Why is Abercrombie & Fitch almost alone among fashion retailers in not struggling to cure post-recession customers of a "discount addiction"?
It’s largely because of their willingness to change everything in order to hang on to a non-price position and a revenue-driven profit formula. After being spun off from The Limited as public company in 1996, A&F enjoyed four years of rapid store growth and industry-leading margins and ROA (Return on Assets). Its position was defined by a unique combination of leading-edge style, edgy and highly focused advertising and a highly differentiated in-store experience that made A&F "the one to beat" in teen and young adult casual clothing. This often required A&F to incur higher relative costs than its competitors, spending more on, for example, its store locations, store fixtures and in-store personnel (who were officially categorized as models and often hired based on physical attractiveness). It generated higher profitability despite incurring higher costs, thanks to prices that were consistently and materially higher than its competitors’.
Retail, however, has a stereotypical growth and decline cycle driven typically by opportunities to open new locations. A concept that proves popular can grow quickly and profitably for as long as it remains popular and there are new shopping malls to colonize. Once customers get bored or the real estate runway has been exhausted, a retailer must focus on same-store sales growth and somehow find ways to stay "trendy" and "relevant" to fashion-conscious shoppers for whom there is nothing less cool than what they used to like.
Abercrombie & Fitch tackled this problem head on, working hard to keep the core A&F brand on the leading edge while also launching new brands that targeted different segments of the clothing market, often defined primarily by age group. A new line, "abercrombie," was launched in 1997, targeting grade schoolers (ages 7–14); Hollister Co. came along in 2000, aimed at the 14 to 18 age group; Ruehl No. 925 in 2004, courting the post-collegiate crowd (22–34); and Gilly Hicks in 2008, which focuses on women’s lingerie and accessories.
They were not all successful—Ruehl was shuttered in 2010—but all shared the same positioning as trendy, "fashion forward" brands with price points that were higher than most of their competitors. All the while, A&F enjoyed industry-leading ROA results. In short, A&F was willing to create whole new images—perhaps the defining feature of fashion retail—in order to more effectively target new segments. Yet it never wavered in its dedication to a position driven by non-price value and a price-driven profit formula.
This sort of persistence was not always uncontroversial, even if it has been successful over the years. When the Great Recession hit in 2008 it was not uncommon for many retailers to cut their prices in the interests of preserving volume and market share. Abercrombie & Fitch, by and large, did not follow suit, sometimes provoking outspoken criticism. Although still regaining its footing, there are signs of a rebound at A&F. It’s revenues are growing again on relatively modest volume increases thanks to consistently higher prices. Those competitors that coped with the recession with price discounts, are finding it difficult to increase their prices, having taught their customers that their T-shirts do not have to cost $30 after all.
The unavoidability of change illustrates that persistence does not mean becoming a corporate barnacle, gluing oneself to a spot and then eating one’s own brain. In a dynamic economy, a company in total stasis is unlikely to even survive, never mind deliver exceptional performance. For exceptional companies, position and profit formula are the only things that are non-negotiable. Everything else is up for grabs.
And everything means everything.
Excerpted from The Three Rules: How Exceptional Companies Think. Published by Portfolio/Penguin. Copyright © Deloitte Development, LLC., 2013.
—Michael E. Raynor is a director at Deloitte Services LP. Mumtaz Ahmed is a strategy practitioner in Deloitte Consulting LLP and the chief strategy officer of Deloitte LLP. They are coauthors of The Three Rules: How Exceptional Companies Think.
[Jeans on Floor: Oleg Golovnev via Shutterstock]