Retailer Blog

FIGHTING FOR PROFITS IN A TOUGH ECONOMY!

Retailing goes through periods when business is booming and periods when cautious consumers curtail some of their spending. During these tough times some major chains will cut back on new store openings, some will declare bankruptcy to reorganize, and others will disappear from the retail landscape altogether. Still others continue to do business without being negatively impacted in any real way in spite of tough times.

One distinct characteristic separates these retailers from the rest. Their company-wide mind-set focuses on financial prudence all the time, not just when times are tough. They cautiously open new stores and never take on large amounts of debt to grow and expand. And they do not waste financial resources on anything that doesn’t generally serve the business and its customers.

The Container Store is among the most prudent retailers in America and also one of the most successful. It began 30 years ago with one store in Dallas, Texas. Today it has just 41 stores around the country, growing slowly and with great forethought. Last year the partners sold the company to an investment firm that likely will continue this slow, steady expansion.

A classic example of massive waste in corporate spending is the Sears Tower in downtown Chicago. At about the same time Sears was building this monument to itself, Sam Walton was building Wal-Mart with headquarters in a two-story, non-descript brick building in Bentonville, Arkansas. During one of the frequent reorganizations at Sears, someone decided the downtown monument was no longer a good idea. So, instead the company leased the offices downtown and built another monument to itself in the suburbs. Today Sears still does business out of a large campus in Hoffman Estates, Illinois, and Wal-Mart still does business from a non-descript two-story building in Bentonville, Arkansas.

I don’t believe retail businesses can instantly become financially prudent. But, I suspect when we look back on this period of time, we will see that most of the retail businesses that went through bankruptcy reorganization or failed will be those without a highly disciplined approach to the financial management of their businesses.

DEBATING THE VALUE OF SAME-STORE SALES NUMBERS!

In the early 1970s, analyst Jerry Gallagher developed a set of calculations to more effectively evaluate the sales of W.T. Grant, the retailer he covered for investment firm Donaldson, Lufkin and Jenrette. As a result, monthly same-store sales numbers became a standard measure of a retail company’s overall health. Over the years it’s been commonplace for most large, publicly held retail companies to reveal these numbers monthly.

Recently, a growing number of publicly held retailers have stopped reporting monthly same-store sales numbers. The first may have been Sears. It did so for the obvious reason; same-store sales were declining month after month. In 2006, as Home Depot’s sales declined, it stopped reporting sales numbers as well. Just this last week, Macy’s chose to no longer report its same-store sales numbers. Hmmm, do you see a trend here?

While certainly not the only way to determine how well a retailer is doing, same-store sales results have been very helpful for Wall Street as well as anyone seeking valid information about a retailer. As long as I’ve been in this business, there’s been an ongoing debate as to the value and importance of same-store sales results. Yes, there are other numbers to look at when analyzing the health of a retailer, but I don’t know of a better way to get a good picture of how consumers are spending their money, which retailers they prefer, or how one holiday season compares to the previous year. I’ve found the best way to use these numbers is to look at them over a one- or two-year period rather than month to month.

I believe every publicly held retail organization should be required to report its monthly same-store sales. If a retailer is willing to take millions of dollars the public spends buying its stock, I believe it has an obligation to keep investors informed about the health of the business. And same-store-sales is a good indicator as to what’s going on with a retailer over a period of time.

TOUGH TIMES IN 2008!

Reacting to poor sales in the latter part of 2007 and prospects for a difficult 2008, a diverse group of retailers recently announced store closings, restructurings, and bankruptcies. The biggest and probably least surprising is from Macy’s—combining divisions and laying off more than 2,300 employees. Macy’s has struggled since the acquisition of May Co. and its various divisions and its attempt to build a national department store chain. Add a challenging economy to the struggle and it’s likely there will be more bad news from this venerable retailer.

Many of the store closing announcements have come from apparel-oriented retailers, but most troubling to me is from Domain Home Fashions. This 27-store retailer headquartered in Massachusetts declared bankruptcy and will likely be liquidated in the next few weeks.

Since its beginning in 1985, Domain grew and prospered under the guiding hand of its capable and charismatic founder Judy George. The problems began back in 2002 when Domain was acquired by Aga Foodservice Group, a British manufacturer of kitchen appliances, tile, paint, and floor coverings. The idea was to integrate Aga’s products into Domain’s existing stores to create a complete home furnishings destination for consumers. It’s something of a mystery as to what the Aga folks were thinking since Domain stores generally are less than 10,000 square feet in size.

Putting Aga’s products in Domain stores didn’t work so the company was sold last June to Synergy Enterprises, an investment company that apparently didn’t have a clue as to how to invest in or run a retail business since six months after the acquisition Domain declared bankruptcy. Synergy CEO Gary Nacht blamed “macroeconomic forces such as
a severely depressed real estate environment” for poor sales. Again, this occurred within six months of the Synergy purchase.

Prior to these ownership changes, Domain was generating more than $70 million in revenues and had been listed among the top 100 furniture retailers in the U.S. by Furniture/Today magazine. The failure of this once thriving business simply should not have happened!

HOLIDAY SHOPPING 2007!

Over the last few weeks I’ve spent a great deal of time visiting stores, observing shoppers, analyzing traffic, and generally paying attention to what’s going on with retailing. Yes, this provides me with anecdotal evidence of the holiday shopping environment. But, my admittedly unscientific evidence may be just as accurate an assessment of whether retailers are doing well or poorly this year as the information being collected by some consumer research firms.

An executive with one of these research firms recently said, “We believe the holiday season has been challenging with sales deteriorating more than we anticipated following a relatively strong Black Friday.”  In a press release dated December 21st, a Reuters story was headlined, “Stores desperately seeking shoppers on Super Saturday.” Another of the retail industry’s most quoted researchers said this, “Retailers are holding back on giving the big discounts that consumers want this year, and as a result retail sales are very weak.”

To anyone who believes or even listens to all this doom and gloom, I strongly recommend you wait until retailers report their sales for the entire holiday season. Many of these same prognosticators were saying the same things prior to the beginning of the season. According to the US Commerce Department, these experts were wrong in November when consumer spending rose at the fastest rate in more than two years. 

We have seen over the last few years, the holiday shopping season begins in late October or early November and ends in mid to late January as consumers cash in the billions of dollars in gift cards they received. When we look at the totals for store sales, online sales, and gift card sales for the entire holiday season, I believe we will have decent, if not spectacular, sales for the season.

As it is every year, there will be segments of the retail business that will have had a difficult year and others that will have enjoyed solid sales growth. While there certainly are difficulties with the overall economy, the nation’s unemployment rate is quite low and the economy continues to create jobs every month. As long as consumers are working, most retailers will benefit and won’t be “desperately seeking shoppers!”

Doom or Glee?

On the days leading up to Black Friday, many in the media including national television news anchors portrayed retailers as desperate to get customers into their stores on Black Friday. This desperation forced retailers to advertise door-buster prices lower than ever before to attract consumers. Apparently they believe retailers aren’t smart enough to actually strategize their moves during this important season each year.

It turns out retailers weren’t desperate but, in fact, were responding to the fiercely competitive retail climate in America. They implemented strategic decisions to draw customers into their stores who would then buy other merchandise in addition to the advertised items. I visited more than 30 stores on Black Friday and virtually every customer I observed checking out made multiple purchases—more than a few with overflowing shopping carts.

The question has long been whether Black Friday is a good indicator of the health of the overall holiday shopping season. I believe it is one piece of a much bigger picture making it virtually impossible to use as an accurate predictor alone. With the growing number of last-minute shoppers and the importance of gift cards to the overall success of the season, we’ll just have to wait to see whether the predictions are accurate. But this won’t stop experts from sharing their opinions.

As early as Sunday afternoon of Thanksgiving weekend, the experts and researchers expressed their opinions as to what happened with consumers and shopping on Black Friday.  And, yes, proclaimed Black Friday to be the indicator of what consumers would do this holiday shopping season and how retailers would fare.

I’m not sure how they made this leap, but one research organization reported 147 million shoppers to be out over the weekend, supposedly an increase of 4.8% over last year. And those shoppers spent an average of $347, down from 2006 by 3.5%.

The fact is most of these findings result from interviews with a limited number of consumers and then extrapolated to reflect the shopping population of the entire country. It will be interesting to see what the major publicly held retailers report with their actual November same-store sales results on December 6. From my perspective, this will provide a far more accurate picture of what happened in November and over the Thanksgiving weekend. 

We’ve got several weeks to go before we’ll know whether Holiday 2007 is a great success or a failure. In the meantime, savvy retailers will continue to focus their attention on executing the plans they put together earlier this year.

Drugstore Wars?

Wal-Mart fired the first shot when announcing last year it was going to sell more than 100 different generic drugs for just $4 a prescription. They were soon followed by Target, Publix Supermarkets, and others. Recently the folks at Publix decided to go even further down this path by offering to fill prescriptions for seven popular antibiotics free.  While $4 prescriptions are quite an incentive to take your business to a particular store, I don’t know of a more compelling incentive than FREE!

In a counter move, CVS/Pharmacy is offering $25 gift cards for customers who bring in a new prescription or transfer an existing prescription to one of its stores. Customers can get up to four $25 gift cards with four prescriptions. Now Rite Aid has jumped on this bandwagon with $30 gift cards for up to five new prescriptions or transfers—that’s potentially a $150 incentive to switch prescriptions to a Rite Aid store. The major drugstore chains, with these gift cards, certainly aren’t sitting on the sidelines watching mass merchants and supermarkets take their customers away.

Why would retailers resort to such costly actions? Apparently pharmacy customers can be very valuable to a retailer since they must come into the store to pick up prescription  refills on a regular basis. These retailers are betting the customer will buy lots of other merchandise on each visit.  This, of course, can simply be a PR move designed to show pharmacy customers just how important they are to these retailers. Whatever the reason, the battle for customer attention, dollars, and loyalty is  going  to get even more competitive as millions of baby boomers reach their 60s and beyond.

You’re Fired!

In a media story that was widely reported last week, wireless telephone company Sprint Nextel sent a letter to more than 1,000 of its customers. The letter informs them that the company will no longer provide their wireless telephone service because they abused the relationship. While this is certainly an unusual approach to firing a customer, Sprint says some of these customers were calling Customer Care hundreds of times a month over a period of six to twelve months. Some customers called back again and again to have problems solved that had already been taken care of by the company.

With approximately 53 million customers, firing 1,000 is just a small number. But it sends a powerful message to anyone who might choose to abuse the company’s service.

In case you missed seeing the actual letter that Sprint Nextel sent to fire these customers, it is reproduced here. (Click to enlarge.)

What to Believe?

Last week the nation’s publicly held retailers reported June sales results and the numbers looked pretty good. The National Retail Federation (NRF) reported that overall June sales were down slightly from May but up by 3.4% from the previous June. The good news, which was widely reported online and in other media, sent stock market averages up significantly from the day before.

The next day, the U.S. Commerce Department announced preliminary results for June stating that sales for the month fell 0.9%. Again, the widely reported results resulted in stock market averages falling precipitously.

What’s going on here?

First, the numbers from NRF and most of the other retail industry-related organizations that report monthly retail numbers do not include automobiles, gasoline stations, and restaurants. It’s also important to remember that the monthly Department of Commerce reports are always preliminary and are usually revised a few weeks later to more accurately reflect actual retail sales.

There’s little doubt that retailers will have to fight  harder for every sale this year than last. With high gas prices, an unsteady housing market, and increasing food costs, consumers will tend to be cautious for at least the rest of this year.

A Little History with Spectacular Results!

In the mid 1960s, a couple of former automobile salesmen found themselves in the business of selling pianos and electric organs in Los Angeles, California. Wayne Mitchell and Andy Zerbo had spent the early years of their working lives selling cars during an era when car dealerships experienced amazing growth in Southern California. As both men entered their fifties, circumstances brought them together in the musical instrument business.

When the Beatles exploded onto the world stage, they used a brand of amplifiers, guitars, and drums that had not previously been sold in the United States. So the company, VOX, made arrangements with the Thomas Organ Company to begin opening dealerships in the U.S. When faced with the prospect of not having a dealer in Los Angeles, the company made a deal with one of its most successful electric organ dealers--Wayne Mitchell. Since he already operated stores in the Los Angeles area, the Thomas company offered to help him open a VOX musical instrument store on Sunset Boulevard in Hollywood.

In the fall of 1966, along with a young, inexperienced store manager named George Whalin, the partners opened the very first Guitar Center in a rented space that measured approximately 1,000 square feet. During that first year, we sold about $100,000 worth of VOX musical instruments. Being the only brand we had, we were quite pleased. While not a roaring initial success, each year thereafter we did substantially more business. As we proved ourselves to such better-known brands as Gibson, Fender, Ludwig, and Gretsch, our business continued to grow. In 1970, we moved one block down Sunset into a much larger building, and the store continued to thrive.

In those early days, it was quite common for limousines to pull up to the front and the biggest stars in the music business would get out and come  into the store to buy. With the British Invasion in full swing, our visitors from across the pond included The Rolling Stones, The Beatles, The Dave Clark Five, The Animals, to name a few.

The big American Bands including The Beach Boys, Chicago, Jefferson Airplane, and the Grateful Dead all found their way to the store as well. Among the many individual musicians that shopped in that small store were Stevie Wonder, Paul Simon, Neil Young, and David Crosby. With a staff that included some excellent guitar players, it was always fun when great players such as Wes Montgomery, Eric Clapton, Chet Atkins,  and Jerry Garcia came in, pulled a guitar off the rack, and played for awhile.

A few years later, the store moved across the street to the large building it now occupies at 7425 Sunset Boulevard in Hollywood. As new management took over, the company began to really grow with its stock trading on the NASDAQ. Today the company operates more than 200 stores including Guitar Center Stores and Music & Arts Centers along with a substantial online musical equipment business known as Musician’s Friend.

This past week, The Guitar Center was acquired by the private equity firm Bain Capital Partners for more than $2 billion including assumed debt. From that funky little 1,000-square-foot store, The Guitar Center has grown to become the dominant player in the musical instrument business. As someone who was there when it started, I am quite amazed!

Stores with Spas!

Think you might need a massage, pedicure, or to have your skin exfoliated? In one of the more unusual pairings, retailers in some diverse merchandise categories are adding spa services to their offerings. While a few department stores have long included beauty salons, their services were usually limited to hair and nails. In 1989, Nordstrom began opening in-store spas and today operates a dozen locations providing a wide range of spa services like one might find in a luxury resort.

Whole Foods, the country’s largest organic and health food retailer, also has gotten into the spa business. Late last year the company opened its first Everyday Spa in Dallas, Texas, providing skin care treatments and massages along with advice from nutritionists and wellness consultants.

Also last year women’s apparel retailer Coldwater Creek began opening spas for its customers with six locations now in operation. As a retailer enjoying an unusually strong bond with its customers, Coldwater Creek Spas are a natural fit. The spas offer such services as various kinds of massages, facials, manicures, pedicures, body treatments, and waxing along with complete packages.

In a world where people are too busy and overstressed, the convenience of having a spa either in or next door to one of their favorite stores is a great idea. After all, a nice massage after a tough day would help most anyone feel better.