Business Strategy : Abercrombie & Fitch - Report Example

Business strategy report: Abercrombie & Fitch BY YOU YOUR SCHOOL INFO HERE HERE TABLE OF CONTENTS 0 Strategic analysis 1 Industry profile 1.2 Market performance 1.3 Organisational purpose 1.4 External environment analysis 2.0 Strategic development 2.1 Existing strategy 2.2 Generating strategic options 2.3 Evaluation of options 3.0 Implementation References 1.0 Strategic Analysis 1.1 Industry profile Abercrombie & Fitch (A&F) maintains its largest presence in the United States as a retailer providing casual wear for its desired target market, the 18-22 year-old male and female demographic. Its product line includes jeans, T-shirts, hoodies, fragrances and shorts. A&F operates in a very saturated competitive market in the United States, competing against such youth-oriented fashion retailers as Eagle Outfitters, Aeropostale, The Buckle, The Gap, Chico’s and Express. Despite high performance in 2011 and 2012, Abercrombie & Fitch has witnessed a reduction in its market share of 1.96 percent in 2014, making its market share only 9.47 percent in the U.S. market compared to its most dominant competitors, see Figure 1 (CSI Market 2014). Figure 1: Market share for A&F and competitors A 9.47 percent market share is unfortunate as this is a high growth industry in the United States, holding steady at approximately 13 percent year on year, including e-commerce sales of fashion apparel (FFC 2014; Fredricksen 2012). There is increasing demand for ready-to-wear products in which retailers are providing consumers with less resources (such as the 18-22 year-old markets) with high quality, yet affordable garments off the rack that has been sold in completely finished condition; which encompasses the fashion merchandise selections at A&F. Abercrombie & Fitch, and its most potent competition, provide standardised sizes produced in mass quantities. Whilst A&F clothing is intended to appeal to trendy and stylish-centric consumers, it is still considered comfortable and casual, thus positioning the business as a casual luxury lifestyle retailer. The company offers limited sizes, additionally, designed to fit the more slender consumer body profile with the largest women’s wear size a Large and men’s pants girth not exceeding 91 inches (The Independent 2013). 1.2 Market Performance In terms of market performance, A&F had experienced explosive sales growth between 2005 and 2012. As shown in Figure 2, its capital market performance dropped 25.96 percent between 2012 and 2014. Figure 2: Capital market performance of A&F – 2011 to 2014 Source: CSI Market. (2014). 1.3 Organisational purpose The mission of A&F is to “focus upon high quality merchandise that compliments the casual classic American lifestyle” (Farfan 2014, p.1). Whilst not the most well-developed mission compared to many other retailers, A&F does consistently reinforce its dedication to being a leader in quality-casual fashion offerings that is congruent with its brand identity intentions. The problem at A&F, however, is not its mission or vision, it is ethically-oriented and transcends more than simply the provision of high quality and comfortable clothing. A&F attempts to appeal to youth consumers using vanity-inspired marketing communications and imagery in an effort to make A&F seem exclusive to the young, attractive markets with outward sexual appeal. In 2013, the CEO of the company, Mike Jeffries, stated openly and publicly that he views the brand as being socially aspirational and should only be worn by attractive consumers. Jeffries himself offered that he rejects his dedicated, core customers having to witness people not considered hot to wear Abercrombie’s clothing (Devon 2013). Said Jeffries, “We go after the cool kids...A lot of people do not belong in our clothes and can never belong” (Levinson 2013, p.1). This explains why the company does not provide plus sized merchandise and emphasises that the mission of providing comfortable and casual clothing is incongruent with a corporate culture and attitude that the brand is sexy, chic and only relevant to cool and attractive consumers. Hence, the true organisational purpose seems to be to make Abercrombie & Fitch a company that caters to only a select consumer clientele maintaining traits deemed desirable by corporate leadership at the firm. As result of considerable social backlash for these comments, sales have continued to fall (Become Gorgeous 2013) whilst many competitors have remained stable or continued to experience growth over time (See Figure 3). Figure 3: Some key competitors’ capital market stability Source: NASDAQ. (2014). Buckle, Inc. Interactive Stock Chart. [online] Available at: http://www.nasdaq.com/symbol/bke/interactive-chart?timeframe=1y&charttype=line (accessed 17 November 2014). Source: NASDAQ. (2014). American Eagle Outfitters. [online] Available at: http://www.nasdaq.com/symbol/aeo/interactive-chart?timeframe=1y&charttype=line (accessed 19 November 2014). Furthermore, utilising the ROCE method using data from both companies’ annual reports, EBIT divided by capital employed, The Buckle and American Eagle outfitters achieved and ROCE of 61 percent and 52 percent respectively in 2013. Abercrombie, however, in an environment where the firm achieved over $4 million USD in sales, the company boasts only a net income of $54,628 for 2013 (Abercrombie 2014) due largely to a massive increase in marketing costs in that year, likely in an attempt to minimise the damage caused by unethical allegation controversies. 1.4 External environment analysis The most significant external market conditions causing problems with Abercrombie’s ability to compete effectively is competitive rivalry as recognised by Michael Porter (1987) as an externally-driven market threat. The Buckle does not attempt to utilise marketing that is exclusive to only the vanity-inspired consumer desiring to maintain superiority over others in the social environment. Psychological theory indicates that many consumers, under social comparison theory, tend to have their self-esteem and overall well-being increased when they feel they are superior to others (Suls, et al. 2002; Taylor and Brown 1988). This is likely why youths, who are highly impressionable, have been attracted (historically) to A&F marketing direction. The Buckle, however, utilises lifestyle marketing in order to capture youth attention, emphasising how the brand can improve their social self-expansion which is recognised by Zhang and Chan (2009) as being a promotional methodology that gains more brand preference to firms that use this strategy. Figure 4 illustrates this competitive rivalry competency that has made The Buckle so successful long-term. Figure 4: The Buckle lifestyle marketing and social self-expansion strategy in promotion Source: Justin Gaston Fans. (2009). Modeling Photos 6 Buckle Ads. [online] Available at: http://justingastonfans.wordpress.com/2009/09/30/modeling-photos-6-buckle-ads/ (accessed 17 November 2014). Youths between 18 and 22, additionally, want to buy brands that improve their sense of social identity. This is documented in much publicised socio-psychological and marketing literature (Weiten and Lloyd 2010; Schiffman and Kanuk 2010). American Eagle Outfitters, additionally, is competent in appealing to youth social identity formation and social needs through similar marketing direction as illustrated by Figure 5. Figure 5: American Eagle Social Lifestyle Advertising to Gain Youth Interest and Attachment Source: Godfrey, S. (2011). Tiara Thomas: Singer/rapper/guitarist and pitchwoman. [online] Available at: http://www.tbd.com/blogs/tbd-arts/2011/06/tiara-thomas-singer-rapper-guitarist-and-model-11353.html (accessed 20 November 2014). Hence, The Buckle and American Eagle Outfitters do not differentiate through product emphasis (as Abercrombie does), they illustrate how the brand can help a youth consumer achieve a more positive social identity and achieve social belonging. This is an effective marketing strategy for the younger customer target segments and illustrates a competency above and beyond the promotional expertise of Abercrombie & Fitch. This effectiveness of competitor promotional strategy and integrated marketing communications represent competitive advantages in terms of company differentiation as compared to A&F. Additionally, in the U.S., the company faces threat of substitutes in the external market. The U.S. maintains many retailers that offer comparable, yet disparate products. (i.e. jeans versus khaki casual pants). Major retailers such as JC Penney and Wal-Mart now have capabilities and supply chains that can provide low-cost, yet high quality casual wear. Diverse and well-established supply chains throughout the world provide access to low-cost labour and high quality raw materials that allow substitute products to be distributed at retailers with low-end price structures on their fashion merchandise. It is difficult in this environment for a higher-priced casual wear company, like A&F, to create incentives (especially in a post-recession environment) to select A&F brand over lower-cost substitute products. Major, long-standing retailers like JC Penney and Wal-Mart have considerable bargaining power in the supply chain that supersedes that of A&F who does not maintain the volume purchasing or size to impose higher switching costs on suppliers. One key success factor lacking at Abercrombie is an appropriate risk management ideology. The business did not consider that changing generational attitudes and motivations would drive less interest in the business when attempting to position according to vanity and beauty exclusivity. Its inability to connect to a new generation of teens and young adults who are no longer interested in logos (Covert 2014) has forced the company to close hundreds of stores (Eaton 2014). To be successful in a market, a company must conduct market research about consumer needs and behaviours as they evolve, consider contingencies to minimise the risk of changing consumer dynamics, and prioritise these identified risks. Abercrombie was completely unprepared for an evolving consumer demographic which has further led to more flexible and risk-oriented fashion retailers to gain market share in the U.S. 2.0 Strategic development 2.1 Existing strategy The firm still maintains a strategic direction to position the business according to the hedonistic, vanity-aspiring consumer segment as the brand personality of the firm. The firm utilises a market penetration strategy (as against Ansoff’s matrix) to attract desired clientele. In this strategy, the firm uses promotion (however ineffective ultimately) to create a connection between the aspirational, exclusive-minded youth consumer in an established market (Hooley, Saunders and Piercy 2004). Using catalogue imagery that depicts sexy and provocative youths and in-store promotional imagery to this end, the firm attempts to create incentives to choose A&F over competing brands. At the corporate level, the firm clearly sees this strategy as being sustainable and relevant for retaining important youth consumers. CEO Mike Jeffries has been very unapologetic about his candid assertion that the brand management strategy to capture sexy and beautiful consumers is relevant for long-term sustainability of the business. All business-level activities are underpinned by this executive-level mentality about the viability of this strategy. 2.2 Generating strategic options A&F is not equipped with resources to develop new products and attempts to expand into foreign markets under a market development strategy have not been largely successful (Ruddick 2013). The company’s only financially-feasible option, in a new contemporary environment with reduced sales in the US and UK, is to seek a differentiation strategy (focused strategy against Porter’s Generic Strategies Model) for niche markets that share the (alleged) unethical values of the firm. With senior executives believing that offering new products for larger consumers (or less attractive ones) will cheapen the brand, focused differentiation is the only viable strategy. The company’s financial capital resources are depleting as a result of not only sales slumps, but with higher marketing expenditures and higher commercial costs associated with rents and wholly-owned retail outlets. The business’ balance sheet does not support a company with ample assets needed to enact other strategies. Credit Suisse recently downgraded the firm’s stock from outperform to neutral (Genner 2014), which detracts investors from providing the firm with investment funds. 2.3 Evaluation of options Hence, according to the BCG Matrix, A&F is a dog, characterised by low growth and low market share. The firm would require a costly turnaround plan in order to achieve market growth, such as adopting a low cost leadership strategy or diversification strategy. The firm is not equipped with resources or experience in either of these strategies and would require revamping of its existing supply chain, opening new markets, promoting the business, and targeting new customer segments. The firm’s SBUs that support business are largely centralised with a single corporate control structure where priorities are determined within a hierarchical structure. Hence, a major turnaround plan is not feasible without a major capital infusion (loans, credit or gaining investor attention) and a strategy other than focused differentiation may even further alienate loyal customers that believe in the brand values of the firm. However, the firm can divest its Gilly Hicks stores that sell women’s undergarments. In 2013, the firm indicated it intended on closing all Gilly Hicks stores, but held out for market success. At the end of 2013, the company had 28 Gilly Hicks stores, with 18 in the U.S., one in Sydney Australia, six in the UK and one in Germany (Karr 2013). As a cost-savings measure, this could potentially eliminate millions of U.S. dollars of operational expenses to support domestic and foreign stores. As a dog company along the BCG Matrix, it must find cash or ultimately liquidate in an environment with low growth and lowering market share. The firm simply can no longer afford, in its current state, to diversify. Hence, prioritisation for this struggling business is to continue with market penetration, whilst seeking capital infusions (credit, loans and divestiture of unprofitable businesses) to cater to the niche markets that share corporate value of the firm. Due to the severity of the economic and brand-related problems, the only viable recommendation is to alter marketing strategy over the next five years to make the firm appear more ethical and appeal to the socio-psychological needs of its most viable youth market (18-22). 3.0 Implementation To create more effective advertising and promotional strategies, the company will need to alter its focus on exclusivity from a beauty and vanity aspirational approach. Problems with implementation include internal human capital with no experience in providing services to consumers without these values and attributes. Internal staff and management have been trained to adopt the main corporate values of the firm and no model exists for new service ideologies or how to cater to a broader, casual-minded consumer demographic. This might require consultation with external human resource consultants about best practice in providing competent service to diverse consumers, building a new and evolved organisational culture of inclusion rather than exclusiveness, developing new leadership competencies, and restructuring the business with fewer, centralised reporting structures. Long-standing shared values at the firm related to elitism at the social level cannot be effectively changed overnight. Management may even have to alter its size ideologies on its fashion merchandise in order to provide a different demographic with clothing options befitting a less-svelte body type. This means that internal staff members will require competencies for dealing with a less self-indulgent consumer profile and one that seeks belonging within a once-excluding culture of vanity and sexiness. Furthermore, to continue with the market penetration strategy using new promotional messages, images and ideologies (whilst also capturing the attention of some new consumer demographics), the business will need to benchmark the activities of competitors that have used psychographic marketing (lifestyle marketing) to appeal to the social needs of these markets. It will be costly for the firm to utilise its long-standing communications focusing on sex, youth beauty and vanity whilst also attempting to appeal to a different consumer type. This can confuse the consumer about what the brand’s identity truly stands for. The company requires a consistent set of messages that are relevant for its loyal consumers and new demographics that once could not shop at Abercrombie as the company did not think they were cool and should not be serviced with larger-sized products. Furthermore, it is quite clear that the values once driving corporate sales successes are no longer resonating with a new generation of teens and young adults, hence it is critical to adopt a new marketing strategy if the firm is to avoid liquidation in the future. Figure 6: Key Milestones of new strategy Activity Description Jan 2015 Mar 2015 June 2015 Sept 2015 Dec 2015 Feb 2016 May 2016 Aug 2016 Nov 2016 Jan 2017 Mar 2017 June 2017 Conduct new market analyses to identify behavioural trends and prepare firm for service of this market   Revamp supply chain to fit firm with new larger sizes   Construct new marketing campaigns to target new consumers   Hire consultants in HR to assist in culture redevelopment and service improvement for new markets                         Create metrics system to measure ROI of new marketing campaign   New catalogue construction featuring small and plus-sized youths for PR event at launch.                       CEO Jeffries to appear on television media programming to promote new corporate values                       Seek new credit and loan opportunities       Contest to identify the Abercrombie & Fitch Plus Sized Consumer of the Year               It is possible, from a risk management perspective, that the business’ reputation has been severely damaged as a result of years of negative publicity regarding the firm’s values and ethical stance. There is also a risk that seeking the attention of a new type of consumer in the American market might not buy into a new positioned brand with more ethical values and beliefs about diversity and what constitutes a relevant consumer demographic. Hence, the business should first hire a change champion who will be responsible for engaging with internal staff members and executives, reinforcing the new corporate vision and collecting metrics of the success ratios and general ROI of each new strategy. This champion will serve as a social resource, one that works on resisting change, and ensures that employees and managers are embracing the concepts proposed by the external HR consultant hired to change culture and corporate attitude. The company, as a further risk mitigation effort, must regularly conduct focus groups with desired target segments to gain perspectives on how this new marketing-based approach and positioning is meeting with consumers. Real-world engagement with consumers will provide valuable qualitative metrics on buyer behaviour that will provide the underpinning for new policies and service concepts to better service loyal and new customer segments. This data will ensure that no labour-based or financially-based expenditures are being placed into inadequate or ineffective marketing communications strategies. This effort for altering market penetration strategies require both quantitative and qualitative data to make appropriate determinations about whether new campaigns are meeting with revenue improvement successes, gaining positive attitude about the A&F brand from multiple consumer segments, and whether employees are complying with new service concepts and engagement expectations with important buyers of diverse demographics. References Abercrombie. (2014). Form 10-K: Abercrombie & Fitch Co. Annual Report. 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