Company and Strategic Problem
Esprit has undergone several stages of entrepreneurial success. This East-Asian fast fashion retail and manufacturing company was founded in California in 1968. With over 800 owned stores and over 14,000 wholesale retail spaces, the company, at a glance, seems to enjoy relative success in 40 countries all over the globe. However, while this may have been true in the 1980-1990s, the intense competition Esprit faced from other youth fashion retailers such as Zara and H&M undermined its accomplishments (Lung, 2020). As Lung (2020) puts it, “what was once a high-end label at affordable prices retailer lost its value-for-money style and quality proposition” (para. 11). Moreover, the business appears to have lost its initial focus over the years. While younger customers were increasingly attracted to more successful competitors, its core mid-thirties customer base grew out of the offered styles (Lung, 2020). Hence, the company’s lack of relevant design lines posed a significant challenge to its stakeholders.
This issue began to affect the business on a large scale, with a continuing profit decline. Following the step-down of its primary chairman in 2006, the brand’s performance began to deteriorate (see Fig. 1) (Lung, 2020; Smith, 2022). The fiscal years of 2017-2018 yielded incredibly disappointing results for Esprit, with the sales plummeting by 11.1% and products not “meeting customers’ expectations” (Santamaria, 2018, para. 1). Despite already having closed stores in some regions and cutting operational expenses by 3.3%, the company lost approximately 294 million USD (Santamaria, 2018, para. 1). Weaker performance and losses in revenue of up to 15% continued in 2019 (Lung, 2020, para. 5). The steady decline in revenue thus put the company’s future in question.
As a result, Esprit launched a significant review of the business, following the strategic initiatives proposed in 2018. The measures included were “brand rejuvenation, product elevation, channels next generation, markets rightsizing and expansion, and cost reduction” (Annual Report FY 17/18, 2018, p. 9). In 2020, Esprit announced the closure of all its Asian stores, following the same action in the Pacific region with New Zealand and Australia (Lung, 2020). Further, it has cut down up to 50% of European stores, dismissed around 20% of employees, cut salaries, and aimed to save upwards of 105 million USD (Esprit reaches restructuring milestone and is well-prepared for the new business reality, 2020). However, these actions seemed only to exacerbate the extant problem. In 2021, the brand faced a steep decline in market shares worldwide – the event that followed the closure of the North American market (Lung, 2020). Thus, despite the initial efforts to cut expenses and attract new audiences, the company is still in a precarious position.
In the most recent days, however, the firm has seemingly enjoyed a relative rebound, with the revenue hiking up to USD 1,066 million and the net profit constituting USD 48.6 million (Esprit Announces Annual Results for FY2021, 2022; Smith, 2022). With the 7% increase compared to the prior year’s profits, the “gross profit margin was 48.6%” (Esprit Announces Annual Results for FY2021, 2022, para. 1). The company itself suggests several reasons for such an increase: “(i) the new infrastructure and strategies instituted by the current management team; (ii) improvement in sales with higher gross profit margin; (iii) positive results of efficient cost control measures; (iv) improved inventory management; and (v) growth in E-commerce.” (Esprit Announces Annual Results for FY2021, 2022, para. 2). Moreover, the CEO of ESPRIT has mentioned “the successful migration of selected strategic functions from Germany back to Hong Kong, ESPRIT’s new global headquarters” as one of the reasons for the improvement (Esprit Announces Annual Results for FY2021, 2022, para. 3). However, it is essential to note that the improvement may be relative to the results of the FY 2020, which has been an especially rough year for any business in general due to the pandemic.
Regardless of the post-COVID recovery, the company has struggled with its image for decades. The company targets millennials and gen Z, as well as younger generations(Yuen, 2022b). However, its marketing and clothing lines have historically failed to meet customer expectations, desperately needing “to revitalise its brand image” (Yuen, 2022b, para. 8). In the words of Esprit’s representative, “we’ve lost touch with our audience due to lack of consumer focus” (van Elven, 2018, para. 1). One of the major realizations that occurred to Esprit executives at that time was that the world now revolved around fast fashion, while Esprit did not accommodate it (van Elven, 2018). Today, although it “achieved a successful transformation of its supply chain model, rejuvenated its e-commerce strategy and adopted an omnichannel approach… it is pitifully missing an audience.” (Lung, 2020, para. 13). Therefore, at the moment, the firm requires further reforms and suggestions for improvement.
Starting in the summer of 2019, Esprit attempted to redesign its collections. By reducing vibrant colours and introducing more neutral tones, primarily focusing on black, grey, white, and beige, the business hopes to attract more customers (van Elven, 2018). According to the market research from their experts, 30-40% of items its competitors sold were black, which prompted this decision (van Elven, 2018). The brand also increased the sustainability of its products, including the process of manufacturing – such as organic and recycled materials – and shipping (van Elven, 2018). Currently, Esprit is commencing its return to the Asian market by collaborating with Korean fashion brands and expanding its online retail platforms (Wong, 2022; Yuen, 2022a). It will attempt to connect with its previous audience and reach younger generations, such as Gen Z, in addition to emphasizing sustainability approaches (Yuen, 2022b). These actions may or may not be vital for changing the future dynamics of Esprit, and only the future will show the outcome.
Suggest a turnaround strategy to improve Esprit’s operating profit and market share.
To select the optimal strategy, one should analyse the major forces that impact the operations of Esprit through Porter’s framework (Fig. 1).
Competition and Buyer Power are highly impactful in Esprit’s case. Stiff competition exists in the apparel industry so Esprit may face it from established European and Asian labels (Singh and Khajuria, 2019). The industry is known for its unpredictable demand and short interest spans in an inevitable trend cycle (Singh and Khajuria, 2019). Further, fashion brands increasingly use online platforms to attract younger customers (Nagaraj, 2020; Jones and Lee, 2022). As a result, Esprit’s relatively slow release of new collections and limited e-presence render it vulnerable to the public’s will and at a disadvantage to competitors. Substitution and New Entry impacts are somewhat limited for the company due to high competition. While there is a threat of substitution since cheap generic options are available, it is countered by demand for quality, unique brands and styles (Dai and Zhou, 2022). Hence, if Esprit manages to create a genuinely outstanding style, it will not be affected by substitution as much. Lastly, suppliers’ power is not very impactful: having many different options for manufacturing, it is relatively easy for Esprit to adapt.
Based on this analysis, the selected turnaround strategy selected is prescriptive. It has been proven highly successful for firms in a highly competitive, fluid, and globally interconnected entrepreneurial environment (Braun, Latham, and Cannatelli, 2019). The prescriptive strategy relies on highly-structured industry analyses by the senior management and the systematic and long-term actions (Braun, Latham, and Cannatelli, 2019). Considering the high competition, quickly changing customers’ preferences, and newly implemented senior management team, the prescriptive strategy that outlines long-term steps for recovery is the best option.
To understand how Esprit may turn the course of its business around, one must first evaluate its strengths and weaknesses and the threats and opportunities (see table 1).
Table 1. SWOT analysis for Esprit.
Esprit’s failure to appeal to its target customer group is key to its downfall. As a result, the biggest threat to the company is the intense competition from other firms that may offer trendier and more appealing items to the customers. The suggested strategy for Esprit is the McKinsey ‘7S’ model. Given its history of reducing employee headcount, the company must critically evaluate how much staff it needs to expand into the Asian market. Regarding skills, Esprit has recently hired a new focus team to oversee the turnaround (Esprit introduces a new leadership team to shake up a brand for an international comeback, 2022). Esprit must also focus on the style and shared values for creating a clear image.
In terms of strategy, thus, it is recommended for Esprit to study market trends and demands and identify a strong customer focus. It must rethink its online and offline store structure and regional distribution. Lastly, the systemic approach to the transformation is recommended, challenging the entire present scheme of retail and rerouting it toward a sustainable and more relevant fashion.
Suggest a framework that can be used to help Esprit gain a competitive advantage.
One should first understand its future strategic direction to consider how Esprit can gain an advantage over its competitors. This understanding is best gained from utilizing Ansoff’s matrix framework to identify risks and the best implementation areas for strategies (Kalogiannidis and Mavratzas, 2020). Esprit should consider the existing products and carefully assess the competitors. Some key factors that it should pay attention to are the prices, the global distribution, and the critical factors for a modern customer. Doing so can establish and analyse the risks of product development in retail, guided by the framework (Kalogiannidis and Mavratzas, 2020). The first step would thus be to identify the market’s needs, which is the crucial step that Esprit has previously failed to execute; the second step, quantifying the problem, has already been outlined – the lack of customer connection. Then, the company should conceptualize new products according to the market’s requirements and create a viable strategy for marketing and distribution.
Porter’s generic strategy framework will be used to evaluate how Esprit may gain an advantage over its competitors. As shown in the case study, Esprit could not establish a connection with its customers and thus lost the competitive advantage, resulting in persistent losses in revenue and market shares over the years. Hence, Esprit must reconnect with its target customer group and demonstrate the unique features of the brand. In other words, it should choose a differentiation strategy and a focus strategy of a “specialist” rather than a “generalist” (Islami, Mustafa, and Topuzovska Latkovikj, 2020, p. 1). These two strategies would allow the business to stand out and prosper.
Among the unique features of Esprit, there may be high-quality, authentic clothing pieces with an emphasis on sustainable production. The collaborations that began with Korean brands might be another distinguishing aspect that can benefit the business. A successful differentiation strategy allows firms to justify higher prices and gain a competitive advantage in the market (Islami, Mustafa, and Topuzovska Latkovikj, 2020). Given that it operates in the casual wear segment, the firm should not attempt to outcompete every generic replacement by lowering the prices and compromising quality.
Regarding the focus strategy, it can be argued that Esprit is already implementing it to an extent. The firm could further it by focusing on its Asian market and adapting its style accordingly. This strategy empowers it to quickly adapt to local consumers’ fluctuations in demand, style, and taste (Islami, Mustafa, and Topuzovska Latkovikj, 2020). Therefore, the future of Esprit may lie in its decision to locate the operations in Asia and manage them in Hong Kong.
Reference List
Annual Report FY 17/18 (2018). Esprit Holdings Limited.
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Dai, Y. and Zhou, T. (2022) ‘The variation of clothing culture and the transformation of fashion brands in cross-cultural communication’, in. 2021 International Conference on Social Development and Media Communication (SDMC 2021), Atlantis Press, pp. 1457–1461. Web.
van Elven, M. (2018) ‘“We’ve lost touch with our audience”: Esprit announces major changes’, Fashion United, Web.
Esprit announces annual results for FY2021 (2022) Esprit Company. Web.
Esprit introduces new leadership team to shake up brand for international comeback (2022) Esprit Company. Web.
Esprit reaches restructuring milestone and is well-prepared for the new business reality (2020) Esprit Company. Web.
Islami, X., Mustafa, N. and Topuzovska Latkovikj, M. (2020) ‘Linking Porter’s generic strategies to firm performance’, 6. Web.
Jones, A.R. and Lee, S.-E. (Joy) (2022) ‘Factors influencing engagement in fashion brands’ Instagram posts’, Fashion Practice, 14(1), pp. 99–123. Web.
Kalogiannidis, S. and Mavratzas, S. (2020) ‘Impact of marketing mix strategies effective product development issues in MNCs/Retail’, International Journal of Business Marketing and Management, 5(12), pp. 118–125.
Lung, T. (2020) ‘After latest round of store closures, maybe Esprit is a boomer brand not worth saving’, Forbes. Web.
Nagaraj, S. (2020) ‘customer engagement by fashion brands: an effective marketing strategy’, in A. Shrivastava, G. Jain, and J. Paul (eds) Advances in Finance, Accounting, and Economics. IGI Global, pp. 161–175.
Santamaria, B. (2018) ‘Esprit back in the red as its collections fall out of fashion’, FashionNetwork, Web.
Singh, S. and Khajuria, R. (2019) ‘Textile and apparel industry’, Circular Economy in Textiles and Apparel [Preprint], Web.
Smith, P. (2022) Worldwide revenue of the brand ESPRIT 2005-2021, Statista. Web.
Wong, J. (2022) ‘ESPRIT is back — and throwing a block party with Hong Kong DJs to celebrate’, Lifestyle Asia Hong Kong, Web.
Yuen, S. (2022a) ‘CMO Larry Luk readies marketing team to “breathe new life” into Esprit brand’, Marketing Interactive, Web.
Yuen, S. (2022b) ‘Esprit marks Asia return plan with Korean brand collab and eCommerce’, Marketing Interactive, Web.