There are several issues for Eddie Bauer, Inc. to tackle, low profit margin ratio, high sales return and high inventory level, and brand positioning.
Analysis of the problems
Eddie Bauer yielded the lowest net income among its competitors like The Gap, A & F and Land’s End. It achieved similar gross profit margin but got a poor performance on overall net income at 1% because it suffered from high expenditure on SG&A in both retail and catalog operations which accounted for 37% of its total net sales. This is extraordinary high while compared with its main competitors like A & F, and the Gap whose SG&A amounted to 22% and 27% of their net sales respectively (Table 1). A & F and Eddie Bauer are similar in size, distribution channels and sales volume, but the amounts of SG&A of Eddie Bauer was $318M, which is almost twice of A&F ($176M). Even though the net sales of Eddie Bauer was $511M which is 63% higher than A & F, the gross profit in absolute amount and percentage are both lower than A & F, which amounted $83M and approximately 5 times more in net income (Table 3). There are two main reasons, the high production cost ($75M) of catalogs with 3.75 million copies (Table 7) mailing out and the high sales return ($528M Gross sales - $345 net sales = $183M) which is due to the service commitment and the weaknesses of catalog business which offer no fitting and touching on the items and hence the return rate would be higher. This means a higher tendency of dead stock and the higher handling expenses that have negative impact to the company’s profit. Indeed, Eddie Bauer placed its footwear and swimwear items in catalog only, which accounted for an extremely high return rate throughout the industry, often over 50%.
The total inventory for retails and catalog $656M equaled the costs of goods sold ($697M), meaning the stock rotation around 12 months (table2) which is extremely high when compared to A&F with 1.3 months and Gap with 2.4 months (Inventory / Cost of goods sold x 12months) even though the competitors are acknowledged to maintain high stock levels. Possible reasons are Eddie Bauer adopted trendy colors wrongly on classic clothes and in catalog channel, the actual products might not meet customers’ expectations. Customers would return those unwanted items to the stores at handy. Most of them cannot be resold because different items are carried in independent channels and they become obsolete stocks. Stockout issue occurs once or twice a day in retail stores which may lead the customers to shop similar items in competitors’ stores instead. As the first priority of stocks will be allocated for catalog customers, there is often insufficient stock in stores. There is no integrated database system for all channels to check stock level which is also a vital problem.
Moreover, image of the brand Eddie Bauer is blurry due to its masculine product line and the insufficient investment of advertisement when compared to the GAP’s $550M and Victoria secret’s $95M. Eddie Bauer’s customers were 70% are women’s but women’s items sales only accounted for 45% turnover so Eddie Bauer should further expand the women’s items which are more profitable. In addition, their target customers look for inexpensive-lasting clothes to quality-newest fashion, which they can promote their items to boost sales.
“One Brand, One Voice, One Customer” increases synergy for all three channels as it could save the overlapping resources on the distribution, production and promotional resources and reallocate resources for brand promotion and database management.
Sales Channels and Marketing Promotion Recommendation
Mass advertising on media such as TV, radio, newspaper and search engine to promote the brand and abundant women’s items available on 3 channels to attract its 70% women customers will boost up sales. All products will be available in all three channels – retail, catalog and I-media to drive the sales...