Abercrombie and Fitch - External Analysis and Internal 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.

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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. 85 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.
• Strategic map Operating revenues in 2005 (Millions) 16,267 2,785 2,309 850 851 3000 Numbers of shops in the world (hundreds) When looking at the map, we can see that the main competitor of Abercrombie is Gap because of its positioning.

Gap is clearly differentiated from the other company, because of its numerous stores worldwide and its operating revenues, which are very high levelled.
• Organizational structure and culture: Michael Jeffries runs Abercrombie Company since 1992; he is president and chief executive of A&F. The company slogan is “trend transcends age” and as a matter of fact A&F goal is to fits the need of a cool, attractive and fashion-conscious target audience (Gamble and Thompson, 2009). The structure of the company is built on the management of four brands at the same time, which are: A&F, Abercrombie, Hollister Company and Ruehl.

Analysis of the business-level strategy of the firm
• Business strategy of the firm PRIMARY ACTIVITIES Following Porter (1985) description, the primary activities of the company are presented as such: Inbound logistics A&F purchase their merchandise from a large panel of factories and suppliers around the world. In effect, the company have never sourced more than 50% of its apparel from a single factory or supplier. They act this way in order to get merchandise at a reduced cost, in order to spend more money on its design services.

A&F has centralized its design services in a unique headquarter, in order to get a more efficient logistic process. Operations The distribution centre of the company is also situated in this unique headquarter. A&F sells its products only in its stores and via its website. The company does not act like the other company, they do not want to use wholesaling, and licensing or franchising to distribute the product they offer. Outbound logistics All the products of the industry are assembles, inspected and designed in its Ohio headquarters.

Then, the products are distributed to stores via contact carriers (Gamble and Thompson, 2009). This process permits to lower up the cost of the process. Marketing and sales A&F core corporate values are “nature, friendships and having fun” (Gamble and Thompson, 2009). As a matter of fact, they invest a lot of money in design. One of their main marketing strategy remains on the design of their stores. A&F stores are reflecting the values they want to attract the consumers with. It means that, each store is designed one precise model, each stores are unique and implemented in an “exciting format” (Gamble and Thompson, 2009).

A&F put emphasis on communicating their specific message around the world, by building “perfect” stores. Also the A&F website has been created in away it matches the best possible with the feel and aura of its stores (Gamble and Thompson, 2009). A&F try to launch at least two new items in its stores each week, in order to be competitive and develop customer loyalty to the brand, by demonstrating, they care about customer’s needs and are different from the other. SUPPORT ACTIVITIES Following Porter (1985) description, the support activities of the company are presented as such: Procurement

Porte (1985) states: “An efficient procurement department should be able to obtain the highest quality goods at the lowest prices”. In effect, A&F procurement department should be considered as an efficient one, as aid previously A&F have centralized its design and development process in a unique headquarter, lowering work force coasts and improving efficiency. Human Resource Management “Human resources are increasingly becoming an important way of attaining sustainable competitive advantage” (Porter, 1985). A&F busiest seasons are spring and fall, when they hire extra staff, keeping control over the situation.

Human resources management at A&T is attentively managed; everything is done to make the staff feeling comfortable and confident. A&F brand representatives have to adhere to the Abercrombie dress code. Technology Development A&F is developing a managing-in-training program for seniors and graduates (Gamble and Thompson, 2009). A&F began experimenting with radio frequency identification technology (RFID), which is a really efficient development since it prevents from thief and counterfeiting. |Key success factor/ Strength|ABERCROMBIE |AEOS |GAP |J.

CREW GROUP | |measure | | | | | | |Rating/ Score |Rating/Score |Rating/Score |Rating/Score | |Quality/Product performances| | | | | |Rating: 0,2 |8/1,6 |7/1,4 |9/1,8 |6/1,2 | |Image | 6/1,2 | 8/1,6 9/1,8 |7/1,4 | |Rating: 0,2 | | | | | |New product innovation | | | | | |capability |8/1,6 |6/1,8 |9/2,7 |4/1,2 | |Rating: 0,3 | | | | | |Manufacturing capabilities | | | | | |Rating: 0,2 |8/1,6 |5/1 |7/1,4 |5/1 | |Customer services | | | | | |capabilities: 0,1 |8/0,8 |6/0,6 |8/0,8 |6/0,6 | |OVERALL RATING/SCORE | | | | | | |38/6,8 |32/6,4 |42/8,5 |28/5,4 | The overall strongest competitor is: GAP The overall weakest competitor is: J. Crew Group
• Key elements and specific problem of the industry After a precise analysis of the A&F case, it seems obvious that the three key elements of the company are: -To anticipate competitors moves In order to anticipate competitor moves, A&F have to continuously compare its industry to the competitors, in order to define where and when the company must take decision and employ a new strategy.

Acting this way, A&F will be able to figure out what kind of strategy they have to adopt in order to undertake those of the competitors. To improve customer service: A&F must go on training employees and make sure them feel confident in their company. Keeping the dress code outlined in Abercrombie Associate’s handbook is imperative because it permits to merger from the competitors, by showing the authenticity of the brand. This also enables to attract clients by being faced with effective and well-qualified employees. Furthermore, A&F must invest more in RFID because it is an easy and simple way to generates more business advantage in their company, as it figures out what are the real needs of customers by making quick and simple inventories of the merchandise. -To maintain consumer loyalty

A&F have to make sure they comply with customer needs by putting links on the website or sending direct mails to its database customers. It will enable the company to get in touch with its customers, but also to gain information and get an accurate perception of customers needs.
• Recommendations First of all, A&F must work on their marketing campaign and stop doing controversial campaign, because nowadays it hasn’t the same impact than it has at the A&F early beginnings. Even if they have became famous acting this way, the period is not the same and Abercrombie is enough experimented to try another way of advertise its industry. Secondly, A&F should continuously improve their website design, since it is the way to attract more and more clients.

The actual website of the company is not enough exiting and fashion-conscious as the brand pretends to be. Thirdly, A&F should work on its expanding abroad. They are not really present in the world and shall work on this point, because they could target more customers. Even if the brand reputation is strong, it would be an opportunity to open more stores in big capitals, as in Amsterdam or Paris, where there are lots of teenagers. Fourthly, organising featured events could help the company to obtain more customer loyalty, because young customers are attracted by some kinds of events as: concerts, parties and would be pleased to join A&F events. It will permit to broaden the “existing” aspects Abercrombie wants to show to the client.

Fifthly, A&F should invest in FCID. This new system is the way to increase customer services and maintain consumers loyalty because it enables to fight against theft and counterfeits goods, which are too much present nowadays. To conclude, FCID would bring a very competitive advantage to A&F if they choose to apply this system to the four brand owned.

References: Porter, M. E. (1985), Competitive Advantage: Creating and Sustaining Superior Performance, New York: Free Press. Gamble, J. , Thompson A. , Jr. (2009) Essentials of Strategic Management: The Quest for Competitive Advantage, New York: Mac Graw-Hill Irwin ———————– GAP A&F AEOS