In the annals of American specialty clothing retailers, J Crew and Banana Republic (GPS) have solid chops. They have been associated with chic style and class. But, cheap prices elude them. On the other hand, Swedish retailer Hennes & Mauritz or H&M (HNNMY) seems to have unlocked a secret formula that combines cheap prices with the latest fashion. (For more, see: The Vikings Are Coming—With Fashion.)
Given H&M's profits, should J Crew and Banana Republic match H&M's cheap prices?
There are two important reasons why Banana Republic and J Crew will not be able to match H&M's prices.
The first one is related to their branding proposition. A brand is a complex mix of intangibles that includes customer experience and product mix. In the case of specialty clothing retailers, the product mix consists of the types and varieties of clothes on offer.
J Crew and Banana Republic are targeted at an audience that is different from the average H&M customer. While J Crew caters to working professionals, Banana Republic, which is owned by Gap, appeals to customers who are interested in affordable luxury. The store's main clientele consists of working professionals and brand-conscious customers.
On the other hand, H&M belongs to the rapidly growing fast-fashion retail category, which has recently expanded to include Zara and Forever 21. The store's clothes are targeted at customers who are interested in the latest fashion trends but cannot afford more expensive options.
H&M's clothes do not have the same quality or make as those of Banana Republic and J Crew. They are also not expected to last long. But, they are trendy. This is because the store's designers are quick to spot and capitalize on the latest fashion trends and put them into production. (For more, see: Zara's Agile Project Management Advantage.)
Contrasting Supply Chains
Second, J Crew and Banana Republic do not possess the supply chain efficiencies of H&M. The price of garments is a measure of the efficiency of H&M's supply chain. This is because the bill of materials (or, components that go into making a product), transportation and logistics cumulatively add up to the price of the total product. H&M's supply chain is adapted to suit its brand positioning as a destination for cheap and fashionable clothing.
The company stocks smaller batches of inventory as compared to its competitors. This has the effect of reducing inventory costs and ensuring rapid turnover. The company also sources a majority of its products from Bangladesh, one of the cheapest garment-sourcing destinations in the world. Besides ensuring lower costs, the strategy also ensures simple and streamlined operations ensuring a reduced time-to-market for its products.
In contrast, Banana Republic and J Crew have complex supply chain operations. The complexities are baked into their operations. For example, Gap contracts with factories in 60 different countries. In addition, it has centralized buying and logistics functions for three brands—Gap, Banana Republic, and Old Navy—thus complicating its supply chain operations. (For more, see: Glenn Murphy: Here's How You Fix The Gap.)
Finally, because they are targeted at a relatively affluent clientele (as compared to H&M), Banana Republic and J Crew make more upfront investments to ensure superior customer experience on their website and in their stores. This means that they invest greater amounts of money in crafting an impressive store layout and training employees. For example, Banana Republic recently mandated training periods for employees to foster "emotional" connections with customers. In contrast, H&M is doubling down on online stores to take advantage of the e-commerce boom.
The Bottom Line
Technically, Banana Republic and J Crew could simplify operations and reduce spending to sell cheap clothing. But, that would entail abandoning their existing clientele, which looks to these chains for quality clothing and to make a personal statement about their preferences. Cheap clothes would result in customers shifting their allegiance to H&M or other similar outlets. This will end up hurting their bottom line.