76-An Industry Leader Stumbles

Companies must clearly define the business in which they compete. When management loses sight of its target customers, products, or competitors, strategic mistakes often follow.

Chico’s FAS provides an instructive example. The company eventually established three distinct brands serving different customer segments, yet simply separating businesses does not guarantee success. Attractive strategy requires not only a clear definition of the business but also participation in markets with sufficient growth, profitability, and competitive opportunity.

This blog examines how Chico’s lost focus on its core customer, how it later established separate businesses, and why those businesses have still struggled to deliver attractive returns.

Posted 2/2/09

For years, Chico’s FAS grew rapidly by selling attractively priced, colorful clothes, to baby-boomer women. But the company began to stumble in 2006. Its growth slowed and its core customers migrated to other companies’ offerings. The company’s costs rose faster than its revenues, squeezing margins.

The company stumbled by chasing after customers of other competitors, especially younger women. From the standpoint of their original core customers, baby-boomer women, Chico’s failed to deliver the products that they had come to expect from Chico’s. (See the Perspective, “Reliability: The Hard Road to Sustainable Advantage” on StrategyStreet.com.) In this case, the failure was a failure in Reliability, one of the key measures of the Customer Buying Hierarchy.

Since its failure started as recently as 2006, there is a good chance that Chico’s can recover from its missteps. The company searched for new customers at the expense of its core customers and threw the baby out with the bath water. (See the Perspective, “Convenience: Much Tougher than it Looks” on StrategyStreet.com.) Other companies have succeeded in search of new customers by ensuring that their core customers are well provided for before the search begins, and while it progresses.

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Update 2022:

Chicos seems to have continued its ambivalence about its core customer. The company itself claims Chicos targets women of relatively high income over 35 years of age. The growing demographic of the aging baby boomers has pushed the chain along. Chicos designs its clothes for plumper figures and relaxed but not flamboyant tastes. Chicos competitors include Talbots, ANN Inc. and Macy’s, each stronger with older demographics. Recently, industry analysts have wondered whether Chicos now appeals to younger consumers. They cite recent advertising focus and quality fabrics that contrast with the fast fashion embraced prior to Covid. In 2018, Chicos joined the crowded lingerie market with a new online only intimates collection for women ages 25 to 40.

The company is struggling. It closed 40 stores in 2020 and planned to close another 13 to 16% of its remaining 1300 locations over the following 3 years. In 2022, it appears to have returned to some level of profitability.

In our system, it appears that Chicos hasn’t really defined the business that it is in. A business is a set of specific customers, products and competitors. Whenever any two of these change, the business changes and you need to develop a separate strategy for each business. As Chicos wandered from its original core customers, it actually changed businesses because all three of the defining components changed: core customers, products that appeal to those customers, and competitors for those core customers. See HERE for more explanation.  Chicos would need a separate strategy for each separate business it would choose to enter.

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Update 09/09/26

Since the original article was written, Chico’s FAS has clarified its portfolio around three distinct brands: Chico’s, White House Black Market (WHBM), and Soma. While the company now appears to recognize these as separate businesses, the challenge has shifted from business definition to business attractiveness.

Chico’s operates in the missy and petite specialty apparel category, focusing primarily on women approximately 55 to 75 years old. Its principal competitors include Talbots, J.Jill, and department stores. WHBM competes in the workwear and occasion-apparel category for higher-income women age 35 and older, facing competitors such as Ann Taylor, Banana Republic, and Nordstrom private-label offerings. Soma serves women 35 and older in the comfort-focused intimates and sleepwear category.

Each of these categories has experienced store rationalization during the last five years as demand has shifted online and category growth has slowed. Chico’s store count has generally declined at a pace similar to the broader category. These are not especially attractive markets in which to compete.

Within their respective categories, the three Chico’s brands generally occupy follower positions rather than leadership positions. In the Chico’s category, J.Jill has demonstrated stronger growth and profitability in recent years. Chico’s has gained some share largely as traditional department stores have weakened. WHBM remains a strong competitor but operates in a mature and highly competitive category where growth opportunities are limited. In the intimates category, Aerie has established a stronger growth and profitability profile than Soma. Soma has nevertheless benefited from weakness among some traditional competitors, including Victoria’s Secret.

Chico’s has succeeded in creating distinct positions for its three brands. The challenge is not one of brand identity but of industry attractiveness. Each brand competes in a mature, highly competitive category with limited growth prospects and modest margin potential. As a result, none of the three businesses offers the combination of market growth, strong margins, and competitive advantage that typically characterizes the most attractive strategic opportunities.

From a StrategyStreet perspective, Chico’s no longer appears confused about the businesses in which it competes. Rather, it faces a different problem: competing effectively in businesses where category leaders capture most of the available economic rewards and where the underlying markets offer limited growth.

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