Abercrombie and Fitch – External Analysis

Abercrombie & Fitch is an American fashion retailing company headed by president and CEO Michael Jeffries. Abercrombie & Fitch brand focuses on offering apparel that reflected the youthful lifestyle for a target audience, which was college students, designed to encourage teamwork and creativity On February 2007, A&F retailer operated 944 stores in 49 States, District of Columbia and Canada. Furthermore, A&F currently operates four other brands, which are: A&F, Abercrombie Kids, Hollister Company, and RUEHL. With the running of those four brands, the company is collectively targeting consumers of 7 through 35.

David T. Abercrombie founded the company in 1892, A&T managers promoted it as: ”The Finest Sporting Goods Store in the world”. At its early beginnings, A&F had been an outfitter of sporting goods and rugged apparel, but also a place where individuals could learn skills and get involved in the community. Since 1960, the company encountered continued financial losses until The Limited purchased it in 1988, when Michael Jeffries became president and chief executive of A&T launching the trademark slogan “casual luxury”, new style of Abercrombie.

This case highlights the strategy of Abercrombie and Fitch, an upscale sporting good retailer who has turn into a leader in trendy apparel. In order to find the key issues, both internal and external analyses will be drawn and the company business strategy will be described.

CONTEXT IDENTIFICATION

  • External analysis and Internal analysis SWOT
  • Strengths: The A&F company strengths stand, firstly, in its strong brand portfolio. The retailer managed four brands: A&F, Abercrombie, Hollister Company and Ruehl, which make them able to target a population from 7 to 35 years old.

The company has also gained a strong brand image, because of its uniqueness as a “casual luxury” brand and thanks to its stores design, which are implemented through an exciting store format, in order to communicate a consistent message in each stores. Abercrombie & Fitch achieved revenues of $2. 785 billion and its net income rose to $334 million. During the same year, the company opened 63 stores and hired 20,600 employees. From 2001 to 2005, the company Financial Performances has done nothing but increasing, in each sectors (see Exhibit 4).

That it to say, A&F achieved a strong financial performance. When looking at Exhibit 1, we can see that A&F also has a strong balanced sheet. The company has no debt/capital ratio, no debt as % of net working capital since 2002 and its Annual high-low stock price is much better than it’s competitors’.

  • Weaknesses: The company is faced with a low inventory turnover ratio, because they choose not to distribute its apparel and accessories through wholesale, license or franchise, unlike other businesses. A&T is the only responsible for creating and managing its brands. The company is implemented only in London, Milan, Canada and Tokyo abroad; thus they needs to focus on their expansion because it represents a limited geographic reach.
  • Opportunities: The fact the company is only implemented in London, Milan, Canada and Tokyo represents an opportunity to expand in new markets, by targeting other kinds of population. Making investment in infrastructures would also be an opportunity for Abercrombie to improve customer services as its staff in the stores, its merchandising and store design, in order to merger from the competitors. The company can work on developing new concepts, in order to anticipate competitor’s moves, now that their own concept of being a “casual luxury” brand is a success. A&F are not really presented online and should it would be an opportunity for the company to increase online sales.
  • Threats: The main threats the company is faced with stands in the fact that US rental rates are increasing while the US economy is slowing down. Furthermore, the competitors are numerous on this kind of market; that is way A&F must be vigilant and anticipate the competitor’s moves.
  • Macro-environment analysis – Political/ Legal: As A&F has always been a brand generating controversy, they have to pay attention at not being disrespectful toward the US laws. The company have generated a lot of scandals, like in April 2002, when they launched a line of T-shirts with matching ethnics slogans: “Wong Brothers Laundry Service Two Wongs Can Make It White”; “Wok-N-Bowl”; “Buddha Bash: Get your Buddha on the Floor” (Gamble and Thompson, 2009:414). Since, the US is a country of vigilance against discrimination, sexual crime and alcoholism, Abercrombie has to comply with the US laws, which are really strict, and stop engaging in risky practices in order to attract attention.

The company also have to prevent counterfeiting, since the US is a big country and it a lot of company have been faced with this kind of problem. – Economic: The retailer market sector is a huge market, which implies a lot of concurrence: American Eagles Outfitters (AEO), Gap (GPS), and J. Crew Group (JC) (Gamble and Thompson, 2009:406). In addition, the fashion retail market sector is a sensible one, which means that if trends or lifestyles change, the market will be affected. That is currently the case in the US due to the financial crisis occurring and it has had an impact on Abercrombie finances.

Moreover, A&F has always been on the top of the competition in its sector, but since the American economy has entered a recession, because of the financial crisis, the company has to strengthen its pricing strategy and try to maintain its status by paying careful attention to its competitors. – Social: Abercrombie benefit from an enviable target market, the teenagers, given the fact that Ablan (2003:21, cited in Gamble and Thompson, 2009:413) stated teens spent approximately $170 billion on goods and services in 2002, with one-third of that amount going toward apparel.

A&F target market have, most of the time, responded positively to their provocative campaigns, because of their strategy, which consists in getting closer to the teenagers by providing products with whom they can identify. – Technological: Continuous technological progress allowed company to sell via the Internet more easily as on the A&F website. The progress in technology also enables to extend the company database and get more and more customers by mailing the products provided through an electronic catalogue. Additionally, A&F have had the opportunity to start experimenting with radio frequency identification (RFID) technology, which permits to fight against counterfeited products.

  •  Industry Analysis Five Porter’s Forces – Power of Suppliers: Abercrombie pertains to the fashion industry retail market, where consumers have a strong power because of the fact this market is sensitive to their needs and behaviour, which can change from a moment to another. That is the reason why, Abercrombie is supposed to have to hold little power on its suppliers.

On the contrary, in this case suppliers hold little power because of the several existing factories in America and as a matter of fact, it enables Abercrombie to argue and negotiate with its suppliers in order to maintain a high price on merchandise.

– Power of Customers: Customers have always had a lot of influence over the retail industry due to their price sensitiveness. Given the fact that websites and direct mailing are increasing, it gives a stronger power to the customer since they have the opportunity to compare prices, quality and have a large panel of the same products purposed. That is to say, the existence of website purposing the same products, is a threat for fashion retailers because it can push the customer to competitors and gives a significant power to them. Customers loyalty can oblige Abercrombie to re-evaluate its prices, because if they don’t they will lose their customer’s loyalty.

– Power of Rivalry: The rivalry in this sector is intense and forces Abercrombie to continuously work on innovating and merger from the others, in order to maintain its status. The main competitors are: American Eagle Outfitters Inc. (AEOS), and Gap Inc, who are publicly held firms and J. Crew group, Inc (JC) who is a privately held firm (Gamble and Thompson, 2009:406). Those three competitors are operating on the same segment than Abercrombie and tried, by several unsuccessful strategies, to become leader, while A&F stays number one. Gap is the largest A&F’s competitor, but there are lots of other competitors on this market segment that haven’t been cited in the case. Thus, Abercrombie have to continuously work on its strategy and compare to the others, in order to stay competitive.

– Threat of new entrants: A large number of new entrants exist in the specialty apparel industry. For example, Metropark, is a West coast chain for 20- to 35-year-old shoppers, who sold True Religion and Joe’s Jeans casual apparels and plan to opened additional 50 stores by 2007. (Gamble and Thompson, 2009:418). The barriers to enter this market are low, because purchasing and producing garments costs are cheap.

– Threat of substitution: Even if consumers are ready to pay a premium price in order to have better quality and brand name produces, the threat of substitution is considered as high because of some existing companies who imitate brand name products and sell them at a lower price. For example, Gamble and Thompson, (2009:415) state that: “A&F launched an anticounterfeiting program in an effort to protect its brand and prevent low-cost manufacturers in Asian factories from making imitations of its products”.

– Industry Life Cycle: Abercrombie & Fitch, as well as the other apparel shops are situated in the maturity stage of the industry life cycle. Fashion apparel introduction on the market has been done a long time ago and because of the numerous competitors existing on this market, the industry can be considered as mature.

  • Driving Forces: Three driving forces were found as having a significant impact on the industry:

– The Power of rivalry, Threat of new entrants and threat of substitution will have a NEGATIVE impact on the industry competition.

– Technological and Legal forces will enable to prevent from counterfeiting and given the new strategies launched by Abercrombie and American authorities, this will have a POSITIVE impact on the industry.

– Power of Customers and Social aspects will have a POSITIVE impact on customer

  • Competitive intelligence analysis: The three main competitors of the company are the following: American Eagle Outfitters (AEOS) who is based in Pennsylvania and sold lower-priced casual apparel and accessories to men an woman ages 15-25 (Gamble and Thompson, 2009).

The company revenues and net incomes are increasing, and they are focusing on an new target market, between ages 24-40, by creating a new intimate apparel sub-brand. J. Crew (JC) operates 200 stores in the United States. They have a joint venture in Japan, with 45 stores. This company has suffered from a series of losses because of its inept strategy. J. Crew is the smallest competitor of A&F’s. Gap Inc is the largest competitor of A&F’s. Gap Inc, operating worldwide with 3,000 stores. Both revenues and net income are high; it is operating at high-quality level and low-priced level, which makes Gap a really strong competitor to look after.