VICTORIA’S SECRET 1 Victoria’s Secret XXXXX XXX ECO 201 Microeconomics Southern New Hampshire University Professor Annette Tanori November 07, 2015 Comment [AT1]:

Running head: VICTORIA’S SECRET 1 Victoria’s Secret XXXXX XXX ECO 201 Microeconomics Southern New Hampshire University Professor Annette Tanori November 07, 2015 Comment [AT1]: Reminder to make sure you are adhering to APA guidelines throughout the essay. The SNHU Writing Center has a solid section on APA guidelines> http://libguides.snhu.edu/c.php ?g=92369&p=596254 VICTORIA’S SECRET 2 Costs of Production Victoria’s Secret’s revenues have continued to increase over the past four years. Their gross profits have risen steadily every year since 2011 from $3.631 million to $4.808 million in January of 2015 (Lbrands Annual Report & Proxy, 2015). One of the big contributors to their continued increasing profits is their yearly fashion show broadcasted on TV. Sales rose “7 percent in the past three quarters to $4.33 billion after posting a record $6.1 billion in revenue for the year through Jan. 28” (Maheshwari, 2012). So although the fashion show costs amount to $12 million to broadcast, it is worth more than that as sales increased by $1.77 billion after the show. Online and catalog sales also rose because of the fashion show “4 percent to $1.56 billion” (Maheshwari, 2012). Just as the profits have increased, so have their costs. A breakdown of the past five years for Victoria’s Secret’s COGS, operating expenses, and gross profit is listed below for comparison. (in millions) Jan. 2015 Jan. 2014 Jan. 2013 Jan. 2012 Jan. 2011 COGS $6,646 $6,344 $6,030 $6,290 $5,982 Operating Expenses $9,501 $9,030 $8,886 $9,126 $8,329 Gross Profit $4,808 $4,429 $4,429 $4,074 $3,631 Their total operating expenses rose from $8.329 million in 2011 to $9.501 million in January 2015 (Lbrands Annual Report & Proxy, 2015). Operating expenses include selling, general, and administrative expenses, as well as labor and related expenses, such as “expenses Comment [AT2]: This section of the paper will examine the costs of production for your firm. See Chapters 8 & 11. Analyze the various cost a firm faces overtime and how they have impacted their profitability. Apply the concepts of variable and fixed costs to the firm for informing output decisions. For instance analyze how different kind of costs (labor, research and development and materials) affects the firm’s level of output. This section of the paper is worth 24% of the grade for Milestone 3. Comment [AT3]: Remember ‐ always use in‐text citations! https://owl.english.purdue.edu/owl/resour ce/560/02/ VICTORIA’S SECRET 3 paid to employees of a company in the form of salaries, wages, fees, benefits or any other form of compensation” (Lbrands Annual Report & Proxy, 2015). COGS increased from $5.982 million in 2011 to $6.646 million in January 2015 (Lbrands Annual Report & Proxy, 2015). Some of those costs could have been from increasing global shipping rates, increased oil prices, and increased cotton prices as their products are manufactured in Sri Lanka and shipped to their store locations, oils are used in some of their beauty products, and the majority of their undergarment apparel is made from cotton. In comparing the profits versus the costs of production, they seem to be doing very well! Fixed costs for Victoria’s Secret are any costs that remain whether or not there are changes in the output. So for example, lease payments for their retail locations, wages for employees, as well as advertising costs, including their pricy annual fashion show that they spend millions on to broadcast, are all continuous costs for Victoria’s Secret that will be there regardless of sales. There isn’t a whole lot that Victoria’s Secret can do as they are fixed costs, but there are a few options they can take advantage of to help aid in lowering them. They can maintain competitive employee wages within the industry, and adjust some of their advertising costs. Although advertising costs are fixed, as those costs will remain whether or not there are changes in their output, they could develop innovative ideas for cheaper advertisement methods. They could also find ways to reduce the amount they spend on the very expensive annual fashion show they put on whilst still meeting consumer and viewer expectations. Variable costs are any “costs that change as output changes” (Hubbard & O’Brien, 353). Some examples of Victoria’s Secret’s variable costs would be raw materials and labor costs, as well as advertising costs, including their pricy annual fashion show that they spend millions on to broadcast. Basically any costs related to making sales are considered to be variable costs. Comment [AT4]: Adding these definitions is a great way to demonstrate your knowledge of the topic and bring it all together. Comment [AT5]: Solid example of fixed costs. Comment [AT6]: Essay examines fixed costs and opportunities that the company has to lower them in order to impact profitability. Comment [AT7]: Variable costs are defined. Comment [AT8]: Examples of variable costs are given. VICTORIA’S SECRET 4 Victoria’s Secret tries to cut down on variable costs as mentioned before by shipping their items from China. Lower demand items are sent through ocean transport and they try to ship items in large quantities to save on shipping charges. Another way they save is by having most of their products manufactured in Sri Lanka, instead of in the United States, as labor costs are much cheaper. They reduce their costs for the production of their catalogs by reducing the amount of paper in them and also by using recycled paper or forest-friendly paper (Kelley, Siniski, & Fontana, 2009). Victoria’s Secret does have options in moving their inventory items around to impact their profits and help offset costs. With over 1000 retail locations, they can move high stocks of inventories that are not selling in one location, and send them to other retail locations where there is a greater demand for those particular products. With increasing store locations yearly, some of this overstock of products could also supply a new retail location. Another option is to reduce pricing on items where the demand does not match up with the supply. By shifting their inventories around to meet the demands of their retail locations individually and reducing pricing as needed can help to increase profits on items that Victoria’s Secret may have had to take losses on otherwise. Overall Market Victoria’s Secret overall market appeals to a wide age-range of women. The largest market consisting of their lingerie collections mainly attract women in their mid twenty to mid thirties. Victoria’s Secret PINK is geared more towards the younger high school/college-aged woman with their casual, sporty, and more conservative appeal apparel. Although this is the main target audience for Victoria’s Secret, customers age ranges can vary greatly with the many products ranging from makeup and perfumes to lingerie and casual wear. Because of their wide Comment [AT9]: A discussion is provided on how variable costs can be changed to impact profits. Comment [AT10]: This section of the paper will examine the overall market for the firm. See Chapters 12 to 15. Discuss the market share for the firm and its competitors; provide details on current percentage of each firms market share and trends. Consider presenting this data graphically. Analyze barriers to entry; see Chapter 14, in this market to illustrate the potential for new competition and its impact on the firm’s future in the market. Describe Market Structure for this firm and analyze how this affects the firm’s ability to influence the market. This section of the paper is worth 36% of the grade for Milestone 3. VICTORIA’S SECRET 5 variety of products, virtually women of every age range can find something they like and want to purchase. Victoria’s Secret’s sales make up a large part of the lingerie industry. According to Forbes, LBrands leading competitors in the specialty retail industry are Chico’s FAS Inc., which is a part of CHS, New York & Company, and Wet Seal (Narrative Science, 2012). After computing the market share for all competitors (shown below in the table), only Chico’s FAS Inc. came close to Victoria’s Secret’s. Their market share percentages remained in the 30% range in comparison to leader Victoria’s Secret ranging from 64.28% of the lingerie industry in 2011 and up to 85.79% of the market share by 2014. Wet Seal and New York & Company didn’t even come close to those percentages, averaging less than 1% of the industry from 2011 to 2014. Victoria’s Secret has done well overall, steadily increasing their market share percentages from 2011 to 2013, but declined a small percentage in 2014, from 87.14% to 85.79%. One possible reason for this decline, according to Harvard Business Review, could have been that they were “harvesting strategies to achieve high short-term earnings and cash flow by permitting market share to decline” (Buzzell, R., Gale, B., & Sultan, R., 1975). Total U.S. Lingerie Revenues 2011 2012 2013 2014 $7.1 billion $7.5 billion $7.9 billion $8.4 billion U.S. Sales 2011 2012 2013 2014 Wet Seal $581,194 $620,097 $580,397 $530,134 New York & $956,465 $966,434 $939,163 $923,332 Comment [AT11]: Provide specific percentage of the market held by your company and major competitors. VICTORIA’S SECRET 6 Company Chico’s FAS Inc. $2,196,360,000 $2,581,057,000 $2,586,037,000 $2,675,211,000 Victoria’s Secret $4,564,000,000 $4,981,000,000 $6,884,000,000 $7,207,000,000 U.S. Market Share 2011 2012 2013 2014 Wet Seal Less than 1% Less than 1% Less than 1% Less than 1% New York & Company Less than 1% Less than 1% Less than 1% Less than 1% Chico’s FAS Inc. 30.93% 34.41% 32.73% 31.84% Victoria’s Secret 64.28% 66.41% 87.14% 85.79% Although there are not too many barriers of entry into the intimate apparel industry, the ones that exist make it quite difficult for new firms to enter into the industry. Some barriers of entry are start-up costs, ability to produce a strong brand with customer loyalty, and economies of scale. The number of stand alone intimate apparel retailers, like Victoria’s Secret are not as great given the industry as a whole, but a consumer can find intimate apparel readily available in almost every apparel retailer. The first barriers of entry that pose a threat to the intimate apparel industry would be the need for capital for the initial start-up of the company and economies of scale. Coming up with the needed capital to start a business may or may not be an issue for a new entrant, but would be a small concern in comparison to the economies of scale. Economies of scale, which is one of the most important barriers to entry, “exists when a firm’s long-run average costs fall as the firm increases output” (Hubbard & O’Brien, 453). Large, profitable companies like Victoria’s Secret, who control a large percentage of the lingerie industry, will be Comment [AT12]: Specific percentage held by companies in the market. Comment [AT13]: Good example of barriers to entry, see Chapter 14. Comment [AT14]: An example of a barrier to entry. VICTORIA’S SECRET 7 hard to stand up to. Because they have a large market share in the industry, they have a cost advantage over new entrants. Large companies already have strong relationships built with their distributors. Companies like Victoria’s Secret whom have many locations are able to order their products in large quantities, therefore reducing their costs, and the ability to charge higher prices for their products. A new company in the industry will not have this advantage, and because of the smaller size of their new business, they will pay higher prices for their raw materials. New entrants must be able to identify both a strong brand name for themselves and create brand loyalty with their customers in order to beat the competition of retail giants like Victoria’s Secret, which control a large percentage of lingerie sales worldwide. Victoria’s Secret’s brand is very strong and is widely known. They have successfully created brand loyalty with their customers, which reflects their profitability. They have built customer loyalty that stands out among the rest by treating their customers with a luxurious total shopping experience. From the personal sizing, and the beautifully wrapped purchases, to the customer loyalty program they have in place drawing their customers back for more, it will take a lot to peel Victoria’s Secret’s loyal customers away from their brand to a new entrant in the lingerie industry. New firms are free to enter and exit the intimate apparel industry, but given the strong competitors, it can be pretty tough for them to become a successful, widely known business. Because there is a lot of competition in the intimate apparel industry, the market structure for Victoria’s Secret would fall into the category of a monopolistic competition. In a monopolistic competitive market structure, “there are a large number of firms selling products that are differentiated, rather than identical” (Hubbard & O’Brien, 392). Victoria’s Secret ability to influence the whole market is great because of their strong brand they have created over the years. With heavy advertising of their products, they have made their name well known in the Comment [AT15]: Brand loyalty is a barrier to entry. Comment [AT16]: Discussion on how barriers to entry impact the company. Comment [AT17]: Clear market structure is defined for this company! The four markets structures are: 1. Perfect Competition 2. Monopoly 3. Monopolistic Competition 4. Oligopoly Select the market structure that best fits your firm and discuss why selected it. Define the characteristic of the choose market structure and how you firm has these traits. Speak to each of the categories that defines a market structure, size of firms, product differentiation, etc. VICTORIA’S SECRET 8 industry and easily recognizable. Their strong ability to influence the whole market is shown through their yearly increasing sales, and dominating 35% of the lingerie market share, with the closest competitor, Aerie, only reaching 2% of the lingerie market share (Team, 2014). Recommendations With the growing number of lingerie retailers and demand for intimate apparel increasing, Victoria’s Secret must continue to remain above their competitors. They can use the trends in demand, the price elasticity for their services, and their strong market position in the lingerie industry to their advantage to sustain their success. Continuing to provide their customers with a luxurious shopping experience that will stand above competitors, heavily advertising their brand and products, and maintaining the production of higher quality products than other lingerie retailers, will continue to place them above their competitors. Being in a very elastic industry of demand, Victoria’s Secret must ensure that their pricing remain competitive enough to withstand consumers purchasing from substitute retailers. Continuing to offer their customers coupons and freebie items will help to accommodate customers purchasing their higher priced items. Because there are so many cheaper substitutes for consumers to choose from, they also need to expand their target audience to include a wider range of consumers. Although Victoria’s Secret already appeals to such a wide variety of women, they are lacking in some areas. Their marketing campaigns are targeted more towards slender sized women. Their advertising does not include any plus sized women, and their sizing also does not accommodate to the plus sized woman’s needs with their sizing currently only available from sizes 0-24. If they could change their advertising images to include a greater size variety from slender to plus size models, their apparel would be more relatable to women of all shapes and sizes, and their profits could Comment [AT18]: Explain how this market structure is a positive or negative for you firm. How does working under this market structure impact your firm’s influence in the market. Comment [AT19]: This section of the paper will examine provide your recommendation for the firm, give all of the information you have found. Develop recommendations for how the firm can manage its future product by synthesizing the data presented. Suggest how the firm’s position within the market and among competitors will allow it to take your recommend actions. Describe how the firm can sustain its success going forward by evaluating the findings from demand trends and price elasticity. This section of the paper is worth 36% of the grade for Milestone 3. Comment [AT20]: Reviews discussion provided in Milestone 2 and ties it to a recommendation. Comment [AT21]: Ties one of the characteristics of the selected market structure back to a recommendation. VICTORIA’S SECRET 9 increase even more. Increasing their market range to include a greater region of the world by offering their products to more countries could also lead to increased demand and profitability for the company. These two recommendations of introducing plus size apparel as well as worldwide locations to purchase from might be a very valuable addition to increasing the market and profits for the company in the future. As stated above, Victoria’s Secret accounts for about 35% of the lingerie market globally. Their brand name is very strong in the industry and well known, but can always improve in order to remain the top competitor. One way they could do this is by including plus sized models in both their annual fashion show, as well as in their other advertising campaigns like their catalog. Currently Victoria’s Secret’s products do not accommodate sizing above size 24, leaving plussized women out of the picture completely in purchasing their products. They also do not feature any plus-sized women models in their advertising. Expanding their current sizing up to size 28, as well as featuring a larger body size variety of women in their advertising will work to both accommodate that missing gap in their customer base, and will also make their products more attractive and relatable to women of all sizes and shapes. Currently Victoria’s Secret does not offer shipping of their products to two U.S. states and over thirty countries. This situation is not easily fixed, as there are a great deal of shipping restrictions that are out of their control. The only real solution to this is to continue expansion in countries where there are few Victoria’s Secret locations and open up more retail locations to reach a greater number of consumers. The competition is great for Victoria’s Secret in the intimate apparel industry with a growing number of retailers. Keeping their pricing competitive to other retailers in the industry and having their products easily stand above the others will continue to bring them success in the VICTORIA’S SECRET 10 market. Expanding their market base to include both greater sizing to accommodate all shapes and sizes and continuing expansion where their brand presence is small can help aid Victoria’s Secret to continued success and profit within the industry. Comment [AT22]: Articulation of Response (Writing Skills & Organization of the Essay) is worth 4% of the grade for Milestone 3. Make sure your submission has no major errors related to citations, grammar, spelling, syntax and organization. Comment [AT23]: Conclusion needed to wrap it all up. This is a miss in this essay. VICTORIA’S SECRET 11 References (2015). Adore Me. Retrieved from http://www.adoreme.com/panties/kaciebikini.html#category=673&promo=3%20for%20%2429.95 Anderson, Elizabeth. (2014, December 02. A Look At How Victoria’s Secret Became A Multi-Billion Dollar Company. Business Insider. Retrieved from http://www.businessinsider.com/a-look-athow-victorias-secret-became-a-multi-billion-dollar-company-2014-12 (2015). American Eagle Outfitters. Retrieved from http://www.ae.com/aerie/browse/undies.jsp?catId=cat6460002&navdetail=mega:aerie:c3:p1 (2015, July 01). Apparel Retailers and Ecommerce: Direct Marketers Dominate. eMarketer. Retrieved from http://www.emarketer.com/Article/Apparel-Retailers-Ecommerce-Direct-MarketersDominate/1012671 Comment [AT24]: Make sure your reference page adheres to APA and includes all your research. https://www.wctc.edu/current‐ students/library/apa‐citing.pdf

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