Abercrombie & Fitch Rethinking Premium on Prices
Last holiday season while competitors were cutting prices to try and drive store traffic, Abercrombie & Fitch management was adamant it was not going to go that route.
The company’s CEO Michael Jeffries saw the promotional tack others were taking as “a short-term solution with dreadful long-term effects.”
David Cupps, chief counsel for Abercrombie & Fitch, told The Wall Street Journal the retailer was not going to be falling in line to follow “the promotional pied piper.”
In the months that followed it became clear that Abercrombie & Fitch’s decision to hold the line on prices was also helping it hold onto a lot more inventory than it wanted to deal with.
Now, a Journal article reports Abercrombie & Fitch is ready to amend its position on discounting.
“Consumer spending patterns domestically continue to be dictated by cost and value propositions, and this is clearly a headwind for our premium brands,” Mr. Jeffries said during a recent conference call.
“We are planning to deliver greater reductions in [average retail prices] for the fall season, but we will continue to review pricing on an ongoing basis,” Mr. Jeffries said.
Discussion Questions: Has Abercrombie & Fitch’s delay in lowering its prices done the type of damage that will negatively affect the business for the longer term? Would the chain be in this position had it cut prices sooner?
Abercrombie has seen its market share crumble in the last year because it has been so slow to react to the “new normal” of a more value-oriented consumer. A&F may have started to offer lower prices, but it has done so in a quiet and piecemeal way. Now it’s in a quandary: How to offer better value without undermining its premium positioning. (One of the underlying questions is whether the quality of its merchandise and store experience warrants the premium price in the first place, since there is nothing especially distinctive about its content or service anyway.) I would look at development of some key items at lower average retails than in the past–rather than a widespread “on sale” mentality–as well as some value incentives to drive loyalty as well as more items into the shopping basket.
It’s a shame that Mr. Jefferies is throwing in the towel so close to the finish line and getting into the discount fray. People have a tendency to get annoyed when premium brands suddenly drop their prices; they feel like they have been ripped off buying full price, especially so far into the game. I don’t think it’s going to work, because I don’t think pricing is the problem.
A&F’s problem is lousy customer service and store experience. I’m not talking about the look and feel of their stores, they’re fabulous, but the store is just the stage. What about the show? You are hard pressed to get anyone’s attention when you enter one of their stores let alone get help. Shopping their stores, I notice that it is nearly impossible to get help in the fitting room, which by the way is the primary conversion zone in an apparel store. This year they had the dubious distinction of being in the top 10 in ‘The Customer Service Hall of Shame’; the only apparel retailer to make it. To turn this around and win, they must align their customer experience with their pricing. If they want to remain an aspirational brand, they need to stop giving the customer service of a discounter.
The single biggest element that drives the nonsensical pricing practices that retailers have found themselves in the last decade or more is inventory management. Their focus on the revenue metrics essentially dictates that they purchase greater and greater levels of inventory with the consequence being that they need greater and greater price cuts to move it.
A&F followed a rational strategy of trying to break that cycle. The problem appears to be that they are still holding a lot more inventory than they had hoped. While they do have to take action to move the inventory, one would hope that their future purchases are in line with sales projections at a pricing level that will break the prevalent pricing cycle.
While they may have to make adjustments in their mix because of a new economic paradigm that change in mix should still be made with the idea that they are going to minimize off-price sales. A&F is trying to establish good business practices. It should pay off in the long term.
Don’t throw A&F under the bus just yet. Any retailer can make a sale by discounting the heck out of every item, but in the end, where’s the margin dollars? Simple math shows that if you start with a 45% GM, and discount the product by even just 25%, you have to produce nearly 70% more sales to make the same amount of gross profit dollars. And, in the process of discounting you now change the brand proposition, training your customers to wait for your sale promotions.
It hasn’t been easy for A&F to take the stance it has, but remember that we won’t be in a recession forever. I for one don’t fully subscribe to the currently popular belief that shopping behaviours have changed permanently and that everyone forever more will be purely value-based shoppers. That sentiment gets tossed around every recession, and then we all go crazy again shopping when times are good. In the end, A&F may in fact be the brightest retailer of all.
It is a curious game that retailers play with us consumers. The psychology of pricing can be a complex thing. There is a big difference, in consumers’ minds, between the actual price, discounts, and sales. It is a constant, fluid calculation in our minds about whether this thing we are considering is worth it.
It all depends on consumers’ relationship with the brand. Granted Abercrombie & Fitch doesn’t have a great deal of cultural experience around aggressive pricing strategy. Look at how Crate & Barrel and Nordstrom handle their “SALES.” They are events that don’t dilute from the brand promise and actually enhance the shopping experience. Reward your best customers with “deals” early on in the season and that allows better inventory management.
They need to find the A&F way of offering a range of pricing.
A&F’s strategy was a highly defensible and strategically appropriate response given their market positioning and previous brand attributes. As has been noted, one of the critical problems A&F faced was not the pricing policy, but rather the erosion of the brand attributes. Put simply, the arrogant almost disdainful delivery of customer “service” found in many A&F stores fit precisely the elitist brand value. The trouble is that the merchandise failed to evolve and sustain that positioning, leaving A&F with poor service, overstocked inventory, and empty stores.
There was a time, very recently, when the affluent enjoyed the feeling of being affluent. Shopping in places like A&F reinforced these social benefits. However, even the affluent have changed in response to the recession. Not only did affluent consumers have enormous amounts of personal wealth destroyed, but the entire culture around affluence and the display of it shifted. While the aspirational marketing model was dominant, A&F flourished…and now that model no longer works. Leaving A&F with a brand positioning associated with the isolated elite. Which is no longer an aspirational position.
At this point, A&F does not need to go on sale. They do need to drop prices on everyday staples and in general respond to an overall downshift in value. More, A&F needs to adjust to it’s clientele. What are the current aspirational values of that core group? Get aligned with your consumer again and the relative pricing won’t be an issue.
The issue for Abercrombie to me isn’t about pricing,it’s about styling. I called this out in yesterday’s discussion on Gap: Compelling fashion and new silhouettes are a middle to upper middle miss at retail right now and shoppers are no longer going to pay premium prices for basics; no matter what brand is slapped on them. To me, it’s that simple. I don’t think that Abercrombie can afford (from a brand equity standpoint) to go the discount route. Instead, I would encourage them to increase the price differential by offering a few, compelling key items at premium prices (say, a great jacket or embellished jean) while adjusting basics down a bit. What’s missing in this space is a fashion point of view that goes beyond brand.
For A&F, pricing is only part of their current problem. To retain the loyalty of their trendy, savvy clientele, they need to make the shopping experience fun again, have the new products on display from the start–and offer good value on the fashion basics that keep the younger folks coming back. As mentioned, the stores are cool, but the staff is not as engaged, and the competition has moved the game ahead. This is a fast moving business, and all the pieces have to be in place or these shoppers move elsewhere.
Sometimes we get smart too late. Pricing is only one of AF’s problems in their clean and solemn stores. May they soon learn the sound of today’s marketplace and determine where they will fit in — succssfully.
A&F has responded late to the changes taking place in the marketplace, and their results have suffered as a result.
Many of the comments in this discussion are spot on. A&F has beautiful stores and lousy customer service. They have more inventory than they can sell profitably. They have arrogantly priced their products, while gallantly (stubbornly?) resisting discounting those products to maintain price and brand integrity.
What they have failed to do is recognize and respond to the fact that the world has changed. They have failed to recognize that their business model is no longer relevant to their target customer, as that customer exists today. They have failed to see that their customer no longer sees their products as premium; they now see them as merely overpriced.
The consumer is not likely to go back anytime soon to paying a premium based solely on brand/store cachet. Intrinsic value is the new driver. It’s an issue that every fashion retailer is now grappling with. A&F is just the most obvious example of how the customer reacts when you fail to recognize and respond to fundamental changes in the marketplace. Their efforts to moderate price points and align inventories are long overdue.