Abercrombie and Fitch report Essay
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Abercrombie & Fitch was established in 1892, and originally was a retailer of outdoor and sporting goods. In 1976, it went bankrupted and was acquired by Limited Brands in 1988. Michael Jeffries was nominated to become CEO in 1992, and he dramatically improved the status of A&F to be a global fashion retailer. Now the symbol of American style and beloved brand by many customers worldwide, Abercrombie and Fitch produces mainly apparel, fragrance and lifestyle goods targeting at consumers aged from 18 to 25. There are 4 sub-brands in A&F which are Abercrombie and Fitch, Abercrombie Kids, Hollister and Gilly Hicks.
Each sub-brand has its own characteristics and its positioning in the fashion market is slightly different. Abercrombie & Fitch is rooted in East Coast traditions and Ivy League heritage, it is the essence of privilege and casual luxury (Abercrombie and Fitch Co. 2012, P. 3).
Abercrombie Kids is for the kids who want to be like their older brothers or sisters and the core concept of it is casual and preppy looks.
Hollister’s heritage stems from Southern California and was designed to represent cool beach style. Gilly Hicks is the newest and smallest brand in A&F made only for the girls’ clothes or underwear. With the opening of a flagship store in Canada in 2005, A&F started to enter the global market. Now it has 139 stores outside of the US, and it recently opened stores in Seoul, South Korea and in Shanghai, China to expand into the Asian market. We chose Abercrombie and Fitch since we would like to see how successful this multinational apparel company can be by insisting its All-American style in different cultures. We wanted to explore its unique retail strategy and brand positioning as this brand is sought after a lot of young adult. Several controversial issues of A&F were the deciding factor in our choice of company.
Work Oriented Culture
Of all the methods which exist for explaining cultural differences, “the dimensional approach is more influential” (Peng & Meyer, 2011). Geert Hostede, a Dutch professor, established the overarching theory consisting of five cultural dimensions. The first is power distance which outlines the expectation and acceptance of the unequal distribution of power by the less powerful members of a country (Peng & Meyer, 2011). Individualism vs. collectivism is the cultural dimension characterized by whether the citizens view themselves as distinctly different or dependent upon group involvement. The third cultural dimension is masculinity vs. femininity which refers to the values, traditional male or female, which are held in the highest regard. Determining the extent to which an individual will embrace uncertain circumstances is the uncertainty avoidance dimension. Finally, long-term orientation deals with the emphasis the citizens place upon “perseverance and savings for future betterment” (Peng & Meyer, 2011). The US is the home country of Abercrombie and Fitch.
Scoring a 40 caused the US to be in the lower half of the countries for power distance. Hierarchy is “established for convenience” (Geert-hofstede.com, 2014) as superiors are easily accessible and communicate informally. Information is free flowing as managers take input form their subordinates. The US received the highest individuality score of 91. Citizens are considered “the best joiners in the world” (Geert-hofstede.com, 2014). It is not extreme for Americans to work with people with whom they are not familiar as deep friendships are not commonly formed. What an individual is capable of doing or has already done will determine their value of being hired or promoted. Ranking 15th on the masculinity scale with a score of 62 indicates a masculine nation. US firms create a culture of “live to work” (Geert-hofstede.com, 2014) where higher status and financial rewards are key driving factors. Leaders which are forceful and decisive are highly valued. Employees who are less visible and indecisive are not able to attain success
With a score of 46, the US is shown to have a below average uncertainty avoidance. Innovation is extremely valued as new ideas are quickly accepted. As compared to firms in higher uncertainty avoidance countries, US firms will quickly go after new, emerging, and risky opportunities. The US is seventh from the bottom of the list for long-term orientation with a score of 29. While future planning is involved in US firms’ decision making process, quarterly reports are incredibly significant and limit the time firms can look ahead. Employees’ savings rates in countries such as the US are much lower than those in long-term oriented nations.
Home Region Oriented Firm
Rugman and Verbeke in 2004 established a triad of economic power consisting of Asia, the EU, and North America. Analysis of 380 firms determined how many were home-region oriented, bi-regional, host-region oriented, or global (Rugman & Verbeke, 2004). A home-region oriented firm has “at least 50% of their sales in their home region of the triad” (Rugman & Verbeke, 2004). To be a bi-regional company, at least 20% of all sales must take place in two regions, but the company cannot have more than 50% in the region where the company is based. If a firm has more than 50% of its sales in a region different than its home region then the firm is considered host region oriented. In order to be global, a firm must have “at least 20% of their sales in all three regions of the triad, but less than 50% in any one region” (Rugman & Verbeke, 2004).
A&F is considered a home region oriented company based upon the released date from 2013. Of the $4,116.9 million in sales, 64.59% or $2,659.09 million is generated in the home region, North America. $1,116.78 million or 27.13% of all their sales take place in the EU region. Asia is far behind as the remaining 8.28% of sales, 341.03 thousand dollars, is dispersed across the rest of the world. No calculations were needed as the sales figures and percentages were given. (Csimarket.com, 2014). The industry for which A&F operates can explain their sales distribution. As the company is in the fashion and retail industry, its’ sales are incredibly dependent upon the affinity of the customers for specific brands and styles. Since the company is based in North America, the firm is much more familiar with the prevalent style which would need to be present to increase sales. A&F also established itself in their home country before expanding. These factors could explain the firm’s international orientation.
First, one downstream ownership advantage of A&F is the possession of a specific brand image which is not easily imitable. The firm operates under different brands – Abercrombie & Fitch, Abercrombie Kids, Hollister, and Gill Hicks – for slightly different targets. Each sub-brand represents a different brand image but they eventually add up to one big image, “American Cool”. To the fashion retailers, the most important ownership advantage is their own irreplaceable brand image. In this context, A&F has its distinct position in the fashion market and is using their brand image successfully to attract the customers (Abercrombie & Fitch Co. 2012, P. 3).
Second, the other ownership advantage of A&F is its’ in-store experience. A&F stimulates the customers’ senses of sight, sound, smell, and touch by utilizing handsome male models, music, fragrances, rich fabrics and interior design. Customers (mainly females) can get a chance to take a photo with the models, and this became a representative in-store experience of A&F. In addition to this, A&F uses certain perfume to attract customers and to make them remember A&F for a longer time than just seeing, which is called “scent marketing”. Also, the stores always play the video of the American beach to emphasize its “cool” brand image. A&F only sets up the flagship stores and controls them through the managers who are trained in the US and sent to the international flagship stores to monitor the whole operation. This system makes it possible to transfer this in-store experience to the newly established flagship stores very well.
Therefore, all A&F stores, even those overseas, are committing the standardized in-store experience by offering customers the same experience (Abercrombie and Fitch Co. 2012, p. 4). Uppsala Model & Network Internationalization Model – Differences “The Uppsala model views that market knowledge is gained only by operating directly in a market; thus the model focuses on experimental knowledge” (Childs & Jin 2013, p. 38). According to the Uppsala model, will increase their market commitment gradually based upon their experience in the market and based on the knowledge they gain in the market. On the other hand, according to the Network internationalization model, firms can start their internationalization before they enter the market by settling network relationship in advance. Therefore, firms do not have to follow the stages of the Uppsala model but “building a number of such relationships constitutes a large and important investment, and once established, and organizational or ownership advantage” (Vahlne & Johanson 2013, p. 195).
Uppsala Model & Network Internationalization Model – Similarities Both models consider the network as important knowledge that firms should gain. The network facilitates information and experience by building up the trust in a relationship and also by learning from other market players. Within the Uppsala model, the core concept of the gradual extension of a company’s internationalization into a market, which gains the company valuable experience, should be based on the interplay with customers, suppliers, and other competitors. As the company’s network broadens, it can get more knowledge and at the same time its degree of internationalization will become higher. In this context, we can find similarity between the two models. International Trajectory
In 2005, A&F first opened its’ flagship store in Canada. Starting from this, A&F entered the European market with opening flagship stores in major cities of the European countries, such as London, Milan, Paris, and Amsterdam. On December 15, 2009, A&F opened its first Asian flagship store in Tokyo as a starting point to enter the Asian market. Currently, A&F owns 19 flagship stores in Canada, 110 in Europe, and 11 in Asia. Among those stores, 39 are sales subsidiaries. In Canada, the Netherlands, and Hong Kong, A&F has wholly-owned subsidiaries because there are DCs in those countries, meaning that they are the most important countries in each continent (Abercrombie & Fitch Co. 2012, PP. 19, 101102). Firms who have a strong brand image and possess asset specificity (a unique product or a unique way of doing business) are more likely to internationalize quickly (Childs & Jin, 2013). A&F is a good example of this case, so it could skip the lower stages of the Uppsala model, such as sporadic exports or exports through sales agents, and could set up the subsidiaries directly overseas, which only takes 7-9 years. Consequently, now we can assume that the company is already in a quite higher stage of the Uppsala-based stages model with its sales subsidiaries and wholly-owned subsidiaries. Degree and Nature of International Sourcing
Abercrombie and Fitch does not own factories producing the products and it has not sourced more than 10% of its merchandise from any single member of its approximately 155 vendors in 20 countries, including the United States, China, Vietnam and Guatemala (Abercrombie & Fitch Co. 2012, p. 4). In particular, more than 90% of its suppliers are in Asia (Google.com, 2011). The company has established supplier product quality standards to ensure the high quality of fabrics and other materials used in the company’s products (Abercrombie & Fitch Co. 2012, p. 5). Abercrombie and Fitch has two distribution centers (“DCs”) in New Albany, Ohio. The two DCs were initially responsible for the distribution of merchandise to the stores and direct-toconsumer customers, both regionally and internationally. Since 2009, A&F has offshored its DCs by using a third-party DC (TNT Fashion) in Roosendaal, the Netherlands for the distribution of merchandise to stores and direct-to-consumer customers located in Europe and a third-party DC in Hong Kong since 2011 for the distribution of merchandise to stores located in Asia. Its two DCs in New Albany, Ohio currently only support its North American stores, and direct-to-consumer customers outside of Europe (Abercrombie & Fitch Co. 2012, p. 5).
The nature of offshoring the DCs is to broaden the direct-toconsumer business worldwide and facilitate the international expansion of Abercrombie and Fitch stores in Europe and Asia. Furthermore, Abercrombie and Fitch has a strong, cooperative and long-term relationship with its vendor factories. When the CEO Mike Jeffries was asked about the cost pressures from raw materials and labor costs, he emphasized that a strong relationship with vendors has been key since they had assisted A&F and been fair in terms of cotton prices and other increases. He also added that A&F and vendors have been there for each other for the long term (Barrie, 2010). Strategic Advantages and Drawbacks of International Sourcing and Offshoring The first advantage of international sourcing is that A&F can hedge against the supplier risks. Since A&F has relationships with over 100 vendors in 20 countries, it can flexibly switch from one source to another when necessary.
A&F has the ability to increase its total supply capacity. Even if there are a sudden wave of demand for certain products, having a strong relationship with over 100 vendors will ensure A&F a certain supply of products and therefore the supply chain will be more stable (Inboundlogistics.com, 2011). However, such global sourcing strategy also brings some disadvantages. The source of production activity is too dispersed; it is a challenge to find qualified executives who know the local business environment and understand the corporation’s inner workings especially in the Asia Pacific region (Inboundlogistics.com, 2011). We would advise Abercrombie and Fitch to send executives from the US to those countries and hire local managers simultaneously to ensure the production activity smooth.
The primary advantage of offshoring is to reduce costs. Offshoring its distribution centers in Europe and Asia can save distribution and transportation costs of merchandise to stores in Europe and Asia. However, if the third-party distribution center in the Netherlands or Hong Kong shuts down suddenly, the distribution of merchandise in Europe and Asia will be totally disrupted. Therefore, A&F should leverage the risk by running an additional distribution center in some low-cost countries, such as Vietnam. This move will also support A&F’s future expansion.
Opportunities and Threats in Vietnam
Labor cost in Vietnam are absolutely lower than that of China (JETRO, 2011) (NWPC, 2014). See Appendix 1 for figure 1.
Government policy to attract FDI (Kim, Lee & Cheong, 2011). See AppendixThreats
2. TPP (Trans-Pacific Partnership) – Cost reduction, lead time reduction, and tax benefit. See Appendix 3 for table 1.
Currently only 16% of A&F clothes are produced in Vietnam (Google.com, 2011). See Appendix 4 for figure 2.
Vietnam has a better status for lead times, infrastructure, and working circumstances than other developing countries (Kim, Lee & Cheong, 2011). As A&F doesn’t operate their own manufacturing facilities but uses vendors, it can be intense competition among the companies who want to attract vendors in Vietnam.
Bangladesh, Cambodia, and Sri Lanka which have lower labor cost than Vietnam are trying to develop their infrastructure and manufacturing conditions to attract vendors. In the future, those undeveloped countries can be a threat to the Vietnam market.
Minimum wage in Vietnam is increasing by 15% in 2013, and 17% in 2014 (Vettoretti & Huyen, 2013).
Suggestions for the Emerging Market
We suggest establishing a distribution center (DC) in Vietnam as a strategy to create synergy with the new manufacturing facilities in Vietnam. Currently, many global fashion retailers are trying to generate vertical integration in the emerging markets because they can control the demand fluctuation easily and simplify procurement and administrative procedures eliminating the need to deal with a wide variety of suppliers and distributors. If TPP is concluded, the degree of tariffs will decrease, so it would be better to concentrate on upstream investment in Vietnam. Because emerging markets are not wellorganized and there is more lack of conditions than the developed market, owning a DC will be more stable and protective. Eventually, a DC in Vietnam will create good access to the Asian market.
In overseas developed markets, A&F doesn’t own the distribution centers but uses third-party DCs in the Netherlands and Hong Kong. However in Vietnam, we assume that A&F would set up a distribution center as a wholly-owned subsidiary. The third-party logistics in outsourcing the whole distribution to a specialized company would reduce the cost. Now A&F has only third-party DCs in overseas and there is a threat to be shut down. In order to prevent this situation in advance, owning at least one wholly-owned DC is practical. Because a wholly-owned DC totally controlled by the company, the company can adjust to the demand fluctuation better than a third-party DC. Therefore wholly-owned DC will function as a safety net in a case there is an uncontrollable problem in a third-party DC. Strategic Objectives of Entering China
With regard to market seeking, “China will represent the biggest market potential for our brands,” said Craig Brommers, senior vice president of marketing for A&F (Fashionunited.com, 2014). Undoubtedly, China is a huge and growing market with a population of approximately 1.4 billion. Therefore, A&F has been trying to locate its potential customers by opening the first flagship store in Shanghai and 8 Hollister stores in different cities since 2012. The company plans to open over 100 new stores under its Hollister and A&F’s label in China over the next ten years (Fashionunited.com, 2014). With regard to efficiency seeking, there are an abundant suppliers and a low-cost labor force. Specifically, over 60% of its vendors were located in China in 2011 (Google.com, 2011). Also, there has been a distribution center in Hong Kong since 2011. Therefore, A&F can achieve lower transportation costs since the delivery is closer to its target markets.
Past Foreign Entry Modes
Abercrombie and Fitch started its international expansion in London by opening the first overseas flagship store in 2007, and it almost adopted a single foreign entry mode in the last 7 years. A&F established a wholly-owned subsidiary when entering a new market, such as the Netherlands, UK, Hong Kong, Singapore and Japan. However, A&F opened its first Hollister store in Dubai in 2013 through a joint venture with Majid Al Futtaim Ventures and an A&F flagship store is expected to open in Dubai in 2014 the same way (Majid Al Futtaim Ventures, 2014).
For Abercrombie and Fitch, establishing wholly-owned subsidiaries is a better entry mode for international expansion. A&F can enjoy full control of the international stores since it pursues an intensely American retail and marketing strategy (Marx, 2010). Therefore, establishing a wholly-owned subsidiary enables A&F to integrate the operation of its subsidiaries tightly with itself and to control what the subsidiary should follow. In addition, it takes a lot of efforts to establish an effective relationship in a joint venture and the cultures of the companies may be incompatible. Financially, The parent company can consolidate the results of its wholly-owned subsidiaries into one financial statement (Basu, 2014).Considering that A&F is opening more international stores worldwide, the financial reporting would be too complicated if it engages in joint ventures in many different countries. Multinational Strategy – Home Replication Stage
The multinational strategy of Abercrombie and Fitch closely resembles the home replication strategy. There are several evidences from practice. First of all, the local responsiveness of A&F’s international stores is very low. The staff greets shoppers in English, rather than the local language of the foreign countries. This results in foreign customer alienation since some customers will be forced to surface their rusty English during the transaction (Marx, 2010). A&F replicates its home country-based competencies such as brand positioning. Sex appeal is a big part of the brand’s charm in the United States; A&F also puts this masculine ideal into practice of its international stores. Particularly, many of the male staff members are half-naked in the stores (Marx, 2010). Finally, the implementation of its marketing strategy and operation is easier. The store design and the interior are the same worldwide along with extremely dim lightings, a strong smell of cologne and perfume and the staff singing or dancing with the pounding American songs.
‘Real-life’ Social and Environmental Dilemmas
A ‘real life’ social dilemma has adversely impacted A&F in recent years surrounding its CEO. The official website of the company states the company strives to be “an inclusive environment that values the differences of its associates and customers” (Anfcareers.com, 2014). While this is the official statement, an interview with the CEO, Mike Jeffries, brought a contrasting view to light. Jeffries identified his target market by claiming, “a lot of people don’t belong [in our clothes]…Are we exclusionary? Absolutely” (Walker, 2014). A&F has since released an apology, but boycotts, negative celebrity statements, and petitions were enacted. This issue is an ethical dilemma to the firm because of their strategic place in the clothing market. In order to stay popular, an essence of exclusivity has been built around the brand, since the more exclusive the brand appears, the more interest the brand receives. This has been A&F’s approach, but this strategy is not inclusive.
The firm had to determine whether to increase their size options or continue with the current productive model. The most important stakeholders for this dilemma are the CEO and those who hold a large portion of A&F’s stock. If A&F is not able to effectively remedy the situation then the company’s profits will continue to suffer. A&F is a public company so their performance directly affects their stock. If the dilemma is not resolved quickly, it could trigger a chain reaction of a loss in profits which leads to lower stock causing several holders of the stock to drop it effectively dropping the value of the stock. The effects of this dilemma could have extremely long lasting repercussions.
An environmental issue which has become a dilemma for A&F is the implementation of harmful chemicals in their signature fragrances. Within the fragrance Fierce, “11 secret chemicals that are not listed on the label” (Henricks, Malkan, & Shils, 2014) were found that heighten allergic reactions. This particular fragrance caused reactions from various activist groups such as Physicians for Social Responsibility, MomsRising, and others which total over 1.5 million people (Henricks, Malkan, & Shils, 2014). Utilizing harmful chemicals is an ethical environmental dilemma for A&F because the current formula has generated incredible revenue. The official website of the company addresses large environmental impact areas such as limiting their carbon emissions, but nothing addresses something which impacts the environmental on this particular scale.
If A&F is able to hide these chemicals and still gain their desired sales results then it has little motivation to stop acting in this manner. The most important stakeholders surrounding this dilemma are not only the executives and upper management of the company, but also the lowest store employees. A loss in serious sales will affect most employees in a company, but this situation would directly affect individual store employees.Customers may stay away from the stores in order to avoid the negative side effects resulting in a loss of profit and jobs for store employees.
Developing a Globally Standardized Strategy
Currently, Abercrombie and Fitch already has an established a globally standardized strategy to cope with the selected dilemmas. The strategy is laid out on a website by the company which was created specifically for displaying the considerate side of A&F. Covering everything from the sustainability to collaborations to specific policies, A&F clearly display their globally standardized strategy to “ensure that the highest values of human rights are being upheld at our headquarters, in our stores and within our supply chain” (anfcares.org, 2014). A&F should have a globally standardized strategy. Even if ethical imperialism is not wise, the specific industry operations call for a globalized solution. Several ethical viewpoints are almost universal for garment manufacturing. Several unethical decisions such as environmental negligence and the use of harmful chemicals have resulted in scandals and dilemmas because of the accessibility of information. For example, the infamous interview with the CEO was conducted years before it gained notoriety. By having a globally standardized strategy, A&F could mitigate potential situations before they arise.
The selected dilemmas have global relevance. Inclusion, the principle dealt with in the social dilemma, is incredibly important to a multitude of cultures across the world. A store in the Netherlands which openly admitted to not wanting homosexual customers would experience a similar backlash. The environment issues also reaches across borders. Asthma, one of the problems which are heightened by the fragrances, is prevalent in “an estimated 300 million people” (Aaaai.org, 2014).
Abercrombie and Fitchs’ Actions Compared to Unilever
The actual solutions by A&F are not similar to the solutions practiced by Unilever. Both A&F and Unilever have explicit codes of conduct and plans to deal with ethical dilemmas which arise. Even though these plans exist, A&F has demonstrated that its actions do not always align with their official stance. Unilever’s approach to social impact such as gender equality has been greatly documented, and one of their main goals by 2020 is to “help more than 1 billion people improve their health & well-being” (Vis, 2014). The implementation of this policy is seen as Unilever has helped generate around “65,000 microentrepreneurs” (Vis, 2014). A stark contrast exists between Unilever’s actions and those of A&F. Unlike Unilever, the ultimate actions of A&F and their refusal to stock larger size clothing proves the company is dedicated to portraying a positive image without actually helping to make a positive change in society.
A&F’s actions toward their environmental impact align almost with their actions for social justice. Although its’ official stance is to reduce its environmental footprint, the company has taken no action in light of the protests by environmental groups driven “to get rid toxic chemicals from the environment” (Lutz, 2013) which are the result of their colognes. Unilever’s approach towards economic longevity has been greatly noted as “75% sites [send] zero waste to landfill” (Vis, 2014). Unilever’s approach is much more preferable to A&F’s approach. From a social standpoint, Unilever’s actions have actively made a beneficial social change as Unilever continues to fulfill their promises. A&F continues to ignore their customer’s plight even though the company claims to truly care. From a corporate standpoint, Unilever’s approach is better because many news outlets have cited the company as making a positive change, while A&F continues to have controversies resulting in a sales drop of 10%. Overall, Unilever has a much better strategy than A&F.
Figure 1: Average Monthly Wage of Asian Countries (Nwpc.dole.gov.ph, 2014)
Improvement of the Vietnam Government Policy on FDI (Kim, Lee and Cheong, 2011) The Vietnam government policy for FDI was dramatically improved by registering into WTO (World Trade Organization) and preparing for PNTR (Permanent Normal Trade Relations). Besides, the government adopted global standards, abolished discrimination of foreigners, and opened the service part such as finance or communication. As a result, FDI into Vietnam broadened to various areas, for example, fabrics, mining, energy, finance, logistic and so on. Especially concluding PNTR between the US made it possible to participating into WTO and encouraged foreing investors to enter into the Vietnam market. Another important change in the policy is related to the modification of legal restrictions or rules. On 1st of July, 2006, the government changed the original law for FDI which had been adapted only to the local people into the newly modified law for FDI which is commonly adapted to the both parts of foreigners and local people. This was the effort of the government to create more competitive investment conditions which are changing subject of application, and abolishing double price and repatriation tax. Also the government has been modifying the original business law, investment law, land law, and corporate taxation.
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