Case Studies

Buy the Book

Fashionably Profitable

Share:

When the Great Recession hit in 2008, one fashion-forward retailer refused to follow the crowd, appearing to apply to its strategy the same sort of path-breaking attitude it brings to its apparel.

The story of iconic clothing retailer Abercrombie & Fitch (A&F) offers a fascinating example of how adherence to the Three Rules -- even in the face of widespread criticism -- can get a business through tough times.

Incarnated as a publicly-traded company in 1996, A&F enjoyed four years of rapid store growth and industry-leading margins and return on assets (ROA). From its earliest days, A&F followed the rule of better before cheaper: Its position was defined by a unique combination of leading-edge style, edgy and highly focused advertising, and a highly differentiated in-store experience -- all of which often required A&F to incur higher relative costs than its competitors. It generated higher profitability despite incurring higher costs, thanks to prices that were consistently and materially higher than its competitors’.

Retail, however, is a fast-moving industry. 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. Not every venture worked, but A&F still managed to enjoy industry-leading ROA results.

Then came the Great Recession of 2008, which tested A&F’s adherence to our revenue before cost rule. Abercrombie & Fitch was criticized by the press for not dropping prices during the recession. Consumers had less purchasing power, and many retailers cut prices in order to sustain volume.  A&F bucked that trend, discounting far less than others.  In the short term, their profitability suffered, and -- like many retailers -- their journey to pre-2008 profitability remains a steep climb.

But A&F is showing signs of recovery, and -- almost alone among fashion retailers -- it’s not struggling to cure customers of a “discount addiction.” Rather than attempt to prop up sales through price reductions, it has stayed focused on finding ways to earn the price premiums that had made it exceptional. From our perspective A&F is trying to solve the right hard problem.

Remember their example the next time you’re tempted to slash prices to make your quarterly numbers. Stick with better before cheaper and revenue before cost -- after that, there are no rules.

Hey, maybe someone should put that on a t-shirt...

See All Case Studies >>