Abercrombie & Fitch Looks To The Middle East For Growth

Abercrombie & Fitch (NYSE:ANF), known for its topless models and sexualized advertising, is delving deeper into the Middle East in the search for growth. The brand, in December, announced the opening of its first store in the UAE, in one of Dubai’s luxury shopping centers. This was opened pursuant to a joint venture with Majid Al Futtaim Fashion, that works with a number of leading fashion brands in the GCC and Levant region, including Juicy Couture, HOSS Intropia, Halston Heritage, and Jane Norman. This marked the company’s third store in the region, following the opening of two in Kuwait in early 2015. The Dubai opening marks several firsts for the brand, including a newly designed concept store featuring a stand-alone fragrance boutique, and a carve-out for the Abercrombie kids brand. The 18,000 square foot store is one of the largest Abercrombie & Fitch mall-based stores globally, featuring the brand’s signature style.

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Following the success of its first store in Dubai, the company opened several more in the region, and the count now totals eight, with six in Dubai and two in Kuwait. As per Arthur Martinez, chairman of Abercrombie & Fitch, while the company does not have a firm plan in place, it would not be a surprise if the store count doubled in the next three to five years. The company expects to open its first store in Qatar in the first quarter of 2017, and in the Kingdom of Saudi Arabia in the second half of 2017, with plans to open even in Bahrain and Oman. The majority of the company’s stores in the area are under the Hollister brand, with two Abercrombie & Fitch outlets in Kuwait, and one in Dubai. Significant growth is expected from the region through the company’s target market – teenagers and consumers in their 20s, as there is a fairly large young population. While Hollister appeals primarily to teenagers, the Abercrombie & Fitch brand has been trying to push its target market towards the older segment of those in the 20 to 29 range.

Growth in this region certainly seems like an attractive opportunity, as the company has been struggling with its performance in the domestic market. While it is clearly not a doubt that the company has too many stores in the US, where it has been closing its stores aggressively, the brand has room to grow internationally. Currently, the company attains 35% of its revenues from outside the US, with Europe being its largest international market. Even in terms of sales per square foot, the company is far more productive internationally, than it is in the US. Aggressive expansion in Europe cost the company, as an unplanned policy resulted in a high concentration of stores in a few tourist destinations, ultimately causing cannibalization of its own sales. Furthermore, lingering economic weakness in the region further put a stop to growth for the company. Focusing instead on other international markets such as those in Asia, the Middle East, and Australia, may prove to be more beneficial for the company.

As can be seen from the above table, the share of US as a source of revenue for Abercrombie & Fitch has remained constant. However, its share from Europe has decreased 340 basis points. Between 2010-2012, Abercrombie expanded vigorously in the market, increasing its total international store count from 52 to 139. However, the retailer did not plan its expansion well, which resulted in a high concentration of stores in a few tourist destinations. This resulted in Abercrombie cannibalizing its own sales, which has troubled it to date. In addition to self-cannibalization, lingering economic weakness in countries such as France, Italy, and Germany (Abercrombie’s main markets in Europe) contributed to the company’s under-performance. An unsettled environment in the region has largely been a result of  a weak currency and lower tourism. Lately, Abercrombie has shown some latent signs of recovery, driven by better-than-expected results in the U.K. and Germany, but it hasn’t been able to improve its performance across the board. The best opportunity for the company, thus, lies in the ‘Other’ category, specifically the Middle East and Asia. The company has stated its plans to open six to seven stores in China in 2016, where there is an expanding middle class, and a growing appetite for western brands, as noted by Martinez. Elsewhere in Asia, ANF is also “exploring methods of entry” into markets such as Indonesia and the Philippines.

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