L Brands, formerly known as Limited Brands Inc. is an American fashion retailer that specializes in women's intimate and other apparel, beauty and personal care products and accessories. The company headquarters are in Columbus, Ohio the home of the founders Bella Cabakoff and her husband, Harry Wexner. The company's most famous brands are the Victoria's Secret and Bath and Body Works. Other brands include PINK, La Senza in Canada, Henri Bendei, C.O Bigelow and White Barn.
L Brands Inc. was founded in 1963 as "The Limited" specializing in clothing for younger women. In 1969, Wexner sold 47,600 shares of the company at $7.25 per share making The Limited a public company. The company moved to its headquarters to Morse Road in Columbus which is still the head office of L Brands. The Limited was first listed on the NYSE on March 16, 1982.
Over the last decade, L Brands Inc. has maintained a steady financial performance with revenues increasing each year significantly. In 2013, the company earned a total revenue of $10.5 billion and was ranked 258 in Fortune 500 list of top companies. In 2017, total income amounted to $12.6 billion, the highest yet by the company (Limited Brands Inc. Annual Report. 2017.). L Brands total debt to total assets ratio has increased over the last three years from 0.39 to 0.74. While the previous rate of 0.74 shows that the firm has more assets than total debts, it indicates that over the last three trading years, L Bands has increased total debt value than the entire asset. Debt ratio which is calculated by dividing total liabilities by total assets shows the proportion of the company's assets financed through debt. Looking at L Brands debt ratio again over the last three years, it is clear that the company has also increased the total assets funded through debts as the rate increased from 0.77 to 1.17. The same case is reported for debt-to-equity ratio and the capitalization ratio. Increase in the capitalization ratio implies that L Brands has more equity to support its operations and add growth but also increase financial risk to the company.
Interestingly, despite the increase in financial risk and total debts, most financial analysts predict a better future for the company in the coming years. For instance, analysts at MSN money predict that LTD will have an EPS of $N/A in 2018 and an EPS of $3.41 for FY 2019. Bloomberg analysts estimate L Brands' revenue to be close to $13 billion marks by the end of this year (Bloomberg, n.d).
Porter Five Forces of Competition
Michael Porter (2008), formulated a framework that identifies five external forces that affect a business in a given industry. The five powers can be used to shape the decision making of a company so that it strategically positions itself to gain a competitive advantage in the market. The figure below illustrates how the fashion retail industry can be assessed using the Porter five forces and the strategic options for L Brands Inc. to gain a strong market position.
Threat of New Market Entrants High
Low prices by new entrants
New value for customers
Bargaining power of buyers High
Small powerful customer base
Low switching costs
Threat of Existing Competitors Low
Large market share
Increased profitability over the years
Bargaining power of suppliers Low
Different raw materials are required
Threat of Substitute Products High
High number of Apparel Stores
Low Switching costs
Figure 1: Illustration of how Porter's Five Forces Impact the Apparel Stores Industry
The threat of New Market Entrant-High
In the Apparel Stores industry, there is a high possibility of new firms entering the market. Grundy (2006), maintain that for such companies to successful launch in the market, it would require them to bring in innovations, better methods of production so that they introduce cheaper products, and providing a new value of products to the customers. Such strategies would put pressure on L Brands Inc. to efficiently manage the new challenges. The company would, therefore, be forced to build new and productive barriers so that its competitive edge is maintained.
There are several ways through which L Brands Inc. can protect its market position. For starters, the company should ensure that it is always coming up with new products for the customers. New products will not only bring new customers but also give the old customers a reason to continue buying from L Brands' products. Secondly, L Brands Inc. should build economies of scale to ensure that fixed costs per unit are lowered. Finally, spending on research and development will guarantee that the company keeps setting the standards for the industry making it unattractive to new entrants.
Bargaining Power of Suppliers- Medium
The Numerous suppliers in the Apparel Stores industry, supply all the companies. Despite a high number, if the suppliers agree to bargain together, there would be in a dominant position which could significantly decrease the margins L Brands Inc. earns in the market. In the Service industry, dominant suppliers use their bargaining power to demand higher prices from the firms. Consequently, due to high supplier bargaining power, the overall profitability of businesses in Apparel Stores reduces significantly.
Fortunately, L Brands has built an efficient supply chain that is made up of multiple suppliers thereby reducing their bargaining power. The company can also experiment with product designs using different materials so that in case the prices of a raw materials goes up; the company can quickly shift to another. Another strategy would require the development of suppliers dedicated to the firm. Walmart and Nike developed third-party manufacturers whose activity is sole to produce materials for them. In such a scenario, the third party manufacturers have less bargaining power.
Bargaining Power of Buyers-High
In all the industries, the buyers are assumed to be rational which means that they want to buy the best products available at the least possible price. The customers in the Apparel Stores industry are no different. The impact of bargaining power of the buyers of L Brands Inc.'s products to the company is pressure on the long-run profitability of the firm. A consumer base that is small and powerful usually has higher bargaining power and ability to demand higher discounts and offers.
To ensure that the firm lowers the power of its customers, it should ensure that it has a large customer base. This will reduce their bargaining power as well as provide L Brands Inc. an opportunity to streamline its sales and production process. Innovations of new products will also limit the bargaining power of the customers and reduce the defection of old customers maintaining a large consumer base for the firm.
The threat of Substitute Products-High
If a new product in the market can meet a customer's needs differently, the industry profitability will suffer. For instance, with the introduction of Dropbox, the market for storage hardware drives was affected including Google Drive. The same case would happen in the Apparel Stores industry. A substitute product or service that offers a value proposition that is unique from the present products has a high threat in the industry.
Despite the high threat of substitute products in the Apparel Stores industry, L Brands can still make sure that it will be able to maintain its market position. The company should become service-oriented rather than the standard product oriented firms in the market. Additionally, by understanding the core need of the customers rather than what they are buying would create value for them. Finally, L Brands could increase the switching costs for its customers.
The threat of Existing Competitors-Low
Intense rivalry among the existing producers in the industry drives down the prices and decreases the overall profitability of the sector (Fratto et al. 2006). The Apparel Stores industry is quite a competitive sector. However, L Brands Inc. being one of the oldest players in the market has established a market share that other players can only target to reach. Regardless of the customer loyalty of L Brands Inc. customers, increased competition in the market significantly lowers the long-term profitability of the firm.
L Brands Inc.'s products are highly differentiated, a strategy that has helped capture and maintained its position in the market. To safeguard its long-term profitability, L Brands Inc. should seek to collaborate with the competitors so that the market share increases instead of competing.
For a company to develop a sound strategy to sustain profitability and stake out a competitive advantage in the market, it is necessary for the company to understand the structure of its industry and how to utilize Porter's five forces. As mentioned earlier, the Apparel Store Industry's threat of new market entrants, the risk of substitute products and the bargaining power of the customers is very high. L Brands Inc. should, therefore, continue providing differentiated products, increasingly releasing innovative products, and maintaining a large customer base. Since it launched its operations, L Brands Inc. has enjoyed a relatively more significant market share and higher profitability compared to the competitors. However, to remain competitive, the company should increase their capacity in the market.
Adewole, A. (2005). Developing a strategic framework for efficient and effective optimisation of information in the supply chains of the US clothing manufacturing industry. Supply chain management: An international Journal, 10(5), 357-366.
Fratto, G. M., Jones, M. R., & Cassill, N. L. (2006). An investigation of competitive pricing among apparel retailers and brands. Journal of Fashion Marketing and Management: An International Journal, 10(4), 387-404.
Grundy, T. (2006). Rethinking and reinventing Michael Porter's five forces model. Strategic Change, 15(5), 213-229.
Growth, Profitability, and Financial Ratios for L Brands Inc (LB) 2007-2017. (2017). Retrieved Feb 14, 2018, from the morningstar: http://financials.morningstar.com/ratios/r.html?t=LB
LB:New York Stock Quote - L Brands Inc. (n.d.). Retrieved Feb 14, 2018, from Bloomberg: https://www.bloomberg.com/quote/LB:US
Limited Brands Inc. Annual Report. (2017). Retrieved Feb 14, 2018, from Limited Brands: https://www.lb.com/media/resources/annual-report
Porter, M. E. (2008). Competitive strategy: Techniques for analyzing industries and competitors. Simon and Schuster.
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