Abercrombie & Fitch's competitive environment 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.

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

External Opportunities

Since Abercrombie & Fitch only operates in the four countries, a major opportunity is constituted by the possibility to expand to other global regions. This opportunity is supported by several features, such as the growing forces of globalization, the increase in income per capita at a global level, which will materialize in an increased access to the more expensive Abercrombie & Fitch products, but also the origin country, which is considered a fashion capital

Abercrombie & Fitch has often been criticized for its reduced interest in innovation. The modern day society however presents them with the opportunity to easily use innovative technologies and then reap off the benefits of investments, such as an increased operational efficiency

External Threats

The UK government strives to regulate the market in the advantage of a lower retail price for the consumer, which means that Abercrombie & Fitch will have to launch strategies of cost reductions

Intense pressure from social and regulatory fields to deliver environmentally friendly products, demand which could significantly increase operational costs and complexity

The customers are well educated and highly pretentious, meaning that serving their needs and ensuring revenue sustainability is often a challenging task for the UK offices

References:

Gnedash, O., Petrushin, a., Hanson, B., Abercrombie & Fitch Co., Dickinson State University, http://www2.dsu.nodak.edu/users/rbutz/E-Commerce/PowerPoint/S08/Brent_ANF.ppt last accessed on December 2, 2009

Lorinsky, C., 2008, High Prices and Lack of Innovation Kill Abercrombie & Fitch, Business Insider, http://www.businessinsider.com/2008/9/high-prices-and-lack-of-innovation-kill-abercrombie-fitch-anf- last accessed on December 3, 2009

Porter, M., 1980, Competitive Strategy, Free Press

Seager, a., September 3, 2007, Political Climate is Changing Faster than Our Prime Minister, the Guardian

2008, Abercrombie & Fitch's CRS Attempt, Consuming PR, http://consumingpr.com/2008/04/22/abercrombie-fitchs-csr-attempt/#comments last accessed on December 3, 2009

2008, UK Summary, Cabinet Office, http://archive.cabinetoffice.gov.uk/e-envoy/reports-benchmarking2002/$file/0.11.pdf last accessed on December 2, 2009

2009, Global Business Environment, Center for Management Research, http://www.icmrindia.org/courseware/Global%20Business%20Environment/GBE-DS10.htm last accessed on December 2, 2009

2009, the World Factbook -- UK, Central Intelligence Agency, https://www.cia.gov/library/publications/the-world-factbook/geos/uk.html last accessed on December 2, 2009

2009, the Industry Handbook: The Retailing Industry, Investopedia, http://www.investopedia.com/features/industryhandbook/retail.asp last accessed on December 2, 2009

Abercrombie & Fitch 2009 Annual Report, http://www.abercrombie.com/anf/lifestyles/html/investorrelations.html last accessed on December 3, 2009

2009, Abercrombie & Fitch Website, http://www.abercrombie.com last accessed on December 2, 2009

2009, Primark Website, http://www.primark.co.uk / last accessed on December 2, 2009

2009, T.K. Maxx Website, http://www.tkmaxx.com last accessed on December 2, 2009