Ralph Lauren: Getting back on the pony
The following article explores retail giant Ralph Lauren and their journey through a volatile consumer-driven marketplace. What has the company learned and what are they doing differently to drive growth? Jeffrey Edelman, director in RSM’s retail and consumer products industry practice, provides his insights.
Driving growth to satisfy Wall Street
Ralph Lauren’s business strategy was to grow market share through brand extension, international expansion and retail store additions. Their iconic brand and strong consumer franchise helped fuel their impressive sales and earnings growth until a few years ago. How did the pony ride come to an end so quickly and how can a new management team restore its luster? The simple answer to recent performance was that prior management was primarily focused on sales growth; everything else fell into place—until it didn’t. The company became inefficient with too many layers of management, bloated inventories, declining store productivity, an inefficient supply chain and lead times too long in today’s marketplace.
Additionally, international and product licensing helped generate sales rapidly, which was followed by the acquisition of many of those businesses, resulting in another step-up in volume. Now that some of those acquisitions are largely mature or suffering economic woes today, sales growth has become more difficult to achieve.
Leveraging their brand equity
Product line extension has typically been one of the easiest and fastest methods of driving volume, and in some cases, Ralph Lauren carried the fashion influence to newly developed brands. These lines enabled broadened distribution to channels such as JCPenney (American Living) and Kohl’s (Chaps), helping to generate impressive sales growth. In time, though, extended product offerings became too overlapping across the brands minimizing differentiation within each channel. Going forward, company management has said they will concentrate their focus on the Ralph Lauren, Lauren and Polo labels. Consistent with this strategy is a goal of increased full-price selling.
Sales to off-price stores were believed to increase faster than their overall wholesale business. This volume was likely very profitable for Ralph Lauren and those retailers; however, the offset was that they helped saturate the market likely leading to diminished impact on the overall brand.
Retail store expansion helped drive sales, but at a cost
Expanded product offerings helped Ralph Lauren increase their distribution in department stores. That channel fill created incremental sales for the company. However, once complete, wholesale growth began to taper off. Ralph Lauren, at one time, was in an enviable position as they were able to stay above the fray of promotional pricing and did not provide markdown allowances. That ended several years ago. Building its own retail store network represented an incremental growth opportunity—an easy way to grow sales at a better than wholesale margin. Unfortunately, many of their show-palace stores were too costly, undermining profitability. A number of those stores are now being closed.
Factory outlets, once the golden goose, helped lead to further market saturation
We estimate that factory outlet stores accounted for most of the retail profit for Ralph Lauren at its peak. Specially made products for these stores were not up to the same quality as their better merchandise, but offered the consumer great value—look-alike products at a lower price—and a favorable margin for Ralph Lauren. Additionally, high sales productivity and low occupancy costs potentially represented the biggest profit contributor. These stores, however, have also suffered traffic, sales and profit declines due to an increasingly competitive marketplace and the changing ways consumers shop; specifically, rather than visiting and purchasing in traditional stores, shopping more frequently online.
A rejuvenation strategy
Given the missteps of the past, what is Ralph Lauren doing now to get back in the saddle and rejuvenate the company? Note the following measures the company has implemented:
- Focused on offering three core lines
- Provided a stronger product assortment within their three key brands
- Overhauled their distribution strategy to better address how their target consumer is shopping
- Improved inventory management by shortening the production cycle and cutting lead time from 15 months to nine months
- Operationalized the idea that demand should drive supply and inventory, not lofty expectations
- Strengthened collaboration with their supplier base in Asia to satisfy demands of their wholesale base
- Streamlined management structure, which shortened decision-making
- Rationalized the retail store base and distribution channels
Assuring sales and profit momentum
Ralph Lauren is suffering the woes of many brands that drove global sales as rapidly as possible and are now searching for more stable and predictable growth. The company recently outlined their goals, which included sales increases during their fiscal year 2019, gradually improving expense-to-sales ratios and gross margin. The real issue is whether Ralph Lauren can move fast enough in a rapidly changing market, and more importantly, successfully operate within an environment where their competitors are not standing still. They must consider: How many of their customers were loyal to the brand and how many reacted to promotional pricing?
Today’s consumer, and likely tomorrow’s, will be more focused on product and quality than just brand. Moreover, many more brands are offering similar looks and, to some degree, differentiation. Looking back at Gap years ago, they capitalized on certain fashion looks, including denim and then later khakis; those were quickly imitated and brands like this are still suffering.
Ralph Lauren is an iconic brand and has a loyal following. That notion is undisputed, however, in this volatile and ever-changing marketplace, the company must challenge themselves to understand their market potential based on a profitable business model, one that focuses on targeted full-price selling, to continue to be that future retail powerhouse.