Harrington Collection Sizing Up the Active-Wear Market Case Analysis

BUAD 6300
Case Analysis Questions
1. Read Case 1 ?Harrington Collection: Sizing Up the Active-Wear Market?
2. Perform the following situational analysis:
a. Identify the major trends in the macro and micro environmental (external) forces in
the women apparel industry (including active wear segment). Discuss the potential
impact of these trends on Harrington Collection decision to enter the active wear
market. Please use the table below to summarize your analysis. (18 points)
Force (e.g., economic,
competitive, consumer,
value-chain
members/retailers, etc.)
Trends based on
information provided in
the case
Potential impact on
Harrington Collection
decision
b. What are the potential retailer partners reactions to Harrington new active-wear
product line? (Hint: are they going to accept it or not?) Please justify your answer
based on information provided in the case. (10 points)
3. Answer the following questions using Exhibit 9 in the case as a guide:
a. What is the Contribution per ?unit?? (5 points)
b. What unit sales target will have to be captured to break even? (5 points) Is this
Attainable (support your response)? (6 points)
c. What is the profit potential if demand is equal to current Vigor market share of 7%
in the segment in which it competes? (6 points)
Your case write-up will be evaluated and graded according to the rubric posted in the syllabus
For the exclusive use of M. Alshuwaier, 2022.
3258
SEPTEMBER 26, 2008
RICHARD S. TEDLOW
HEATHER BECKHAM
Harrington Collection:
Sizing Up the Active-Wear Market
On January 22, 2008, financial results for Harrington Collection?s 2007 fiscal year were distributed
to all senior executives. Harrington, a large manufacturer and retailer of high-end women?s apparel,
had posted lackluster sales for the past three years and margins were now at an all time low. Sara
Huey, Vice President of Strategic Planning, gathered her strategy team and key operating managers
to review the disappointing 2007 results and brainstorm ideas to reverse the negative trends.
During the meeting, Blake Myers, the general manager for the Vigor division, proposed his idea to
expand into a new product line. Myers stated, ?The word I hear from some of our retailers is that
stylish, sporty, casual attire is flying off the shelves. There has been tremendous growth in the activewear segment. Harrington is missing a huge opportunity by not offering this kind of line.?
Karen Allen, a director in Strategic Planning, responded, ?Expanding our lines downstream is not
a sound long-term strategy. And a new product launch would probably put a significant drain on
our resources. I doubt we could capture enough sales in the first year to break even.?
Huey thought for a moment. Expanding into a product line with more casual, lower-priced
fashions was not a novel idea, but it had always been dismissed as too big a departure from
Harrington?s sophisticated, high-class roots. However, with continued pressure on profits, it was
clear Harrington needed some fresh ideas if it was going to continue to remain an industry leader.
Huey thought that there might be something to Myers?s idea. She told the group, ?Interesting
suggestion, Blake. Perhaps the time has come to flesh out this idea. I want you and Karen to gather
all the data you can, and then we?ll analyze the opportunity properly.?
________________________________________________________________________________________________________________
HBS Professor Richard S. Tedlow and Heather Beckham prepared this case solely as a basis for class discussion and not as an endorsement, a
source of primary data, or an illustration of effective or ineffective management. All names and key data in this case have been disguised. This
case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional
references to actual companies in the narration. The authors and HBS are grateful to Suzanne Norris for her assistance.
Copyright ? 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
This document is authorized for use only by Mohammed Alshuwaier in BUAD 6300 – Strategic Marketing & Analysis (Spring 2022) taught by BASHAR GAMMOH, University of Toledo from Jan
2022 to Mar 2022.
For the exclusive use of M. Alshuwaier, 2022.
3258 | Harrington Collection: Sizing Up the Active-Wear Market
The U.S. Women?s Apparel Industry
In 2007, the U.S. women?s apparel market was both mature and highly competitive. The economic
downturn that began in the early 2000s significantly impacted the industry. Consumers had become
very price-sensitive, and over half of all apparel purchased was sold ?on sale.? The trend toward less
expensive, casual clothing and the rising supply of low-cost, imported apparel intensified price
pressure. Consumers? discretionary dollars, once earmarked for fashion, were being diverted to
technology products, home design, and leisure-activity spending (e.g., travel, spas). In 2007, the
women?s apparel industry was estimated at $133 billion in retail sales. Exhibit 1 and Exhibit 2
provide data on the women?s apparel market in dollars and unit volume sales.
Women?s apparel products could be divided into six general categories based on quality and
price: (1) haute couture, (2) designer, (3) bridge, (4) better, (5) moderate, and (6) budget. See Exhibit 3
for definitions of each product class.
One of the greatest challenges facing apparel companies was managing the short-lived fashion
product life cycles. Hot new designs were easy to imitate, and consumer demand was often shortlived. New products and product lines were constantly introduced in an attempt to stimulate sales.
Rapidly changing consumer tastes required apparel manufacturers to continue to reduce their
product design, production, and retail placement cycle time. Major factors that differentiated apparel
products included (1) Fabrication: fabric choice, finish and pattern; (2) Silhouette: the outline or shape
of the design; (3) Quality of construction; (4) Brand; and (5) Price.
Competition in the Industry
Scores of brands competed fiercely for market share and shelf space. The industry was
moderately concentrated. Leading companies, such as Jones Apparel Group and Liz Claiborne,
captured significant market share with their diverse brand portfolios.
Jones Apparel Group and Liz Claiborne were both involved in the design, marketing,
wholesaling, and retailing of women?s apparel. Both companies outsourced production of their
apparel to third parties overseas. Jones operated 396 specialty retail stores and managed an array of
brands (e.g., Jones New York, Nine West, Anne Klein, Gloria Vanderbilt, Kasper, Bandolino, EvanPicone, Energie, Enzo Angiolini). Claiborne operated 338 retail stores around the globe (201 in the
United States). Company-owned brands included Liz Claiborne, Mexx, Juicy Couture, Lucky Brand
Jeans, and Ellen Tracy.
Producing Women?s Apparel for the U.S. Market
The value chain for the women?s apparel industry consisted of seven critical activities: (1)
Branding; (2) Design; (3) Buying; (4) Production; (5) Channel Marketing; (6) Distribution; and (7)
Retailing. Exhibit 4 provides detail on each activity. Apparel manufacturers generally took
responsibility for branding, design, sales and marketing to retailers, and managing production and
distribution of the apparel. Some companies were completely vertically integrated across the entire
value chain. However, the trend toward outsourcing production to low-cost labor areas was
increasing.
Imports dominated the U.S. women?s apparel market, accounting for 82% of total industry sales in
2005. 1 Once global import quotas on textiles from China were eliminated at the end of 2004, apparel
1 Internal note: Freedonia Industry Report, ?Focus on Apparel,? December 2006
2
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Harrington Collection: Sizing Up the Active-Wear Market | 3258
imports from China soared. Due to low labor costs in China and other developing nations, COGS for
imported apparel was significantly less than for similar apparel produced in the United States. Cost
advantages from producing in low-cost countries could reach 50%, depending on the product and the
labor involved. 2 Outsourcing production also eliminated the need for overhead and capital spending
associated with the manufacturing plants. Due to the relative ease of outsourcing production,
barriers to entry in this industry were rather low. Firms that chose not to outsource cited lack of
quality control, concerns about reliable delivery, and long lead times as reasons for retaining
ownership of production activities. In addition, cost advantages for imported apparel were shrinking
due to skyrocketing oil/transportation costs, rising wages in developing nations such as China, and
the relative weakness of the U.S. dollar.
Retailing Women?s Apparel for the U.S. Market
Women?s apparel retailers included department stores (e.g., Macy?s, Bloomingdale?s), discounters
(TJ Maxx, Marshalls), mass merchandisers (Target, Wal-Mart), specialty stores (Ann Taylor, Talbots),
and warehouse clubs/supercenters (Costco, Sam?s Club). See Exhibit 5 for industry market share
breakout by channel.
In recent years, discounters had established themselves as strong competitors in the women?s
apparel retail space. They were able to exploit the overproduction by many manufacturers and buy
branded pieces at deeply discounted costs. Their off-price merchandise often competed directly with
the department store offerings. In an effort to boost financial performance, many department stores
pursued consolidation strategies. For example, Federated (operator of Bloomingdale’s, Macy’s, and
Rich’s) acquired May Department Stores (operator of Marshall Field’s, Lord & Taylor, Filene’s, and
Kaufmann’s) in 2005. Mergers of large department store chains provided them with significant
bargaining power in the value chain.
Another trend in the industry was for retail outlets to integrate backwards in the value chain by
contracting directly with manufacturers to produce private label brands. Private label brands had
been growing at twice the rate of regular brands for the past 10 years. 3 The allure of private label
brands for retail outlets was product costs that were about 20% below those of national brands. 4 As a
result, these products could be offered at a lower price to the consumer, and margins for the retailers
were 10% to 20% higher. 5 Manufacturers had also expanded their roles by integrating forward into
retailing. With company-owned stores, manufacturers benefited from controlling customer service,
product display, and the sales staff.
Company Background
Harrington Collection was established in 1960 by Ella and Steven Harrington as a manufacturer
and marketer of designer women?s clothing. In the early years, the company focused solely on
designing and manufacturing formal dresses for high-end specialty stores. In 1970, Harrington grew
2 Internal note: Reinecke, Dr. Nicholas, ?Getting to Grips with Global Outsourcing,? Business Day South Africa, November 26,
2007.
3 Internal note: Baker, Stacy, ?The apparel industry’s top seven mega-trends: Management briefing: Trends for 2007,? Just Style,
May 2007
4 Internal note: Sloane, Leonard, ?Private-Label Clothes Find New Buyers,? New York Times, February 20, 1988.
5 Internal note: ?Mid-Range Brands Suffer as Department Stores Focus on ?Private Label? Clothing,? The Economist, May 19,
2007
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3258 | Harrington Collection: Sizing Up the Active-Wear Market
its product lines to include women?s suits, pants, blouses, and coats. By the mid 1980s, Harrington
had built a chain of company-owned retail stores and sold products in upscale department and
specialty stores as well. In 1984, Harrington expanded by acquiring the Vigor and Christina Cole
brands, which appealed to younger, fashion-conscious customers. Huey stated, ?Throughout
Harrington?s history, we?ve had the preeminent brands for women desiring elegant, high-end
fashions. In the 1980s, we capitalized on the demand for professional and stylish attire for women
entering the workforce. Because of our superior quality, knowledgeable sales staff, and designer
styles, customers became extremely loyal to the brands. Our logos are still synonymous with highclass fashions.?
Harrington Collection separated financial results into two reportable segments: The
Manufacturing Group, dedicated to designing, producing, and marketing upscale women?s apparel,
accounted for 50.3% of company profits in 2007; and The Retail Group, focused on retail-based
operations for company-owned stores, accounted for 49.7% of profits in 2007. Detailed company
financials are provided in Exhibit 6.
Manufacturing Group
Harrington?s manufacturing group supplied apparel for company-owned stores and also sold
products to upscale department and specialty stores. Company-owned stores accounted for about
20% of the manufacturing group?s sales in both units and dollars. The remaining sales were split
40:60 between specialty stores and department stores. Harrington did not sell any products to mass
merchandisers or discount retail outlets. The manufacturing group owned and operated production
facilities in the United States, Mexico, and the Caribbean. Many apparel firms had closed their North
American manufacturing plants to achieve savings by outsourcing production to China. Some senior
managers at Harrington Collection had urged CEO Kathleen DuBroff to do the same. However, two
concerns had led DuBroff not to outsource: a desire for greater quality control than she thought she
could dependably obtain from an outside source, and a desire to have manufacturing plants
reasonably close to the U.S., to ensure that when a particularly fashion-sensitive product line was
ready, it could be placed into retail outlets with maximum speed?that is, faster than container ships
from China could get it there. Harrington Collection manufactured clothing under four distinct
divisions: Harrington Limited, Sopra, Christina Cole, and Vigor. Harrington did not manufacture
private-label brands or use licenses from other companies. Overall, Harrington Collection products
held approximately 1.83% share of the total women?s apparel market in terms of retail dollars in 2007.
Exhibit 7 provides details on the product focus, positioning, competition, and market share for each
division.
Retail Group
Harrington Collection?s retail group operated 120 company stores: 70 stores sold a combination of
Harrington Limited and Christina Cole merchandise, and 50 of the stores were dedicated solely to the
Vigor division. Products from these divisions were also sold in upscale department stores and
specialty stores. Sopra designs were sold exclusively at specialty stores. Each division also had a
sophisticated e-commerce site where products could be purchased directly. Harrington Collection
felt sales people were the most important factor in the consumer decision-making process and spent
significant resources training its retail sales force and offering attractive commissions.
4
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Harrington Collection: Sizing Up the Active-Wear Market | 3258
Brand Positioning, Sales and Marketing Strategy
Harrington Collection targeted affluent, fashionable, college-educated, professional women ages
25 to 60. Each manufacturing division focused more narrowly on a specific target consumer.
Harrington Limited?s target customer was interested in ?sophisticated elegance,? Sopra?s customer
was described as a ?status seeker?, Christina Cole consumers wanted to be ?office chic,? and Vigor
consumers were labeled ?trend setters.? Exhibit 7 provides further details on each division?s target
customer. According to Huey, ?Harrington products are aspirational in nature, and wearing a piece
of clothing with one of the Harrington labels provides instant status. We were one of the first
companies to successfully introduce a lifestyle-branding strategy. This brand equity fuels the
premium prices that Harrington Collection captures.? Harrington Collection differentiated its
products through design, marketing, and outstanding service. Harrington Collection was known for
its top in-house design staff, extensive national advertising campaigns, and its exceptional quality
and styling.
In company-owned stores, Harrington employed cutting edge technology to track inventory and
sales information. This allowed the manufacturing group to quickly react to market demands,
improve productivity and shorten manufacturing cycles. Harrington?s expertise in analyzing market
data helped to prevent overproduction in the manufacturing group. An added benefit of staying
ahead of the product life cycles was reduced overstocks for the retail trade partners.
Harrington Collection maintained a significant channel marketing budget and had an excellent
relationship with the retail trade. Huey explained, ?We focus on a push marketing strategy. We
offer our channel partners more support and incentives than most manufacturers. We consider them
a strategic partner. We offer retailers valuable inventory and sales advice based on decades of
expertise and data from our retail group. The independent specialty stores find this invaluable.
These smaller specialty stores are our most fervent supporters. They love dealing with us because
they can count on reliable deliveries, help in selling the merchandise, and credibility that comes with
carrying the Harrington labels.?
The Active-Wear Opportunity and Its Costs
In recent years, several companies had launched stylish, active-wear lines sold in department
stores. These lines often consisted of a matching hoodie, pants, and tee shirt and were meant to be
worn everywhere, not just to the gym. The trend toward more contemporary, athletic fashions
resulted in rapid growth for firms that offered these lines. Liz Claiborne?s Juicy Couture was one of
the early leaders in the ?better? active-wear category. Popular with Hollywood celebrities, Juicy
Couture focused its line on glamorous fabrics and sexy styling. Knock-offs in the ?moderate? and
?budget? classifications quickly arrived on the market. Harrington Collection estimated that over
seven and a half million active-wear units 6 had been sold in 2007. This number was expected to
double by 2009. In 2007, 80% of this apparel was in the ?moderate? and ?budget? classifications.
However, many brands were starting to trade-up and 40% of active-wear in 2009 was expected to be
captured by the ?better? classification. The successful ?better? active-wear product lines focused on
large-scale advertising campaigns, with average price points just below $100. Ongoing advertising
for an active-wear line was estimated at $3 million per year, exclusive of launch costs.
6 Since active-wear was sold as separates, the ratio of hoodies to tee-shirts to pants was not equal. Historical sales in the
market segment showed this ratio was one to three to two. Therefore, an active-wear ?unit? was viewed as half a hoodie, one
and one-half tee-shirts, and one pair of pants.
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3258 | Harrington Collection: Sizing Up the Active-Wear Market
During her analysis, Karen Allen convinced a Harrington manufacturing expert to tear apart one
of the ?better? sets and was astonished by the results. Allen noted, ?This is one of the most poorly
made garments I have ever seen. The consumer will not be fooled for long. She will wash it once and
be appalled.? Blake Myers agreed: the durability was well below Harrington standards, but he
added, ?Our research shows that 95% of purchasers were satisfied with the products? durability, feel,
fit, and look.?
Reports from department stores showed the stylish active-wear inventory sold extremely quickly.
Active-wear inventory had an inventory turnover rate almost twice the rate of current Harrington
Collection apparel. In addition, markdowns for the stylish active-wear were not as extreme as other
product lines.
Surveys and focus groups commissioned by Harrington Collection, revealed that their target
customers showed considerable interest in more active-wear clothing. Myers explained, ?Our survey
findings showed 10% of customers purchasing apparel in the $100?$200 price range would buy an
active-wear set if one with superior styling, fabric, and fit was available. This is a huge opportunity
for us. By conducting focus groups we also uncovered that there is a subset of Harrington customers
who were loyal to the brands throughout their careers but no longer desire the tailored, professional
look. They are now interested in something fresh and comfortable that fits with their active lifestyles.
Other studies have also supported this finding and have shown the aging baby boomer population
wants clothing that does not make them feel old.?
Myers felt active-wear would be a perfect addition to the Vigor division. Vigor styles were less
traditional than the other Harrington divisions. Although the division currently focused on career
wear, it emphasized comfort and fashion. Myers explained, ?Vigor has the strength to branch out
and support a more casual, less-expensive line. Fewer than 2% of respondents in the customer
research survey felt that a less-expensive active-wear line would cheapen the brand.? Vigor currently
provided a very broad line and advertised nationally. Also, account executives called on retail trade
partners about four times per year?double the industry average of two sales calls per year.
Myers thought the new active-wear pieces could be offered well below Vigor current price points.
The suggested retail sales prices for a Vigor hoodie, tee-shirt and pants would be $100, $40, and $80
respectively. Wholesale prices from the manufacturing group to the retailers would be 50% of those
figures.
Both Huey and Allen felt the company could not outsource the production of this line to a third
party. When Myers brought up the idea of outsourcing to China, Allen quickly cut him off by saying,
?Kathleen DuBroff has made it clear that in-house production is one of our competitive advantages.
Quality and agility are Harrington?s mainstays. Outsourcing does not provide for adequate control
over quality or turnaround times. If shoddy, outdated pieces with a Vigor label make it to the public,
then it will irreparably harm all Harrington divisions.? Allen felt the optimal strategy was to rent
plants in Mexico to produce the pants, hoodies, and tee-shirts. Allen believed renting plants in
Mexico complied with DuBroff?s control mandate at the lowest possible cost structure. Although
costs to produce apparel in Mexico were slightly higher than in China, Allen felt the close proximity
to U.S. retail outlets made Mexico the optimal choice. Wage differential between laborers in China
and Mexico was less than one dollar per hour. 7
7 Pollina, Ronald R., ?Can Mexico Compete for Jobs Internationally,? Area Development Site and Facility Planning, August 1,
2004.
6
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Harrington Collection: Sizing Up the Active-Wear Market | 3258
A facility to manufacture the pants could be rented for $500,000 annually with equipment costing
about $2 million and plant start-up costs estimated at $1.2 million. Yearly overhead, excluding rent,
was projected to be $3 million. Hoodies and tee-shirts could be produced at a plant that could be
rented for the same annual amount as the pants plant. Equipment would cost $2.5 million, start-up
costs would be another $2.5 million, and yearly overhead, excluding rent, would be $3.5 million.
Launch costs, which included a national advertising and public relations campaign, were
estimated at $2 million. New fixtures for company-owned stores carrying the active-wear line would
run $50,000 per store. All launch, fixture, plant start-up, and equipment costs would be depreciated
over a five-year period.
Allen had also run some numbers on variable costs. Direct labor of sewing, pressing, and cutting
had to be considered. Raw material costs were broken out into fabric and findings (e.g., buttons,
zippers, and thread). Allen?s estimates are summarized in Exhibit 8. Allen projected working
capital requirements at 3% of wholesale prices and sales commissions at 4%. She expected carrying
costs for inventory to be 1% of wholesale prices. Other expenses that Allen estimated were bad debt
at .7% of wholesale prices, transportation at .24% and order processing/miscellaneous at .15%.
Vigor would be able to leverage Harrington?s existing corporate support functions (e.g., IT, HR,
Legal, Finance, etc.) to run the new business, but Vigor would have to hire a general manager,
merchant, planning manager, and two design staff members who were dedicated to the new product
line. These management salaries and support allocations were estimated at $1 million per year.
Making the Decision
Allen and Myers had spent two months collecting data on active-wear trends and cost estimates
for launching the new line. As Huey examined their findings, she was pleased with the potential of
the opportunity, but she was also mindful of the risks. In March of 2008, Huey called her strategy
team into her office. Once they arrived, she looked up from the papers strewn upon her desk and
addressed them: ?I think we could be ready to launch a new active-wear line January 1, 2009.
However, we need to first think through all the critical questions. What is the potential competitive
reaction? Will both department and specialty stores enthusiastically support this new product line?
Can active-wear be folded into the existing Vigor division or should a brand new division be created?
What sales are needed to break even? Is this attainable? Can we achieve the sales needed to capture
an attractive profit margin? Before we bring this idea to the board, we need to have answers to all
these questions. I sketched out a template to help us work through the demand and profitability
analysis (Exhibit 9). Let?s order in some lunch and start to sort through the issues.?
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2022 to Mar 2022.
For the exclusive use of M. Alshuwaier, 2022.
3258 | Harrington Collection: Sizing Up the Active-Wear Market
Exhibit 1
U.S. Apparel Market Salesa
U. S. Retail Sales of Women?s Apparel
2002 ? 07
Sales
Year
2002
2003
2004
2005
2006
2007
$ billion
$ 106.0
$ 109.7
$ 115.9
$ 122.1
$ 127.7
$ 133.0
% change
?
3.5
5.7
5.3
4.6
4.2
a Mintel International Group
Exhibit 2
U.S. Women?s Apparel Market Unitsa
U. S. Women?s Apparel Market: Units Sold
Annual
2005
millions
Annual
2006
millions
Annual
2007
millions
$200+
138.3
139.2
143.2
$100 – $200
219.0
218.9
222.2
$50 – $100
438.0
468.9
511.5
Under $50
489.9
524.3
584.6
1,285.3
1,351.2
1,461.5
Price Point
Total
a Fictional industry numbers
Exhibit 3
Women?s Apparel Product Classifications
Haute Couture?Custom, made-to-order apparel. Only affordable for the most elite members of society. Costs
could be in the tens of thousands of dollars for each item. Example: Chanel, Christian Dior.
Designer?Highest quality ready-to-wear apparel. Characterized by high-style fashions. Usually sold in highend department and specialty stores. Items typically have an average suggested retail price of more than $1,000.
Example: Gucci, Marc Jacobs.
Bridge?Offers a ?bridge? between designer and better segments. Pieces like career wear and dresses with high
quality fabrics usually appear in bridge lines. Items typically have an average suggested retail price of less than
$1,000. Example: Tahari, Ellen Tracy.
Better?Brand-name labels which are less expensive than bridge. Lines generally include sportswear, career
wear, and dresses. Items typically have an average suggested retail price of less than $500. Example: Jones New
York, Liz Claiborne.
Moderate?Moderate quality sportswear, career wear and dresses often fall into this category. Items typically
have an average suggested retail price of less than $100. Example: Gap, Nine West.
Budget?Least expensive product category. Product lines generally consist of more casual clothing, including
jeans and tee-shirts. Items typically have an average suggested retail price of less than $50. Example: Old Navy,
Cherokee.
8
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Branding
?Source raw
materials or
locate
manufacturers
that make all or
part of the
finished product
Buying
?Cut fabric
?Sew and press
?Assemble
garment
?Perform final
finishing
Production
?Develop
promotional
strategies for
retail channel
partners
?Sell p