits the company will receive include sustainable profit growth, increase market penetration and improvement of your brand’s reputation.
Key Issues Abercrombie and Fitch Co. is a men and women’s clothing company which is built on the philosophy of not trying to be all things of all people, meaning, not everyone is able to identify themselves and relate to the brand. Their current CEO, Mike Jefferies, is faced with the issue to decide whether the firm should expand its direct-to-consumer and international sales. By doing so, he would be looking to close down domestic stores in the United States. This issue have appeared due to the company missing Wall Street’s estimates in 2011, thus experiencing a drop in shares. Although sales have increased domestically, the company had to use price discounts in order to drive those sales, thus lower gross profit, and creating an unsustainable strategy for the future. As a result, he ponders whether to close down the lower-yielding domestic stores and concentrating on online and international expansion. External Assessment The retail clothing industry involves the manufacturing and sale of clothing goods around the world. Different sales channels are available such as retail stores and online which firms typically sell through.
Opportunity: Emergence of International Interest With less than 10% of Abercrombie and Fitch stores being outside of the United States, focusing more on international expansion can be a highly lucrative opportunity for the company. The company’s domestic stores in major cities, such as New York, experience an influx of international customers. The interest of foreign markets is present for the company however; there are certain success factors that are essential. For instance, they would have to market their product in a manner that fits the foreign countries values, and be able to overcome competition of already-established brands.
Threat: Emergence of Online Shopping Over the years, the prevalence of the internet and online shopping amongst consumers has grown dramatically.
Customers no longer need to visit stores to purchase goods and are able to make purchases from their home. This trend poses a serious threat to retail stores in the United States. Furthermore, strictly online sellers may arise (Exhibit 1) who don’t require a store at all. Domestic stores are not gaining enough traffic in order to produce sales and are not maintaining high levels of dollar per square foot. In order to mitigate this threat, creating an online sales strategy and eliminating stores with lower traffic will help with profit restoration.
Threat: Perception of the Brand The brand has faced public scrutiny as far as its current practices are concerned. With previous lawsuits and negative perceptions, it can create a threat to the firm’s ability of expansion and profitability. Marketing the firm in a manner which highlights its improvements and philanthropy as well as conforming to the community’s values can help relieve this threat.
Internal …show more content…
Assessment
Abercrombie and Fitch is a “casual luxury” clothing band based in the United States. They have 3 distinct brands (Gilly Hicks, Hollister, abercrombie kids) that relate to a specific segment of the market with each having their own marketing story. Discussed further below is an analysis of the firm’s key strengths and weaknesses.
Temporary Competitive Advantage: Marketing and Sales Strategy Abercrombie and Fitch’s marketing strategy is a strength and key competitive advantage (Exhibit 2).
They utilize fictional stories and unique store decorations in order to propel sales. Their sales force is often trained in a manner which fit the company’s look and the stores design. For instance, the Hollister store differentiates itself with its California-like store display. Furthermore, the store attracts customers with their usage of pop music and cologne scents. Their sales representatives greet customers with a specific tagline which aids in the creation of a unique store experience. This strategy is valuable since it has given the firm the opportunity to relate to consumers more efficiently than other brands.
Strengths: E-Commerce and Online Presence Direct-to-consumer strategies have been a key strength for Abercrombie and Fitch’s sales goals. They have a strong presence, notably their website, which facilitates in-store and online sales. It is valuable to them as it allows consumers to shop at their convenience and can browse selection easier. Next, with the increase in online shopping, having a presence online is valuable for future growth.
Weakness: Hiring and Human Resource
Practices Abercrombie and Fitch has been subject of lawsuit cases where they have engaged in unfair hiring practices. They seek employees who fit the “look” of the company and hire “good-looking people.” Hiring solely a specific segment of the population is a weakness for the firm since it will hinder their ability to expand internationally. Furthermore, the company believes that employees must wear clothes similar to their products and have engaged in unfair practices to those who were not consistent.
Financial Diagnosis In comparison to their competitors, Abercrombie and Fitch’s profitability ratios, notably their Return on Assets, are significantly lower than their competitors. They do have an outlier in 2010 with less than 1%, as they only net $254,000 with $2.82 billion in assets (Exhibit 3). Their profits were low in 2010 because they discontinued the operations of the RUEHL brand with attributed in a $78,699 (in 000s) loss. Abercrombie and Fitch needs to manage their assets better in order to become more competitive. For instance, The Gap, who is the sales leader of the group, attained an average of 15.5% while Abercrombie has an average of 4.89%. Aeropostale is extremely efficient at managing their assets as well and has seen increasing profits each year. If Abercrombie is looking to expand into new markets, asset management is essential if they are looking for a strong return on their investments. Looking at their inventory turnover, Abercrombie also has significant lower inventory turnover numbers in comparison to the other firms listed. Lower turnover indicates lower efficiency with regards to inventory management. Abercrombie might have poor sales in comparison to their inventory numbers. Looking at other companies, Aeropostale poses a threat as they have high inventory turnover, meaning inventory is being sold quick. Lastly, while looking at the liquidity ratios, Abercrombie is quite comparable to its competitors with only American Eagle faring better. This means that the firm is able to pay off creditors and debt quicker than other firms. Their quick ratio is more comparable to the other firms due to their influx of inventory levels. For future concerns, this could create issues with paying off creditors if they are unable to sell their merchandise inventory on hand.
Current Strategies Abercrombie’s current strategy is based around creating a differential product. They used a focus-based approach where they attempt to market their products to people who fit their look. The way they strategies they use to convey this message include, hiring representatives that fit with the look, creation of fictional stories to aid marketing tactics and the overall creation of a casual luxury product line. Marketing is Abercrombie’s greatest business function. It is the manner in which the company conveys their product across consumers. A key to Abercrombie’s success is that there customers are able to relate to the clothing and the overall brand. The organization supports their marketing strategies with the people they hire, the store’s decorations and location. Marketing will play a major role in international expansion as well. Being able to adapt to foreign countries view and values will be key in Abercrombie’s future growth. The way they conduct business in the United States will be different for when they penetrate countries in Asia or Europe. Therefore, being able to diminish the bad press they have received in the past and communicating they are a respectable brand will be crucial for future success. Abercrombie’s current strategy is also in the midst of a transition into a greater emphasis on direct-to-consumer sales. Having formulated an online strategy early in the 1990s gives them a competitive edge. With consumer trends indicating more internet use and an increase in online shopping, the online presence that the firm has will bode well in future growth as well. However, with a greater emphasis on direct-to-consumer sales, the organization, particularly CEO Mike Jefferies, has to come to a decision how to maximize profitability with this strategy. Considering the trend of high online activity and a pursuit of international expansion, the company has to realize what holds in store for domestic outlets.
Implementable Strategic Alternatives
• Alternative #1: Focus on changing customer’s brand perception in the domestic market Abercrombie and Fitch’s brand reputation has been hurt over the years with numerous lawsuits over the brand’s hiring practices and their sexual marketing. This could be a reason why their sales have been falling in the United States. Reworking their image in the eyes of consumers can benefit the brands and revamp their sales. This can be done through corporate social responsibility actions, endorsement partnerships and overall marketing.
• Alternative #2: Retract domestic stores and penetrate international markets further
The demand for Abercrombie and Fitch has been increasing amongst international consumers. This has been made evident by the traffic flow of international customers in the higher-end malls in the United States. Over the years, they have expanded overseas while still maintaining their domestic presence. However, with the increase in direct-to-consumer sales, Abercrombie can look to retract its underperforming outlets from the United States and concentrate on their online offerings. While expanding internationally, the firm has to consider remaining consistent with the foreign countries values in order to succeed.
• Alternative #3: Introduce an executive line which penetrates the older generation of consumers
Abercrombie previously had an executive line that was meant from the older generation of consumers, but due to the recession in the late 2000’s, it was forced to close its doors. They currently penetrate all segments of the market except the upscale and older generation (25+). Their main competitor, Gap Inc., has penetrated this market with the brand Banana Republic with great success. Perhaps Abercrombie can implement a brand of similar stature in the upcoming years as well.
Criteria and Evaluation of Alternatives by Criteria In order to implement a successful decision, the company must consider three decision criteria. To start, their decision must be able to increase long-term profitability for the firm. Their decision must be sustainable in the long run and improve overall profitability without lowering perceived brand value. Secondly, the decision must improve the brand reputation. Many people still hold the company in a negative light, thus improving their perception will be helpful for long-term success. Lastly, the company must increase market share via penetration of new market segments or increased product line.
To start, alternative one seeks to concentrate on changing the view of consumers in the US market. Methods of doing this can include, celebrity endorsements, increase in marketing and corporate social responsibility work. Engaging in more equitable practices and more of a receptive stores atmosphere will aid tremendously in this alternatives as well. This method meets the criteria of increasing brand reputation, increasing sales, however, it could fall short in long-term profitability if more expenditures need to be done in terms of marketing. By ignoring aggressive international expansion, Abercrombie can minimize its risk of failure and its risk of not garnishing returns on investment. They would need to monitor their returns on marketing expenses in order to evaluate how effective their marketing actions are.
Next, alternative two seeks to penetrating the international market further, while evaluating and limiting under-performing domestic stores. This method would require research on which markets to penetrate first and which stores to close down. The firm does not have much presence in the Asian countries, thus creating a store there can be valuable. Penetrating an international market would require the company adhering to the foreign countries values in terms of hiring and marketing techniques. The brand’s reputation would definitely increase with this since they are no longer being sold to just the people who fit their “look” but to all market segments. Furthermore, they have seen success amongst international consumers in the domestic market. Lastly, by closing down US stores, they can concentrate on online sales. Eliminating stores would lower their domestic building and hiring costs, while transferring them to the new foreign country.
The last alternative looks to reintroduce an executive product line tailored to the older generation of consumers (ages 25+). Their competitors are selling products in this segment yet Abercrombie currently does not compete in it. Their previous line, RUEHL NO. 925, was forced to close due to the economic recession, however they do have potential in this space. For instance, their loyal followers who relate to the “look” and the stores atmosphere will be getting older and look for clothing alternatives that fit their lifestyle. As Abercrombie’s consumer’s age, their products can age along with them. This alternative meets the criteria of penetrating a new market segment and seeks to increase sales and profitability. The risk involved with it is the increase of brand reputation; they would have to change their marketing tactics to become more premium and respectable in order to attract this audience. By doing so, they will garner respect from an older generation of consumers.
Recommendation and its Implementation Based on the criteria and environmental factors, Abercrombie should consider options #1 and #2 for implementation. The company’s image in the US has been hurt due to their unfair practices, and their revenue has been sporadic due to their domestic sales. Thus, increasing marketing and penetrating a new market will help rejuvenate the company’s overall success. These two options meet the criteria of, recreating the brand’s image, increasing overall profitability in the long run (Exhibit 5 & 6), and penetrating a new market. Implementing these alternatives will be difficult early on. The company is going to have to rebrand their image of being an exclusive brand to certain segments into a more receptive brand. At the same time, they would have to conduct research of underperforming stores and close them down. From 2012-2014 they will see an increase in capital expenditures as they open new stores abroad (Exhibit 4, 5 & 6), and then continue to see growth in sales with an online domestic strategy and their new international strategy.
Limitations and Critique of Recommendation Penetrating the international market will be extremely difficult. Different countries hold different values than what Abercrombie portrays and may not be receptive to the brand. Thus, recreating their image and conducting research on where demand is located will help mitigate these risks of failure. Furthermore, if the company does not see a return on their international investments, the project can be considered a failure. Thus, expanding slowly to demanding countries and adhering to the foreign countries values will help alleviate these risks.
Exhibits
Exhibit 1: External Assessment: Six Forces Model
Risk of new entrants • Low-medium risk
• Low cost inputs and raw materials
• Hard to gain market share in clothing market
• Rise of online shopping might create online-only venders
Intensity of Rivalry of Competition • Highly competitive market
• Well-established firms already adopting strategic plans to expand (ex: Gap)
• Hard to expand into different segments with already-established firms.
Bargaining Power of Buyers • High bargaining power
• Numerous companies offer clothing options
Bargaining Power of Suppliers • Quality suppliers offer a low-medium risk
• Suppliers who aim for fair practices are rare
• The company has a global sourcing strategy with many suppliers
Substitutes of Product • Medium-high risk
• Consumers can easily purchase clothing from elsewhere
• Consumers might not be able to relate to substitute products
• Fashion trends are always changing
Complement Products • Many complement products exist for clothing industry
• Examples: Watches, earrings, footwear
• Demand for clothing does not depend on complements
Exhibit 2: Internal Assessment (VRIO Analysis) Company uses a unique marketing strategy to differentiate from competitors and create a special customer experience. The use of a sales force with a distinct look helps customers relate to the product being sold. Continuing to diversify hiring practices and philanthropy will diminish negative brand image.
Exhibit 3: Financial Ratios
Exhibit 4: Assumptions and Justifications
Alternative 1:
The discount factor was estimated using the weighted average cost of capital. This was calculated by the total cost of company shares and debt, and cost of debt stated in the financial statements. For revenue growth, we used the year to year growth of 18.4% from 2012-2014, then 10% thereafter. Stores and distribution expenses remained consistent with the historical growth of 18% for the first two years, then half of that thereafter. Marketing expense was calculated using the firm`s marketing returns in 2011 (4,158,058/437,120) for the first 2 years, then the average of 2010 and 2011 after. Tax rates remained the same (34.25%) through all alternatives.
Alternative 2: Used the company`s one year direct-to-consumer growth for 2012 (36.8%), then half of it for the next 4 years. For international growth, we used the one year international growth rate (73%), then a third of it for the next 4 years. Capital expenditures increased from the years of 2012 and 2013 with more retail stores being opened internationally, and then leveled off afterwards. Stores and distribution expense did the same as well. Marketing will increase due to marketing expenditures in new countries
Alternative 3: We looked at RUEHL`s first year of sales and included an increase of 16% for the first year of implementation to account for the increase in online sales activity. Sales double the year after then increase by 30% (RUEHL`s average growth from 2006-2008). Marketing and working capital (inventories) increased due to the promotion and merchandise of the new line as well.
Exhibit 5: Alternative 1: Increase Brand Reputation Through Marketing in US (in 000`s of US dollars) Exhibit 6: Retract From the US and Penetrate the International Market (in 000`s of US dollars)
Exhibit 7: Introduce Executive Line(in 000`s of US dollars)
Exhibit 8: Action Plan
2012 - Close down domestic stores that are not meeting sales quota $/sq. foot
- Target international locations that are able to maintain $2000-$2500 square foot
- High capital expenditure costs
- Market Abercrombie as corporate social responsible brand through philanthropic work or international endorsers
2013 - Continue to conduct research on market demand
- Continue penetrating international market, such as Asia
- Review on how well smaller stores do prior to more expansion
- Increase direct-to-consumer (example: online) sales in US
2014 - Market international stores heavy and fit stores to foreign countries values
- Continue penetrating international market
2015 - Same as 2014
- Partner up with online distributers for quicker deliveries to consumers
2016 - Review Returns on Assets on international expansion to measure success
- If ROA has improved, continue to implement the strategy until it stalls again