Should A&F expand to the
Indian Market by Opening up a New Store in New Delhi?
Abercrombie
& Fitch (A&F) is one of the most recognizable American retail brands on
the planet. Ezra Fitch and David Abercrombie founded the firm in 1892 and
today, it boasts approximately 1,049 stores worldwide. The brand is easily
recognizable globally because of a catchy logo and a unique name. Therefore, it
is undeniable that the company’s strategists employ exceptional marketing
strategies to attract an international audience. A&F provides its customers
with a distinctive style which teenagers and young adults love. Nevertheless,
the organization has undergone multiple brief periods of market uncertainty and
turbulence caused by high commodity prices and its reputation of religious
discrimination particularly during employee selection (McBride 16). On the
brighter side, A&F has put a lot of effort to turn this situation around as
the brand is growing at a steady pace as it once did.
A&F continues to re-establish their image
worldwide to increase their sales revenue, hence make up for declining
profitability in 2014 and 2015 financial years. The corporation’s mission
statement is “Abercrombie and
Fitch focus upon high-quality merchandise
that compliments the casual classic American lifestyle.” It is
significant that the firm satisfies its potential customers and deliver
merchandise that each customer segment demands.
Numerous researchers have conducted
industrial surveys which reveal that young Indians are very keen on maintaining their
loyalty to A&F products because of its favorable
clothing style that meets the needs of
the modern generations. In light of this, it is
imperative to analyze the business prospects, benefits, and the importance of A&F expansion in the Indian
market through opening up a new store in New Delhi.
To meet the demands of this research, the researcher
should exhaustively investigate the potential benefits and probable challenges
that A&F may face if it exploits the available opportunities by expanding
into a new market segment. Clearly, this is a relevant topic for discussion
since A&F needs to crucially make decisions based on gaining customer
loyalty, re-establishing brand image, increasing sales and consequently
profits. By doing this, it re-engineers
and rejuvenates the business to guarantee its survival in the ever-changing
global business environment.
Current Market Situation
Currently, Abercrombie & Fitch is doing
well after its drastic downfall in the previous year. The A&F major
comeback in the retail industry is a testament to
its undying determination to compete fiercely with its rivals. In the first
quarter of 2015, the company posted a 20% increase in sales revenue. In fact, its
financial results exceeded the estimated revenue by analysts in the United States and are attributable to their
change in marketing strategies and a healthy brand image.
To grow
sustainably in an international market, Abercrombie appeals to the customers through
the provision their clothing choice. In addition, the organization conducts product
line adjustment according to the tastes and preferences of different age groups
and people instead of limiting their merchandise to a specific group of people. In the long run, A&F avoids religious
or generational discrimination (Greenhouse A16). Notably, Abercrombie is
offering fragrances for women and accessories for the first time in its
history, thus signaling maturity and
diversification.
Secondly, as the brand
continues to grow in countries like the United States, China, and the South
America (through their e-commerce
business), the negative European economic performance neutralizes the gains in
other regions. Interestingly, A&F expanded into the European market between
the year 2010 and 2012, thus doubling the number of international stores from
59 to 139. However, Europe’s economy (especially in countries such as the U.K,
Spain, and Italy) is yet to attain its pre-financial crisis glory. Therefore,
the financial challenges affecting the international retailers such as A&F
are directly linkable to gloomy business forecasts in the European Union.
A&F is a clothing firm that has expanded across the world successfully and
seamlessly. It makes up approximately 36% of their sales revenue from their
retail brands set in different continents on the planet. Particularly, the
company’s stores in Europe contribute the largest share of their sales revenue among all their other international stores.
Despite this, the company recently has noticed a drastic fall in their revenues
in Europe. The impact on organization’s overall performance is significant
since up to 75% of A&F’s international revenues come from Europe. Therefore
as their performance improves in the United States, there is a sharp contrast with
that of other Western countries due to gradual economic recovery.
Graph 1.0: A&F Revenue and Growth Rate
Graph 1.0 depicts A&F’s growth rate and success.
It is clear that since January 2016, A&F’s performance has improved rapidly
hence strengthening its competitiveness against industrial rivals. Undeniably,
the company has vast opportunities to exploit the developing markets in Asia,
Africa, and Latin America. In South East Asia, the economy of countries like Philippines,
South Korea, and India are doing relatively well in comparison to their Western
allies. A&F organization currently operates 11 stores in China, 4 in Korea,
1 in Singapore and 7 in Japan. The success of these stores is higher than the
firms’ overall performance in Europe in 2016. As India’s economy joins the
world’s top 10 economies, economists are convinced that the country has a
strong growth potential. Therefore, it is recommendable for Abercrombie &
Fitch to exploit the opportunity by opening a branch in New Delhi, an Indian
metropolitan city with a large middle-class
population.
The Cause of A&F’s downfall
Over the past half a decade, A&F has struggled
its way out of an overwhelming downfall. The explicit failures were caused by
several factors including poor management, lack of customer loyalty, a tainted brand
image, and inefficient marketing techniques. The organization blames Michael
Jeffries, a 70-year-old man that worked
at Abercrombie for 22 years serving as an executive officer (Hirst and McAnally
6). In the course of his leadership, Mr. Jeffries endorsed policies that led to
the fall of corporation’s sales and revenue. In fact, he was involved in all
the decision-making activities within the internal business environment, for
instance, the specifications on the clothing types, sizes, displays, and
models. Given his adoption of authoritative leadership, there was no
flexibility among the staff. Furthermore, he conducted personal interviews and exclusive
inspections of all the employees without involving human resource
professionals. His keen attention to details when selecting the company’s
fashion models is worth noting as well. In addition, the manager gave strict
instructions and specifications on the sizes of clothing pieces. Ideally, he
passed a policy that all clothing pieces should not be larger than size 10,
therefore promoting the idea of only the “fit”, “thin” and “beautiful” were
meant for this brand. This limited their target market and made the public feel
insecure, a key reason behind the brand being unsuccessful for a certain amount
of years.
Secondly, the American Supreme Court has raised alarm
over the discrimination and gender bias allegations at A&F. Currently,
there are dozens of lawsuits centered on
racial discrimination and exploitation of workforce. For example, in the year 2008,
Samantha Elauf applied for a sales position in Oklahoma but the human resources
department rejected her due to her Muslim background. On the day of Samantha’s
interview, she wore a hijab the
hiring staff failed to consider her competence and qualification to handle the
task at hand. Ideally, Samantha had an impressive resume as compared to other
interviewees, hence was poised to get the job.
The rampant discrimination have lead to the brand
making a profit of $911.4 million in quarter 3 of 2014 while they had managed
to earn a profit of $1.033 billion in the year 2013, decreasing the sales
revenue by 12%. During an interview, Michael said that they “...are
clearly disappointed with our results for the third quarter”. Market analysts
argue that the poor financial outcome resulted in his job loss.
In
an optimistic move, A&F’s board turned the tables when they introduced and
adopted revolutionary policies which have been successful in the short-run.
Since September 2015, A&F has registered increased profits. Therefore, it
is gradually regaining its position in the market.
Rising
Sales and Business Rejuvenation
After 3 financial years of poor market performance,
A&F’s management is struggling to overcome the company’s negative figures.
In one instance, the brand has prioritized its short-term plans to meet the
market demands, maintain competitiveness, and to regain stability. During the
fourth quarter of 2015 fiscal year, profit margin re-entered the positive
territory after years of a dry spell. Due
to investors’ optimism and consumer confidence, sales rose drastically, while
gross margins increased sharply from 0.2% to 62.3% as reported by The Business Insider. A significant
number of A&F stores have managed to double their profits, hence
neutralizing the impact of decline between 2012 and late 2014. Consequently,
the store has shifted its attention towards the conception of profit-making
strategies.
In a
Wall Street Journal interview, Arthur Martinez, (the executive chairman of
A&F) mentions that “the initiatives we’ve been working on are getting positive traction”.
The dedication and effort injected by A&F’s staff and management ultimately
lead to a brighter outlook. The costly
failures teach A&F the importance of keeping up with the latest trends and
fashion. Otherwise, their targeted group can shift their loyalty and preferences
to competitors such as Zara, H&M,
and Forever 21.
There are several measures that A&F has taken to
reverse the negative business trend in the international market. First, the
staff updated the firm’s merchandise with the tastes and preferences of their
customers. They understood the sales revenue cannot increase unless A&F
meets the customer’s needs. Secondly, the brand’s board realized that it ought
to minimize spending on model promotion strategies that have proved ineffective
in attracting new customer segment, especially the young middle-income-earning
population. Instead, they divert the resources towards revamping brand image
and sustaining customer loyalty. If A&F does this, it will regain its reputation
as a top brand in the United States. Essentially, the company’s leadership
should create an environment in which discrimination is unacceptable. Further,
the atmosphere should be more welcoming for customers. Irrespective of the
latest development, A&F continues to seek for strategies and opportunities
to succeed since the organization is yet to solidify
its customer base and to establish a proper organizational culture.
PEST Analysis of the Indian
Environment
Using the PEST
analysis, it is possible to assess the opportunities and threats the Indian market is
currently facing in order to allow Abercombie & Fitch to make a well-informed decision.
Political/Legal Environment
Prime Minister Modi, has introduced “Make in India”
slogan that supports an increase in global investment and manufacturing in
India and other Asian states. As a first step, the recently adopted Foreign
Direct Investment (FDI) policy makes it easier for multinational companies to
invest in the country to gain private benefits. In return, India increases its
GDP through the implementation of this policy, thus a mutual benefit.
Economic Environment
India’s economy is growing at a rapid pace and has
recently joined other top 10 global economies as a middle-income prosperous
nation. Even better, numerous economic forecasts predict that India will be the
third-largest economy in the world by
2030. Additionally, global investors consider India as a potential market
leader due to its high population and rapid economic expansion. Consequently,
it ranks second to China in high investment and growing consumer confidence. As
late as 2016, the country has 131 points in a global investment index, which is
competitively very high and has remained this way for the past 9 quarters.
A
growth in industrial production is evidenced by an economic expansion of more
than 7.8% in 2014 and7.9% in 2015. Undoubtedly, India is one of the most
optimistic countries not only in Asia but
also in the rest of the world. The good relations with the West and political
democracy contribute to the economic prosperity that the country has enjoyed
for more than a decade.
Moreover, India’s consumer sector currently has an
annual growth rate of 5.7%. The increasing disposable income explains this
relatively high demand for foreign
commodities.
The
India’s economy target forecasts ushers in a new era of favorable business opportunities, especially if it maintains an
average growth rate of 6.7% by 2020 and a gradual rise up to 7.1% by 2025. By
the year 2020, the household income in India will probably triple. Resultantly,
the consumer spending will rise to more than $3.6 trillion.
India’s
fashion industry is developing at an unprecedented rate. For example, the textile industry
constitutes 13.5% of the country's exports which is equivalent to USD $42.2
billion.
India’s
high and growing population and middle class also contribute to increasing
demands for clothing.
Social Environment
The “mom-and-pop” shops have been operational in
India for more than four decades. They contribute to the development of a
common culture for people to purchase goods from such shops at a relatively
lower price in comparison to the local outlets. Besides, Indian modernizes
itself periodically depending on the location of the city and the composition
of its population. In metropolitan cities such as Mumbai and New Delhi, the
local population has a similar taste and
preference for international goods and services. Therefore, Western
multinationals such as McDonalds and Coca-Cola have established regional
headquarters in such cities. Most importantly, the Indian population enjoys
relatively high literacy skills and advanced education, making it easier to
hire skilled workers locally.
Technological Environment
India’s progress is evident in its adoption of the
latest technology and properly developed communication infrastructure. In a
race for technological dominance in Asia, India and China are at par. Notably,
both countries have adequate training facilities to improve technological
efficiency. However, India has a larger tech-savvy population that is
attractive as a labor force to new
multinationals. Hence, most organizations that chose India are driven by the
availability of cheap but highly qualified computer literate population.
There is a high demand for Indian IT professionals worldwide because
of their high level of skills. The majority of the nation’s computer scientists
render their services in the international market to large multinationals like
Google, Twitter, and Amazon. In addition, India is making a significant
progress in aviation, shipping, telecommunication, and tourism.
India
business Environment and Investment
Since
the 1947 independence from British, the Indian
economy has grown tenfold. Prior to the self-rule, the country’s economic and
business problems ranged from extreme poverty
and recurrent violence. Notably, India’s industrial sector developed as early
as 19th Century, thus resulting in a gradual economic growth.
Nevertheless, agriculture was the main source of income for both the government
and its citizens. At the dawn of the millennium, India underwent a reformation
process that resulted in economic diversification. Consequently, industrial
sectors like cotton, service, and the manufacturing
sector have sprung up in different cities and urban areas. Still, more
than 60% of rural Indians depend on agriculture as a main source of income.
The
service sector in India grows impressively. Therefore, the developed countries
such as the United Kingdom and the US consider the country as a public
outsourcing hub especially with regards to the provision of customer service
and technical support. In light of this, A&F will benefit immensely from
the availability of well trained cheap labor
should it opt to set up a branch in New Delhi. Of keen to note is that the
government regulates and controls Indian economy. Moreover, a wide gap exists
between the poor and rich.
The
main challenge for Modi’s government is to eliminate the inequality and social
classes that are an impediment to the
future prosperity and attraction of investment. Even after an unprecedented
economic boom for over a decade, nearly 30% of the population live below the
international poverty line. India faces a threat of soaring poverty due to the
increasing birth rates.
In the spirit of
globalization, the government has reduced restrictions on foreign trade and
investment controls. As a result, the fashion and technological sectors
experience high levels of investment because the government grants permission
for the operation. Regardless of this
development, some of the economic reforms bar competitive foreign
multinationals from establishing businesses in the country.
Moreover, India
has a well-developed infrastructure in the
urban areas such as New Delhi. Both the state and central government invests
heavily in the development and
rehabilitation of transport facilities to improve industrial efficiency.
Besides, the private sector participates actively in this sector to woo
investors.
Fashion
Industry
The
India’s fashion industry is in its growth
phase. Annually, the country registers dozens of foreign brands that seek to
exploit the Indian market. They intend to set a foothold
with an established globally-renown brand value. The companies allocate more
finances towards product promotion and luring of the consumers. In the short
run, the majority of multinational fashion brands make losses but over time,
there is a gradual generation of profits as the local population embrace
globalization and Western style.
Completion is
intense between the local fashion companies and the foreign brands.
Furthermore, there is a high financial risk when customers switch from the
domestic products to the international brands because of the personal comfort zone and sales promotion
offers. Experienced brands like A&F build the customer loyalty by
delivering excellent value irrespective of the price. The values include
consistent fit, durability, styling, and quality of fabrics. Fashion companies
understand that when a brand name is linked with aspirations and lifestyle, it
epitomizes desirable intangibles to the consumer.
The Role of Middle Class in India
The Indian middle
class has grown over decades from a minority to a vast majority in the urban
areas. Given their large numbers, the middle-income
earners play a major role in driving the country towards economic development
and adoption of a new culture. The
recently launched economic reform liberated the middle class and gave them the
option of living a full life of adventure and exploration. Some of the few
changing patterns in the society include changing clothing style,
telecommunication evolution, and the freedom of mobility.
Further, the middle
class has adopted a can-do attitude that eliminates mindfulness of hierarchy
and fear, thus leading to the view of local issues on a global perspective
rather than religion. In the long run, they inspire the young generation to be
self-driven. In a generation where money has its language, the Indian middle
class is aware that anybody who possesses money has power. Knowledge such as
this is a source of energy that drives the nation’s economy.
A&F Expansion to India
If A&F expands to India, it implies that the
firm is a truly multinational brand that takes unprecedented risks to enjoy the
profits. Besides, setting up a shop in India means that A&F will have
access to a wider market, nearly twice that of the EU. In addition, the move
will be in line with India’s vision to be a developed multi-cultural country by
the year 2035. Within 2-3 years of operations, other clothing brands will
follow A&F’s footsteps, especially if the organization registers a positive
performance. Joining the Indian market guarantees the company’s sustainability
in a time where the European market is affected by economic uncertainty due to
the British vote to leave the EU.
Challenges
of opening up a business in India
While walking through the Indian streets, a person
must notice “mom-and-pop” retailers all over the urban areas. They are the
small traditional shops clustered around New Delhi, Mumbai, and other major
cities. Further, the owners run such retail shops as family businesses selling
groceries, clothes, and electronics. Indian retail businesses are in high demand because there are very low margin and a negligible real estate
cost in the country. The low labor costs
encourage the firm owners to employ more skilled Indians as store technical
assistants or as product distributors throughout the city. The shops have been
in the country for decades and it is a common culture for the majority of city
residents to purchase the goods for a much cheaper price from a nearby
traditional retailer. The management of A&F should know this since it could
be a source of unfair competition. Nevertheless, the trend seems to be changing
as the middle class grows and disposable income increase.
India still has an inefficient supply chain management
system. It explains the frequent delays in the delivery of commodities, thus explaining
the observed slowdown in production and sales. The government needs to develop
this unorganized sector to cope with the fast-paced
retail industry.
Education is an important factor in Indian
development. The Indian people enroll to
institutions of higher learning to acquire the necessary blue collar skills. As
the literacy levels improve, the labor
cost rises, though the rates are still relatively lower in comparison to those
of the United States and Europe. In this regard, India
is a competitive market for international corporations.
Lastly, the distribution channels are also
challenging. It may become increasingly harder for the firm to reach out its
potential customers given the language barrier and poor relationship with the
suppliers. Logistical challenges can arise since India will be a distant market
from the firm’s headquarters. Besides, it will take a remarkable amount of time
for the market researchers to study and understand the new market. Though India
is on the rise with strong growth potential, these are a handful of potential
threats that can affect the A&F while it pitches
camp in New Delhi.
Competition
The intense competition within the fashion retail
industry in India is evident as new multinational brands launch their
subsidiaries periodically. However, some of the Indian brands that have
established their name in the market have existed for over 15 years. They
include highly reputed fashion brands like as, shopper stop, Lifestyle, Pantaloon, and Westside. The internal
competition within the Indian retailers is enormous, implying that A&F must employ a unique strategy to provide exceptional goods and services that
match the tastes and preferences of the local consumers. As more regional and
international brands join the Indian business environment, they gain access to local
contacts that link them with suppliers, information on the economies of scale,
and knowledge about the Indians’ demands. With the rising preferences of
modern clothing, A&F will have to compete with other international brands
on the prices and products to gain an Indian market share.
SWOT Analysis of Abercrombie &
Fitch
Strengths
A&F has a
strong brand portfolio that appeals to young customers aged between 10 years
and 20. This strength is particularly useful in countries such as India and
China that have large young population. In addition, the firm raises its
profile through its initiative that raises finances for organizations and
charity groups. Besides, the organization is an official sponsor of Elite
Racing Team that has Indian racers.
Further, A&F
has expanded to more than 16 countries. Therefore, it can introduce diverse
global cultures to India through its products. Moreover, the firm has a unique
ability to captivate the attention of teenagers and to condition them into
demanding the brand’s products through the innovative look of their products
and the welcoming atmosphere. While this is disadvantageous for the young population,
the organization will maximize its sales revenue and profitability. The brand has developed
for decades, hence is easily identifiable. In addition, A&F’s product line known for casual and
comfortable clothing.
Weaknesses
Annually, A&F
loses millions of dollars to the counterfeit
products. The financial losses will be extensive in India since Chinese
products have already flooded the market. Further, the employees view A&F’s
‘look policy’ as too strict, hence can scare off the best talent. Additionally,
the high commodity prices will be unattractive in Indian population that is
accustomed to low local retail prices. Even worse, the firm suffers a string of
lawsuits due to employee discrimination. Lastly, the firm faces a stiff
competition in the developing world as most global brands are operational in
India and other Asian countries.
Opportunities
A&F can set the Indian subsidiary as their
manufacturing base through the adoption of “Make
in India” policy, to lower the operational costs. In addition, the
management should take advantage of India’s lower costs of production to increase
their global profit margin. Notably, a growing Indian market offsets the
revenue impact from other slowing international markets such as Europe. Furthermore,
the firm should secure the endorsement of Bollywood celebrities to penetrate
the market. Given the large size of the young
population, it is recommendable that the company should target teenagers in its
production and marketing. Lastly, A&F should alter the shopping experience
to include quieter Indian music, more lighting, and readily available clothing.
Threats
There are multiple
threats to A&F’s operations. First, the poor global economic condition
means that import taxes may rise significantly. Second, the brand faces a
substitution threat introduced by high commodity prices. Given the extent of
piracy in Asian countries, the
organization can easily lose its stocks. Third, the exchange rates can affect
the A&F’s profitability. Fourth, new players in the market offering similar products create a threat of
brand switching. Moreover, a strong international competition with brands such
as American Apparel, Forever 21, and Urban Outfitters can threaten the survival of A&F in India. Lastly,
Indian fashions trends changes according to seasons and occasions thus can affect the sales.
The
Ansoff’s Matrix Analysis
The
Ansoff’s matrix analysis addresses the different strategies thatA&F can
employ in India. They include the new product development, market
diversification or extension, and market penetration.
|
Strategy
|
Products
|
|
Market
Penetration (Existing Products in Existing Markets)
|
Unisex: jeans, tops, swimwear, sweaters,
handbags, pajamas, and fragrances.
|
|
Market
Development (Existing Products in New Markets)
|
- aims at plus size women.
- aims at males and females below 32 years
of age.
|
|
Diversification
(New Products in New Markets)
|
Phone cases, shoes, lingerie, cosmetics,
and athletic clothing.
-Launching of
more prestigious clothing to target male and female high-income earners.
|
|
Product
Development (New Products in Existing Markets)
|
-more summer clothing because of a shifting
style and a change of environment.
-more luxurious jewelry
|
Table 1.0: the Ansoff’s Matrix Analysis
Investment
Appraisal
According
to Weygandt et al. (65) investment appraisal (also known as capital budgeting)
assists the financial manager in decision making. Before committing funds to a new market, it is important for the
business leaders to review the new business environment and determine the
chances of profitability or a loss. Ideally, the finance manager checks the
outflows and inflows to reveal the business risks that threaten the
organization’s survival.
In the first
quarter of 2016, A&F’s total global investment was 1, 872 million dollars.
On the other hand, the average first quarter income was $-39 million dollars.
Therefore, the company made a loss since the invested amount is higher that the
outcome. A&F achieved a return on average invested assets of 3.3% in this
year’s first quarter but is still below
its average ROI. Despite the evident deterioration in performance, the overall
profitability of improved in comparison to the previous quarter as seen in
graph 1.2. In the United States alone more than 126 retail sector organizations
rank above A&F due to high ROI.
In summary, it is
clear that A&F should invest in India to exploit a vast market and to
reverse the annual losses registered in Europe and the United States. Unless
the organization considers creating a new branch in New Delhi, chances are that
A&F will enter a period of steep decline and an eventual demise. India has
a large population of middle-income
earners hence is an ideal market for global brands. Besides, the reforms
introduced by Prime Minister Modi encourage the citizens to embrace Western
clothing and culture. Most importantly, New Delhi is a metropolitan city where
the residents are mostly youth. They are ready to spend their income on luxury
products such as those provided by A&F and other multinationals.
Works Cited
Greenhouse, Steven. "Abercrombie &
Fitch Bias Case is Settled." New
York Times, November 17
(2014): A16.
Hirst, D. Eric, and Mary Lea McAnally. Cases in Financial Reporting: An
Integrated Approach with an Emphasis on Earnings and Persistence. London: Prentice
Hall, 2012: 1-7. Print.
McBride, Dwight. Why I hate Abercrombie & Fitch:
Essays on Race and Sexuality. New York: NYU Press, 2005: 1-64. Print.
Weygandt, Jerry J., Donald E. Kieso, and
Paul D. Kimmel. Financial
Accounting. Vol. 1. London: John Wiley & Sons Incorporated, 2013:
27-83. Print.
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