Will Abercrombie & Fitch pull out of the German market? It doesn’t look like it Easter Saturday in Düsseldorf. Five months after the opening of the biggest A&F outlet outside the USA ca. 50 people queue patiently to be allowed in. Inside the 2,500m² store with the moose logo, the sense of a collective shopping spree is tangible. Customers laden with T-shirt, hoodie and shorts stand in line at the cash registers. By rough estimate >70% of visitors make purchases; three retail KPIs guaranteed to raise the pulse of any fashion retailer. Abercrombie’s crisis in the US obviously hasn´t reached Europe yet, shopping experience and the concept fly. But will the experience, the retail benchmarks stay, once there are 30 Abercrombie and Hollister shops in Germany? Looking at A&F’s annual report on US business – one can only hope! The US management is counting on the success of the brand’s international expansion. In 2011 alone, US$ 230m in capital expenditure went to expansion in Asia and Europe – a risky bet, with international sales currently at just US$ 876m. If this retail strategy is to succeed, all Abercrombie stores better have the KPIs the Düsseldorf outlet showed Easter Saturday – every day of the week.
US Retail KPI not convincing
According to the annual report, the 2010 drop in sales has been overcome, yet net profit has again shrunken, to a mere 3.1%. Space Performance rose by 5%, after closing 71 US stores, but is still 8% below the 2007 performance. A critical point: since 2007 gross margin has fallen from 67.3% to 60.6%, a sure sign the brand is losing value from consumer´s perspective. It’s still possible to generate good retail profits with those gross margins, but not when coupled with low stock turnover, high operating costs and capital-intensive expansion. Add to this Abercrombie’s low staff productivity: with annual sales of €120t per employee. It seems the moos´ “lifestyle party” is still much too cost-intensive.
If the US management does not pursue a new strategy with its dynamic internationalization, the history of other major American retailers in Germany could repeat itself. The Gap was also greeted enthusiastically in 1995, only to sell its German stores to H&M after nine unsuccessful years. Or Wal-Mart: a big-bang market entry in 1998/99 and complete exit after seven years and more than €0.5bn in investments. And neither retailer can be accused of failing to make a lot of innovative moves to offer consumers a new personal shopping experience. The business models simply did not have the right economic setup for expansion. To be fair, US brands don’t have a monopoly on strategic missteps. Asia’s No. 1 fashion chain, Uniqulo, failed with stores in the UK, as did Esprit. In each of these cases, growth readiness was lacking.
Is A & F ready for Retailing Europe?
Will Abercrombie go the same way in seven years or will it stand the acid test of Europe? Will it learn from its American predecessors and its own mistakes in the USA? To do so it obviously has to answer two essential strategy questions:
- What’s left of the A&F shopping experience when hoodies can be bought online without the standing-in-line experience?
- What happens to sales conversion quotas and sales slips when nobody asks you whether your frayed sweater came from London or New York anymore?
Whatever the final outcome, the market can thank the Americans for one thing already: increased investments in the shopping experience are becoming part of retail strategies in Europe. One can only hope players like A&F stay long and stay innovative.
Guido Schild, Corporate Developer, Team Retail Excellence