A High End Retailer in a Leader’s Trap

In a Leader’s Trap, an established industry competitor maintains a price umbrella and gives up market share to a discounting competitor. (See the Perspective, “The Leader’s Trap” on StrategyStreet.com.) The company in a Leader’s Trap believes that customers will stay loyal to the established company’s brand name by paying a premium for its product. Over time, the company in the Leader’s Trap not only loses share, but also sees its prices eventually fall to a level near the price established by the discounting competitor. Abercrombie & Fitch is now in a Leader’s Trap.

The company is refusing to discount its latest clothing lines, even though competitors are discounting their lines. Both American Eagle Outfitters and Aeropostale are offering discounts on their current lines. Not Abercrombie.

Abercrombie is a higher-end retailer, someone we call a Performance Leader competitor. American Eagle and Aeropostale aim for somewhat lower price points. Nonetheless, even though the companies compete at different price points, significant discounting in a marketplace affects all competitors. If an industry Standard Leader, who prices at average for the industry, or a Price Leader, who prices at the low end of the market, begin offering new significant discounts, even Performance Leaders have to follow or be willing to give up market share. (See the Symptom and Implication, “Most competitors are offering low prices after a period where leaders held prices high” on StrategyStreet.com.)

So far Abercrombie has refused to go along with discounts. Its market share is also falling. In December, its same-store sales fell 24%. Aeropostale’s same-store sales rose 12% at the same time. Eventually, Abercrombie will have to reduce its prices to stay competitive.

Posted 2/12/09