237-Abercrombie – Recovering in a Falling Price Environment

Nearly two years ago, we began a series of blogs about Abercrombie & Fitch (See Blogs HERE, HERE and HERE). Abercrombie & Fitch had been in a Leader’s Trap, where the company held prices high despite the onslaught of discounting competitors, including Aeropostale and American Eagle Outfitters. (See “Audio Tip #119: A Price Umbrella” on StrategyStreet.com.) The discounting competitors gained share while Abercrombie & Fitch lost it, sometimes in handfuls. In fact, all throughout 2008 and 2009, sales at stores opened at least a year declined.

We predicted in the original blog that Abercrombie would have to come out of its Leader’s Trap and discount its prices to keep its competitors at bay. (See “Audio Tip #118: The Leader’s Trap” on StrategyStreet.com.) In the spring of 2009, the company did begin discounting its prices to stop its share loss. These discounts gradually brought business back to the stores so that stores opened at least a year began to see sales increase rather than decrease during 2010. In fact, the company has found that, while it cut its prices by 10% or more, it still generated higher sales because the growth of unit volume made up for the price cuts.

The company was judicious in the way it went about reducing its prices. It discounted its prices in the United States to narrow the price gaps it had with its competition. On the other hand, it held its premium price position in its overseas markets. Prices for the same item of clothing are 30% to 50% higher in London and Tokyo stores than they are in the U.S. Abercrombie & Fitch’s international customers cannot take advantage of the low U.S. prices because they cannot reach the U.S. domestic internet sites of the company. Instead, international buyers searching on the internet for the company’s online stores are automatically redirected to their local company web sites of Abercrombie & Fitch.

We liken the task of pricing in a falling price environment to a game of darts. In the game of darts, the circular dart board is broken into several pie-shaped areas. The players must aim for a particular area that changes with each turn. Within each of these areas on the dart board, the more narrowly the player can target his dart, the more points he accumulates on the turn. Of course, the dart is the vehicle to hit the target area with precision. In pricing, the target area is a segment of customers. These segments reflect particular competitive situations the company faces rather than needs of the customers themselves. The darts are the components of price that the company can use to hit the target segment with precision. These price components include the set of benefits in the product, the basis of charge for the product, the list price of the product and several optional components of the price. The combination of the segment and the component of price the company uses to hit the segment limits the scope of the price reduction to those customers who absolutely require it. This precision pricing reduces the impact of the price reduction on the company’s margins. (See Improve/Pricing on StrategyStreet.com.)

Abercrombie reduced U.S. prices to meet U.S. competition. It did so by reducing some list prices and introducing new, lower priced, products to compete in the U.S. market. Overseas, however, it held its prices high because competitive conditions allowed it to do so.

Now we will wait to see whether Abercrombie regains the market share it lost to its discounting competitors in 2008 and 2009.

Posted 12/2/10

Update:

After clashing with one another and suffering grievously in the process, Abercrombie, Aeropostale, and American Eagle have diverged from one another though all face continuing intense competition.

Abercrombie went through a tough period of closing stores from 2010 through 2018. It began to rebrand itself, moving away from Its former sexualized advertising and stressing more customer service. It now operates 729 stores worldwide focusing on a market segment of 21+ years. Today it is a near luxury brand selling high quality and high-priced fashions.

Aeropostale went through bankruptcy in 2016. It was unable to move away from its pricing strategy of constant discounting. It emerged from bankruptcy after a bid from former vendors and private equity companies. By 2019 it had over 1000 worldwide stores targeting a consumer in the age range of 14 to 17.

American Eagle Outfitters today is classified as a “retro/vintage” retail chain focused on consumers around the age of 20.

All 3 companies maintain a solid online presence. Abercrombie and American Eagle enjoyed something over 13 million online visits in February 2022, with American Eagle leading Abercrombie with 5.38 pages per visit to Abercrombie’s 4.95. Aeropostale trailed both of these competitors by a wide margin.

While the 3 companies are less engaged with one another than they were 10 years ago, they all face intense competition from the newer, fast fashion competitors such as Zara, H & M and Forever 21. Each of the three companies has many alternatives to develop new products and services as they consider what their final customers expect of them as retailers. HERE is an explanation of the many concepts and examples of product innovation that are possible. You can use these innovation concepts and examples to brainstorm improvements for your own company.

10/22

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THE SOURCES FOR STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile.  We put their facts into frameworks applicable to all industries and found patterns.  Strategystreet.com describes the inductive results of these thousands of observations and their patterns.