American Apparel Vertically Integrated into Downtown LA - Identification of Strategic Issues - Case Study Example

CASE STUDY ANALYSIS - Case 16 American Apparel: Vertically Integrated in Downtown LA’ Name Institution Executive Summary American Apparel deals in basic apparel and branded fashion. This company implements vertical integration in manufacturing, distribution and retail sectors handling its branded products. With a desire to expand, American Apparel launched its e-commerce website. American Apparel seeks to tap into the “Young Achievers” metropolitan market segment. This group of consumers is tech-savvy, independent minded, fashion conscious, and well-educated. The company’s main marketing objectives are to build and improve its brand perception amongst the youthful target market. This aim is underpinned in its campaigns that focus on social consciousness as a strategy to achieve increased market penetration. The industry strengths for American Apparel include its strong supplier relationships, rapid store expansion, steady company leadership, high garment quality, sweatshop fee products, and shorter product distribution time. The company’s weaknesses include high fixed costs for doing business, engagement in provocative advertisement, negative brand perception and financial restrictions. Contents Contents 3 Introduction 4 Identification of Strategic Issues and Problems 5 Competition 7 Analysis and Evaluation 8 Recommendations 10 Conclusion 11 References 13 Introduction American Apparel is a company in dealing in basic apparel and branded fashion. This company has managed to achieve vertical integration in manufacturing, distribution and retail sectors handling its branded products. The company was started in Los Angeles as a Wholesale Distributor back in the year 1998. By 2003, it started the slow vertical integration by opening one of its early retail stores in Los Angeles. With a desire to expand, American Apparel launched its e-commerce website and proceeded to open more stores across Europe, Asia, Latin America, Canada, and Australia. This expansion drive also met some serious business challenges. It made its highest net loss in 2011, a value never seen in the company’s financial performance since inception. The interesting business aspect about American Apparels is that it has managed to entrench strong vertical integration in its business operations. It handles all its business operations in a factory situated in Downtown Los Angeles. The company brands all its apparel and fashion products with the phrase “MADE IN THE USA”. These products are done in high quality fabric, earning it a top market approval. It has also established a highly ranked sewing facility that has a high business value and size as compared to other operators in the Western countries. The facility manages to produce 53 million garments annually. The other merit areas that make American Apparel score highly among business peers is that it offers competitive remuneration to employees in America, with an average of $12 dollar per worker (Grant 2012, 663). The production is also done in an environmentally friendly approach, as it uses all the residues of fabrics that come from its production facility. American Apparel has about 285 stores around the world. These are spread across 20 countries, especially in metropolitan city centers. It has opened 10 localized store fronts (Grant 2012, 655). Its wholesale distribution division is headquartered at Los Angeles. This division serves a value chain of over 10000 specialty shops and screen printers. American Apparel seeks to tap into the “Young Achievers” metropolitan market segment by developing products that are culturally sophisticated to match their taste. This particular group of consumers is tech-savvy, independent minded, fashion conscious, well-educated with an average income of $50000 income per year (Grant 2012, 656). They love high quality fashion that is well designed and can access them in physical shops or through online e-commerce platforms (Entwistle 2000, 224). Identification of Strategic Issues and Problems Some of the problems the company has been facing in recent years include persistent lack of cash flow, declining annual profits, relative difficulty in servicing of past debts and a latent negative brand perception that has been growing over the years. These issues explain the company’s focus to increase brand awareness and set positive brand recognition. It specifically positions the product as one meant to serve the youthful urbanite market niche. The company has been organizing focus groups and conducting market research against its existing and prospective consumers as a way of understanding the consumer behavior in relation to marketing trends. The objective of these extensive marketing campaigns has been to position American Apparel as a retail brand that focuses on premier fashion, especially for the youthful urbanite (Entwistle 2000, 217). The company has been striving to comply with the established legal requirements such as the National Minimum Wage Act, the Employment Rights Act, and the Working Time Regulations. It currently pays an average sewer some $25,000 annually (Hiltzik 2006, 1). It has been on a steady recovery from the recession that happened in 2008. This recession saw the company face a decline in its share prices by a great margin (from $15.8 to $1.55 in a year) (Grant 2012, 661). In taking social responsibilities, the company understands the importance that its target consumers attach to corporate social responsibility. To address this need, it has been contributing towards registered charitable organizations. It has also benefitted immensely from the ease of access to product information through social media. Most of its retail shops have been undergoing direct replacements through e-commerce (McClendon, 2010, 17). The competition in the US Apparel industry is based on factors such as store location, fashion design, customer service, quality, brand image, marketing, and product price. These factors are modeled into the different apparel products that target varied markets according to their function. Most of the business operations are centralized, giving way for a vertically integrated business that handles fashion designing, distributing, photography, cutting, sewing, and marketing. It has since sought to build its competencies around its business processes in these areas to edge out competition. American Apparel developed an unconventional business model in the garment industry. Most players in the garment industry in the US prefer to outsource labor to other countries. However, American Apparel built a vertically integrated plan that housed both the company’s headquarters and its manufacturing factories under one roof in Los Angeles (Grant 2012, 658). It stood out for paying competitive rates of wages and benefits to its employees. All its business facets were vertically integrated to achieve high production speed and maximum business efficiency. Its growth since inception saw the company extend its operations to include wholesale and retail distribution. The company has been experiencing growing sales, with the increased marketing efforts led by its founder. It engages in much brand imaging to create a differentiated line of apparels. The company managed to break even for the first time in the year 2000. It has since been growing in size and employee numbers. Its vertical integration was a strategy to ensure that the company saved costs, and served an alternative market segment for fashionable urban wear (Bugg 2009, 11). Its target market was the youthful urbanites that were socially conscious. Competition American Apparel has been in direct competition with corporates making footwear and clothing. Its “sweatshop free” products competed directly with similar clothing from SweatX (Smestad 2009, 155). This company closed shop in 2004. Other direct competitors include the No Sweat in Massachusetts. It sought to grow so that it could compete with other industry giants like Old Navy and Gap, but this has been elusive despite the company’s growth in sales over the years. There rivals have more than 3000 stores worldwide that could earn it $16 billion back in 2004. Its marketing strategy has been involving the running of ads in urban weeklies such as the L.A Weekly and the New York Village voice. It also relies on lifestyle magazines like Vice to expand into new markets where it has opened its retail stores. It used photographs of random people wearing its outfits as a marketing approach, contrary to the conventional approach that uses models (Barthes, 517). These were chosen from American Apparel employees whose photos aimed to describe natural female beauty that appeared genuine to the target market. These marketing campaigns contributed to explosive market growth for American Apparel (Grant 2012, 657). The product marketing mix for American Apparel Inc. include cosmetic goods, dresses, jackets, denim, shirts, accessories, basics, shoes, sweaters, and bags (Brunel 2002, 34). It relies on product designs that prioritize the depiction of vintage imagery and iconic retro. Most of its promotion strategies focus on utilizing digital, outdoor and print advertisements to boost retail and online sales (Story 2008, 1). The company’s pricing strategy has always aimed to support acquisition, and retention of a growing consumer market. Analysis and Evaluation The company produces its garment products in a centralized headquarter and manufacturing plant in Los Angeles. Its business segments include a wholesale distribution division in the US, retail distribution division in the US and Canada, and an international e-commerce distribution segment. It’s target market is mainly the urbanite youth with a culture for trendy fashion (Bugg 2009, 22). The company connects to this market segment through branding that depicts sexual imagery, social consciousness, quality products, reduced visible branding and reasonable garment pricing (Grant 2012, 659). The company engages in extensive customer service, and heavily depends on technology to drive its growth. Most of its attire are designed as high quality casual wear. Its focus on quality has led to progressive thinking that contributes to its continued market growth. It also allows the company to plan and forecast its future growth in sales. The company has also been keen on applying a marketing strategy for penetrating new target markets, retaining its customers in existing markets, improving its garment product quality , growing a positive public image, and improving its operational standards (Shesky 2008, 12). Its handmade clothing depicts high standards of excellence for quality lasting clothing. It currently sets the garment and apparels industry standards through environmental responsibility programs, social responsibility programs, sustainability programs and direct community involvement. The company’s main marketing objectives are to build and improve its brand perception amongst the youthful target market. This aim is underpinned in its campaigns that focus on social consciousness as a strategy to achieve increased market penetration. One step in this area is the company’s move to introduce plus size clothing line to serve the big bodied target market. The company has also been persistently increasing its marketing activities at the local store level (Grant 2012, 662). There has been an increased demographic shift in the target market for American Apparel. Over the years, there has been an increase in the overall US population by about 10%. Adults aged between 25 years and 44 years have increased by 8%. These demographic changes happen as the baby boomer generation is increasingly being replaced by the younger millennial workforce. The general market trend also shows that more youthful urbanite consumers in America prefer shopping in specialty clothing stores. Industry wide performance shows that the general earnings by clothing stores in America grew by about 10% from 2005-2010, while those in conventional departments reduced by 14%. There is also an anticipation of increased competition from international brands in the near future. The industry strengths for American Apparel include its strong supplier relationships, rapid store expansion, steady company leadership, high garment quality, sweatshop fee products, and shorter product distribution time. The company’s weaknesses include its high fixed costs for doing business, its engagement in provocative advertisement, negative brand perception and financial restrictions in its pursuit of business (Grant 2012, 662). Despite these weaknesses, the company has several opportunities for growth such as its e-commerce platform, its campaigns for prune line offerings, an effort to change brand perception through socially conscious advertisements, and a focus on international expansion, establishment of a market niche (Hill 2010, 25). It also has an opportunity to improve its processes in inventory management, and also improve its financial margins. American Apparel faces direct business threats occasioned by stringent government regulations, tough economic market trends, increased global competition, competitors’ endorsements by celebrities, and increased cost of cotton as the main raw material. Recommendations American Apparel’s financial objectives include an aim to secure a double digit market growth rate in every subsequent year of business. It also strives to reduce its operating expenses through adoption of effective business processes. The company should also strategize on how to reach and penetrate the progressive and full-figured target market segments. Another important strategy is to combine the company’s core competencies that emphasize product quality into its advertising channels. The company can also create brand ambassadors to push its products among the youthful urbanite market. Its vertical integration allows the company to position itself as a business model that focuses on value development for the youthful urbanite market and the community that it serves. Its products should provide sweat free alternative for quality clothing. It should continue to focus on production of quality apparel products as a key corporate strategy. The company should also consider building an updated merchandise mix. The inclusion of the plus-size line is a good step towards expanding its merchandise mix. It is also important that American Apparel discontinues those product lines that have proven unprofitable. It should establish market hubs for urban renewal within university and college towns. This should be augmented with an emphasis to grow its e-commerce segment. The company should also consider building its stores in locations that have an inviting atmosphere. The company should also focus in highlighting its fashion pieces in its advertisement campaigns, not the models that display them. It should also consider pursuing the “Back to Basics” campaign to encourage the youthful target to buy its high quality, trendy, fashionable and versatile garment products. It can use digital methods to revamp its product image (Grant 2012, 662). Conclusion Vertical integration means that the company achieves a faster product turnover. American Apparel needs a contingency plan to help it counter risks and difficulties that emerge in the course of business. There is a real possibility that the company’s competitors would produce clone products and sell them at lower prices, thereby reducing the profit earnings for the company. When the plus-size clothing line becomes unprofitable, it would mean that the segment would be maintained and run with a financial burden incurred in terms of labor expenses. This would be done for the sole reason of maintaining the established urbanite plus-size market. When pursuing pricing, the company should strive to maintain its premium prices as a strategy to communicate value to its target market. Premium prices would also ensure that the company creates maximum profit from its products, and this would go a long way in increasing the company’s liquidity. It can also consider planning for special events and slightly adjusting its prices to pull more clients. Through public relations, American Apparel stands a chance of appealing to consumers through social consciousness, customer engagement, and promotion of a positive brand image. References Barthes, R., Fashion Photography. Fashion Theory: A Reader, pp.517-519. Brunel, C., 2002. The T-shirt book. Editions Assouline. Bugg, J., 2009. Fashion at the Interface: Designer—Wearer—Viewer.Fashion Practice, 1(1), pp.9-31. Entwistle, J., 2000. The Fashion Industry. The Fashioned Body: Fashion, Dress and Modern Social Theory, pp.208-236. Grant, R M. 2012. Case 16: American Apparel In R. M. Grant, Contemporary Strategy Analysis Text and Cases, 8th Edition, (655 – 667). New York, NY: Wiley Publishing. Hiltzik, M., 2006. Employer is for Open US Door. Los Angeles Times. Hill, A., 2010. The Rise and Fall of American Apparel. The Guardian, 25. McClendon, E.C., 2010. THE POLITICAL POWER OF THE ONLINE SHOP: AMERICAN APPAREL’S VIRTUAL CAMPAIGN FOR IMMIGRATION REFORM. Shesky, L., 2008. The New Meaning of Marketing: How Branding Changed the Fashion Industry. Smestad, L., 2009. The sweatshop, child labor, and exploitation issues in the garment industry. Fashion Practice, 1(2), pp.147-162. Story, L., 2008. Politics Wrapped in a Clothing Ad. The New York Times. Read More