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This Leader's Trap Comes to a Quick End

In February of 2009, we wrote a blog about Abercrombie and Fitch in a Leader’s Trap (see the blog, “A High End Retailer in a Leader’s Trap”). In that blog, we observed that Abercrombie and Fitch refused to discount its products in the marketplace, despite the fact that American Eagle Outfitters and Aeropostale, two of its main competitors, were offering lower prices. We noted that Abercrombie’s market share was falling, while Aeropostale’s was clearly on the rise. We predicted that Abercrombie would have to come out of its Leader’s Trap soon by changing its pricing policy.

Abercrombie has surrendered.

The company reported a larger than expected first quarter loss and said that it planned to lower prices to boost sales. It admitted that this price reduction is a 180 degree change from its previous strategy of keeping prices high through the recession (see the Perspective, “Who has Pricing Power?” on StrategyStreet.com).

Earlier in the year, Abercrombie had argued that price-cutting would increase sales but would destroy its high-end image and the company’s future pricing power (see Video #4: The Risk of Slow Demand Growth on StrategyStreet.com). Competitors saw otherwise. They took advantage of Abercrombie’s high prices. The predictable result is that shoppers deserted the teen retailer for other retailers offering lower prices. Abercrombie then faced an inventory pile-up and a fall-off in sales.

Once customers begin deserting a company because of its high prices, the company’s Leader’s Trap will always come to an end (see Video #42: Leader’s Trap on StrategyStreet.com). When it does end, the company will have lost market share and margin. Some of the market share loss is likely to be long lasting.

Posted 5/21/09

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