American Apparel

Bana Amare Andrew Goldberg Jorge Ventura

American Apparel is an American company that manufactures clothes in the United States and is sweatshop free. Dov Charney, a Canadian with a fascination with American culture, founded the company in 1989. Charney started by subcontracting the sewing for a few months to Sam Lim, who he would eventually become partners with. American Apparel started as a wholesale business, growing the company by selling blank T-shirts to screen printers, uniform companies, and fashion brands. After several years, the company moved to its current headquarters in Los Angeles. After American Apparel experience as a wholesale brand, the company moved into the retail market. American Apparels expansion into retail was one of the fastest retail rollouts in American history. The company opened up company stores to nearly $80 million in sales. By 2008, American Apparel had over 200 stores worldwide and nearly $40 million in online sales by 2009 (American Apparel, Inc FORM 10-K, 2010). The company is vertically integrated, integrating all aspects of production to avoid outsourcing. This allows American Apparel to achieve a fast turn around time from design to a finished product. Also in 2008, American Apparel was named Retailer of the Year at the 15th annual Michael awards for the fashion industry (Company Information, 2014). The company is very socially conscious. American Apparel has different campaigns promoting different issues, such as Legalize LA, Legalize Gay, and Pride. Legalize LA is an advertising campaign promoting amnesty for undocumented immigrants. After the passing of Prop 8 in California, American Apparel launched the Legalize Gay campaign. Legalize Gay is similar in campaign structure Legalize LA, same style shirts, but with the message of legalizing gay marriage. American Apparel was named one of TheStreet.coms 8 Pro-Gay Companies (The Street, 2014).

American Apparel is known for having controversial and provocative ad campaigns. Currently, the company is back in the news for controversy over featuring a former Muslim model topless, with the words, Made in Bangladesh across her chest. American Apparel also has an ad out starring a 62-year old woman with the caption, Sexy has no expiration date. These are only the most recent of American Apparels history of using provocative ads to promote their products. While these ads cause a stir, they do not bring more in more customers. This may be because American Apparel has had several lawsuits brought against them for sexual harassment. Luckily none of the charges brought against the company have stuck. Another issue that American Apparel has had in recent years was an investigation by U.S. immigration, which found that about 1500 workers lacked the legal immigration documents. Dov Charney stated in a farewell letter that, When you are able to get your immigration documents in order, you will be given priority treatment, in terms of being interviewed for further positions in the company (A Farewell Letter, 2009). After taking an extensive look at American Apparel we have done both a SWOT analysis and an analysis using Porters five forces.

SWOT Analysis Strengths American Apparel encompasses some strengths that are beneficial for any clothing company. The products sold at American Apparel are considered high quality. Many American Apparel customers vouch for the companys clothing quality, via online reviews, due to its fabric purity (Yelp, 2014). The basic t-shirt collections, both male and female, are made of 100% cotton, and are available in many colors. The

manufacturing of the clothing also plays its part in the high-quality reputation American Apparel holds. The detailed production of their clothing undergoes an extensive process including a total of three factories: two for knitting and dyeing, and the other for business/headquarters operations. The multiple stages that take place when creating American Apparel clothing sometimes involves many of their employees at once: it takes 25 sewers to make one pair of jeans (Russell, 2012). By controlling all aspects of their production management within its own factories, it allows the company to respond to market demand very quickly. From cutting fabrics, to sewing, all the way through distribution and marketing, American Apparel directs its entire supply management. With sewers, designers, and corporate officials working alongside each other, the establishment creates an effective work atmosphere (Russell, 2012). Based in California, American Apparel prides itself for being sweatshop-free, owning the largest sewing factory in North America. The average sewer with experience at American Apparel is making about $25,000/yr, or $12 an hour, according to their online website, which is almost twice the federal minimum (American Apparel, 2012). They are also offered employment benefits, such as health care, and bonuses for good work. While employing sewers with or without proper documentation, American Apparel has been very public in admitting that they employ immigrants. Campaigns to reform immigration policies were put into place in 2011. Legalize LA stated American Apparels support for its immigrant employees, as well as all of the immigrants in the United States. Along with Legalize LA, American Apparel also created a campaign for its support of gay-lesbian rights, titled Legalize Gay Sample. As a socially responsible

clothing company with trendy styles, it puts American Apparel in an untouched branding category, making it hard to compete with. Some companies, like Gap or J. Crew, are considered similar when comparing the simplicity of the product collection. But when comparing brand identity, American Apparel sets itself apart from its competitors. The rare style of clothing, shoes, and accessories creates a clean, retro image, ultimately portraying the hipster trend that many of its consumers follow. The brand identity American Apparel upholds illuminates the companys best practices, but not many people agree with how the company perceives itself. Weaknesses Among many of its customers, and ex-customers, complaints about American Apparel clothing are in regards to the price and style of the clothing, as well as the environment of the stores. Reviews of the clothing state that people view the merchandise as too expensive. Majority stated that the price didnt match the clothing, which they viewed as poor quality. Others said that the merchandise price was overpriced when comparing it to its simplicity. Though there are a variety of colors to choose from, the style selection is very limited. The store atmosphere is also viewed as unappealing to those whove visited. Reports state experiencing poor customer service from sales representatives, and feelings of discomfort due to the small size of the stores (Yelp, 2014). Many controversial issues have emerged from American Apparels website and advertisements. The ads and online store include pictures of assumingly young, thin women wearing the brands clothing in a provocative pose, and/or showcasing indecent

exposure. The company has not only been condemned for its seductive poses, excessive use of nudity, and for the use of models that appear to be underage, but most recently for a pubic hair stunt (American Apparel, 2012). According to Time, American Apparels New York store in Lower Manhattan displayed mannequins with fully-fledged pubic hair wearing lingerie; making it blatantly visible to all in passing. American Apparel stated that they believe the expectation of hairless women should be diminished. The mannequins display the companys intention on removing the taboo attached to pubic hair. Multiple people found it offensive, or hilarious, and the media acclaimed it as another attention-seeking gimmick (Russell, 2014). Along with the companys marketing strategy, American Apparels CEO and founder, Don Charney, precedes a bad reputation. Charney has been accused of sexually harassing his employees. From corporate officials to in-store management, many employees have written testimonials about their experiences with Charney. In 2004, reporter Claudine Ko interviewed Charney for Jane magazine, revealing his extremely personal and relaxed way of doing business. Kos interview, titled Meet Your New Boss, told the story of how Charney conducted business, as well as the backstory of his sexual relationships with certain employees. Shortly after, reports from his employees accused Charney of sexual harassment (Ko, 2004). The tainted reputation of American Apparels CEO is not beneficial to the companys current financial standing. In recent annual reports, American Apparel is experiencing high inventory and high debt. Experts say that the companys small market niche makes it difficult to overcome its current financial state, making bankruptcy probable in the near future.

Opportunities American Apparel is in a difficult financial situation, but there are opportunities it can take advantage of. The main opportunities are to open up discount stores, have more sales and create a loyalty program. Providing better prices can attract new customers and increase their market share. The sales and loyalty program will attract current customers to continue to shop and buy more products. The discount stores would also increase the amount of locations there are, which would increase availability to customers. American Apparel also can expand their products internationally by opening new locations outside of the United States. As of 2013 they have 245 stores in 120 countries, but there is still opportunity to grow. (American Apparel, Inc., 2014) As of now they have a simple range of products, but by adding new patterns and designs to their good quality products could appeal to a new consumer base. New products will increase the diversity of products they have to offer and increase the value of the apparel. Plus-size marketing is another strategy that can increase the consumer base and market share. American Apparel is known for its controversy and sexy ads, but most models are thin and petite. If plus-size models were used in the ads, it could open up their niche and possibly sell more products, which would help them in their financial crisis. Threats American Apparel has threats that can affect its growth and ability to stay afloat in the clothing industry. A major threat is the economic status of the nation. As we know in 2008 the housing bubble is still affecting citizens and companies. Consumers are spending less and saving more, and this can affect the sales and growth of American Apparel. This also leads to another threat, which is change in consumer preferences. Style

in clothing changes all the time, and the changes could affect the attractiveness of American Apparels product to the consumers. Increases in raw material are also a risk that American Apparel can run into. They are focused on a Vertical integration style of manufacturing and an increase in raw materials would increase the prices of products and this could turn off customers from their already high prices (American Apparel, Inc., 2014). Finally, competitors can cause a threat to the company because they can take away market share and profits from American Apparel. The main competitors of American Apparel are Hanesbrands, Urban Outfitters, and Fruit of the loom (Global, 2012). If these companies begin to lower their prices or provide new innovative products, this decreases revenue and increases the problem of financial stability.

Porters 5 Forces Competitive Rivalry within an Industry The competition between rivals in the apparel industry is high. The main competitors of American Apparel are Hanesbrands, Urban Outfitters, and Fruit of the loom. Compared to the competition American Apparel is doing the worst (American Apparel, Inc., 2014). Their competition offers similar products at competitive prices, which attracts customers who value price over quality. The competition also higher brand recognition when compared to American Apparel (American Apparel, Inc FORM 10-K, 2010). Each company is forced to increase marketing ads, innovation and availability of their products. The intensity in this industry puts importance in price competition and production introductions. American Apparel is known for their high quality material, but have the negative image of high prices, which lowers the appeal to consumers. They have to maintain the customers they have and attract the new youth upcoming. As we know

trends tend to constantly change and they have to stay up-to-date with the new styles to respond to consumers preferences. Not only does trends change, but technology advances and consumers in todays society have switched to online buying. This has forced everyone in the industry to allow customers to shop online (American Apparel, Inc FORM 10-K, 2010). The industry has to adapt to its markets needs and if a competitor doesnt then it is falling behind and will have a difficult time to catch up. Bargaining Power of Suppliers In the clothing industry the power of suppliers is relatively low. The reason for this is because there are many different suppliers in the apparel industry who are available. If problems occur with your current supplier you could always find another one. American apparel does have an advantage because it creates its products in their own factory in the U.S. They are able to produce quickly and not wait for their products to be shipped due to them not outsourcing (American Apparel, Inc FORM 10-K, 2010). Suppliers do have some power in this industry, and it comes with their product. If suppliers increase the cost for raw materials, then it causes an increase in the whole industry. This would create a problem for American Apparel and its competitors because it would lead to an increase in price or a change in its management. For example, if raw materials increased to a price where it was unprofitable, then American Apparel might have to resort to outsourcing. Out of the five forces, the power of the supplier is the least of Americans Apparels worries. Bargaining Power of Buyers The bargaining power of buyers within the global apparel retail industry is considered moderate. Within the global apparel retail industry, bargaining power of

buyers is thinning due to its small size of buyers. Nearly all buyers are individual consumers in this industry. The large numbers of individual consumers weakens buyer power. The demands of individual buyers are rapidly changing (MarketLine, 2013). In this market, brand consciousness and monitoring thorough marketing campaigns are is essential in order to grasp and retain market share (MarketLine, 2013). Clothes are seen as related to matters of lifestyle and social status, even though price sensitivity varies depending on the area. This gives retailers the chance to influence consumer behavior (MarketLine, 2013). Threats of New Entrants The threat of new entrants into the global apparel retail industry is high. In recent years, growth within the industry has been little more than weak to moderate. Hypothetically, the level of growth within the industry can result in new entrants finding it less attractive (MarketLine, 2013). The global apparel retail industry has low barriers to entry and somewhat low requirements for capital. This can increase the probabilities of new entrants into this market. A few large corporations, such as Inditex, The Gap, and H&M, have a significant share of total industry revenues. The amount of market share creates a greater buying power for these large corporations when negotiating with suppliers, giving them the opportunity to powerfully compete on price. These corporations experience an advantage from scale economies that allow them to construct brands in numerous retail outlets (MarketLine, 2013). Child labor, workers wages, and working conditions bring about the practices that are frowned upon but still very common in the global apparel retail industry. Many

companies do very little, if anything at all, to regulate the welfare of their workers. Over the years, many apparel companies have been exposed for their negligence and demeaning methods of manufacturing, resulting in consumers wanting to be aware of how their clothing is being made. Many consumers choose to only purchase from companies who regulate the proper means of operations, and new entrants that do not control the wages, conditions, and child labor laws for the betterment of their workers could lose customers (MarketLine, 2013). Threats of Substitute Products The threat of substitute to apparel retail is moderate. Though there are no substitutes for apparel itself, there are alternatives to retail. One alternative is the option to purchase apparel right from the manufacturer instead of the conventional distribution chain. The growth of online purchases has simplified the process of purchasing directly from the manufacturer. Due to the popularity of online shopping, nowadays all major retailers run their own online store in conjunction to their current presence offline (MarketLine, 2013). Fashion stores based solely from an online platform (known as pure play fashion stores) are growing, seizing the opportunity of lower running costs compared to stores with a physical presence. This allows manufacturers the chance to cut out the retailer if interested in selling directly to its consumers (MarketLine, 2013). Bespoke tailoring, homemade clothing, and second hand clothing are also niche alternatives to retail of high-street clothing. Apparel made from imitation, brand or style, can cause a substantial threat to the profits of manufactures in various countries. Charity

shops, such as Goodwill Industries International, Inc. and Salvation Army, and eBay facilitate the sales of second hand clothing (MarketLine, 2013). Recommendations After reviewing the company American Apparel we came up with several recommendations. The first recommendation that we have is American Apparel should be selling in department stores. Selling in department stores such as Macys and Nordstroms would help with both their sales and high inventory problem. Selling in department stores would allow American Apparel to sell products without having to lease property, hire staff, and manage a store of their own. Another recommendation that we came up with was having outlet stores. We feel that American Apparel would greatly benefit from having a store similar to Nordstrom Rack. This again would help with their inventory problem by allowing previous styles to be sold at a discount, while keeping the brands exclusivity. An easy way to start this would be to sell in the outlet malls around the country. Currently American Apparel has a few outlet stores, however they are not utilizing them. The company is using the outlet stores to sell clothing that are damaged or irregular at a discount of a few dollars. They should be using these stores to sell past seasons styles and inventory at a steeper discount. The last recommendation we had for American Apparel was to change its marketing. It is clear that their racy ads have caused a lot of controversy. The ads might be talked about but its not bringing people into the stores. There is no need to have a campaign with a 62-year-old woman in lingerie if the target market is young adults aged 20 to 35. American Apparel should be pushing ads that show they are being socially

responsible. Instead of putting out an ad of a nude girl saying Made in Bangladesh, push ads for the Legalize Gay campaign. These ads might still bring about controversy, but its with a topic that shows the company cares about people. It sends a much more appropriate message for the target market. We feel that the best thing for American Apparel to do is to have outlet stores and change its marketing. It would not be difficult for the company to switch from the current provocative ads to making ads surrounding the causes the company believes in. If American Apparel opened up an outlet chain the company could then utilize these new ads by promoting their clothing at the new locations. Ultimately, this would allow the core values of American Apparel to be shown, and for people to be able to afford American made clothing at a lower price.

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http://www.businessinsider.com/heres-what-happens-to-these-american-apparel-clothesbefore-they-end-up-on-hot-models-2012-3?op=1