Victoria's Secret

2012

MANAGEMENT OF CHANGE | GROUP 2

VICTORIA’s SECRET TO SUCCESS

Candice Swanepoel Victoria’s Secret Angel Victoria’s Secret Fashion Show 2011

Victoria’s Secret is an American retailer of lingerie, women’s wear and beauty products. It is the largest subsidiary of Limited Brands with sales over 6 Billion USD. The brand has been very creative in keeping itself relevant to customers and redefining the category as such.

AAQUIB AL HOSSAIN ABHISHEK BHATIA AJITABH CHAUDHURI ANIKET PATKI

August 22, 2012

VICTORIA’S SECRET TO SUCCESS Victoria’s Secret Angels, who are usually among the top supermodels in the world and they have helped Victoria’s Secret earn a tremendous following from the American teenage girls and young women. Victoria’s Secret Facebook page has over 20 million users and its website has a very high Alexa ranking (one of the highest visited corporate sites.)

WHY VICTORIA’s SECRET? “It’s amazing what they can do with a pair of bra and panties”:Doutzen Kroes (Supermodel and Victoria’s Secret Angel) On November 9, 2011 in New York City, the annual Victoria’s Secret Fashion Show was telecasted across America over the prime time channel CBS. The show, unofficially termed as the largest fashion event in the world was seen by over 10.3 million people. To understand the value of the number, one should know that the average number of viewers for one of the highest rated sitcoms aired over CBS, How I Met Your Mother, garners only around 6-7 million viewers in the prime time slot. Established only in 1977, Victoria’s Secret has blossomed over the last 3 decades to become the fastest growing subsidiary and largest contributor to its parent company Limited Brands with a revenue over 6 billion USD.

Although enjoying a great status now, when Victoria’s Secret entered, the market was cluttered, and women’s lingerie was just considered as an aide for comfort (or as Victoria’s Secret would term: “Boring”). To have grown in an industry which was not openly discussed, Victoria’s Secret has performed exceptionally well to change the way the category is perceived and also employ a strategy which differentiates itself significantly to keep it as the market leader.

Victoria’s Secret was initially a brand established for women’s lingerie. With some innovative marketing, distribution and supply chain strategies, the company has currently the largest share in the lingerie market in US. The company has over 1000 stores across different parts of US. It is also renowned for its popular brand ambassadors famously termed as the MANAGEMENT OF CHANGE GROUP 2 REPORT

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VICTORIA’S SECRET TO SUCCESS UNDER LIMITED BRANDS

BREAKING THE CLUTTER ORIGIN OF A MULTI BILLION DOLLAR IDEA The story of Victoria’s Secret’s origin is an interesting one. Roy Raymond, a Stanford graduate found it highly embarrassing to shop for lingerie for his wife in austere surroundings. Raymond thus founded Victoria’s Secret in 1977 with the vision of creating an appealing shop with a welcoming stylish décor inspired by the Victorian era. The shop’s design was meant to make men comfortable while shopping for lingerie with or in absence of their better half. The lingerie was also offered in a variety of designs and styles to provide choice to women while shopping and boost sales. Raymond also popularly introduced a mail order catalog in the following year to sell the lingerie under the Victoria’s Secret brand. The response to Raymond’s idea had been positive and Victoria’s Secret had earned $500,000 in its first year of operations. It had 5 stores under its name and its 42 page mail order catalog was earning 6 million USD per year by 1982. It was at this time that Raymond sold the company for 4 million USD to Leslie Wexner, CEO of Limited Brands (Hoovers)

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Leslie Wexner carried forward the Victoria’s Secret idea and invested money in the concept to create a power brand. More stores were built on similar lines with Victorian era design and wooden paneled walls to make the décor inviting for men. Wexner also strongly believed in the catalog business of Victoria’s Secret. Wexner thus hired CYNTHIA FEDUS and made her the chief executive officer of the Victoria’s Secret Catalog operation. This was the genesis of the two separate divisions: The Catalog (Present Day Victoria’s Secret Direct) and The Stores (Present Day Victoria’s Secret Stores).

CYNTHIA FEDUS’ VISION FOR VICTORIA’S SECRET CATALOG Cynthia Fedus as the chief executive of Catalog Division pushed for Customer education and brand identity building. Popularity of the brand amongst men was high as Victoria’s Secret provided them a welcoming environment to buy and also educated them about lingerie and how to make a choice. Thus Fedus believed in importance of customer education and built a telephone operating team to cater primarily to embarrassed men who were attempting to purchase lingerie as gift items for their wife/ girlfriends. The catalogue telephone operators were trained to be patient and helpful to the male customers who formed a sizeable portion of the customers calling for help. However, this concept had not taken off with women although being a hit amongst men To develop the brand following amongst women, focus was shifted to building Brand identity, Fedus changed the focus in the catalog from steamy shots of men and women to that of women posing alone in romantic and seductive, yet socially acceptable settings. The change led to doubling of catalog sales within a year to a value exceeding a million USD. Page 3

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VICTORIA’S SECRET TO SUCCESS

Hence Fedus’ move to focus on women and increase revenues had paid off. In fact the same theme has carried onto present day catalogs.

GRACE NICHOLS: THE SAVIOUR

Victoria’s Secret. Nichols also appointed a person from Marks and Spencer for quality management.. The person was responsible for assuring quality work by suppliers as per the contractual agreements.

In the nineties, the Company had begun to face issues with quality. Victoria’s Secret was a premium lingerie brand and quality was one feature that could not be compromised upon. In the beginning stages, Victoria’s Secret had mostly made use of designs which were knockoffs from other popular brands. Later on, Victoria’s Secret sourced designs from various vendors. The marketing strategy had worked effectively to establish a premium image, however the quality did not back up the message

Having obtained the right vendors, Nichols next step after laying the building blocks for private label creation was to create the image of Victoria’s Secret lingerie as an extension to wardrobe. Having developed the supplier database, Nichols pushed for increase in Stores and communicating the message. Nichols went on an average of creating 50 stores every year. Nichols achievements during her stint as an EVP took Victoria’s Secret in the top 10 apparel brands in the US.

Grace Nichols was the executive Vice President of Victoria’s Secret Stores and held the position from 1986 to 1992. When complaints regarding quality of the lingerie upon washing came under question, Mrs.Nichols known for her outgoing nature, took the problem head on. She identified two reasons for the lack of quality. The first being poor vendor choice and the second being lack of quality testing. These functionalities were weak in Victoria’s Secret as the two primary divisions were catalog and Stores whose prime responsibility and core competency was selling designs. Victoria’s Secret before Nichols had a 5 member team in the Stores division who were responsible for obtaining merchandise. To ensure quality, Nichols developed relations with reliable vendors such as Vanity Fair and Hanes. She convinced these major suppliers to remove their tags and name them as Victoria’s Secret by assuring them considerable sales, which although the suppliers were reluctant about, they were convinced later with the results. Nichols hence started the system of truly developing the quality private label of MANAGEMENT OF CHANGE GROUP 2 REPORT

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VICTORIA’S SECRET TO SUCCESS communication and customer service and generate lesser confusion.

PIONEERS OF THE INDUSTRY Victoria’s Secret could not have become a 6 billion dollar brand just by having a clutter breaking concept. The company is known for its extensive innovative marketing and one of the best adopters of e-commerce in the industry. The key to Victoria’s Secret Success has been its adaptability and ability to set trend and make them traditions.

The division has become an essential part of the Direct Division and has a budget of over 10 million dollars annually with a size exceeding 40 members. The website has accomplished what it was established for and has grown to become a great interaction medium between the company and its customers. The e-commerce of Victoria’s Secret has been profitable too. Ken Weil attributes the success to his following moves  Developing an in-house content

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VICTORASSECRET.COM THE ONLINE PIONEERS

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Victoria’s Secret entered the online medium through www.victoriassecret.com in 1998. The web group was headed by KEN WEIL, a veteran from an Internet professional services firm (Proxicom). The website was launched with two goals  Strengthen and support the Victoria’s 

Secret brand Increase Sales goals.

Amazon.com was established in 1995 and Victoria’s Secret made its first online sale worth 39 dollars only three years later. The new web group was here to stay and it was directly incorporated into Victoria’s Secret Direct instead of being made into a different division. The company felt that this would ensure better MANAGEMENT OF CHANGE GROUP 2 REPORT

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management and database management capability called WENDI. The in-house system helped Victoria’s Secret in easier customization of its look and also enabling changes on a very short notice, thereby keeping the website interesting and dynamic. Ken was able to utilize the call centre support of Catalog division (now the Direct Sales Division) and he successfully digitized the catalog. He enabled live streaming of Victoria’s Secret fashion events in the mid-nineties, and the experience at that time was phenomenal for the customers. Victoria’s Secret parties and events had gained a great reputation, and since the customers weren’t able to gain access to the same, the online viewing made the site very popular. Development of the website also helped in a demographic and historic analysis of buyers. Customized e-mails were sent to cater to the customers as per their likes. The same could not have been imagined with mail catalogs.

The success of the online medium was truly phenomenal with sales increasing from near zero Page 5

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VICTORIA’S SECRET TO SUCCESS

in 1998 to over 200 million USD in 2001. Infact, Victoria’s Secret in 2000 beat Amazon and Paypal to win many e-retailing awards. The web presence has also taken Victoria’s Secret directly to the customers. The importance of the medium for Victoria’s Secret can be gauged from Appendix F. Although webcasts are common now, its impact in 1998 is tough to gauge but was a remarkable feat which helped make the brand more popular

PACIFYING CATALOG AND WEB The web medium inspite of being a success was under the Direct Sales division whose Catalog Sales department had a proud legacy and had basically spearheaded its revenue up until now. Hence merging the two channels did bring up issues regarding resource allocation and appraisal calculations. The web was also blamed for cannibalization of sales from the other channels. Irrespective of a definite cost advantage over mail catalogs, the web still drew some flak as its returns and necessity of existence as additional brand builder tool was questioned. SHAREN TURNEY, the current CEO of Victoria’s Secret Megabrand was named Chief Executive Officer and President of Victoria’s Secret Direct, in May 2000. In midst of the problems mentioned, her thoughts were clear about the necessity of the catalog and e-commerce arms to exist together. With extensive experience in retail, her major actions to reduce the tension were  Align incentives for the management with

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perks and bonus dependent upon divisional performance rather than channel performance Not calculating Channel profitability but releasing Divisional sales and profitability to enhance collective responsibility.

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Develop the RFM (Recency, Frequency and Monetary Value” System totrack customer behavior so as to mail catalogs accordingly in proportional volumes to more profitable buyers as mail catalogs costed more than web catalogs.

THE VICTORIA’S SECRET FASHION SHOW ED RAZEK: THE MAN BEHIND THE ANGELS With the increasing contribution of Victoria’s Secret to Limited Brand’s revenue, it was deemed necessary to develop the brand with a unified marketing effort across the distribution channels. Hence in 1993, the marketing efforts of Victoria’s Secret were brought under the Chief marketing Officer of Limited Brands, Edward Razek (popularly called Ed Razek). Before this, the Direct Sales and Stores Division took their own marketing initiatives and this sometimes confused the customer as they were not always aligned. Ed Razek introduced two of the most innovative and unique features of Victoria’s Secret; they were the Angels and the Annual Fashion Show. Ed Razek is also popular for the eye-catching and creative Victoria’s Secret Commercials aired on TV. In 1995, Ed Razek organized the first Victoria’s Secret Fashion Show. The show was organized on a budget of 120,000 dollars and was in Razek’s opinion, more of a learning experience as they had no idea of the future of the concept. However the show was termed by media as the ‘lingerie event of the century’ and thus, a potential brand building tool was discovered. The show was since, held annually except in 2004.

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VICTORIA’S SECRET TO SUCCESS

In 1999, the show was also featured through a live webcast which received viewership of almost 2 million. In 2000, the show was aired over television for the first time in the ABC network. Since 2001, the fashion show has aired on the prime time slot of CBS network. With the success of the fashion show, Ed Razek introduced the concept of Angels, where some of the top supermodels became the brand ambassadors for Victoria’s Secret, and famously walked in lingerie during the annual fashion show. The Angels initially introduced for the glamour factor were soon used to enhance the positioning and create role models for the target audience. The Fashion Shows and Angels have in the current day become unanimous with the brand and have resulted in huge popularity for the brand. Ed Razerk infact has a team of 200 people assisting him to manage a marketing budget of 250 million USD, one of the highest in the industry. The fashion shows now hire the best of the designers and have a much higher production value with the one in 2011 having a budget of 13 million USD. A still (left) from the Victoria’s Secret Fashion Show 2011. The Fashion Show had major star performances by Nicki Minaj, Kanye West, Jay Z and Maroon 5. The star value is an indicator of the high production value of this event

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VICTORIA’S SECRET TO SUCCESS

PRODUCT DESIGN AND LAUNCH

KEEPING THE BASICS RIGHT SUPPLY CHAIN: THE LIFELINE Victoria's Secret consists of several sub-brands (PINK, Body etc) with each conveying a specific theme or targeting a specific audience. Each of these sub-brands is offered in various styles (push-up, lace etc) and various materials (cotton, satin etc). Forecasting and delivery of these goods in an efficient manner hence becomes a major factor for an excellent customer experience In terms of determining the ideal source, the products are classified into Launch Fashion, Non-Launch Fashion and Basic Products. About 60% of the products are basic (all year round). Fashion Products are those which are marketed for specific seasons and Launch items are those on whose introduction, a significant investment is made. Almost 25% are Non-Launch fashion and 15% are Launch fashion products. The critical processes that make up the Victoria's Secret's supply chain are: 1) Product Design and Product Launch; 2) Merchandise Planning, Allocation and Forecasting; 3) Production & Sourcing; 4) Logistics; and 5) Store Operations/Delivery. A design idea, from conceptualization to delivery is termed as "Concept-To-Market". MANAGEMENT OF CHANGE GROUP 2 REPORT

Victoria’s Secret has its design office in New York (Victoria’s Secret Design: VSD). There is also an enterprise-wide design department called the Limited Design Studios (LDS) in New York. However the ideas for new products may come from third party designers too. The new products are market tested in the Henri Bendel store in New York to decide the positioning. Based upon the initial market test, Launch Strategies are devised by the marketing Team. MERCHANDISING PLANNING AND ALLOCATION The Chief Executive Officer (CEO) of the brand, the Executive Vice President (EVP) of Planning, and the General Merchandise Manager (GMM) together formulate a merchandise growth strategy creating a roadmap with a three year planning horizon. The goal of the effort was to come up with a multiple annual view of the growth of sub brands and categories within the sub-brands (Bras, Panties, Sleepwear) in cognizance with the merchandise growth strategy.. “A design Ratio is determined in which the various different sub-brands would be chosen specifically depending upon their potential. The Merchandising Team thus has a Final Edit Meeting beyond which a Buy Meeting is organized. The Buy Meeting is organized to finalize upon the purchase orders The orders decided upon are passed by the Victoria’s Secret Production Group. The Merchandising group reports to the Finance Team. All brands including Victoria’s Secret go through a quarterly review process with the Chief Financial Officer to decide upon the value for the next buy period. Physical store inventory is done once a year in Victoria’s Secret.. Page 8

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VICTORIA’S SECRET TO SUCCESS

PRODUCTION & SOURCING 80/, of the merchandise sourcing and manufacturing for The Limited Brands is handled by Mast, (a completely owned division of the Limited Brands). The CEO of Mast holds the title of Senior Vice President, Production & Sourcing. About a quarter of Mast’s revenue comes from non-Limited Brands transactions like Abercrombie and Fitch, Chico’s and Triumph. Mast is the organization within Limited Brands used by all subsidiaries to efficiently source material. LOGISTICS The logistics of delivery to stores/ Direct Sales is handled by the Logistics division of Limited Brands, the Limited Logistics Service (LLS). The LLS acts as a third part when it comes to transactions as the model is similar to what it would be if the service was outsourced. This results in keeping a portion of the margins within Victoria’s Secret. The LLS operates on a Shared Service Model in which a service level agreement (SLA) is used as a contract between businesses and LLS. THE PROCESS MENTIONED HERE SHOWS THE COMPLICACY IN THE WORKING IN RESPECT TO THE ORGANIZATION STRUCTURE SHOWN IN APPENDIX B. APART FROM THE INNOVATIVE MARKETING AND WEB PRESENCE, EFFICIENT MANAGEMENT OF THE SUPPLY CHAIN BY MANAGING THE LIMITED AND VICTORIA’S SECRET SIDE HAS BEEN THE MAJOR CRITERIA FOR VICTORIA’S SECRET’S SUCCESS

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VICTORIA’S SECRET TO SUCCESS

APPENDIX A

KEY PEOPLE LESLIE WEXNER CEO, LIMITED BRANDS Majored in Business Administration from The Ohio State University. At the age of 74, he is the current CEO of Limited Brands. Wexner has popularly quoted Victoria’s Secret as not being a lingerie brand but more of an indulgence brand

GRACE NICHOLS NON-EXECUTIVE BOARD, LIMITED BRANDS A graduate from UCLA. She was the Victoria’s Secret Direct Sales CEO from 1992 to 2007. She is however famous for her stint as EVP from 1986 to 1992 where she too significant measures build people’s trust in Victoria’s Secret as quality issues had been raised

EDWARD RAZEK CEO, LIMITED BRANDS Mr. Razek joined Limited Brands in 1983, as Vice President, Marketing Limited Stores, and was one of the chief architects of the highly successful Forenza and Outback Red private label brands. In 1993, he was promoted to Vice President, Director of Marketing for Limited,

ROY RAYMOND FOUNDER, VICTORIA’s SECRET A graduate from Stanford, he founded Victoria’s Secret with a funding of 80,000 USD. After selling Victoria’s Secret, two years later, he started My Child's Destiny, a retail store for children. It went bankrupt in 1986. He committed suicide in 1987 from the Golden Gate Bridge

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APPENDIX B

ORGANIZATIONAL STRUCTURE

Updated 2002

The organizational structure illustrated above is updated as per 2002. However significant changes have undergone in the last 10 years. This is primarily due to emergence of Victoria’s Secret as a major subsidiary under Limited. Hence a lot of Limited Brands divisions work to support the Victoria’s Secret infrastructure. Victoria’s Secret has a single CEO now to whom the 3 major divisions report. The three divisions are shown above. The major marketing initiatives are under Limited Brands Control

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APPENDIX C

SUPPLY CHAIN STRUCTURE

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VICTORIA’S SECRET TO SUCCESS

APPENDIX D

FINANCIAL PERFORMANCE Revenue (in Billion USD) Stores Sales per Average Sq.ft (USD) Sales per Avg. Store (1000 USD) Avg. Store Size (sq.ft) Operating Income (MUSD) Stores Revenue (BUSD) Direct Revenue (BUSD) Limited Brands Revenue (BUSD)

2011

2010

2009

2008

2007

2006

6.121

5.520

5.307

5.604

5.607

5.139

1028

1040

1043

1020

1003

998

754

663

581

620

694

731

4463

3886

3356

3480

3678

3698

5941

5892

5830

5727

5489

5111

1081

889

868

589

1110

1176

4.564

4.018

3.919

4.081

4.208

3.723

1.557

1.502

1.388

1.523

1.399

1.416

10.364

9.613

8.632

9.043

--

--

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VICTORIA’S SECRET TO SUCCESS

APPENDIX E

CURRENT VICTORIA’S SECRET ANGELS

Adriana Lima

Alessandra Ambrosio

Miranda Kerr

Doutzen Kroes

Lily Aldridge

(2000present)

(2004present)

(2007present)

(2008present)

(2010present)

BRAZIL

BRAZIL

AUSTRALIA

NETHERLA NDS

UNITED STATES

Candice Swanepoel

Erin Heatherton

Behati Prinsloo

Lindsay Ellingson

Chanel Iman

(2010present)

(2010present)

(2009present)

(2011present)

(2010present)

SOUTH AFRICA

UNITED STATES

NAMIBIA

UNITED STATES

UNITED STATES

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APPENDIX F

ONLINE INTERACTION WITH CUSTOMERS

Source: Original Research MANAGEMENT OF CHANGE GROUP 2 REPORT

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REFERENCES  Limited Brands Annual Reports 2009-2012  “Supply Chain Strategies in the Apparel Industry: The Case of Victoria’s Secret” by Sumit Kumar (June 2005)  Case #6-0014, Tuck School of Management (2002)  Victoria’s Secret: Uncovered: Kristia Morabito  The Silky Strategy of Victoria’s Secret: Chelsea Chi Chang, Alice Lin, Charlene Mak (28 May, 2004)  Original Research: Ajitabh Chaudhuri under Prof. Krishanu Rakshit (Ongoing)  Victoria’s Secret Fashion Show (2005 – 2012)  Wikipedia  www.victoriassecret.com  www.limited brands.com .

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