Formal Business Report on Abercrombie & Fitch

Executive Summary

In this formal business report, Abercrombie & Fitch Co.’s history, strengths and immediate goals were evaluated.  Recently, it has experienced substantial profits in its operation in its stores in Canada, Italy and the United Kingdom.  Overseas expansion was so vital in its performance that the profits for its international operations more than made up for the decline in revenues in the United States.  It is now looking to expand its operation in the South Asian region, particularly Afghanistan, which is conveniently located at the heart of South Asia.  

The peace and order situation, economy, culture, infrastructure and financial markets of Afghanistan were also researched to determine whether Abercrombie & Fitch Co. will thrive in this country.  The purpose of this research is to find out whether establishing a flagship store in Afghanistan will be to the best interest of the company. 

The results of the study will show that while Abercrombie & Fitch Co may be among the first clothing company to make investment in Afghanistan which may prove beneficial in the long-term, Afghanistan is still not ready for the casual and trendy clothing line because it has an unstable peace and order situation, poor economy, low purchasing power, poor infrastructure facilities and road conditions and has weak financial market.  Because of these factors Abercrombie & Fitch Co. should not invest and open a flagship store in South Asian region.    

Abercrombie & Fitch Co. which focuses on a limited segment of the population and caters to the high-end market will not thrive in this business environment.  Until these conditions change in the near future, Abercrombie & Fitch Co. should not risk its company reputation on Afghanistan.

INTRODUCTION

In November 2009, Abercrombie & Fitch Co. entered the Italian market by opening an Abercrombie store in Milan (Mae Anderson, 2009). At the same time, it also opened two Hollister stores in Britain.  Before the end of the year, it is expected to open Hollister stores in Frankfurt, in Rome and another Abercrombie store in Japan.  It is not only seeking to invest in new markets but is also investing in new concepts and brands.  A testament to this is the opening of a new brand called Concept 5 (“Abercrombie & Fitch plans fifth concept”, 2009).   It is no secret that the Abercrombie & Fitch Co. is pursuing an aggressive growth strategy by expanding overseas.  Chief Executive Officer Mike Jefferies has expressly stated that it looks forward to opening new stores in 2010 and 2011. 

           

As Abercrombie & Fitch struggles through the recession in the United States, it is important to more forward and attempt to look for better opportunities in the international market. This long-term strategy is working as international sales are offsetting the losses in the United States.  As expands the Abercrombie & Fitch to new markets and locations it is also important to examine new markets aside from Europe and Southeast Asia.  A good market could be the South Asia which consists of Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka, Afghanistan, Burma, Tibet Iran and the British Indian Ocean Territories.  Opening flagship store in any of these markets can pave the way for further expansion in other South Asian countries.  This study aims to find out whether there is an opportunity for business expansion in Afghanistan. 

BACKGOUND

A. HISTORY OF ABERCROMBIE & FITCH CO.

Abercrombie & Fitch Co. is a specialty retailer that sells casual sportswear apparel, personal care and other accessories for men, women and children under its different brands:  Abercrombie & Fitch, abercrombie, Hollister, Ruehl No. 925 and the Gilly Hicks.  It has also expanded its product line and now offers bras, underwear, personal care products, sleepwear and at-home products for women under the Gilly Hicks brand name. Currently, it operates 1105 stores in the United States, District of Columbia, Canada, United Kingdom, Italy and Southeast Asia, as shown in Figure 1. 

Figure 1

Abercrombie & Fitch Co. Store Count

Abercrombie & Fitch Co.	Abercrombie & Fitch	Abercrombie	Hollister	Ruehl No. 925	Gilly Hicks	Total
Store Count	356	212	515	28	14	1105

Source: Abercrombie & Fitch 2008 Annual Report, p.4

Abercrombie & Fitch Co. is a brand name known for its casual styles and trendy sportswear.  It primarily targets the teen-agers and adults below the age of 35.  It has established a reputation for being the premier source of clothing apparel for its young and hip customers.  It is also known for its high-end market because of its relatively expensive brands.  A comparison of its prices and those of its competitors – the American Eagle Outfitters, Inc. and the Aeropostale Inc will reveal the price difference.  It is also known for its semi-naked models for which the company has been criticized in the past.

The company’s history will reveal that it did not start right away selling hip and trendy casual clothing line.  In 1892, the Abercrombie & Fitch brand was known as a specialty store that catered to the adventurous market by selling camping, fishing and hunting equipment.  When the relationship between its owners David Abercrombie and Ezra Fitch turned sour Abercrombie resigned leaving Fitch to continue the business.  Subsequently, the company slowly gained a reputation for catering to the elite markets.  Among its customers at the start of the 20^th Century were Ernest Hemingway, Theodore Roosevelt, Roald Amundsen and Admiral Richard Byrd (“Company History”, 2008). 

In 1978, Oshman’s Sporting Goods acquired ownership of the Abercrombie & Fitch brand.  Because camping and fishing equipment were already outdated, it introduced changes in the company’s product line and shifted to the sale of exercise machines, tennis rackets, golf clubs, and other sporting equipment.  It also introduced business and casual dresses and even sportswear.    In 1988, the company was sold to The Limited Inc. which was the start of its gradual transformation to the sale of casual clothing lone.

B. FACTS ABOUT AFGHANISTAN

Afghanistan is a country located in South Asia.  It can be found north and west of Pakistan and East of Iran.  Afghanistan is known for being the crossroad of Central Asia that links Central Asia to Middle East and Indian sub-continent.  Because of its strategic location in the world map it had enticed the great conquerors like Alexander the Great and Genghis Khan.  In the 19^th Century, Afghanistan was caught between two super-powers fighting over its territory – British Empire and the Russians.  In 1978, Afghanistan was again under Soviet Union control.  However, after several years of resistance, the Afghans with the help of the United States, Saudi Arabia, Pakistan, successfully drove the Soviet Union away from their territory. 

As of July 2009, it has a population of 28,396,000 million.  Its age structure is very young with 0-14 years of age composing 44.5% of the population, 15-64 years of age composing 53% of the population and 65 years of age composing over 2.4% of the population (“The World Fact Book: Afghanistan”, 2009).  The median age for both male and female is at 17.6.  It has a high population growth rate at 2.626% which is ranked 28^th in the world. 

           

There are several ethnic groups in Afghanistan.  42% are Pashtun, 27% are Tajik, 9% are hazara, 9% are Uzbek, 4% are Aimak, 3% are Turkmen, 2% are Baloch (“The World Fact Book: Afghanistan”, 2009).  The main religion is Sunnni Muslim which composes 80% of the entire population while 19% are Shia Muslim.  The languages spoken are Afghan Persian or Dari, the official language spoken by 50% of the population, Pashto which is spoken by 35% of the population, Turkic language which is spoken by 11% of the population and 30 other minor languages.

Afghanistan is a country that is severely devastated by decades of conflict, crime and violence.  Currently, it has started to recover from the conflict and war and its economy has improved starting from the fall of the Taliban regime in 2001.  At present, it is a nation which is extremely poor and depends mainly on foreign aid.  Among its main problems are crimes, job insecurity and poverty.  There is also a shortage of housing, clean water, electricity, medical care and jobs.  There are also interethnic strife and violence, inequality of women, kidnapping, and banditry.  Blood feuds are also very common oftentimes being handed down through generations which are settled through revenge and violence. 

Its labor force comprises 15 million of its population which is around 55% of its population.  By occupation, the labor force is devoted mainly to agriculture which composes 80% of the entire population, while the service and industry sector only comprises 10% each (“The World Fact Book: Afghanistan”, 2009).  However, it is worth nothing that only 12% of the land area is available for agriculture.  The equipment used by farmers is still primitive and the peasants are dependent on spring rains and winter snows.  There is hardly anyone who uses machines, pesticides or fertilizers.  Some are also engaged in the grazing of cattle which is an important part of the economy and an important source of income.

Its unemployment rate is estimated at 40% of the entire population.  The population of the people living below the poverty line is fixed at 53% as of 2003.  Investors which are seeking to infuse money in this county should also take note that its inflation rate is at 13%.  The prevailing bank prime lending rate is at 14.92%.

Afghanistan’s clothing is mainly cotton and wool.  The men wear long-sleeved shirt which is belted at the waist.  It is also traditional for men to wear baggy cotton trousers which the men pair with long cotton shirts hanging over their trousers and wide sashes around the waist.  The women wear Chadri which covers them from head to foot.  They also drape a wide shawl over their heads. 

DISCUSSION

On one hand, the Abercrombie & Fitch is an internationally recognized brand name.  The brand recognition for Abercrombie & Fitch Co. goes back as early as the 19^th Century.  It is a company that has survived many economic fallouts and crisis.  Its shift in company direction from catering to adventurists and sports enthusiasts to casual and trendy clothing line and its gradual expansion to selling accessories are indications that it is a company that knows and understands its business environment.  It is a company that can adjust to the changing environment and can take advantage of the opportunities existing within its environment. 

Moreover, Abercrombie & Fitch Co. has established a strong connection with the small market that it caters to.  Because it has specialized in offering hip and trendy clothing line it has developed an expertise to this line of business (Michman & Mazze, p.3.  It also seeks to always improve its in-store experience so that its customers may want to come back to any Abercrombie & Fitch Co. stores.  For instance, it recently contracted with a scent technology and media company called Prolitec, Inc. which will help it provide the needed scent ambiance to all its retail stores (“Abercrombie & Fitch Partners with Prolitec for In-Store Scenting”, 2008).  For Abercrombie & Fitch Co. cost is not an issue as it spends millions of dollars simply to remodel and improve its stores from the fixtures, flooring, and sound system to the chandeliers and wallpapers in its stores just so its clients may appreciate the atmosphere inside the Abercrombie & Fitch Co. stores.  Customers who have visited the Abercrombie & Fitch Co. stores will also notice that every brand is displayed uniformly to ensure a consistent store experience.  Store managers also receive detailed plans designating the furniture and merchandise placement not only to maximize space but to ensure that coordinated execution of the company strategy (Abercrombie & Fitch  Co., 2008 Annual Report, p.3).

However, taking into consideration Afghanistan’s peace and order situation, economy, culture, lifestyle, it stands to reason that it will be a serious blunder to open a store at this present time in Afghanistan.  While South Asia is a relatively attractive market and that placing a store at this present time in Afghanistan may later on prove to be beneficial for Abercrombie & Fitch Co. because of its strategic location, prudence dictates that Afghanistan is still not yet ready for a company like Abercrombie & Fitch. 

A. AFGHANISTAN IS A WAR-TORN COUNTRY

The current peace and order situation in Afghanistan is a turn-off for many business organizations.  Despite the removal from foreign rule, Afghanistan was still plagued by civil wars brought about by the Mujahidin warlords who occupied different cities of Afghanistan. According to Adam Ritscher, during the reign of the Mujahidin warlord, over 60,000 people were murdered and thousands of women were raped.  (Adam Ritscher p.2)  The Talibans soon replaced the Mujahidins.  The Talibans were educated rebels who initially wanted to liberate the people from the Mujahidin warlords.  Once the Talibans destroyed the Mujahidins and rose to power, however, the Afghans discovered that the Talibans were as cruel as the Mujahidins. 

One of the most recent wars the country has witnessed is that of the United States and the Talibans.  After receiving intelligence reports that the Talibans were harboring Osama bin Laden, a known terrorists, the United States warned them to surrender Osama and to cease their support for international terrorist organizations.  Osama Bin Laden was alleged to be responsible for the September 11, 2001 bombing of the World Trade Center and the bombing of the U.S. Embassies in Nairoba.  Because of their refusal to turn over Osama Bin Laden, the United States with the help of its allies began its campaign of destroying the Taliban forces.  They successfully obliterated them on November 13, 2001. 

Since the removal of the Taliban forces in 2001, the United States and several other countries have expressed hope for a quick and speedy recovery for Afghanistan. They pledged that they will provide the much needed food and medicine to finally “heal” the country.  The United States led this mission of providing support for Afghanistan so that there will be a smooth transition from being a war-torn country to “a viable, democratic and friendly Islamic state.”  Yet all these hopes dissipated when eight years have elapsed and still there is no sign of improvement in Afghanistan despite international aid. Up to this date, Afghanistan remains as one of the poorest countries in the world alongside Somalia and Sudan in Africa. (“Afghanistan Five Years Later: The Return of the Taliban”)

B. POVERTY IN AFGHANISTAN

The Abercrombie & Fitch Co. takes pride in being a high-end brand.  It generally caters to the upper class market as they are the ones who are most capable of purchasing their relatively expensive brand.  Taking this into consideration, Afghanistan where unemployment rate is at 40% and 53% of the population is living below the poverty line may not be able to afford the Abercrombie & Fitch Co. brand.   Moreover, since the products which are being sold by Abercrombie & Fitch are discretionary items, the Afghans may find these good as items of luxury which are the least of their priority.

It is also unlikely that there will be a substantial improvement in the economy and the financial capacity of the people in Afghanistan.  It is worth stressing that there is still no substantial development and improvement in Afghanistan despite the destruction of the Taliban a few years ago.  Moreover, there is no sign that the Afghanistan may in the near future become a prosperous nation since majority of the youth in Afghans do not have education.  Education is a basic right of every child.  As such, it is the obligation of every government to be able to provide all children with access to free education.  The problem however is that education seems to be a privilege for the Afghans. 

According to a research conducted by the Afghanistan Independent Human Rights Commission (2006), out of a total of 7929 respondents, only 4,467 or 56.3% said that all their primary school-age children are attending regularly (p.32).  Also, it was reported that 3,462 of families or 43.7% out of the total respondent of 7929 said that not all their primary school-age children are attending school regularly. 

It must be stressed that education is very important for a country like Afghanistan.  When children are not able to go to school for any reason, they grow up to be illiterate. Their children may also grow up to be illiterate.  The Afghanistan Independent Human Rights Research stated that out of 4292 respondents, 1264 gave reasons why their boys are not regularly attending school.  The main reasons given were child labor, according to 462 respondents, physical accessibility, according to 41 respondents, and economic accessibility according to 25 respondents.

C. POOR INFRASTRUCTURE AND ROAD CONDITIONS

In a study conducted by the Multilateral Investment Guarantee Agency (MIGA) of the World Bank Group, they noted a marked progress made in Afghanistan since the end of the major fighting in 2002 (“Investment Horizons: Afghanistan”, 2005).  It also cited that Afghanistan’s Gross Domestic Product has grown considerably by up to 50% since 2003.  However, despite the positive assessment by the MIGA, the reality is that few investors have infused the needed investment to bring life to the ailing economy of Afghanistan. 

           

Even the MICA cited that Afghanistan has poor infrastructure facilities and road condition.  Based on their study, the main transit road for the shipment of goods to Pakistan, which is its main trading partner, is also in bad condition.  Some of the companies interviewed even expressed their frustration over the major highways which are frequently closed without prior notice due to security reasons.  The closure of these roads may even last for several days which adds costs and brings damage to the business in the area (“Investment Horizons: Afghanistan”, 2005).  Moreover, air freight is still limited and even more costly.  Currently, there is no facility that will facilitate the shipment of goods directly to Afghanistan.  Consequently, business investors which are interested in shipping goods to Afghanistan need to go through Pakistan first before the goods can be brought to Afghanistan which is an additional layer of cost for business investors. 

D. WEAK FINANCIAL MARKETS

Business investors which are interested in investing in Afghanistan need the help of financial institutions like banks to be able to bring the needed investment to the weak economy of Afghanistan.   The Afghanistan economy also needs business investors because they bring jobs and opportunities to the country.  At this point however, there does not seem to be any motivation on the part of the businesses to explore the Afghanistan market. 

One reason for this is the weak condition of its financial markets.  While international banks and the Central Bank provide for conventional financial services to businesses that may be interested to bring life to its ailing economy, the domestic banks in Afghanistan are not yet capable of offering commercial loans and financing to investors (“Investment Horizons: Afghanistan”, 2005). 

According to a study conducted by the Multilateral Investment Guarantee Agency (MIGA) of the World Bank Group, the companies currently operating in Afghanistan did not borrow from its banks and are not even aware if there are banks offering commercial loans to interested business investors (“Investment Horizons: Afghanistan”, 2005).  Since the banks do not offer the basic commercial loans, business investors are forced to get the needed funds though the informal banking system which offers a higher rate of interest. 

           

           

E. PRICING STRATEGY OF ABERCROMBIE & FITCH CO.

            The Abercrombie & Fitch Co. is also known for its expensive prices.  As a result, only the customers who can afford to pay it are able to wear their brand of clothes.  A few years ago, Abercrombie & Fitch Co. remained firm over its decision not to lower its price and offer discounts despite the recession and the global economic crisis.  Its critics have already suggested lowering its price so that it can attract more customers, drive traffic to their stores and increase its customer-base.  CEO, Michael Jefferies however has remained firm to maintain its price strategy.  “Demand is not elastic for A&F merchandise, and promotional strategies merely work to cheapen the aspirational nature of the brand” (Marie Driscoll, 2003, p.1).  It wanted to retain its status as a company that provides its customers with quality and style.  Moreover, giving discounts and lowering the price of its products will only cause long-term damage to the company’s brand name which it has painstakingly established through the decades of its operation. 

            In the United States, the Abercrombie & Fitch Co. has felt the impact of the global financial crisis on its stores.  Consumers have reduced their spending for discretionary items which are also some of the items being sold in its stores.  Loss of jobs and debts have also affected consumer spending in the United States which have affected the people’s purchasing power.  As a result, it has experienced substantial revenue decline in its 2008 revenue, as stated in Figure 2.

Figure 2

Income Statement: Abercrombie & Fitch

Fiscal Year	2008	2007	2006	2005	2004	2003
Net Sales	3,540,276	$3,749,847	$ 3,318,158	$2,784,711	$ 2,021,253	$1,707,810
Gross Profit	2,361,692	$2,511,367	$ 2,209,006	$1,851,416	$1,341,224	$1,083,170
Operating Income	439,386	$ 740,497	$ 658,090	$ 542,738	$ 347,635	$ 331,180
Net Income	272,255	$ 475,697	$ 422,186	$ 333,986	$ 216,376	$ 204,830
Source: Abercrombie & Fitch Co. 2008 Annual Report

            Consequently, Abercrombie & Fitch Co. was forced to make adjustments in its pricing strategy in the United States to drive customer traffic to its stores and to sell its existing inventory.  While there is improvement in its revenues, it is not enough to recoup its losses in the past years.  If this pricing strategy is enough to lure customers inside Abercrombie & Fitch Co. stores, using the same strategy in a struggling economy like Afghanistan may not be as effective.  Considering the lack of jobs and poverty, Afghans have low purchasing power such that even the offering of its products at discounted price will not do any help. 

CONCLUSION

The fourth quarter of 2009 will continue to be tumultuous for Abercrombie & Fitch Co.  The global economic crisis and the decline in consumer spending will continue to affect the company’s performance for 2009 and even until the first semester of 2010.  The company’s strategy which is to efficiently and properly manage its expenses, reducing its capital expenditures and conducting promotional sales and discounts in its stores and have helped in clearing its inventory and getting substantial cash flow in its stores.  Most importantly, the strategy of international expansion in United Kingdom has proven to be effective not only in establishing its presence in the United Kingdom market but also in generating cash for the company.  As the company further experiences the effects of recession in the United States, it will further look for opportunities in the international market. 

However, the existing business environment in other countries should be analyzed first before the company ventures into opening flagship stores overseas.  Based on this report, opening a flagship store in Afghanistan for purpose of establishing its presence in the South Asian region should not be an immediate goal of the company.  Afghanistan is still suffering from the decades of wars and conflicts brought by warlords that controlled this story.  Despite the destruction of the Talibans economic recovery is still slow.  Infrastructure facilities and road conditions are still poor.  Financial markets are also weak and does not provide for adequate commercial loans for interested investors. Even if the company changes its pricing strategy by lowering the prices of its products it is unlikely that it will be able to attract customers in this county.  Abercrombie & Fitch Co. which focuses on a limited segment of the population and caters to the high-end market will not thrive in this business environment.  Until these conditions change in the near future, Abercrombie & Fitch Co. should not risk its company reputation on Afghanistan.

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