American Apparel’s bankruptcy explained

After American Apparel filed for Chapter 11 bankruptcy two weeks ago, the future of retailers with high price points and a young target market, such as Hollister and Abercrombie and Fitch, have been called into question. With low priced, fast-fashion retailers, such as Forever 21 and H&M, increasing in popularity, previously profitable clothing retailers are finding themselves being pushed out of the market. As of this week, American Apparel has had to close their Lower East Side store despite claims from the company that they could return to financial prosperity within the next three years.

There are the number of factors involved in the reported net losses of $324 million that American Apparel have accumulated in the last five years. These losses have only gotten worse over the years, with a reported net loss of $19.4 million in the company’s most recent quarter.

As the name suggests, one of American Apparel’s main brand ideologies involves keeping manufacturing of their products within the United States. Thereby, operating as a socially and environmentally responsible company: one of the company’s main selling points. However, many of their fellow clothing retail competitors have now moved their manufacturing to the Asian Pacific region, where hourly labour rates are around $2-$3. In contrast, American Apparel have yet to abandon their current manufacturing facilities in Los Angeles, where current hourly labour rates are around $12-$14. If American Apparel is to survive their current financial turmoil they will have to either automate production, which could be a possibility due to advances in “sew-bots”, or move their production abroad.

In recent years, it  became more and more obvious that American Apparel has been trying to gain attention from potential customers by releasing controversial and risqué advertising campaigns. The most shocking of all American Apparel advertising and public relations stunts occurred when mannequins appeared in their F/W 2014 store windows wearing opaque underwear and, what appeared to be, permed toupees on their lower regions. This unusual choice of styling was similar to the company’s F/W 2009 advertising campaign. As American Apparel is a clothing retailer that sells merchandise within the men’s, women’s and children sector of fashion, this rather provocative advertising campaign was heavily criticized for being disjointed from the company’s overall strategy.

The company, and many more like it, have taken an economic beating from other lower priced retailers saturating the clothing market. The main sector that the company aims at, young adults, is particularly crowded by competing retailers. The objectives of their target market has quickly transformed over the past decade, which has left American Apparel struggling to play catch up. Fast-fashion has increased in popularity, with retailers such as Zara, Topshop and River Island changing their variety and assortment of clothes each season, to keep up with current runway trends. Most of the time these retailers achieve this at a similar, or even a lower price than American Apparel. Hence, fast-fashion retailers are not only attracting more customers with their product offering but also by their competitive pricing, which is achieved by shifting their production into country’s with extensive labour forces and lower minimum wages.

American Apparel appeared was surrounded by a media storm in June of last year for removing the company founder and CEO, Dov Charney, from his position in the company. After years of allegations of misconduct and violations of company policy, involving multiple law-suits, the company board finally decided to remove Charney “for the sake of company”. However, this move by the board did not seem to have had a positive effect on the company. Especially in light of the $20 million law-suit Charney brought against the company and its’ chairwoman for defamation.

As the fashion market evolves faster than ever, it has become clear that American Apparels stringency against change has become its downfall. In a struggle to maintain the majority of its’ original brand strategy, the company is now facing an identity crisis. In my opinion, American Apparel needs to make more radical changes, and quickly, or risk falling victim to the volatile global economy, much like La Senza and Woolworths did in the recession.

Jo Grimwood

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