With its same-store sales in free fall, American Eagle Outfitters (NYSE: AEO) is looking to cut costs to prevent margins from tanking in a wave of discounting. The Wall Street Journal (subscription required) reports that "it hopes to recalibrate its costs with moves that involve everything from changing where a garment is made (fewer Chinese factories and more Indian villages) to how it's shipped (less use of air freight) to how it looks (no patterned pockets in many jeans)."
By moving production from China to Cambodia and Vietnam, American Eagle thinks it can cut its per-garment production costs by 4% to 8%. But analysts warn that quality issues associated with production in those countries make it something less than a no-brainer.
It makes sense for American Eagle to cut costs where it can. Every company should always do that. But by jeopardizing the quality of its merchandise to try to boost results during a terrible economy, American Eagle runs the risk of hurting its brand and long-term potential in order to add a couple points to gross margins.
Cost-cutting seems like a great idea now. But American Eagle might regret it once the economy turns around.
It makes sense for American Eagle to cut costs where it can. Every company should always do that. But by jeopardizing the quality of its merchandise to try to boost results during a terrible economy, American Eagle runs the risk of hurting its brand and long-term potential in order to add a couple points to gross margins.
Cost-cutting seems like a great idea now. But American Eagle might regret it once the economy turns around.
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Reader Comments (Page 1 of 1)
2-03-2009 @ 5:22PM
Jessy Scholl said...
I don't know, is American Eagle cutting the wrong costs? I, for one, know that they will be saving on fuel costs since their factories were more likely landlocked in China compared to Cambodia and Vietnam. This will save on gas and make it much easier to ship out merchandise making them more likely to use the slogan "Good Quality for Low Prices."
2-04-2009 @ 6:56AM
Samiur Rahman said...
Is American Eagle cutting the wrong costs? I don't think so, in fact, in order to be more competitive, Jim O'Donnell (Chief Executive, AEO) should shift more production from China to India and Bangladesh.
As for quality issues, India and Bangladesh have been manufacturing branded items like Hugo Boss, Kenneth Cole, Tommy Hilfiger (just to name a few) and they have a highly skilled workforce with vertical integration. Indian factories are able to offer items with more specialized and detailed/intricate finishing while Bangladesh makes for the top competitive sourcing solution not only because of the country’s strength in garment production in terms of quality and price, but the country’s low overhead cost structure and central position within Asia. To cut costs while maintaining quality, top US and European retailers are now shifting to India and also Bangladesh, which has become the best choice for producing low-priced basic items like T-shirts, denim pants, trousers, sweater and shirts.
So, once the economy turns around AEO would be in a better position than their competitors who fails to make the same strategic decision.