Abercrombie + Fitch and the Recession

Teenage fashion retailer, Abercrombie + Fitch, like most retailers, has witnessed declined sales in the economic downturn. Abercrombie is a particularly interesting topic, however, due to the large profit margins the company enjoyed during more prosperous times. The once market leader was able to charge much higher prices than their competitors due to non-price factors and a widely recognizable marketing and advertising strategy. These perceived differences by consumers positioned Abercrombie as a premium brand. Between 2002 and 2007 Abercrombie reported operating margins slightly below 20%, by 2008 this was reduced to 13.3% and all the way to 4% in 2009 (Holmes, 2009)

Abercrombie is positioned in an industry that is a monopolistic competition. The price elasticity of clothing is very high and when you consider the fact that Abercrombie is a premium brand and this even further increases that price elasticity. A highly competitive industry with numerous participants, retailing is fairly simple to enter and exit.

As the economy has slowed and consumers have shifted to lower cost and discount clothing retailers Abercrombie saw their sales decline. As shopping centers and retailers were discounting their items to move inventory, Abercrombie resisted any sort of drastic promotions or sales in order to retain their place as a premium brand and protect what they deemed to be integral to the brand. CEO Mike Jeffries was quoted in a February 2009 Reuters article as saying, "We are not promotional and will not be promotional..." (Wohl, 2009). The company had the long term reputation of the brand in mind before the short term financial results and was hedging weathering a short term recession. This reluctance has led to devastating double digits losses for the retailer. Abercrombie's excess inventory exposed them to far greater margin risks. Even though the CFO of Abercrombie is now taking the stand that he will continue to discount the stores merchandise at levels uncharacteristic of the company, the refusal to do so when its competitors first started has led to significant erosion in the company's gross profit margin.

The department store Nordstrom responded to the economy by altering their pricing strategy and merchandising and implementing lower cost lines of brands that were selling well before the recession. Nordstrom introduced promotions such as a denim line under $100 while retaining their $1,000 plus footwear lines like Jimmy Choo (Smith, 2010). This wide range allowed the department store to retain high income consumers who were less affected by the economy or consumers who were still spending on discretionary items, as well as attract new or old consumers looking for a bargain. Abercrombie, in contrast, is still trying to sell products that are two times as much as its competitors. The retailer is now at the point where they have admitted that they need to sacrifice margins to improve their sales. Since giving up their resistance to lowering prices the operating margins of Abercrombie has almost doubled. Beyond reducing their prices Abercrombie is hoping to mitigate the length and depth of this measure by cutting operating costs and expanding internationally. It's hard to determine at this point if luxury clothing will be able to enjoy the success it once did and if so when.
Sources:

Holmes, E. (2010, March 10). Abercrombie Will Keep Discounting. Wall Street Journal, Retrieved March 11, 2010, from the ProQuest database.

Holmes, E. (2009, August 14). Skimpy Profits Pressure Abercrombie's Pricing Attitude. The Wall Street Journal. Retrieved March 22, 2010, from online.wsj.com/article/SB125020118719130371.html

Smith, T. (2010, March 1). Getting Pricing Right - Nordstrom vs. Abercrombie & Fitch. The Wiglaf Journal. Retrieved March 22, 2010, from http://www.wiglafjournal.com/pricing/2010/03/getting-pricing-right-%E2%80%93-nordstrom-vs-abercrombie-fitch
Wohl, J. (2009, February 13). Abercrombie profit tops view, shares surge. Reuters. Retrieved March 22, 2010, from http://www.reuters.com/article/idUSTRE51C2XH20090213