Applications of Management Science

Evaluating the Impact of Advertising on Sales and Profitability in The Apparel Industry
Rashmi Malhotra, D. K. Malhotra, Elizabeth Mariotz, Raymond R. Poteau,
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To cite this document: Rashmi Malhotra, D. K. Malhotra, Elizabeth Mariotz, Raymond
R. Poteau, "Evaluating the Impact of Advertising on Sales and Profitability in The
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2018; 37-55.
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 EVALUATING THE IMPACT OF
ADVERTISING ON SALES AND
PROFITABILITY IN THE APPAREL
INDUSTRY

Rashmi Malhotra, D. K. Malhotra, Elizabeth Mariotz

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and Raymond R. Poteau

ABSTRACT

In this chapter, we evaluate the dollar amount spent on advertising relative

to sales, profit margin, and growth rates to study the effectiveness of
advertising in today’s retail environment, and whether it leads directly to
higher sales and increased profits affording positive earnings for the investor.
The study illustrates the use of data envelopment analysis (DEA) technique
to benchmark 16 apparel firms to evaluate the effectiveness of their
advertising dollars on the sales, profit margin, growth, return on assets
(ROA), return on equity (ROE), and return on investment (ROI).
Keywords: Data envelopment analysis; benchmarking; efficiency;
efficiency frontier; slack; apparel firms; advertising to sales ratio

INTRODUCTION
Are we getting the desired return from our advertising dollars? This question is
of great interest to any company in general. In this chapter, we benchmark the
advertising dollar spend of 16 apparel firms in terms of its impact on sales and

Applications of Management Science, Volume 19, 37
55

Copyright r 2018 by Emerald Publishing Limited
All rights of reproduction in any form reserved
ISSN: 0276-8976/doi:10.1108/S0276-897620180000019003
37
 38 RASHMI MALHOTRA ET AL.

profitability to find out which firm or firms are using their advertising dollars
most effectively relative to other firms in the industry. We measure the effec-
tiveness of advertising spending through its impact of profit margin, return on
assets, return on equity, return on investment, sales growth rate, and growth of
the firm.
Advertising is a method of communication between the retailer and the cus-
tomer. It is a marketing tool used for the purpose of informing, persuading,
and building brand recognition, leading to purchases of goods and services by
the customer. Advertising is facilitated through a mass marketing approach,
reaching large audiences with the goal of generating high levels of sales. As
sales increase, economies of scale occur, which may lead to decreases in costs,
ultimately creating higher profits and earnings enjoyed by investors.
The way in which companies communicate to their customers has evolved
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over time. In earlier times, mid-twentieth century, print, radio, and television
were the most widely used media for advertising. Today, print has been
decreasing while television continues to be significant in the mix. In using the
one way communication strategy, the marketer is communicating a message to
the consumer which does not result in direct feedback. Therefore, it is difficult
to gauge the impact that advertising has on sales.
The company’s strategy is to increase visibility of its products and/or
services through these vehicles with the expectation that consumers will be
exposed to its message which will lead to an increase in sales. Many studies
have been done on “cause and effect” which have resulted in being nonconclu-
sive. While this study does not focus on the methods of communication and the
vehicles used to communicate, it is worthy to note some of the techniques that
are being used to demystify the marketer’s message and make it clearer to the
consumers what the real value is for them leading to an increase in sales.
The question at hand is which firm is spending the advertising dollars more
effectively in today’s retail environment in terms of its impact on sales, margin,
growth, return on assets, return on investment, return on equity, and sales. In
this study, we use data envelopment analysis (DEA) technique to benchmark
16 apparel firms to evaluate the effectiveness of their advertising dollars on the
sales, profit margin, growth, return on assets, return on equity, and return on
investment. The study is important for several reasons. First, it benchmarks a
company’s advertising spending relative to other firms in the industry. Second,
it will help plan companies set their advertising budgets. By benchmarking
advertising to gross margin ratio or reinvestment rate, a company can deter-
mine a reasonable and competitive level of advertising support for an ongoing
business or product. Advertising agencies can also use the study as a new busi-
ness development tool. The rest of the chapter is organized along the following
lines. In the second section, we provide a review of previous studies. The third
section discusses the model that we use in this study. The fourth section dis-
cusses the methodology and data used in this study. The fifth section provides
 Evaluating the Impact of Advertising on Sales and Profitability 39

empirical analysis of our results. The sixth section summarizes and concludes
our study.

LITERATURE REVIEW
The impact advertising has on sales, profits, and ultimately on earnings is very
complex; it is difficult to be conclusive. Many studies have been conducted with
mixed results. There are many variables including the product, the type of retail
outlet, the advertising strategy, and the consumer.
Tuli, Mukherjee, and Dekimpe (2012) evaluate the degree “advertising
spending and growth in same-store sales are valued by investors.” According to
Tuli, Mukherjee, and Dekimpe, investors evaluate a company based on earn-
ings which is the ability of the company to sell product profitably. The study
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examines the degree to which advertising enhances the level of sales for a com-
pany. According to Srinivasan and Sihi (2012), when firms have high advertis-
ing expenditures, they are signaling to stock market participants that they
anticipate their advertising to be effective and that their performance is likely
to be superior. In a study of 1,052 firms over a period of 20 years, Luo and De
Jong (2012) find that a decline in advertising spending reduces the rate of return
for the firms.
McAlister, Srinivasan, and Kim (2007) note that advertising communicates
and informs consumers, which “enhance(s) brand loyalty,” and this indirectly
translates into sales.
Research by Chauvin and Hirshey (1993), Desai (2000), Joshi and Hanssens
(2009, 2010), cited by Tuli et al. (2012) indicates that when companies spend
more money on advertising, investors see this as a strategy to increase the con-
sumer base leading to more sales.
Eng and Keh (2007) analyze the joint effect of advertising brand, value on
the firm’s future operating, and market performance. They find that impact of
advertising on future stock performance is minimal, but spending on advertis-
ing results in better brand sales. They also noted that advertising expenses lead
to higher Return on Assets (ROA), and the effects last up to four years.
Rajagopal (2006) states that building a brand involves not only the physical
traits of the product but also the benefits it offers to the customer. Building
brand equity requires a comprehensive and strategic marketing effort. Advertis-
ing is the tool that facilitates this effort. “Strong brand equity allows the com-
panies to retain customers better, service their needs more effectively and
increase profit.”
Kamber (2002) looked at advertising expenditures during an economic turn-
down. The study noted that reductions in adspend in 1991 lagged the economic
downturn by about six months. Companies that maintained or increased
adspend during the 1991 recession had a five-year sales growth that was 25%
higher, as a whole, than companies that did not.
 40 RASHMI MALHOTRA ET AL.

Kamber also found a positive and statistically significant relationship

between adspend during recession and subsequent sales growth. The study fur-
ther reported that change in adspend during a recession had a positive and sta-
tistically significant relationship to short-term sales growth.

MODEL
The Data Envelopment Analysis Model1

DEA is a linear programming technique that was developed by Cooper (1978)

to assess the relative performance of homogenous organizational units.
Further, this generalized optimization technique measures the relative perfor-
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mance of different decision-making entities (called decision-making units or

DMUs) that have multiple objectives (outputs) and multiple inputs structure.
Since, in this study, we analyze 13 thrift and mortgage companies, these compa-
nies are the DMUs. DEA measures the efficiency with which a DMU uses the
resources available (inputs) to generate a given set of outputs. The DEA meth-
odology defines efficiency as a ratio of total outputs to total inputs and uses
this to evaluate the relative performance of a DMU. Further, the DEA model
estimates relative efficiency, which is with reference to the best performing
DMU or DMUs (in case multiple DMUs are most efficient). The DEA allo-
cates an efficiency score of unity or 100% to the most efficient unit. The low-
performing DMUs’ efficiency can vary between 0% and 100% in comparison
to the best performance.
To develop a DEA model, we consider “n” DMUs. Further, we define the
following variables:
j ¼ 1, 2,…, n (DMU variable).
i ¼ 1, 2,…, m (inputs variable).
r ¼ 1, 2,…, s (outputs variable).
Therefore, each DMUj, j ¼ 1, 2,…, n, uses the following variable factors:
xij
amount of input i for the unit j, i ¼ 1, 2,…, m and j ¼ 1, 2,…, n.
yrj
amount of output r for the unit j, r ¼ 1, 2,…, s and j ¼ 1, 2,…, n.
ur
weight assigned to the output r, r ¼ 1, 2,…, s.
vi
weight assigned to the input i, i ¼ 1, 2,…, m.
Further, for each DMU, we form the virtual input and output using the
weights (to be determined) vi and ur:

X
m
Virtual input ¼ vi xij
i¼1
 Evaluating the Impact of Advertising on Sales and Profitability 41

X
s
Virtual output ¼ ur yr; j
r¼1

where j ¼ 1, 2,…, n (DMU variable).

For a given DMU the ratio of virtual output to virtual input gives a measure
of efficiency that is a function of the multipliers. In mathematical program-
ming, this ratio forms the objective function for the particular DMU being
evaluated.
We want to determine the weights, using linear programming so as to maxi-
mize the ratio.

Virtual output
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Virtual input

The DEA methodology gives a measure of efficiency that is defined as the

ratio of weighted outputs to weighted inputs. The most important issue in this
method is the assessment of the weights. Charnes et al. define the efficiency mea-
sure by assigning to each unit the most favorable weights. In general, the weights
will not be the same for different units. Further, if a unit happens to be ineffi-
cient, relative to the others, when most favorable weights are chosen, then it is
inefficient, independent of the choice of weights. Thus, given a set of weights, we
define the efficiency with which a DMU processes the inputs to produce outputs
as the ratio of the weighted sum of outputs to the weighted sum of inputs.
Ps
ur yrj
Efficiency ¼ Pr¼1
m ð1Þ
i¼1 vi xij

The weights for a DMU are determined using mathematical programming

as those that will maximize the efficiency of a DMU subject to the condition
that the efficiency of other DMUs (calculated using the same set of weights) is
restricted to values between 0 and 1. The weights are chosen that only most effi-
cient units will reach the upper bound of the efficiency measure, chosen as 1.
Let us take one of the DMUs, say the oth DMU as the reference DMU under
evaluation whose efficiency (Eo) is to be maximized. Therefore, to compute the
DEA efficiency measure for the oth DMU, we have to solve the following frac-
tional linear programming model:
Ps
ur yro
max Eo ¼ Pr¼1m ð2Þ
i¼1 vi xio
 42 RASHMI MALHOTRA ET AL.

subject to
Ps
ur yrj
Pr¼1
m ≤ 1; j ¼ 1; …; n ð3Þ
i¼1 vi xij

ur ≥ ε; r ¼ 1; …; s

vi ≥ ε; i ¼ 1; …; m

where ε is an infinitesimal or non-Archimedean constant that prevents the

weights from vanishing (Charnes et al., 1994). When we solve the above mathe-
matical program, we get the optimal objective function (2) that represents the
efficiency of DMUo. If the efficiency is unity, then the firm is said to be effi-
cient, and will lie on the efficiency frontier. Otherwise, the firm is said to be rel-
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atively inefficient. To find the efficiency measure of other DMUs, we have to

solve the above mathematical program by considering each of the DMUs as
the reference DMU. Therefore, we obtain a Pareto efficiency measure where
the efficient units lie on the efficiency frontier (Thanassoulis, 2001). The frac-
tional mathematical programs are generally difficult to solve. To simplify them,
we should convert them to a linear program format. The fractional programs
(2) and (3) can be conveniently converted into an equivalentPm linear program by
normalizing the denominator using the constraint i¼1 vi xio ¼ 1. As the
weighted sum of inputs is constrained to be unity and the objective function is
the weighted sum of outputs that has to be maximized.

X
s
max ur yro ð4Þ
r¼1

subject to
X
m
vi xio ¼ 1; ð5Þ
i¼1

X
s X
m
ur yrj
vi xij ≤ 0; j ¼ 1; …; n;
r¼1 i¼1

ur ≥ ε; r ¼ 1; …; s

vi ≥ ε; i ¼ 1; …; m

This model is the CCR (Charnes, Cooper, and Rhodes) model. Similarly, a
general input minimization CCR model can be represented as:
 Evaluating the Impact of Advertising on Sales and Profitability 43

X
m
min v0i xio ð6Þ
i¼1
subject to
X
s
u0r yro ¼ 1
r¼1

X
s X
m
0
u0r yrj
vi xij ≤ 0; j ¼ 1; …; n; ð7Þ
r¼1 i¼1

ur ≥ ε; r ¼ 1; …; s

vi ≥ ε; i ¼ 1; …; m
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According to the basic linear programming, every linear programming prob-

lem (usually called the primal problem) has another closely related linear pro-
gram, called its dual. Therefore, the dual of the output maximizing DEA
program is as follows:

θ ¼ min θ ð8Þ

subject to

X
n
λj xij ≤ θxio ; i ¼ 1; …; m
j¼1

X
n
λj yrj ≥ yro ; r ¼ 1; …; s ð9Þ
j¼1

λj ≥ 0;
θ unrestricted.
If θ* ¼ 1, then the current input levels cannot be reduced, indicating that
DMUo is on the frontier. Otherwise, if θ < 1, then DMUo is dominated by the
frontier. θ* represents the input-oriented efficiency score of DMUo. The indi-
vidual input reduction is called slack. In fact, both input and output slack
values may exist in model (8)

X
n
s

i ¼ θ xio
λj xij ; i ¼ 1; …; m
j¼1
 44 RASHMI MALHOTRA ET AL.

X
n
sþ
r ¼ λj yrj
yro ; r ¼ 1; …; s ð10Þ
j¼1

To determine the possible nonzero slacks after solving the linear program
(8), we should solve the following linear program:

X
m X
s
max s

i þ sþ
r
i¼1 r¼1

subject to

X
n
λj xij þ s

i ¼ θ xio ; i ¼ 1; …; m
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j¼1

X
n
λj yrj
sþ
r ¼ yro ; r ¼ 1; …; s ð9Þ
j¼1

λj ≥ 0;

θ unrestricted.
DMUo is efficient if and only if θ* ¼ 1 and s
þ
i * ¼ sr * ¼ 0 for all i and r.
DMUo is weakly efficient if and only if θ* ¼ 1 and si * ≠ 0 and (or) sþr * ≠ 0 for

some i and r. In fact, models (8) and (9) represent a two-stage DEA process
that can be summarized in the following DEA model:
!
X
m X
s
min θ
ε s

i þ sþ
r
i¼1 r¼1

subject to
X
n
λj xij þ s

i ¼ θxio ; i ¼ 1; …; m
j¼1

X
n
λj yrj
sþ
r ¼ yro ; r ¼ 1; …; s ð9Þ
j¼1

λj ≥ 0;

θ unrestricted.
 Evaluating the Impact of Advertising on Sales and Profitability 45

DATA AND METHODOLOGY

We study 16 apparel firms in order to benchmark their advertising dollars
impact on sales, profit margins, growth, return on assets, return on equity, and
return on investment. Sixteen firms included in this study are: Alpha Pro Tech.,
American Apparel Inc., Carter’s Inc., Columbia Sportwear Co., G-III Apparel
Group Ltd., Gildan Activewear Inc., Joe’s Jeans Inc., Jos A Bank Clothier
Inc., Oxford Industries Inc., Phillips-Van Heusen Corp., Tandy Brands
Accessories, True Religion Apparel Inc., Under Armour Inc., Unifirst Corp.,
VF Corp., and Vlov Inc. The data for this study are from S&P Netadvantage
and Schonfeld & Associates, Inc.’s advertising ratios and budgets. The data are
for the year 2011. In order to benchmark the impact of advertising on sales,
profit margin, growth, return on assets, return on equity, and return on invest-
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ment for 16 apparel companies, we consider the following seven ratios:

1. Ad-to-sales ratio
2. Ad-to-margin ratio
3. Ad-growth percentage
4. Return on assets
5. Return on equity
6. Return on investment
7. Sales growth
The third section describes the computational details of the DEA model. In
addition, there are many noncomputational aspects that are crucial to the
application of DEA procedures. Besides the mathematical and computational
requirements of the DEA model, there are many other factors that affect
the specifications of the DEA model. These factors relate to the choice of the
DMUs for a given DEA application, selection of inputs and outputs, choice of
DMUs for a given DEA application, selection of inputs and outputs, choice of
a particular DEA model (e.g., constant returns to scale (CRS) and variable
returns to scale (VRS)) for a given application, and choice of an appropriate
sensitivity analysis procedure (Ramanathan, 2003). Due to DEA’s nonparamet-
ric nature, there is no clear specification search strategy. However, the results
of the analysis depend on the inputs/outputs included in the DEA model. There
are two main factors that influence the selection of DMUs—homogeneity and
the number of DMUs. To successfully apply the DEA methodology, we should
consider homogenous units that perform similar tasks, and accomplish similar
objectives. In our study, the firms are homogenous as they compete with each
other in the same market. Furthermore, the number of DMUs is also an impor-
tant consideration. The number of DMUs should be reasonable so as to cap-
ture high performance units, and sharply identify the relation between inputs
and outputs. There are some simple rules of thumb that guide the selection of
inputs and outputs, and the number of participating DMUs.2
 46 RASHMI MALHOTRA ET AL.

To apply the DEA model, the major issue is to decide on the variables to be
used as inputs and outputs. We can apply a simple measure of a cost and effi-
ciency to determine the variables that should be minimized or maximized. A
variable that has a cost associated with it should be minimized. On the other
hand, a variable that indicates some measure of effectiveness should be maxi-
mized. A company wants to maximize return on assets, return on equity, return
on investment, sales growth, and minimize ad-to-sales ratio, ad-to-margin ratio,
and ad-growth percentage. Therefore, we use ad-to-sales ratio, ad-to-margin
ratio, and ad-growth percentage as input variables and return on assets, return
on equity, return on investment, and sales growth as output variables. Finally,
the choice of the DEA model is also an important consideration. We should
select the appropriate DEA model with options such as input maximizing or
output minimizing, multiplier or envelopment, and CRS or VRS. DEA applica-
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tions that involve inflexible inputs or not fully under control inputs should use
output-based formulations. On the contrary, an application with outputs that
are an outcome of managerial goals, input-based DEA formulations are more
appropriate. In addition, for an application that emphasizes inputs and outputs,
we should use multiplier version. Similarly, for an application that considers rela-
tions among DMUs, envelopment models are more suitable. Furthermore, the
characteristics of the application dictate the use of CRS or VRS. If the perfor-
mance of DMUs depends heavily on the scale of operation, CRS is more applica-
ble, otherwise VRS is a more appropriate assumption.
In our study, both inputs and outputs of apparel firms are important.
Therefore, we select the multiplier model for our analysis. In addition, the out-
put factors used in the study: return on assets, return on equity, return on
investment, and sales growth are a direct outcome of managerial policies.
Therefore, we use input-based formulation for our study. Furthermore, the per-
formance of these firms does not depend on the scale of operations, thus VRS
is the safe assumption. Also, the structure of the DEA model uses an equation
and separate calculation for every input and output. Therefore, all the input
and output variables can be used simultaneously and measured in their
own units. Thus, we apply the input-oriented multiplier model (4) and (5) to
estimate the efficiency of the apparel companies so as to study the impact of
advertisement.

EMPIRICAL ANALYSIS
As the data for this study are from S&P Netadvantage and Schonfeld &
Associates, Inc.’s advertising ratios and budgets, each of the firms is a compara-
tive, homogenous unit, and we can apply the DEA methodology to asses a
comparative performance of these organizations. As illustrated above, we use
ad-to-sales ratio, ad-to-margin ratio, and ad-growth percentage as input
 Evaluating the Impact of Advertising on Sales and Profitability 47

variables and return on assets, return on equity, return on investment, and sales
growth as output variables. The study analyzes the performance of 16 apparel
firms using the multiplier model. Using the DEA methodology, we calculate an
efficiency score for the 16 firms on a scale of 1
100 for the year 2011. Table 1
illustrates the efficiency scores and the rankings of the 16 firms. As illustrated
in Table 1, in the year 2011, 12 firms are 100% efficient as compared to all
other firms. These firms are: Alpha Pro Tech., G-III Apparel Group Ltd., Joe’s
Jeans Inc., Jos A Bank Clothier Inc., Oxford Industries Inc., Phillips-Van
Heusen Corp., Tandy Brands Accessories, True Religion Apparel Inc., Under
Armour Inc., Unifirst Corp., VF Corp., and Vlov Inc. The other firms in the
order of increasing efficiency (80
89%) are: Carter’s Inc., Columbia Sportwear
Co., and Gildan Activewear Inc. In addition, American Apparel Inc. is 59%
efficient.
Fig. 1 illustrates the efficiency factor as a bar chart. The Pareto-efficient
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firms form the efficiency frontier, and the inefficient firms are below the effi-
ciency frontier.
Once we identify inefficient apparel firms, the next step is to identify the effi-
cient peer group or firms whose operating practices can serve as a benchmark
to improve the performance of these firms. Table 2 illustrates the peer group
for the inefficient firms.

Table 1. Efficiency Score by Benchmarking the Impact of Advertising on

Sales, Profit Margin, Growth, Return on Assets, Return on Equity, and Return
on Investment.
Company Efficiency (%) Rank

Unifirst Corp. 100 1

True Religion Apparel Inc. 100 1
VF Corp. 100 1
Under Armour Inc. 100 1
G-III Apparel Group Ltd. 100 1
Phillips-Van Heusen Corp. 100 1
Vlov Inc. 100 1
Tandy Brands Accessories 100 1
Alpha Pro Tech. 100 1
Jos A Bank Clothier Inc. 100 1
Joe’s Jeans Inc. 100 1
Oxford Industries Inc. 100 1
Gildan Activewear Inc. 86 2
Columbia Sportwear Co. 85 3
Carter’s Inc. 85 4
American Apparel Inc. 59 5
 48 RASHMI MALHOTRA ET AL.

Efficiency
120%

100%

80%

60%

40%

20%

0%

Tandy Brands Accessories

Alpha Pro Tech
American Apparel Inc.
Carter's Inc.
Columbia Sportwear Co.
G-III Apparel Group Ltd.
Gildan Activewear Inc.
Joe's Jeans Inc.
Jos A Bank Clothier Inc.
Oxford Industries Inc.
Phillips-Van Heusen Corp.

True Religion Apparel Inc.

Unifirst Corp.
Under Armour Inc.

VF Corp.
Vlov Inc.
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Fig. 1. Bar Chart of Efficiency Factor (2009).

Table 2. Illustrates the Peer Group for the Inefficient Companies for the Year
2011.
Company Efficiency Jos A Bank Phillips-Van Tandy Brands Unifirst Vlov
(%) Clothier Inc. Heusen Corp. Accessories Corp. Inc.

American 59 0.00 0.11 0.89 0.00 0.00

Apparel Inc.
Carter’s Inc. 85 0.00 0.24 0.00 0.58 0.18
Columbia 85 0.00 0.21 0.00 0.70 0.09
Sportwear Co.
Gildan 86 0.29 0.00 0.06 0.66 0.00
Activewear Inc.

As shown in the table, Phillips-Van Heusen Corp. and Tandy Brand

Accessories serve as peer for American Apparel Inc. In addition, American
Apparel is more comparable to Tandy Brand Accessories (weight 89%) and
less comparable to the more distant peer Phillips-Van Heusen Corp (11%).
Thus, American Apparel Inc. should scale up its return on assets, return on
equity, return on investment, and sales growth to make them comparable with
Tandy Brand Accessories. Similarly, Carter’s Inc. has Unifirst Corp. (58%) as
the closest peer that it should emulate and Phillips-Van Heusen (24%) as the
 Evaluating the Impact of Advertising on Sales and Profitability 49

distant peer firm and Vlov Inc. (18%) that can also be investigated. Columbia
Sportwear Co. has Unifirst Corp. (70%) as its immediate peer, and Phillips-
Van Heusen (21%) as its next distant peer, and Vlov Inc. (9%) as its far distant
peer. Similarly, Gildan Activewear Inc. has Unifirst Corp. (66%), Jos A Bank
Clothier Inc. (29%), and Tandy Brand Accessories (6%) as its peers. Unifirst
Corp. is the most immediate for most of the inefficient firms. On the other
hand, Phillips-Van Heusen is the distant or far distant peer for three inefficient
firms. Similarly, Gildan Activewear Inc. is the far distant peer for Columbia
Sportwear Co. Vlov Inc. is the far distant peer for Carter’s Inc. inefficient firms
and immediate peer for Axis Firm. Therefore, Unifirst Corp. is the most effi-
cient firm among all the firms as not only is 100% efficient, but also serves as
the role model for all (except one) firms. Similarly, Tandy Brands Accessories is
the next most efficient firm among the group of given firms. Likewise, Phillips-
Van Heusen serves as the next far distant peer firm for all firms (except one).
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Similarly, Jos A Bank Clothier Inc. is the next immediate peer for Gildan
Activewear Inc. as the two firms share similar characteristics. Thus, Phillips-
Van Heusen and Jos A Bank Clothier Inc. are the next most efficient firms
among the group of firms under consideration. The efficient peer firms have a
similar mix of input
output levels to that of the corresponding inefficient firm,
but at more absolute levels. The efficient firms generally have higher output
levels relative to the firm in question. The features of efficient peer firms make
them very useful as role models that inefficient firms can emulate to improve
their performance. Furthermore, Unifirst Corp. is used as an efficient peer to
almost all Pareto-inefficient firms, so their frequency of use as an efficient peer,
expressed as a percentage of the number of Pareto-inefficient firms, is 75%.
Thus, we have enhanced confidence that Unifirst Corp. is a truly well-performing
firm as it outperforms all the other firms. Similarly, Tandy Brand Accessories
serves as a peer to one of the inefficient firms. Furthermore, these firms are
more likely to be a better role model for less efficient firms to emulate because
their operating practices and environment match more closely those of the bulk
of firms.
After calculating the efficiency of a firm using DEA, and identifying the effi-
cient peers, the next step in DEA analysis is feasible expansion of the output or
contraction of the input levels of the firm within the possible set of
input
output levels. The DEA efficiency measure tells us whether or next firm
can improve its performance relative to the set of firms to which it is being com-
pared. Therefore, after maximizing the output efficiency, the next stage involves
calculating the optimal set of slack values with assurance that output efficiency
will not increase at the expense of slack values of the input and output factors.
Once efficiency has been maximized, the model does seek the maximum sum of
the input and output slacks. If any of these values is positive at the optimal
solution to the DEA model that implies that the corresponding output of the
firm (DMU) can improve further after its output levels have been raised by the
efficiency factor, without the need for additional input. If the efficiency is 100%
 50 RASHMI MALHOTRA ET AL.

and the slack variables are zero, then the output levels of a firm cannot be
expanded jointly or individually without raising its input level. Further, its
input level cannot be lowered given its output levels. Thus, the firms are Pareto
efficient with technical output efficiency of 1. If the firm is 100% efficient but
one slack value is positive at the optimal solution then the DEA model has
identified a point on the efficiency frontier that offers the same level on one of
the outputs as firm A in question, but it offers in excess of the firm A on the
output corresponding to the positive slack. Thus, firm A is not Pareto efficient,
as with radial efficiency of 1 its output can be further expanded. Finally, if the
firm A is not efficient (<100%) or the efficiency factor is greater than 1, then
the firm in question is not Pareto efficient and efficiency factor is the maximum
factor by which both its observed output levels can be expanded without the
need to raise its input. If at the optimal solution, we have not only output effi-
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ciency > 1, but also some positive slack, then the output of firm A correspond-
ing to the positive slack can be raised by more than the factor output efficiency,
without the need for additional input. The potential additional output at firm
A is not reflected in its efficiency measure because the additional output does
not apply across all output dimensions. Table 3 illustrates the slack values iden-
tified in the next stage of the DEA analysis. The slack variables for 100% effi-
cient firms as well as less than 100% efficient firms are not zero. Therefore, all
the firms used in this study are not Pareto efficient as the DEA model has been
able to identify some feasible production point which can improve on some
other input or output level. For example, for American Apparel Inc., besides
increasing the output level of return on assets by 23.40 units, there is further
scope for increasing interest to return on equity by 96.86 (units), return on
investment by 20.82 (units), and sales growth percentage by 24.16 (units). In
addition, American Apparel Inc. can also shrink the input level of advertise-
ment growth percentage by (24%). American Apparel Inc. can follow Tandy
Brands Accessories and Phillips-Van Heusen as its role models and emulate
their policies. Similarly, Carter’s Inc. can reduce its advertisement growth per-
centage by 2.56 units and return on assets by 10.09 units, return on equity by
20.20 (units), return on investment by 9.36 (units), and sales growth percentage
by 9.38 (units) while maintaining efficient levels equivalent to that of its peers—
Unifirst Corp. and Phillips-Van Heusen. On the same lines, we can find slack
values for Columbia Sportwear Co. and Gildan Activewear Inc. Table 3 illus-
trates the slack values of the relevant factors for inefficient firms.
In addition, we can also record the optimal multipliers of the multiplier
model. Table 4 illustrates the optimal multipliers for all the firms. Thus, we can
also calculate the impact that one unit change in either input or output will
have on the efficiency rating. For example, American Apparel is 59% efficient.
Thus, to become relatively efficient, we should increase the efficiency by 100—
59% or 41%. Using the increment of 41%, we can calculate that we should
reduce advertisement growth % by (0.41/0.02) or 19.09 units and increase sales
 Evaluating the Impact of Advertising on Sales and Profitability
Table 3. Slack Values for Input and Output Factors for the Year 2011.
Company Efficiency Ad/Sales Ad/Margin Ad Growth ROA Return on Equity Return on Investment Sales Growth
(%) (%) (%) (ROE) (ROI) (%)

Alpha Pro Tech. 1.000000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
American Apparel Inc. 0.591226 0.0000 0.0000 0.2444 23.4042 96.8643 20.8218 24.1565
Carter’s Inc. 0.851528 0.0000 0.0000 2.5582 10.0880 20.1963 9.3626 9.3831
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Columbia Sportwear 0.85493 0.0000 2.3049 0.0000 12.1847 20.2563 11.8630 9.9377
Co.
G-III Apparel Group 1.000000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Ltd.
Gildan Activewear 0.857044 0.2544 3.1592 0.0000 13.5389 26.3204 6.7113 10.1701
Inc.
Joe’s Jeans Inc. 1.000000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Jos A Bank Clothier 1.000000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Inc.
Oxford Industries Inc. 1.000000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Phillips-Van Heusen 1.000000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Corp.
Tandy Brands 1.000000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Accessories
True Religion Apparel 1.000000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Inc.
Under Armour Inc. 1.000000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Unifirst Corp. 1.000000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
VF Corp. 1.000000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Vlov Inc. 1.000000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

51
 52
Table 4. Optimal DEA Multiplier.
Company Efficiency (%) Deficit (%) Ad/Sales (%) Ad/Margin (%) Ad Growth (%) ROA ROE ROI Sales Growth (%)
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Alpha Pro Tech. 100 0 0.00 0.10 0.02 0.00 0.00 0.00 0.03
American Apparel Inc. 59 41 0.00 0.00 0.02 0.00 0.00 0.00 0.04
Carter’s Inc. 85 15 0.00 0.00 0.02 0.00 0.01 0.00 0.02
Columbia Sportwear Co. 85 15 0.00 0.00 0.02 0.00 0.01 0.00 0.02
G-III Apparel Group Ltd. 100 0 0.01 0.00 0.02 0.00 0.00 0.01 0.02
Gildan Activewear Inc. 86 14 0.00 0.00 0.02 0.00 0.00 0.02 0.02
Joe’s Jeans Inc. 100 0 0.05 0.00 0.01 0.00 0.02 0.00 0.03
Jos A Bank Clothier Inc. 100 0 0.00 0.03 0.01 0.00 0.00 0.05 0.01
Oxford Industries Inc. 100 0 0.10 0.00 0.02 0.00 0.00 0.05 0.00
Phillips-Van Heusen Corp. 100 0 0.00 0.00 0.02 0.01 0.00 0.00 0.02

RASHMI MALHOTRA ET AL.

Tandy Brands Accessories 100 0 0.00 0.20 0.03 0.00 0.00 0.00 0.02
True Religion Apparel Inc. 100 0 0.05 0.02 0.01 0.00 0.00 0.07 0.00
Under Armour Inc. 100 0 0.00 0.00 0.02 0.00 0.00 0.02 0.02
Unifirst Corp. 100 0 0.08 0.00 0.03 0.05 0.00 0.00 0.00
VF Corp. 100 0 0.00 0.00 0.02 0.00 0.02 0.00 0.02
Vlov Inc. 100 0 0.03 0.00 0.01 0.04 0.00 0.00 0.00
 Evaluating the Impact of Advertising on Sales and Profitability 53

Table 5. Calculations for Inefficient Companies Using Optimal Multipliers.

Company Efficiency Deficit Ad Growth ROE ROI Sales Growth
(%) (%) (%) (%)

American Apparel Inc. 59 41 19.09 10.22

Carter’s Inc. 85 15 8.61 11.03 6.88
Columbia Sportwear 85 15 7.79 9.98 6.23
Co.
Gildan Activewear Inc. 86 14 7.03 7.15 7.13

growth % by (0.41/0.04) or 10.22 units. Table 5 illustrates the deficit or surplus

calculations after using optimal multipliers.
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SUMMARY AND CONCLUSIONS

Using the DEA approach, this study compares the relative performance of 16
apparel companies against one another with seven performance variables as the
benchmark parameters for the year 2011. This study finds that Alpha Pro
Tech., G-III Apparel Group Ltd., Joe’s Jeans Inc., Jos A Bank Clothier
Inc., Oxford Industries Inc., Phillips-Van Heusen Corp., Tandy Brands
Accessories, True Religion Apparel Inc., Under Armour Inc., Unifirst Corp.,
VF Corp., Vlov Inc. consistently outperform all the other firms with 100% rela-
tive efficiency, in addition, Carter’s Inc., Columbia Sportwear Co., Gildan
Activewear Inc., and American Apparel Inc. The study also shows the areas in
which inefficient firms are lagging behind and how they can improve their per-
formance to bring them at par with other firms.
The DEA is a powerful technique for performance measurement. The major
strength of DEA is its objectivity. DEA identifies efficiency ratings based on
numeric data as opposed to subjective human judgment and opinion. In addi-
tion, DEA can handle multiple inputs and outputs measured in different units.
Also, unlike statistical methods of performance analysis, DEA is nonparamet-
ric, and does not assume a functional form relating inputs and outputs. This
study finds that there is lack of convergence in the performance of 16 firms and
some firms have performed more efficiently in contrast to other firms.
However, as with any other study, this study using DEA has certain limita-
tions (Ramanathan, 2003). The application of DEA involves solving a separate
linear program for each DMU. Thus, the use of DEA can be computationally
intensive. In addition, as DMU is an extreme point technique, errors in mea-
surement can cause significant problems. DEA efficiencies are very sensitive to
even small errors, thus making sensitivity analysis an important component of
post-DEA procedure. Also, as DEA is a nonparametric technique, statistical
 54 RASHMI MALHOTRA ET AL.

hypothesis tests are difficult to apply. Therefore, further extension of this study
would be to perform principal component analysis of all the DEA model com-
binations. Furthermore, we can also use logistic regression to test the validity
of the results.

NOTES

1. The main sources of the DEA model description are Ramanathan (2003) and Zhu
(2003).
2. The following are the guidelines for DMU model selection:
• The number of DMUs is expected to be larger than the product of number of
inputs and outputs (Darrat et al., 2002; Avkiran, 2001) to discriminate effectively
between efficient and inefficient DMUs. The sample size should be at least two
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or three times larger than the sum of the number of inputs and outputs
(Ramanathan, 2003).
• The criteria for selection of inputs and outputs are also quite subjective. A DEA
study should start with an exhaustive, mutual list of inputs and outputs that are
considered relevant for the study. Screening inputs and outputs can be quite
quantitative (e.g., statistical) or qualitative that are simply judgmental, use
expert advice, or use methods such as analytical hierarchy process (Saaty, 1980).
Typically inputs are the resources utilized by the DMUs or condition affecting
the performance of DMUs. On the other hand, outputs are the benefits gener-
ated as a result of the operation of the DMUs, and records higher performance
in terms of efficiency. Typically, we should restrict the total number of inputs
and outputs to a reasonable level. As the number of inputs and outputs
increases, more number of DMUs get an efficiency rate of 1, as they become too
specialized to be evaluated with respect to other units (Ramanathan, 2003).

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