Specialty Retail A Strategic Group Analysis Drew Kifer Ed House Kate McClain Ashley Riessen Sam Casey Introduction Abercrombie and Fitch, J. Crew, American Eagle, Gap, and Pacific Sunwear, are all competing retailers in the specialty clothing strategic group. Each company has its strengths and weaknesses compared to the overall industry. By collecting adequate data on each company, we have gained essential knowledge and understanding of this particular strategic group. We have analyzed each of the companies’ strategies and performances in order to evaluate which is most likely to have sustainable competitive advantage. The specialty clothing retail industry has many trends that influence each of these companies’ success. Of those, we have paid particular attention to discussing and analyzing the blending of sectors, the impact of online shopping trends, and the growth of international sourcing. Company Profiles Pacific Sunwear Pacific Sunwear is a shopping mall retail store whose target market is mainly teenagers and young adults. PacSun is a specialty retail store that offers many name brand clothing lines, such as Billabong and Quicksilver, that is influenced by certain sports like snowboarding, skateboarding, and surfing and the clothing brands that are related to these sports. Along with clothing for adults, the stores also offer juniors apparel and footwear. There are 954 of these mall based stores in 50 states and Puerto Rico. PacSun has a strategic competitive advantage over other retail stores in malls because they not only have their own brand name of clothing but they also offer over 70 other lines of brand name clothing targeted for the specific sports mentioned above. PacSun also listens to what their customers want and change to their needs. There are many strengths that make PacSun one of the leaders in mall retail, but they do have a few weaknesses. One of their weaknesses is that they may have expanded too much and tried to open stores that fit too many markets. Not only do they have the PacSun stores but they also have outlet stores, Demo stores, which cater to hip-hop music and the styles related targeting an age group of 16-24 year olds, as well as other formats. One Thousand Steps stores are owned by PacSun, and focus on an age group of 18-24 year olds who desire casual, fashion forward footwear and related accessories. Because the total company sales for Pacific Sunwear were down by 3.7 percent in January from a year ago, they have decided to shut down their Demo and One Thousand Steps stores so that they can focus solely on the PacSun and outlet stores. Abercrombie and Fitch According to Reuters.com, Abercrombie and Fitch co. was incorporated in 1996. They are a specialty retail store and have many other brands. Beside the Abercrombie and Fitch brand they created the ‘abercrombie’ and RUEHL brands to attract different types of consumers. Abercrombie is well known for its provocative and aggressive advertisements. These questionable advertisements create a buzz and lots of free publicity for the company. Abercrombie’s clothes have a East Coast, casual feel that are in the mid- to high price range. The clothing is aimed at the average college student. They sell a variety of products for men and women ranging from graphic t-shirts, shorts, jeans, tanks, hoodies, knit shirts, and casual pants. They also have accessories including hats, necklaces, and perfume. Reuters.com states that Abercrombie’s target market is men and women of ages ranging from 18 to 22. J Crew J Crew Group, Inc.’s primary retail focus is on upper-end preppy fashion. With a full line of khakis, jeans, and other business casual attire, the J Crew line is aimed more towards the same market as Gap than any of the other companies in our strategic group. The company operates over 300 retail stores and outlets as well as an expansive online and catalog sales base. A plan to take the company public in 1997 was shelved as J Crew fell further behind rivals Abercrombie & Fitch and American Eagle Outfitters. However, in 2006, the company launched an IPO which raised $376 million to be spent primarily on opening 25 to 35 stores per year. This turnaround is in part due to J Crew’s shift of focus to new and expanded markets. For example, the company has increased its focus on accessories, shoes, and expensive limited- edition items such as the new J Crew Wedding line. By shifting into these other items, the company has been able to separate itself from Gap in the upper-end markets. J Crew is utilizing differentiation and a heavy focus on cost management in order to achieve a competitive advantage. American Eagle American Eagle Outfitters is a mall-based clothing retailer that sells exclusively its own private label clothing. It currently operates 854 stores in all 50 states and Puerto Rico, as well as 75 additional stores in Canada. American Eagle describes its target market as 15 to 25-year-olds who are looking for laid-back and current clothing at affordable prices while maintain a high level of quality. American Eagle, Inc. has also recently launched a concept store called Martin + Osa, which targets 28 to 40-year-olds who desire refined, casual apparel, and describe their clothing as “valuable, irresistible, inspiring, authentic, and adventurous.” Martin + Osa currently operates only 19 stores. Even though this is currently a small segment of the American Eagle family, it represents a strategic look at the future of the company and its attempt to retain its customers as they transition out of the American Eagle core brand target market. Another core competency that may not be as visible to the outsider is its streamlined logistics and distribution system. In 2007, American Eagle built a brand new, 552,000 square foot warehouse in Ottawa, Kansas, more than doubling its previous warehouse capacity. Now, the company can process over 100,000 items per day to meet the needs of its in-store, online, and catalog business quite efficiently. The company is an industry leader in this category, implementing new radio frequency technologies and other state-of-the-art equipment, which allows the company to handle all of its distribution processes in-house, unlike most of its competitors. This is an important cost-saving technique in the value and distribution chain, which makes American Eagle more attractive to both shoppers and investors. Gap Inc. The Gap Incorporated group contains retail stores including Gap, Gap Kids, Old Navy, Banana Republic, Fourth and Towne and a new online shoe store called Piperlime. Each of these stores attracts a different key target market mostly based on the price of the clothing starting with Old Navy as the cost leader, followed by Gap and ending with a higher priced, more esteemed brand of Banana Republic. Gap Inc. is a publicly traded company that is a great deal larger than the other retailers in its competitive group operating 3,131 retail stores. Gap is currently going through some administrative changes at this time which includes the departure of its Chief Financial Officer, Chief Legal and Administrative Officer, and the General Manager of its Old Navy stores. Gap has also recently taken a cost initiative to further reduce costs and included in this initiative was the decision to close and discontinue the Fourth and Towne stores and lines. This new cost initiative will hopefully end a 3 year trend of steadily decreasing Gross Profit Margins. Key Performance Measures When examining the performance of companies within the specialty retail strategic group, a person needs to understand internal and external environment of the industry. Later on, we will discuss Porter’s 5 Forces for this industry which explains in detail the elements of this industries external competitive environment. One thing is for certain, differentiation, cost management, and year-over-year sales growth are the key concepts and strategic goals facing firms within this industry, as you will see in the Five Forces discussion. As a result, to understand the true strategic and financial performance of a company within the industry in relation to its competitors, examine the company’s Gross Profit Margin, Net Profit Margin, Percent Change in Sales YOY, Revenue/Employee, Net Income/Employee, and Return on Assets. Financial Leaders and Losers in Strategic Group Within the specialty retail strategic group, Gap is by far the largest firm with $15.7 Billion in revenue during fiscal 2007; however, Abercrombie & Fitch is a clear leader within these measures over the last 5 years. Abercrombie & Fitch leads the group with an average Gross Profit Margin of 66% since 2003. This figure is a clear testament to Abercrombie & Fitch’s ability to differentiate its product from the competition as well as effectively source for low-cost, two key strategic components within this industry. Furthermore, the company operates with a Net Profit Margin of 12.7%. This figure is second within the group to American Eagle (13.10%), but it is still an indicator of successful cost management. The firm also leads the group in compound annual growth in sales over the last 4 years. Abercrombie has experience average growth of about 22% compare to its closest competitor, J Crew at about 18%. Finally, Abercrombie has posted solid results within the other key measures such as NI/Employee of $26,547 in 2007 and an average ROA of 18.8% since 2003. While Abercrombie & Fitch appears to be leading the group, Pacific Sunwear appears to be falling further and further behind. Last in Gross Profit Margin (28% in 2007), Net Profit Margin (-2.1% in 2007), and ROA (5.56% average since 2003, -4% in 2007), and second to last in percent change in sales YOY (5.8% average since 2005, just 0.8% in 2007); Pacific Sunwear continues to go deeper into the downward spiral. Although Gap is outperforming Pacific Sunwear, the company has also experienced low profit margins, a downward trend in percent increase in sales YOY, and the industries second lowest NI/Employee and ROA. Trends Within the Strategic Group Online Retailing A dominant theme that can be found in specialty retailing is direct sales through online shopping. The popularity of online retailing has grown significantly over the past few years due to many factors including the accessibility of the internet, the attractiveness of retailer’s websites and the convenience of online shopping. According to a recent study conducted by the Nielsen Company, among all internet users in the United States, in the previous month, 41% had purchased clothing, shoes or accessory items. Due to this significant growth, retailers such as the ones in our strategic group are spending more money and resources on effective and easy to use websites. Consumers are also more comfortable shopping online since payment methods are guaranteed and secure by using either a pay pal website or using their favorite store’s credit card. Customers feel at ease making purchases from the comfort of their own home knowing that they can get the exact size or color item and if there is a problem with the fit or they are just unhappy with their purchase, the items can be returned to either the physical store or through the e-commerce site. This trend may ultimately result in a change in the industry’s value chain, as can be seen in most industries that have seen a dramatic shift from brick-and- mortar business to e-commerce. Blurring of Sectors A second theme that can be seen in specialty retail stores is the blurring of the retail sectors. It seems that retail stores are trying to become more of a one stop shop and therefore are trying to tweak and add to their lines to attract new customers to the stores. For example, American Eagle now offers a line of pajamas and “dorm wear” along with selling make up and fragrances. Stores including American Eagle, Gap, and PacSun are also now selling shoes and other footwear as well. Gap has even included a maternity line to their collection along with teaming up with new artists to create songs and music videos inspired by colors. J Crew has even added wedding dresses to its line. It seems as if these companies are moving from a smaller specialty niche market to a more differentiated product line and customer base. While it is good for a company to be differentiated, they need to be careful that they do not lead into the blurring of their brand’s identity. When a company opens many different stores and product lines to differentiate itself, it can lead the customer to be confused. What does this company stand for and what does their image do for the customer? The blurring of brand identity is really important for the retail industry to watch out for because of how hard they try to be diversified. International Sourcing A common theme that can be found among most self-described low-cost, high-fashion merchants is its international sourcing. This is one technique that companies use in order to keep costs low. However, as firms place more and more of their orders from vendors based in other countries (American Eagle stated that it is safe to say that nearly 100% of their merchandise comes from foreign vendors), there also lies the risk that something that is out of a merchant’s control can happen and negatively affect their business or their sector. In the much- publicized case regarding Mattel and lead paint, it was a third-party, foreign vendor who was at fault for using lead paint on the toys, but Mattel ended up taking the brunt of the scandal because at the end of the day, their logo was the one stamped on the toy. A more likely instance in this particular strategic group is the possibility of the negative publicity of poor working conditions that those third party vendors may employ. Furthermore, many companies in this strategic group rely on a small number of foreign vendors, and that if one of those vendors experiences a major problem, the effects of that problem will be felt strongly in the apparel retailer as well, even if those forces are entirely out of the retailer’s control. Finally, the political and economic conditions of some foreign countries are constantly in turmoil, so any significant change in the economic or political forces of the home country of one of those vendors may be detrimental to some or all of the companies in this strategic group. Expanding and Retrenching Companies Expanding and Retrenching Companies It is interesting that some companies in this strategic group are expanding, while others are retrenching. Some are expanding in terms of age demographics, while others are expanding in their product mix. Other companies are retrenching in that they have discontinued parts of their companies that focused on other lifestyle segmentations. For example, both Gap and American Eagle have expanded their product mix. Gap has introduced PiperLime, an online-only store offering handbags and shoes, while American Eagle has introduced a full line of young women's underwear. American Eagle has also focused on growing their age segment in their recent introduction of Martin + Osa, catering to 25-40 year olds, and 77kids, catering to 5-15 year olds, thereby expanding their overall target market from ten to thirty-five years. J.Crew has also expanded into the wedding segment. On the other hand, Pac Sun has recently retrenched from its venture into the urban- alternative clothing line, and also ended their efforts in the shoe business as well. Even though Gap has introduced a new product line in shoes and handbags, they have closed their Fourth and Towne segment, which targeted forty and up aged mature women. This behavior within the strategic group could be caused by fluctuations in the economy that happened to occur at different times of each new line’s introduction, but is probably more attributed to each company’s level of research and capability of introducing a new segment. Porter’s Five Forces When looking at the five forces model for the special retail industry, you can see that the rivalry among existing competitors is extremely competitive. This is due to different strategies that are used by each firm to compete for the market share. Firms in the industry must have a competitive advantage and use their advantages to gain market share. The firms rely heavily on brand recognition, specialization, and differentiation to compete and maintain customer loyalty. The next force in the model is threat of new entrants. In the specialty retail industry the threat of new entrants is low because this industry is made up of many large, established firms with high competition. It is hard for a new firm to come into the industry with a brand that is not established and recognized because customers want what is popular and well known. The third force is threat of substitute products, which is moderate for the specialty retail industry. Because the firms rely on their brand recognition, which can only be found in select locations, they have to focus on customer royalty. Also consumers expect to purchase quality products for a reasonable price, so the firms have pressure to produce products that are of good quality to keep their customers happy. The bargaining power of consumers in the specialty retail industry is also moderate because there are different levels of price sensitivity for this industries customers. Firms focus on differentiation because consumers are willing to pay a higher price for merchandise if it is original and different from what other stores are selling. The less differentiated a firms products are, the more price sensitive its customers will be. Also having few substitute products, which relates to differentiation, will secure more consumers because they will have few alternatives. Lastly, the bargaining power of suppliers is low for the industry because many firms exist in the industry. The bargaining power shifts from the suppliers to the buyers and they are able to receive the prices they want from the suppliers. In the long run, the large firms in the industry have a greater chance of survival and in return have higher margins or are able to ask a lower price for their products. Company Strategy Patterns Each company in this strategic group tends to focus on differentiation. The level to which their appeal is focused or broad is one of the main aspects that sets one company’s strategy apart from the others. For example, Pacific Sunwear focuses on differentiation because they not only use their proprietary brand, but also 83 other recognized brands. They have entered a niche market that is targeted to a surfer/boarding style of clothing and an age market of 16-24. The brand recognition and brand loyalty are what Pacific Sunwear concentrates on to be successful. The other company that could be considered focused differentiation is J.Crew, as their products are focused on a smaller target market, and have developed their brand identity to mesh with the lifestyles of that market. The two companies that employ a broad differentiation strategy are Abercrombie and Fitch, as well as Gap. Abercrombie and Fitch provides higher quality, higher priced items and focus mainly on clothing. Most consumers are willing to pay extra for the Abercrombie name and style. Abercrombie’s major competitive advantage is its brand name. Abercrombie is a major status symbol in many high schools and colleges in America because of its higher price and fashionable look. Gap’s strategy is somewhere in between being an overall cost leader and a broad market differentiator. This is due to the large variety of clothes that Gap offers including women, men, children’s, juniors, baby and accessories. The three companies that Gap owns could easily have three different strategies: Old Navy as the overall cost leadership, Gap as the broad market differentiator, and Banana Republic as the Focused Differentiator. However, the mean value of these three stores leaves Gap as a corporation with somewhat of broad market differentiation strategy. The last company, American Eagle, is positioned as a Best Cost provider, bordering on broad differentiation to appeal to 15-25-year-olds who are both fashion and budget conscious. AE focuses on trends in style and fashion, but keeps relatively low opening price points, compared to places such as Abercrombie and J.Crew. Key Takeaways After researching the specialty retail strategic group, to be hired into one of those companies would be beneficial to the company. After analyzing financial ratios and company’s financial statements, learning about each company’s strategic environment, and understanding the current economic and market positions, we would have the knowledge necessary to make informed decisions about the company in its current situations. Also, knowledgeable employees sell more or train their employees to sell more products because they are able to educate the customer on the products or company. Even though the companies in our strategic group were large national chains, one suggestion would to be to implement an open book policy with regular, hourly sales associates. Even if the only numbers shared are specific to that store, if the employees are aware of goals and current standing of the store and company, they will strive to meet the sales goals they understand.
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