Andri Capital Letter to Abercrombie & FItch
April 7, 2017
The Board of Directors
Abercrombie & Fitch Co.
6301 Fitch Path
New Albany, OH 43054
To the Board of Directors of Abercrombie & Fitch Co.:
This letter primarily concerns Abercrombie & Fitch (the brand).
Abercrombie & Fitch ("A&F" or "Abercrombie") is at crossroads.
In recent years the company has performed poorly. A&F has experienced declining revenues, profits have decreased and its reputation has been severely tarnished. Nowhere is this more apparent than by the continually falling share price that hasn't been lower in nearly seventeen years.
As a minority shareholder we are writing to you now because this dire situation that has gradually presented itself over the recent years may, if handled properly, offer one of the greatest opportunities in the company's history - or, if handled poorly, be the beginning of its ultimate demise.
Despite the recent efforts by management to turn the situation around we strongly believe that more can be done. Hopefully you will consider the recommendations in this letter to further strengthen and ensure the potential long-term value of Abercrombie & Fitch Co.
We believe that the fundamental problem facing Abercrombie today is one of brand identity and positioning, or rather the lack thereof.
With the advent of low-cost, fast-fashion retailers the brand has struggled. Sales have declined with customers leaving, and customers have left because Abercrombie does not deliver sufficient value beyond its competitors. In other words, the company is unable to keep a hold on customers because it doesn't present customers with a unique selling proposition that is based on a durable competitive advantage.
In it's heyday A&F was known as "the greatest sporting goods store in the world", specifically catering to "those interested in fishing, shooting, canoeing, camping, prospecting, exploring, mountain climbing and other "near to nature" pursuits".
Later the brand reinvented itself as a teen retailer – a move that culminated with the very outgoing "rude and brash" image, which in our view was fundamentally untrue to the authentic A&F and perhaps doomed for failure (especially since that model lacked many characteristics of a good business, e.g. decent customer service and sustainable competitive advantage).
Today the brand is in the midst of an identity crisis. It is not the greatest anything. Frankly, it risks being boring, irrelevant and easily dismissed by customers. The company is described as a "leading, global specialty retailer", yet there's nothing really special about it. It doesn't have a clearly defined space in the minds of consumers. The recent turnaround move from the previous extravagant image to the more general, less flashy image for an older customer segment has not been supported by the development of any kind of sustainable brand identity or energetic marketing campaigns. The brand describes itself on social media channels as "Founded in 1892, A&F represents enduring style that is always evolving." This message is too vague – it lacks a clear value proposition and certainly does not make A&F so important to customers to not be ignored. This lack of uniqueness, unspecified positioning and vague brand identity are dangerous elements that must be countered in order for the business to endure.
Without a clearly defined and well-articulated brand positioning any efforts intended to shore up sales are likely to fail. No enduring value will be created since customers won't have a specific reason to choose A&F over any other retailer (a scenario currently evident by the continuing decline in revenues and minimum stronghold on customers). Furthermore, without a clearly defined positioning the company is more likely to engage in competitor-like activities and succumb to the influence of low-cost, fast-fashion competitors by offering relatively generic products at lower, non-premium prices. Such a strategy will "numb" the brand, cause it to consistently operate in the fickle world of trends and fashion without a solid ground of enduring value, and ultimately set the company on a path towards sustained underperformance and eventual failure.
Even with the recent turnaround efforts we see signs of forthcoming underperformance with no real recovery in revenues, persistent store closures and diminishing shareholder value. The company's share price has continued to fall and is now at a near seventeen-year low. Investors seem to have little confidence in management's efforts to turn things around and with no share repurchases or increase in the marketing budget it is logical to ask if management itself even has much confidence in the turnaround. Overall, the current turnaround strategy is defensive and reactive, with the company becoming a more "for-all" brand that offers relatively generic products in a larger, more competitive market without giving customers a compelling reason to choose A&F over any other retailer – all the signs of a brand with a weak identity.
In summary, Abercrombie's unique selling proposition is vague and not supported by a durable competitive advantage. This lack of a strong brand positioning weakens the current turnaround efforts, causes lack of focus, nudges the brand towards more price-dependent, competitor-like behavior, diminishes premium pricing power, increases costs and adds to the uncertainty of future earnings with less dependable revenues, ultimately leading to lower firm value.
Although being a step in the right direction, we believe that the current turnaround efforts initiated by management in the past months are simply not sufficient and decisive enough to sustainably turn things around and ensure the long-term growth, or even maintenance, of shareholder value.
As stated above we believe that without more decisive action the company will continue on a path towards sustained underperformance and failure. But even though the situation seems bleak today we do believe it to present a fertile ground ripe for growth. In fact, this pivotal moment may be one of the greatest opportunities in the brand's history, if handled properly.
The current turnaround strategy falls short in reviving the brand because it doesn't present customers with a unique selling proposition based on a durable competitive advantage (customer don't have a strong reason to choose A&F over other retailers). If management takes advantage of the current situation and develops a strong brand identity, based on elements that are not easily copied by competitors, the brand's turnaround could actually become successful with:
- Renewed revenue growth, or at least improvement from the current decline
- More sustainable earnings
- Fewer store closures
- Less need to compete with low-cost, fast-fashion retailers
- Premium pricing power and luxury appeal
- Materialization of a long-term, "base value" for shareholders
- Improvement in customers' perception of A&F
- A stronger and better company, able to prosper over the long term
With the appropriate action and revived turnaround efforts Abercrombie could thus go from being the broken brand it is today to becoming a truly great company – one of the few wonderful ones that are so important they cannot be ignored.
For the turnaround to be successful Abercrombie must present customers with a unique selling proposition based on a durable competitive advantage. This means that management must develop a strong brand identity and present it clearly to customers. (What do mean by "strong brand identity"? A strong brand identity is based on elements that are not easily copied by competitors. "The greatest sporting goods store in the world" is an example of a strong brand identity, whereas the previous A&F "rude and brash" image or the current "enduring style, always evolving" are examples of the opposite.)
To successfully accomplish this we propose the following:
1) Competitive Advantage: Identify the durable competitive advantage.
Heritage & Origins
Unlike most apparel companies Abercrombie & Fitch has what could be considered a durable competitive advantage: A 125-year heritage.
Management should bring the brand back to its original roots. The brand's history and sportswear-related origins give it luxury appeal, justify premium pricing and enable the creation of enduring value.
2) Brand Identity: Develop a strong brand identity.
Management should refine Abercrombie's mission statement. A refined, sharply focused mission statement provides a path for the company, includes the brand's unique selling proposition and properly aims the turnaround efforts to realize the most value:
"Abercrombie & Fitch is the original American sportswear brand - creating expertly crafted products that remain true to its 125-year heritage of casual luxury and effortless, American style."
Management should focus Abercrombie's product offerings on three categories:
- Abercrombie Sport (sportswear)
The "athleisure" movement should have been lead by Abercrombie. The sportswear area is underserved by the brand and offers a clear opportunity to enhance revenues. In addition, embracing sports gives the brand energy (that would surely help in this turnaround) and makes A&F more relevant to the target 20+-year-old customer.
- Abercrombie (casual)
This category would include the brand's current main offerings of casual wear.
- Abercrombie Limited (special editions, partnerships, exclusives, etc.)
This category would focus on exclusives, product partnerships and other special offerings – underscoring the premium position and luxury appeal of A&F's heritage.
This will solidify the brand's position without upending its current array of product offerings, add life and desirability to the brand, and make Abercrombie practically fashionable, instead of just fashionable. It will present the brand as being more valuable and useful, highlight the "Abercrombie lifestyle", underline its origins and heritage, enable premium pricing and distance it further away from competitors. The company should also not shy away from targeting older, more affluent customers.
3) Marketing: Present customers with a unique selling proposition.
This turnaround offers a unique opportunity to reignite customers' excitement by introducing the "new Abercrombie". The company should take advantage of the opportunity and allocate greater resources to marketing. The decent financial position of the company should allow, at least temporarily, for an increase in advertising expenditures beyond the now relatively low level of 3% of sales.
The company should communicate the brand clearly across all channels. The brand must be presented directly to customers with a singular focus that gives them everywhere a definite answer to the question "what is Abercrombie?" ("Abercrombie is the original American sportswear brand."). And this presentation of the unique value proposition must happen instantly right at the start of every customer touchpoint.
The company should amplify content marketing efforts, both online and potentially offline. This primarily involves informing customers about the brand, creating story appeal and complimentary content to Abercrombie's products – giving customers a reason to buy by emphasizing useful value instead of just style and fashion. The "Made for You" online initiative is a step in the right direction, but a lot more can be done.
Today customers don't have a strong reason to buy from Abercrombie. Taking the steps outlined above will present customers with a reason to choose A&F over other retailers. By positioning Abercrombie as "the original American sportswear brand" and showing customers how the products fit into their lives the brand will single itself out, make everyone else secondary and provide customers with a compelling reason to buy – even though everyone else makes the same kind of clothes customers should always pick Abercrombie because Abercrombie is the original.
This letter has focused on three topics:
The Problem: The company doesn't present customers with a compelling reason to buy because the brand lacks a unique selling proposition based on a durable competitive advantage. This fundamental problem causes the current turnaround efforts to not be sufficient and decisive enough to successfully ensure the long-term growth, or even maintenance, of shareholder value.
The Opportunity: The best time to change is in a time of crisis. With the appropriate actions the brand's turnaround can actually become successful and in the process pave the way for Abercrombie & Fitch to become a truly great company.
The Plan: Abercrombie must present customers with a unique selling proposition based on a durable competitive advantage. The company can give customers a compelling reason to choose A&F over other retailers by positioning the brand as "the original American sportswear brand". Furthermore, it should use the situational opportunity and the company's decent financial position to build brand momentum by enhancing marketing activities across all channels.
Overall, the dire situation of Abercrombie & Fitch calls for immediate action with no half measures. If implemented now the proposed actions in this letter will significantly add value to the firm, fuel the current turnaround efforts and overall contribute to the long-term welfare of the company. The window of opportunity is narrow but we believe that this situation, if handled properly, can really make Abercrombie & Fitch one of the truly great companies in America and worldwide.
In addition to the general proposal in this letter we have come up with more specific tactics that can be implemented quite quickly and effectively. These tactics involve various aspects of the business, including online presence, design aspects, media, marketing and advertising, store policies, product strategies, and further detailed and complimentary strategies relating to this letter's proposed actions. To that extent, we would be pleased to offer our services to further advise, elaborate and work with the board and management in the best interest of Abercrombie & Fitch.
Stefan A. Stefansson,
About Andri Capital
Andri Capital is a European-based private investment firm, est. 2017. The company invests in public equity and alternative asset markets around the world.