CASE 17
American Apparel:
Vertically Integrated in Downtown LA
TEACHING NOTE
■ SYNOPSIS ■
American Apparel is an unusual company. While most U.S. fashion clothing is produced offshore in low-wage
countries, American Apparel’s T-shirts and other garments are designed and manufactured in downtown Los
Angeles, and then sold in company-owned retail stores. Despite the high costs of producing in the US,
American Apparel developed a strong brand following and, from opening its first retail store in October 2003,
The case offers students the opportunity to explore the logic of American Apparel’s strategy of vertical
integration, to consider the sources of the current problems, and to develop a turnaround strategy for the
beleaguered company.
■ TEACHING OBJECTIVES ■
I use the case primarily to allow students to discuss and analyze the costs and benefits of vertical integration (as
compared to the outsourcing of production which is the norm for most fashion apparel brands). The case is
particularly useful in showing how the factors which lead to vertical specialization within an industry do not
necessarily apply to all firms within it. There are similarities here to the case of Zara/Inditex: because of the
Finally, the case offers students the chance to develop competency in analyzing the sources of poor financial
performance and designing turnaround strategies.
■ POSITION IN THE COURSE ■
I use this case in the corporate strategy part of my course. Under corporate strategy, I distinguish three
■ ASSIGNMENT QUESTIONS ■
1. The textile/clothing sector is vertically de-integrated: design, textile manufacture, clothing manufacture,
and distribution are undertaken mainly by specialist firms. Why?
■ READING ■
R. M. Grant, Contemporary Strategy Analysis (9th edn.), Wiley, 2016, Chapter 10, “Corporate Strategy and
Vertical Integration”, especially the sections on the benefits and costs of vertical integration (pp. 297-303).
■ CASE DISCUSSION AND ANALYSIS ■
The vertically de-integrated structure of the textile/clothing sector
I start by asking my students: What are the principal stages in the value chain for a T-shirt?
The result is something like this:
I then ask: Where do these activities take place?
Cotton growing: 1. China; 2. India; 3. US; 4. Pakistan; 5. Brazil; 6. Uzbekistan; 7. Australia; 8.
What firms (or what types of firm) are positioned along this value chain? Asking the class who is in
this industry and the activities in which they are positioned results in a map of the industry in a
diagram that looks like this:
We are now in a position to explore the factors which explain the predominance of vertical specialists in
most stages of the value chain. Here we can draw upon the criteria outlined in Figure 11.5 on p. 303 of
Contemporary Strategy Analysis (9th edn.). The slide below summarizes the factors which determine the
relative merits of vertical integration as opposed to outsourcing.
For example, between cotton growing, spinning, and knitting there is very little vertical integration for the
reasons given in the chart: there are many firms, there is very little need for investments specific to a particular
What is American Apparel’s strategy? What role does vertical integration play in this strategy?
To appreciate the reasons why American Apparel defies industry conventions in pursing vertical integration, we
need to recognize American Apparel’s strategy and the basis of its competitive advantage.
Although American Apparel offers a wide range of clothing (and accessories), I find it useful to focus on T–
shirts. One way into this is to ask about the market for T-shirts: why do people buy them?
The slide below summarizes the key components of American Apparel’s strategy:
So what role does vertical integration play in supporting American Apparel’s strategy and how does it
contribute to its competitive advantage?
In terms of tangible factors, vertical integration allows:
Control over quality—especially in production
Innovation in marketing: American Apparel uses amateur models (typically its own employees) and a
distinctive approach to marketing and promotion
At the intangible level, vertical integration supports American Apparel’s brand personality and the self-image
of the company. Inevitably there will be members of the class who are American Apparel customers and it is
interesting to ask them to articulate American Apparel’s brand positioning and identity—including the brand’s
relationship with America and “Downtown LA”. A number of themes typically emerge: urban culture
brand’s positioning.
What are the sources of American Apparel’s current difficulties? Advise the board on what
American Apparel should do next?
The financial data (Tables 1, 4, 6 and 7), shows that, between 2008 and 2014, American Apparel’s sales have
been broadly static and, while gross margins have been fairly constant, selling and distribution costs and general
and administrative costs have risen as a percentage of sales. The result is that operating losses were incurred in
What’s causing performance to deteriorate? Two major factors seem to be at work:
Waning appeal of American Apparel’s style and brand. In the fast-moving world of fashion, it is
possible that American Apparel’s Los Angeles, urban, retro look is suffering from a declining attraction
within its target demographic segment. It is also conceivable that the American Apparel style held favor
with only a small consumer segment.
Under Dov Charney, the coordination of American Apparel’s different activities and functions was undertaken
by Charney himself. The way in which product design, marketing, purchasing, manufacturing, distribution, and
retailing linked together was through Charney’s personal involvement in all aspects of the business. He
approved new product designs, created advertisements, selected new store locations, and was closely involved
In terms of recommendations, these depend upon the diagnosis of what is causing American Apparel’s
deteriorating performance:
1. Improving managerial effectiveness and efficiency. If American Apparel’s brand positioning is sound
2. Retrenchment and core business focus. American Apparel’s reputation was based upon the quality and
style of its T-shirts. The US wholesale business is currently American Apparel’s biggest business and
its most profitable. American Apparel’s declining profitability has coincided with its expanding retail
3. Repositioning American Apparel as a mainstream casual, fashion brand. As American Apparel top
What do these different strategy options imply for American Apparel’s vertical integration? For the
retrenchment strategy, vertical integration remains a centerpiece of the strategy: indeed, American Apparel
would become more of a design and manufacturing company and less of a retailing company. Conversely, as a
mainstream casual fashion brand, American Apparel would shift to an offshore, outsourcing approach. It is the
first strategy, based much more on maintaining the status quo where the pros and cons of vertical integration are
■ KEY TAKE-AWAYS FROM THE CASE DISCUSSION ■
