Value chain analysis of victoria's secret

THE VALUE CHAIN ANALYSIS OF THE BIGGEST LINGERIE BRAND IN THE UNITED STATES 2463 WORDS (EXCLUDING, TABLE OF CONTENTS, SECTION HEADINGS, IN-TEXT CITATIONS, APPENDIX AND REFRENCES)

OLUWABUSAYO ONOME OYETUNJI | OPERATIONS MANAGEMENT | January 11, 2016

TABLE OF CONTENTS 1. Introduction

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1.1 Aim of the report

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1.2 Background information on Victoria’s Secret

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1.3 Victoria Secret Business Model

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1.4 Industry Overview: Intimate apparel Industry USA

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1.5 Key aspects of Victoria’s Secret competitive Value chain

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2. Literature Review: Michael Porters Value Chain for Competitive Advantage

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2.1 Introduction

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2.2 Analyzing the value chain for apparel designed in United states and Manufactured Overseas

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3. Analysis of Victoria’s Secret Value Chain

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3.1 Introduction

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3.2 Victoria’s Secret: Concept to Market

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3.3 Victoria’s Secret Value Chain

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3.4 Victoria’s Secret Competitive advantage over its main competitor (Fredrick’s of Hollywood)

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4. Conclusion

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4.1 Final remarks

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4.2 Difficulties encountered during the research

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4.3 Limitations of the report

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5. Appendix

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6. References

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7. Bibliography

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1. Introduction 1.1 Aim of the Report It could be said that Victoria’s Secret (VS) Lingerie line is inarguable the biggest lingerie brand in the United States. This report will be analysing key aspects of the brand value chain that gives it a competitive advantage in the United States intimate apparel industry. Porter’s value chain theory for competitive advantage will be used in analyzing the value chain. This paper will be focusing on the primary activities of the value chain, especially the Lingerie line marketing and sales. 1.2 Background Information on Victoria’s Secret Victoria’s Secret is an American retailer and the largest subsidiary of Limited brands. It specializes in women lingerie and beauty products. It was founded by Roy Raymond in 1977. He started Victoria’s secret because of the embarrassment he felt while purchasing lingerie for his wife in a department store. He sold the company five years later to Limited brands. (Market line, 2015) Limited Brands rapidly expanded the Victoria’s secret product line, offering a wide range of products like beauty products, night wear, swim wear, shoes. In 2007, the Limited sold 75 percent of its clothing chain to focus on Victoria’s secret because of its high earning power. Victoria Secret accounted for 72 percent of Limited brands revenue in 2006 (Clark & Lutz-Tveite n.d.) According to Harrington (2015), Victoria’s secret accounts for between 35-60 percent of the market share of the US lingerie market and they are inarguable the most famous lingerie brand in the United States. Lutz (2013) believes that Victoria’s Secret has been able to stay ahead of the competition by defying the challenges affecting the intimate apparel industry. The brand has been able to accomplish this through years of expensive and flawless marketing. Later on in the report, we will be looking closely at their marketing and sales activities which is a very important part of their value chain.

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1.3 Victoria’s Secret Business Model According to Al (2005), there are two major ways Victoria Secret creates value for its customers: Products: The Company offers top notch innovative items at fair prices. The products are basic like the push up design while others aspiration (fashion items), items linked to the Victoria’s secret fashion show. Experience: This is the quality experience that customer enjoy when they shop in the Victoria’s Secret physical stores or online stores. Shopping for intimates become an enjoyable experience with Victoria’s Secret. 1.4 Industry Overview: Intimate Apparel in the USA Victoria’s secret is a premium lingerie brand and it operates in the intimate apparel industry. It could be said that it is influenced by the operational characteristics of the industry. What are the operational characteristics of the intimate apparel industry in the United States? • Geographical scope: Within the United states and International (Nguyen n.d.) • Market Segment: Majority female, aged 16-49 years, middle to high income earners (Nguyen n.d.) 

Sales Channels: Physical stores, catalog and online stores (Kumar, 2005)

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Product life Cycle: Companies used to carry apparel months before they are in season style, they cannot do this anymore because customers are now buying items closer to when they need it. Companies now have to shorten their concept to market times to cope with this trend (Nguyen n.d.)

1.5 Key Aspects of Victoria’s Secret Value Chain The following activities are what makes Victoria’s Secret value chain unique. We will address them in more detail later on in the report; • Two supply chains • Sales and Distribution: Multichannel strategy, • Marketing: Victoria’s secret fashion show, Victoria’s secret angels, store ambiance

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2. Literature Review: Michael Porter’s Value Chain for Competitive Advantage 2.1 Introduction This section will review key related concepts associated with Porter’s value chain which will be used in analysing the value chain of Victoria’s secret lingerie line. Value chain analysis evaluates the value each activity adds to a company’s products or services. Porter believes that the ability of a company to perform its activities and manage the relationships between them gives it a competitive advantage (Recklies, 2001) Porter divides value chain into two groups: primary (direct) activities and support (indirect) activities (Recklies, 2001). The primary activities include; inbound logistics, operations, outbound logistics, marketing and sales and services. While the support activities include; procurement, technology development, human resources management and firm infrastructure. (IMA, 1996). 2.2 Analyzing the Value Chain for Apparel Designed In the USA and Manufactured Overseas According to Hester (n.d.) the value chain for a company like Victoria’s secret adds a twist to porter’s value chain. Its value chain includes an additional activity, product design. • Product design: According to global purchasing groups, when designing a product the companies ask themselves the following questions, what is our target market? What is our selling point? What retailers fit our market? And what is your niche? The key is to follow the money trail, since every brand is in the business to make money. The goal is to give the product a strong competitive advantage in the target market. • Inbound logistics: This involves physically transporting finished products from overseas manufacturing centers to the company’s distribution centers. It also involves managing or providing technology to coordinate a company’s supply chain (Fernandez-Stark et al)

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• Operations: Most of the company operations take place in the United States. Activities are coordinated between the company Headquarters and offices around the world. • Out bound logistics: This involves all activities concerning the transportation of goods from the distribution centers to the retail stores (Kumar, 2005). • Marketing and sales: According to Howard (2015) companies leading in the apparel industry do not only recognize changes in fashion trends but also in how customers like to shop. Furthermore, the apparel industry relies heavily on technologies and multi channeling to market and sell their products. According to Tayabali (2008) Multi channeling means multiple ways companies offers sales and support to customers. It could be through physical stores, mail, telephone and catalogues. 3. Analysis of Victoria’s Secret Competitive Value chain 3.1 Introduction Victoria’s secret has a very robust value chain. After the products are designed, they go through a number of test to see how customers feel about it. Products will continually be adjusted until they are approved for mass production and distribution through their physical stores, website and mail channels. To help manage this complexity the company has become almost fully vertically integrated (Santos et al n.d.). Victoria’s Secret strategy Improve customer experience: goal is to create a shopping experience that depicts Victoria’s secret life style: sophisticated, sexy, and modern (Chang, Lin & Mak 2004) 3.2 Victoria’s Secret: Concept to Market According to Duggan (2015) Victoria’s secret is getting into fast fashion and is also cutting down its speed to market lead times. The brand previously used to design items twelve months before it hits the shelve but they have taken it down to eight months and they

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are looking at taking it further down to six months. This allows them to compete with fast fashion brand like Forever 21. 3.3 Victoria’s Secret Competitive Value Chain This paper will analyse Victoria’s Secret product design, inbound activities, outbound activities, marketing and Sales. Product design: The value chain of Victoria’s secret lingerie starts from the design studios. The designs are created in line with their target market preferences. According to Kumar (2005), there are at least four pathways to innovation for the Victoria’s secret brand 1. Victoria’s secret design studios located in New York; this was where the concept of “body by Victoria” was created 2. The limited design studio; this was where the brand “PINK” was created in 2004 3. Getting inspiration from third party 4. Open commercialization: travelling around the world for inspiration Inbound Logistics: According to Kumar (2005), Mast a subsidiary under Limited Brands does about 80% of the merchandise sourcing and manufacturing for the subsidiary brands under Limited brands with Victoria’s Secret being no exception. The sourcing of materials for Victoria’s secret is done keeping in mind the overall strategy of the Limited company. The items are manufactured in 50 factories around the world, which includes but not limited to China, India, and Sri Lanka. Once the products are produced, Limited logistics services (LLS) another brand under the limited brand company takes over Victoria’s secret value chain activities. They are responsible for; getting the goods from the factory to the retail selling points and they are also responsible for the purchase of non-merchandise products for the enterprise which includes bags, boxes etc. (Kumar 2005)

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Victoria’s Secret two supply chains LLS gets a 48 to 72 hour’s notification when the goods are ready to be picked up from the factory (Kumar, 2005). They may decide to ship or air lift the goods, this decision is made in collaboration with the brand. The goods that are shipped are the basic (low margin) goods while the fashion items are airlifted. Even though air transportation is more expensive, the fashion item are high margin goods so the benefits of having it available at peak season far outweighs the cost. Victoria’s secret does this to maximize their overall profit, increase satisfaction of the customers by ensuring the goods are available when they are needed and also to meet their strategic goal of improving their customer experience (Watson 2009). The items are then transported to Limited brands Headquarters in Columbus, Ohio which has seven distribution center and one of these centers is dedicated to Victoria’s secret (Kumar 2005). Warehousing and distribution: The warehouse at the distribution center performs some value added services before the transporting the items to the Victoria’s secret stores. The services include, tagging, re-ticketing, monogramming, steaming and hanging. Productivity in the distribution center is measured by units per hour (Kumar, 2005) Outbound Logistics: The Logistics limited service have relationships with domestic carriers like Schneider who help deliver the boxes of items to 45 delivery agents. This agents have to deliver these boxes to Victoria’s Secret retail outlets within two hours and they accomplish this goal 97 percent of the time (Kumar, 2005) Sales: Victoria’s Secret sells through it physical stores and direct stores (catalogues and web stores). According to Baldwin, German and Le (n.d.), Victoria secret has over 1000 physical stores, the direct stores (web stores, catalogues) appeals to customers who are not comfortable with buying their lingerie in public or customers who just want to purchase replacement lingerie. Victoria’s secret and PINK brand most recent sales was $6.6 billion, $1.6 billion of this amount came from websites and catalogs. The brand also spends about $220 million annually on making and sending catalogs (Maheshwari, 2013) 7|P A G E

Victoria’s Secret Multi-channel strategy: Victoria’s Secret was ahead of the competition when it decided to embrace a multi-channel strategy in the 1990s. It recognized the benefits went beyond additional sources of communication with retailers. It also brought about increased customer experience and additional revenue from retailers. The Victoria’s Secret physical stores complemented the additional sales channel. It gave customers the opportunity to come into store for the Victoria secret experience, get measured by a staff, purchase lingerie and order replacement via the online store or catalogue. The online store has supported the brand helping it surpass its sales goals. An investment in the online store of 5 million dollars brought in revenue of 200 million dollars. Victoria’s secret integrated its distribution channel, this was part of the strategy to support the brand and its store. For example a consumer can enter a products catalogue number to find an item on the online store. Also, the database e-mail address for customers that shop in their different distribution channel was merged together to build a cross channel database. They use this in making advertising decisions, like what kind of catalogue should be distributed to each customer (Kumar, 2005)

MARKETING: It could be said that this is the main value driving activity in Victoria’s Secret value chain. Victoria’s Secret massive marketing campaign as put it ahead of its competition. Victoria’s secret Fashion show which features “Angels” (supermodels who are ambassadors of the brand) and major music artists is Victoria’s Secret major marketing campaign. The fashion show cost a lot of money, in 2011 it cost $12 million dollars which is a lot higher than a typical fashion show which cost between $200,000-$1,000,000 dollars (Robehmed, 2015). The fashion show does not directly promote the products because the lingerie worn on stage by the models are never actually worn by the customer. What it does is position the brand as a high fashion lingerie brand, therefore increasing the demand for the product (Jenny 2014).

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3.4 Victoria’s Secret Competitive advantage over Frederick’s of Hollywood Strategy: Target Audience They sell similar products through comparable channels and their target market is quite similar. Fredericks markets itself as a racier brand which appeals to adults while Victoria’s secret targets both teenagers and adults. Victoria’s secret ability to capture teenagers with its PINK brand which is targeted to a younger demographic between the ages 16-29 creates a sense of brand loyalty, so teenagers do not switch to Frederick’s when they are adults (Fowler, Garcia & Rosales n.d.). It could be said that brand loyalty gives Victoria’s secret their competitive advantage. Marketing and Sales: Promotions Victoria’s secret is heavy on marketing and this truly sets them apart from their competitors. Their marketing activities include, the Victoria’s secret fashion which is aired on CBS and viewed by millions of people around the world, Catalogues you can easily get a hold off by providing your mailing address on the store website, in store promotions, TV and print advertisement, PINK college ambassadors. (Chang, Lin & Mak 2004). This methods of promotion persuades customers to purchase lingerie from Victoria Secret instead of their competition. On the other hand, Fredrick’s promotion is limited, advertising only to existing customers through emails (Fowler, Garcia & Rosales n.d.). Strategy: Value Proposition Victoria’s Secret value proposition follows the value of Limited Brand. This includes top notch customer service, passion, inclusion and doing the right thing (Clark & Lutz-Tveite n.d.). This means that they hire people who are passionate about the brand so they can provide high quality service to the clients. By doing the right thing, The Company ensures the factory workers are well taken care off and they are offered health and educational programs (Kumar, 2005). Fredrick’s of Hollywood main value proposition is making sexy lingerie available in plus sizes for women who are overweight. This is something Victoria’s secret does not do (Fowler, Garcia & Rosales n.d.). However it could be said that customers feel more

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accepting of Victoria’s secret brand because of the values it upholds in the conduct of its operations. 4. Conclusion 4.1 Final Remarks In summary, it could be said that Victoria’s secret Lingerie line success is influenced by three major things. First, Its vertically integrated value chain, second, its well-integrated multi-channel strategy and third, its intense marketing campaign. However, the brand still faces some limitations in its value chain. According to Santos et al (n.d.), though the president of the Victoria’s secret stores and the president of the Victoria’s secret direct (webstore and catalogue) work closely together, their profit and loss accounts are different. This means there is a limit to which they can bring major changes to brand especially in the area of promotion which is the soul of the business. This means that Victoria’s secret multi-channel strategy possibilities has not been fully explored. 4.2 Difficulties encountered during the research Information Constraint: There are only a few research papers on Victoria’s secret available on the internet. This led to the limitations listed below. 4.3 Limitations of the Report 

Victoria’s secret value chain is very complex and this report does not cover this complexity in its entirety. However, this report describes Victoria’s secret value chain with a lean structure that allows the reader fully understand Victoria’s secret competitive advantage.

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It focuses on the intimate apparel industry in the United States. It does not compare Victoria’s Secret value chain to other world leading lingerie brands in the world like Marks & Spencer a United Kingdom brand.

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This paper does not compare Victoria’s secret lingerie line inbound and outbound activities to that of its competitors (Frederick of Hollywood and Aerie) because of information constraint.

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A significant part of the information used in writing this report was from a research paper written on Victoria’s Secret supply chain by Sumit Kumar because of information constraint.

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APPENDIX Appendix A Flow Chart summary of the Value Chain analysis for apparel designed in the United States but Manufactured overseas

Product Design

Inbound Logistics

Operations

Outbound Logistics

Out

Coming up with Designs that align with taste of target market. This is usually done at the company’s headquarters in the USA. This designs are taken to their overseas production sites.

All activities that has to do with moving the finished goods from overseas production site to the companies’ distribution center

Most of the company Operations take place in the United States. Activities are coordinated between the company Headquarters and offices around the country

All activities that has to do with moving the items from the distribution centers to the retail store

Appendix B

Marketing and Sales

It includes Promotion activities like advertising and Distribution channels like physical stores, webstores, catalogues 12 | P A G E

Appendix B Flow chart summary of Victoria Secret Value Chain

Product Design

Inbound Logistics

This usually takes place in Victoria’s Secret design studio in New York. The designs are then taken to overseas manufacturing sites like Sri Lanka and India for production

Mast a subsidiary of Victoria’s secret parent company, the limited, coordinates all activities that has to do with the production of the lingerie items. After production, limited logistics services a subsidiary under the limited which acts as a third party will make sure the items arrive safely to the Limited brand distribution centers in Columbus. They also coordinate the two supply chains of Victoria secret.

t

Outbound Logistics

Limited logistics services contract out distribution of the goods to Victoria’s secret retail stores through domestic carriers like Schneider

Marketing and Sales

All activities that have to do with promotions and distribution of the goods. For example, the Victoria’s secret fashion show and Multi-channel strategy (physical store, webstores and catalogues)

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References Anonymous (1996) Value Chain Analysis For Assessing Competitive Advantage. Institute of Management Accountants. Anonymous Global Purchasing group. Al. (2015) Victoria's Secret to Success. 9th December. Available from: https://rctom.hbs.org/submission/victorias-secret-to-success/ [Accessed 26th December 2015]. Baldwin, C., German, B. & Le, J. Victoria's Secret: A Brand Analysis. Chang, C., Lin, A. & Mak, C. (2004) The Silky Strategy of Victoria’s Secret. Clark, L. & Lutz-Tveite, M. (2011) Victoria's Secret. Duggan, L. (2015) How Victoria's Secret is Copying Zara's Fast Fashion Strategy. 11th April. Available from: http://www.refinery29.com/2015/04/85436/victorias-secret-fastfashion-brand [Accessed 24th December 2015]. Fernandez-Stark, K., Frederick, S. & Gereffi, G. The Apparel global Value Chain. Center on Globalization, Governance & Competitiveness, Duke University. Fowler, C., Garcia, G. & Rosales, A. (n.d.) Comparative Analysis of Victoria’s Secret and Frederick’s of Hollywood. Available from: https://christinadianefowler.files.wordpress.com/2014/10/vsandfohanalysis-1.pd [Accessed 24th December 2015]. Harrington, C. (2015) Lingerie expert: Here's the problem with the Victoria's Secret Fashion Show. 9th December. Available from: http://fusion.net/story/243216/lingerieexpert-victorias-secret-fashion-show-models/ [Accessed 26th December 2015]. Hester, S. (n.d.) Analyzing the Value Chain for Apparel Designed in the United States and Manufactured Overseas. Howard, J. (2015) Top 5 Trends In Apprael Retail for 2015. 27th February. Available from: http://digitalmarketingmagazine.co.uk/digital-marketing-lead-generation/top-5-trendsin-apparel-retail-for-2015/1610 [Accessed 24th December 2015]. Kumar, S. (2005) Supply Chain Strategies in the Apparel Industry: The Case of Victoria's Secret. Masters of Engineering in Logistics. Massachusetts Institute of Technology. Lutz, A. (2013) How Victoria's Secret Became The Most Popular Apparel Brand in The World. 29th January. Available from: http://www.businessinsider.com/victorias-secret-isthe-top-brand-2013-1?IR=T [Accessed 25th December 2015].

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Maheshwari, S. (2013) The Numbers Behind Victoria's Secret And Its Iconic Fashion Show. Available from: http://www.buzzfeed.com/sapna/the-numbers-behind-victoriassecret-and-its-iconic-fashion-s#.xqPvbMvJ5 [Accessed 9th January 2016]. Market Line. (2015) Company Profile: Victoria's Secret. London, United Kingdom, Market line. Nguyen, V. (n.d.) Analysis of the Luxury Goods & Apparel and Footwear Industries. Recklies, D. (2001) The Value Chain. Robehmed, N. (2015) The Business of Victoria's Secret Fashion Show. Available from: http://www.forbes.com/sites/natalierobehmed/2015/12/08/the-business-of-the-victoriassecret-fashion-show/ [Accessed 9th January 2015]. Santos, E., O'Leary, K., Wright, A., Jeffrey, T. & Lin, J. (n.d.) The Innovation of Victoria's Secret. Tuck School of Business at Dartmouth. Tayabali, R. (2008) Multi-Channel Retail: Benefits, Challenges and Impacts. Watson, M. (2009) Victoria's Secret Has Two Supply Chains. How Many Do You Have? 26th May. Available from: https://www.ibm.com/developerworks/community/blogs/sca/entry/victoria%25e2%2580%2 599ssecrethastwosupplychainshowmanydoyouhave?lang=en [Accessed 27th December 2015]. Yan, J. (2014) Victoria's Not-So-Secret Marketing Strategy. 8th December. Available from: http://www.financialbuzz.com/victoria-s-not-so-secret-marketing-strategy-fashion-191177 [Accessed 26th December 2015].

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Bibliography Gereffi, G. & Memedovic, O. (2003) The Global Apparel Value Chain: Whats Prospects for Upgrading by Developing Countries. Vienna, United Nations Industrial Development Organization. Gustafson, A., Schmiesing-Korff, A. & Ng, S. (2004) A Time Efficicent Supply Chain Model For An Apparel Company. MBA In International Business. Kristianstad University. Kaplinsky, R. & Morris, M. A Handbook For Value Chain Research.

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