Competitive Strategy and Business Performance. A Case in the German Clothing Industry

Content

1.Abstract... 1

2.Introduction... 2

3.The Case - An Overview... 3

3.1.the German clothing industry... 3

3.2.The Companies... 3

3.2.1. Target company: JIL SANDER AG... 4

3.2.2. Selected competitors: HUGO BOSS AG ESCADA AG... 4

4.Qualitative Analysis... 6

4.1.Broad Context: Pest Analysis... 6

4.1.1. The political environment... 6

4.1.2. Economic environment... 7

4.1.3. Social factors... 8

4.1.4. Technology... 8

4.1.5. Impact Analysis... 9

4.2.Industry / Sector Analysis: Five Forces... 11

4.2.1. Intensity of rivalry... 11

4.2.2. Supplier power... 14

4.2.3. Distribution channels... 14

4.2.4. Potential entry... 15

4.2.5. Substitute products... 16

4.3.Company Analysis: Ansoff Matrix... 17

4.3.1. Current products for current markets... 17

4.3.2. New products for existing markets... 18

4.3.3. Current products introduced to new markets... 19

4.3.4. Diversification of new products for new markets... 19

5.Quantitative Analysis... 21

5.1.Choosing the benchmarks... 21

5.2.First glance on the financial statements of Jil Sander... 21

5.3.Common Size Statements... 22

5.3.1. Vertical analysis... 22

5.3.2. Horizontal analysis... 23

5.3.3. Cross-sectional analysis... 24

5.4.Time Series Analysis and Financial Ratios... 25

5.5.Operating Ratios... 25

5.5.1. Overall performance... 25

5.5.2. Working capital... 26

5.6.Financial Ratios... 26

5.6.1. Debt ratios... 26

5.6.2. Liquidity ratios... 27

6.Scenario Recommendations... 28

6.1.Do nothing (Short-Term... 28

6.2.Push Sales in Europe (Mid-Term)... 29

6.3.Outsourcing production (Long-Term)... 29

7.Bibliography... 32

8.Annex... 33

Illustrations and Tables

Table 3.2‑1: Comparison of Sales Regions... 4

Illustration 4.1‑1: PEST Analysis... 9

Table 4.1‑2: Impact Analysis... 10

Table 4.2‑1: Turnover Ranking... 12

Table 4.2‑2: Number of Companies and Employees... 12

Table 4.2‑3: Turnover with Textiles in Germany... 13

Table 4.2‑4: Structure of Costs... 13

Illustration 4.2‑5: Structure of Sales by Channel... 15

Table 4.2‑6: Threat of Entry... 15

Illustration 4.2‑7: Five Forces Analysis... 16

Table 4.3‑1: Jil Sander: Structure of Sales by Products... 18

Table 4.3‑2: Jil Sander: Sales Trend by Regions... 19

Illustration 4.3‑3: Ansoff Matrix (Jil Sander)... 20

Table 5.3‑1: Vertical Analysis (Jil Sander)... 23

Table 5.3‑2: Horizontal Analysis... 24

Table 5.3‑3: Cross-sectional Vertical Analysis... 25

Table 5.6‑1: Comparison of Financial Ratios... 27

Table 6.3‑1: Horizontal Analysis (Scenario)... 30

Table 6.3‑2: Vertical Analysis (Scenario)... 31

1. Abstract

The clothing market environment is characterised by strong competition, low demand and declining margins. German retail sales showed a fifth successive annual decline: in 1997, clothing retailers struggled with a 3% drop in sales revenues. As apparel-related textile prices deflate, many manufacturers are producing premium products. Key success factors are the use of modern technologies - and a change in business strategies, which usually result in either diversification or specialisation.

The present paper consists of an analysis of the German clothing company JIL SANDER AG, which is then compared to BOSS AG and ESCADA AG. Despite their different size (JIL SANDER is by far the smallest one in every respect) they have many things in common: all pursue a similar strategy to survive in a highly competitive surrounding. They built up a strong brand, diversify in other lifestyle segments and distribute their products through own mono-brand shops as well as through franchise partners. The main task is to assess the performance of a company like Jil Sander in pursuing this strategy, especially considering its size constraints. This is done by qualitative as well as quantitative analysis. Analysing the environment, the most important recommendation regarding Jil Sander is to push further European integration: to reduce dependence on the political and economic situation in Germany, to reduce labour costs and to take advantage deriving from the Single European Market. Regarding industry competition, the main objective is to reduce costs to compete against other companies who are operating in the same market segments. In the qualitative analysis, it is seen that sales increased steadily. As Jil Sander invested in a product-line extension as well as in new shops, the profit in 1997 decreased sharply. Nevertheless, the financial analysis shows that the overall performance of Jil Sander is average, debt and liquidity ratios good. A comparison of common size statements (vertical and horizontal) indicates that the company to benchmark against is Boss. The scenario analysis shows that the investments during the last two years will not automatically lead to a sustainable competitive position in the future. Instead, another strategy has to be taken into account. Not surprisingly, the scenario analysis is corresponding to the recommendations of the qualitative analysis: the position of the company will be strengthened and profits will increase when pushing international integration. In a first step, it is recommended to push exports in Europe. In the long-term, the strategy of producing exclusively in Germany and Italy should be abolished. It is leading to unfavourable cost-sales ratios and is not necessary to sustain high quality standards. Debt and liquidity ratios allow further investments; the capital employed should be increased. Implementing this strategy, it should be kept in mind that it means less control over franchise partners and factories. The push is on to speed up communications through electronic data exchange systems, reduce materials that are warehoused for a long time and allow just-in-time delivery to retailers, so that best-selling items are quickly replenished. Another task is to answer the 'management question', which was posed at the end of the company analysis: the second management level has to be strengthened, as a tight control over sales channels will not be possible by the person Jil Sander itself.

2. Introduction

"Clothes make the man. Naked people have little or no influence in society." Mark Twain

Twain's musing on the importance of being dressed still stands today: the German apparel and textile industry generated a DM 54.19 billion turnover in 1997.[1] However, companies have to meet the challenges deriving from the difficult economic situation: high labour costs and the continuous weak demand resulted in a reduction of workforce throughout the 1990's. Like many other industries, the textile apparel industry tries to compensate pressure with increasing exports (about 1/4 of total production). Within Europe, Germany is the second largest exporter (after Italy, followed by France). The main share is being exported in other EU countries. On the other hand, Germany is also the world's second largest importer (after the US) and therefore has to state a trade gap in textile trade. Main imports are coming from Italy and France as well as from Asia.[2] In times of increasing international division of labour, mixed calculations were possible and necessary. A rising share is invested in Middle and Eastern Europe; up to now the main investments were still made in the US and Western Europe (see Annex 8-3: Foreign Direct Investments of German Textile and Apparel Industry). The present paper is analysing the situation of the German clothing company JIL SANDER AG, which is compared to BOSS AG and ESCADA AG. Despite the different size they were chosen as they all pursue a similar strategy to survive in this highly competitive surrounding: they built up a strong brand, diversify in other lifestyle segments and distribute their products through own mono-brand shops as well as through franchise partners. The main task is to assess the performance of a company like Jil Sander in pursuing this strategy, especially regarding its size constraints. After a short overview on the industry as well as the companies, the first part consists of a detailed quantitative analysis: in a three-step approach the environment, the sector and the company are assessed. The second part is dedicated to a quantitative analysis. After a first look on the financial statements of Jil Sander, common size statements as well as financial ratios were described and interpreted in comparison to the selected competitors. In the last step a modelling of three scenarios is carried out - based on different assumptions and connected with recommendations for future strategies. Sources were used as follows: management literature for the theoretical background, annual reports of the three companies (up to 1997) and other secondary data, i.e. statistics provided by governmental organisations and trade associations as well as other internet articles.

3. The Case - An Overview

3.1. the German clothing industry

The clothing market environment is characterised by strong competition, low demand and declining margins. In the mid-nineties, the German clothing industry was affected by unsettled currency markets. With regard to supply, the German industry is hard put to assert its position in international markets, particularly against Italian companies benefiting from a weakened Lira. On the demand side - given the persistent difficulties in the labour market, the high level of taxation and the uncertainties about how the economy will develop - consumers are cutting back their expenditures and spend less on clothes. This resulted in the fifth successive annual fall in German retail sales: in 1997 clothing retailers struggled with a 3% drop in sales revenues. This downturn in the retail sector did not have a corresponding impact on the clothing industry, which more or less succeeded in maintaining its sales volumes. Exports played a strong supporting role in this respect. During 1998 the situation turned slightly: whereas domestic demand remained stable, the slow economic development in a number of export markets had a damping effect on sales. Faced with high direct and indirect wage costs in Germany [3], manufacturers are under sustained pressure to boost efficiency in all areas. As a consequence, the number of people employed in the German clothing industry decreased by further 10% to 85,000. This was accompanied by an even sharper decline in the number of production plants in Germany, which now stands at 940 (-15%). Main reasons were weak domestic demand and strong competition, coupled with an increased tendency to transfer production capacities abroad. [4] Nevertheless, the capacity utilisation still reached satisfactory 86 %. [5] As apparel-related textiles prices deflate, many manufacturers are producing higher-value products. Key success factors are the use of modern technologies and the improvement of business strategies, which usually result in either diversification or specialisation.

3.2. The Companies

All three companies design, manufacture and market exclusive clothing under an own brand name in a premium segment. They diversified their product line - either in different market segments like women’s resp. men’s wear or in other complementary segments like accessories. Whereas JIL SANDER and BOSS earn additional income through licence agreements for the use of their brand names, ESCADA produces accessories and cosmetics on its own. On the sales side, the export content of Jil Sander is lowest (more than 40% of products sold in Germany). The most diversified company is Escada, with 1/3 of sales made up in Germany, Europe and America respectively (see Table 3.2‑1). Table 3.2‑1: Comparison of Sales Regions [6] [Dies ist eine Leseprobe. Grafiken und Tabellen werden nicht dargestellt.]

3.2.1. Target company: JIL SANDER AG

JIL SANDER AG, founded in 1968, designs, markets and sells luxury women's clothing. 1989, JIL SANDER was going public with 33% of the company's capital. The majority of assets are still held by Ms. Sander. The company also licenses the sale of cosmetics and designer-eyewear under the JIL SANDER brand name. JIL SANDER products are sold in company-owned stores, as well as partnership and franchise stores. Retail outlets are located in various German cities and in numerous international locations such as Bangkok, Paris, Tokyo, Toronto, Kuwait, Singapore, London, Zurich, San Francisco and other cities. In 1997, there were 57 retail units worldwide. JIL SANDER's worldwide operating area management ensures distinctive identification as well as addressing of its customers, their needs and demands. JIL SANDER has subsidiaries in Germany, France, Italy and the USA. In 1997, the company introduced its new section of men’s wear, which accounted for 9% of revenues. Wholesale/ retail of own-designed clothing accounted for 70% of 1997 revenues; retail of other clothing 28% and licensing fees for use of JIL SANDER brand name 2%. [7] The brand philosophy is based on 'pureness, cachet international design'; the products are characterised by a 'clear design free of frill as the purest form of expression'.[8]

3.2.2. Selected competitors: HUGO BOSS AG ESCADA AG

Hugo Boss AG, founded in 1923 and publicly traded since 1985, designs and manufactures exclusive clothes, mainly for men. A three-brand concept (BOSS, HUGO and BALDESSARINI) represent three distinct yet complementary branding worlds. Notwithstanding their autonomous characters, they contribute to one international identity of HUGO BOSS: one of 'modern elegance and dynamic creativity'.

The company markets its brand name products through franchise Boss outlets as well as through independent retailers. In addition, the company earns income through licence agreements for the use of its brand names, such as the Hugo Boss body wear collection, or fragrances. According to product breakdown by brand names, the Boss brand accounted for 92% of turnover in 1997; the Hugo brand name 5%, Baldessarini 2%, and company-external brand names 1%. In 1997 the company launched its first collection for women under the name Hugo. [9] Boss has worldwide subsidiaries.

ESCADA AG, founded in 1974 and publicly traded since 1986, is a leading German manufacturer of women's fashion. The company designs, manufactures and markets brand name clothing collections for women. In 1997, brand name products accounted for 96% of total revenues. The breakdown of brand names by percentage of revenues is as follows: House of Escada 70%, Laurel 20% and Escada Sport 10%. ESCADA also manufactures fashion accessories, such as handbags, shoes, costume jewellery, belts, ties and miscellaneous leather items. In addition, ESCADA produces sport/leisure clothing, evening dresses and a range of beauty products. The company sells its products through its own ESCADA Shops, franchise shops and selected retailers. ESCADA has worldwide subsidiaries. [10]

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[1] Gesamtverband der Textilindustrie. Konjunkturbericht Dezember 98 (05.1.99).

[2] See Annex 8-1: International Trade with Textiles and Apparel (1996) and 8-2 Regional Structure of German Trade with Textiles and Apparel (1997).

[3] Within the textile industry, labour cost per hour amounted to DM 35,32 (1996), which is one of the highest in the world (just exceeded by Swiss, Denmark, Belgium and Japan). Gesamtverband der Textilindustrie, IWD. Textilindustrie: Schwerer Stand im globalen Rennen. 30. Okt. 1997, 44/Jg. 23.

[4] Textilwirtschaft: Bekleidungsindustrie 1998 (5.1.99); Digitale Medien: Hugo Boss, 1995 (12.11.98).

[5] Gesamtverband der Textilindustrie. Konjunkturbericht Dezember 98 (5.1.99)

[6] Annual Reports (1997): Jil Sander p. 26, Boss p. 38, Escada p.12.

[7] Krebs; Wright Company Analysis (12.11.98).

[8] Annual Report Jil Sander, p.2.

[9] Wright Company Analysis (12.11.98). Digitale Medien: Hugo Boss, 1995 (12.11.98)

[10] Wright Company Analysis (12.11.98).