Abercrombie and Fitch's market presence in the United Kingdom

Abercrombie & Fitch (UK)

Abercrombie & Fitch

In order to portray a faithful image of the environment in which Abercrombie & Fitch operates it is necessary to conduct three separate assessments. First of all, it is imperative to look at the economic, political, social and technological elements which characterize the market place. Secondly, it is required to assess the company's competitors. Finally, it is important to present the power of the five competitive forces, as they were identified in 1980 by Michael Porter.

Analysis of the Macroenvironment

PEST Analysis

Political

The political environment in the United Kingdom is in many ways advantageous to economic agents. Constructed on democratic principles, the policies promote free economic action and limited governmental intervention. The policies are also advantageous to entities which promote modern applications, such as electronic commerce. It does however pose some challenges in the meaning that the current political efforts are centered on superior levels of consumer protection, generally materialized in the demand for the implementation of lower retail prices (Cabinet office, 2008). Current policies and regulations also focus on the well-being of the natural environment, with sustained efforts being made to reduce polluting emissions and deliver more eco products (Seager, 2007).

Economic

Before 2008, UK was registering one of the fastest growth rates in Western Europe. As the internationalized crisis emerged however, the country found itself in a recessionary state of the economy. The reaction came quickly from the Brown Government, which implemented a wide series of strategies to reduce the threat of the credit crunch. They for instance transformed part of the private sector into state-owned institutions; they also reduced taxation. Today, the UK retrieves most of its contributions to the state budget from the services sector, followed by industry and agriculture. The unemployment rate is of 5.6 per cent. Despite its membership to the European Union, UK has not yet adopted the euro and is not likely to do so in the near future (Central Intelligence Agency, 2009).

Socio-cultural

The population of UK is a mixture of numerous ethnicities, meaning that the country is highly developed and accepting of cultural diversity. Examples of ethnic groups common in the UK include the English, Scotts, Welsh, Irish, Indian, Caribbean, Pakistani, Bangladeshi as well as several Asian ethnicities (Center for Management Research, 2009). Most of the inhabitants of UK live in urban areas, with less than 10 per cent still living in the country side. The life expectancy at birth is of 79 years and 99 per cent of the population can read and write (Central Intelligence Agency).

Technological

From a technological standpoint, Great Britain is highly well developed. On the top of 266 countries completed by the Central Intelligence Agency, the UK is situated:

on the 9th position in terms of main telephone lines in use, with a total of 33.209 million on the 11th position relative to the number of mobile telephones, with a total of 75.565 million on the 11th position in terms of internet hosts, with a total of 9.322 million, and on the 7th position relative to the number of internet users, with a total of 48.755 million

Competitors' Analysis

Abercrombie & Fitch operates in the retail industry, the special lines segment. The sector is characterized by the presence of 40,000 companies, which operate a total of 90,000 stores. Large companies have created scale economies and as such dominate the market; small size entities compete on niche markets and often through specialized product offerings. At an international level, the industry has revealed a decrease in financial results, due to the internationalized economic crisis (Gnedash, Petrushin and Hanson).

Abercrombie & Fitch's main competitors are: The Gap, Primark and T.K. Maxx. The Gap is present within the market since 1969, meaning that their expertise in comparison to that of Abercrombie & Fitch's is reduced. Their strategy has been based on a global expansion, through which the company has come to operate in 19 countries, through a total of 3139 stores (Gnedash, Petrushin and Hanson). Their main weakness refers to the large size of the company, which materializes in a reduced flexibility and ability to adapt to new market requirements.

Primark operates solely within Europe, and their strategy is constructed around the offering of fashionable clothing, at highly competitive prices. Their strength revolves around their ability to become a market leader based on prices lower than the competition. Their weakness is pegged to the fact that they are an integrant part of the larger Associated British Foods (Primark Website, 2009). This means that their independence is reduced, as is their ability to quickly respond to emerging customer needs. The situation is extremely similar relative to T.K. Maxx, in the meaning that they are part of a larger group (the TJX Companies) and that they attract customers through the implementation of price leadership strategies (T.K. Maxx Website, 2009).

Porter's Five Forces

Threat of new entrants

The threat of new entrants is generally reduced, as the appearance of a large retailer to compete with Abercrombie & Fitch is pegged to the creation of scale economies. Smaller size retailers can easily make a presence within the market, but their competitive power is fairly reduced.

Bargaining power of buyers

The power of the buyer depends on the very nature of the shopper. If on the one hand the buyer is the final consumer, or otherwise put, the individual customer, his power is limited to inexistent. If on the other hand, the buyer is a large retail facility, such as Tesco or other supermarket chain, its bargaining power is fairly increased.

Threat of substitute products

This threat is virtually inexistent as the need for apparel characterizes the entire society and as the clothes cannot be replaced with other product.

Bargaining power of suppliers

This threat is also generically reduced. Since the apparel manufacturers sell to the final pretentious customers, they, Abercrombie & Fitch, are the ones demanding the type and quality of the merchandise they purchase from the purveyors, rather than the other way round.

Competitive rivalry

In a context in which the number of customers remains constant, but the number of retailers continues to increase, the competitive rivalry intensifies. Retailers respond to this threat by focusing on strategies that increase the loyalty of their already existent customer base (Investopedia, 2009).

2. Analysis of the Internal Environment

Activities

Abercrombie & Fitch's main activities are those of selling fashionable clothes to their customer base. They do this in both traditional stores as well as within the virtual community. Support activities include the offering of delivery services to the customers who purchase online, customer support, open communications with various categories of stakeholders, such as employees, customers, non-governmental institutions and so on, as well as several social programs that support the development of the communities in which the stores operate. In 2008 for instance, the company donated $10 million to the Nationwide Children's Hospital in Columbus to support the construction of a trauma center (Consuming PR, 2008).

Each of the primary and support activities plays its unique and important part in creating organizational value. The actual sale of clothes for instance is the direct activity which sends the finished product to the final customer and exchanges it into money. The communications with the clients generate value through the creation of feedback. In other words, the customers inform the company of their needs and desires, which are then integrated into products and transformed into revenues. The social programs generate value by enhancing the company's reputation and image, and as such providing it with the attention and interest of various categories of stakeholders. It virtually adds value by increasing the company's access to customers, human resources, financial resources and so on.

Capabilities

An accurate assessment of Abercrombie & Fitch's capabilities is difficult to conduct for the simple reason that they the quality of a private entity allows them to only make public the type of information strictly required by law, or the information which presents the company in a favorable light. Nevertheless, the available sources manage to shed some light into the core capabilities of Abercrombie & Fitch in terms of assets, competencies and innovation.

Abercrombie & Fitch possesses assets of a total value of $2.84 million; this value is however inferior to that of $2.56 registered in 2008. The current assets total up to $1.08 million, having suffered a reduction from their $1.14 value in 2008. The category of current organizational assets is organized onto six subcategories -- cash and equivalents, marketable securities, receivables, inventories, deferred income taxes and other current assets. The rest of the assets include properties and equipments, marketable securities and other assets. Their values for the years 2008 and 2009 are revealed within the table below:

Source: Abercrombie & Fitch 2009 Annual Report

In terms of competencies, these are best highlighted by the company's ability to precisely identify its target market -- such as people in the age group of 14 to 35, and then attracting them through the most compelling marketing campaigns. A core competency is also revealed in the pricing strategy, due to which the company has managed to achieve sustainable growth in revenues, has overcome the competitive forces and has maintained its customer base.

Finally, in terms of innovation, the company strives to align itself to the latest it tendencies. In response to the rapid pace of development imposed by the advancements in Information Technology, Abercrombie & Fitch has launched its website as a means for customers to shop online. The website presents the user with a multitude of features and with the possibility to customize his/her shopping activities. Aside the website however, Abercrombie & Fitch is generally criticized for its low levels of innovation. Corey Lorinsky (2008) for instance goes as far as to argue that the lack of innovation, combined with the strategy of maintain prices higher than the competition, are reducing the investors' interest in the organization.

3. SWOT Analysis

Internal Strengths

The company has a vast expertise pegged to more than a century of existence in a dynamic market; this materializes in positive results, including strong financial highlights

They secured a global presence across four countries (U.S., Canada, UK and more recently, Italy), throughout 1039 stores and they employ 80,100 dedicated staff members

They sell their products in five specific brands -- Abercrombie & Fitch, AbercrombieKids, Gilly Hicks, Holliester and RUEHL (Abercrombie & Fitch Website, 2009)

The fashion retailer has recently launched online operations through which it reaches larger audience bases and sustains higher levels of sales through the removal of the geographical and temporal barriers

Internal Weaknesses

Due to the nature of the operations conducted and the products served, Abercrombie & Fitch requires the support of highly skilled staff members, which translates into increased costs with the personnel

The company has in many instances registered lower sales volumes than other companies due to its strategic decision to implement lower levels of discounts (Gnedash, Petrushin and Hanson); nevertheless, this has often materialized in higher value of revenues, meaning then that the feature can be perceived as both weakness as well as strength

2008 has revealed reductions in several of the company's financial highlights: net sales decreased from $3.75 million in 2007 to $3.54 million in 2008; the gross profit decreased from $2.51 million in 2007 to $2.36 million in 2008; the net income registered a dramatic decrease from $475.69 million in 2007 to $272.25 million in 2008 (Abercrombie & Fitch 2009 Annual Report)

The advertising strategy is often considered unsuitable; most of Abercrombie & Fitch's advertisements feature semi-dressed people who seem to enjoy life. While this may be seen as an intriguing approach to capture the attention of their young and libertine target segment, the more traditional young customers might not relate to the company's ads