Thursday, December 17, 2009

Sol Price—A Retail Revolutionary

We were saddened to hear about the passing of Sol Price, a retail legend who revolutionized retailing over the past several decades. We also have some very personal links to Sol, and can trace McMillanDoolittle origins almost directly to that era of profound retail change.

For those not aware, Sol Price founded Price Club, which was the original membership warehouse concept pre-dating any of the efforts we see today. He almost single-handedly created the notion of this business, which is now well over a $100 billion business in the US and taking root internationally as well.

It all started with Sol Price in a single club in San Diego in 1976. Sol had the revolutionary idea of re-inventing the productivity chain in retail: Carry a few of the absolutely critical sku’s, sell in incredible tonnage, with great velocity, at extremely low margins and charge membership fees paid for by consumers for the privilege of shopping. And, being the brilliant merchant that he was, Sol also figured out that creating a treasure hunt environment that mixed unexpected surprises with the staples would keep customers loyal and coming back again and again. In the process, he created retail stores that drove volumes in excess of $100 million, unheard of that time and still rare today.

While we are all now familiar with how the model works, so many pieces were so radical at the time that his ideas were dismissed by many in retail. Of course, there were a few people paying close attention. Jim Sinegal of Costco worked for Sol Price and later launched his own concept and eventually acquired Price Club. Our founder, Sid Doolittle, was an early follower as well, and partnered to open The Warehouse Club in the Chicago market. Other early models included BJ’s, The Wholesale Club, and Pace. And, there was a guy named Sam Walton who used to visit Sid Doolittle at his first Chicago location on the weekends…..600 stores and nearly $50 billion in revenues later, Sam’s Club remains a staple of US shopping.

For many of us who have worked at McMillanDoolittle for a long time, we had the privilege of learning the lessons of high productivity retail from Sid Doolittle first hand. For such a simple idea, execution becomes incredibly complex and razor thin margins necessitate an extreme focus on all of the levers of retail profitability. But, while the clubs have been around now for 30+ years, the lessons of productivity are slow to take hold. Even today, with all of the analytical tools at a retailer’s disposal, the club model still produces 50 to 100 times the productivity per sku than the retail models it competes against—drug stores, supermarkets, discounters and supercenters.

In our book, Greentailing and Other Revolutions in Retailing, we began our discussion reviewing historic revolutions in retail, ranging from the birth of the supercenter to the advent of the Internet. And, there was certainly a prominent place in that discussion of the contributions of Sol Price and clubs. In an era of so much sameness, the real innovators tend to stick out. Sol Price was one of the true icons of modern retailing.

Monday, November 23, 2009

Big Book R.I.P.

With JC Penney’s recent announcement that they will no longer publish a big book (their large general merchandise catalog), it effectively ends the lifecycle of a business that ushered in modern day retailing in the United States as we know it.

Back in the late 19th Century, Montgomery Ward began the mail order business in Chicago, IL (a major rail and water hub perfectly positioned to serve the established East Coast markets and the emerging West). Along with Sears, Roebuck and Spiegel, mail order boomed through the first half of the 20th Century, bringing goods to customers in remote areas and effectively ushering in modern consumerism in the United States.

Post WWII, as Americans began to cluster in closer to the cities (the development of the suburb) and with brick and mortar retailing greatly expanding (the simultaneous development of the modern day shopping mall), mail order began its gradual, inexorable path to extinction. This was particularly true for the big books of Sears and Montgomery Ward that also relied on their stores or catalog stores for product pick up and return (and we think multi-channel retailing is a new invention…). But, for millions of Americans, the arrival of the big catalog provided an incredible window into the all of the products that could be available.

By the 80’s, the general merchandise catalogers reached further obsolescence, as specialty catalogs and specialty retailers proved to be more nimble and cost effective than the cumbersome books. One by one, the big books fell, and often their companies with it—Montgomery Ward and Spiegel both disappeared and Sears shut down catalog operations.

Ironically, JC Penney who was late to the catalog game (they entered through acquisition in the 60’s) also survived the longest. Catalog remained a multi-billion business for them in the late 1990’s. Most importantly, they hung on long enough to effectively bridge the gap into the modern day era of e-commerce. As the Internet began to boom in the late 90’s, JC Penney had the infrastructure and name to become an instantly formidable player in e-commerce as other companies struggled to quickly ramp up capability.

Unquestionable, as catalog retailing changed the retail landscape in the early 20th Century, e-commerce is having the same effect on the 21st century.
Even though this obit could have been written fifteen years ago, we’re going to miss those big books and that link to a form of retailing that brings back a flood of nostalgia.

In our most recent book, Greentailing and Other Revolutions in Retailing, we discuss this very theme. As mail order fades, e-commerce takes it place. Has the modern day department store been rendered irrelevant by specialty and discount stores? Will Amazon make book superstores obsolete? And most importantly, what’s around the corner that will one day threaten Amazon?

Monday, October 5, 2009

Taking Private Label Public

One of the few bright spots in retail has been the explosive growth of private label during this current recession. While private label has also grown during non-recessionary periods, the double digit increases of late has brought overall share to historic highs in the U.S. Individual chains, like Kroger, report that private label share is now in the high 20’s as a percent to sales and nearly 35% of units.

Of course, private label growth has been coming at the expense of national brands, with private label growing faster than brands in most categories. For retailers, the trade-off between lower average selling prices and higher margin is one they seem willing to make. In fact, many have begun to take the battle for private labels very public, beginning to compare both quality and price to the brands:

•Major re-launches for private brands that have occurred this year include the massive packaging re-design and reformulation of Wal-Mart’s Great Value brand, which is the largest single private label brand in the U.S. Target also chose to replace its iconic “bulls eye” packaging in personal care and households products with the Up & Up brand, which is finding its way onto shelves now.

•Stepped up media efforts include companies like HEB, Loblaws and Safeway running dedicated spots for their private brand programs. In the case of Safeway, brands such as Eating Right and O Organics are being sold outside to other retailers (shades of Loblaw’s Presidents Choice from years ago).

We have also seen more guerilla-marketing driven efforts appear of late, sometimes in seemingly unlikely places:

The first evidence comes in the form of an old supermarket trick—the shopping cart comparison. In the old days, of course, the cart would be used to compare Store A against Store B and show how much cheaper they are. Now, we see a diverse group of retailers performing the same comparison, using private label and national brands. The photo to the right is Costco, which shows a whopping $116 savings on a $442 basket, nearly 30%. The fact that this is placed prominently at the front, after walking through a display of exclusively private label products makes the impact that much more powerful.

This picture is Safeway, which is offering a $44 savings, or over 35%, in their basket against national brands. They have also been aggressively marketing the quality of their private label with in-store POP materials.

What happens when you don’t have national brands in your store? Trader Joe’s goes back to the tried and true of comparing against another retailer.

This time, Trader Joe’s compares their basket of private label against Dominick’s (Safeway), as you can see from the image on the left.

In fairness to Safeway, they were only 40% cheaper (great merchants, lousy mathematicians…)

We did something similar last month. As part of a larger pricing study, we looked how private label prices compared across retailers. Now, we acknowledge that this isn’t the way a consumer shops (they compare private label to a national brand at the shelf) but we did think it would be interesting to see who has the lowest prices on private label, period. In a basket with 10 private label items (they can’t be called identical because they aren’t brands and are not the same), Aldi was 25% lower than Wal-Mart and nearly 80% lower than the two leader Chicago area grocers—Jewel and Dominick’s.

Finally, Consumer Reports recently weighed in, asserting that a number of private label products did as well or better than the brands in their tests.

As private label becomes more mainstream, it puts pressure on the retailers to deliver products that deliver on the promise and national brand manufacturers to fight back with real innovation while ensuring that the value remains.

One thing is certain—the battle of private label versus national brand has been elevated to a very public status.

Thursday, August 27, 2009

Has Retail Gone on Permanent Sale?

A few weeks ago, we attended (code for "shopped" and "did our part to stimulate the economy") Nordstrom’s famous semi-annual sale. The premise has always been a novel one—put in-fashion and current season goods on sale now, before they are put on regular (and higher) prices post sale. A great way to get a jump on the season and we know of many customers who circle the date on their calendar to buy for the year. It has also traditionally enabled Nordstrom to avoid the massive price cutting and clearance that occurs at most retailers towards the end of the season. And, while there have been precious few winners in the retail space of late, Nordstrom has been able to maintain decent margins even as their sales have consistently averaged down double digits over the past six months.

Our experience with the Nordstrom semi-annual sale this year yielded two critical observations:

• The average retail price point has gone down. Besides the products that were on sale, everyday priced items from well known brands were at seemingly lower price points than in the past.

• This would seem to mean one of two things: Nordstrom is taking a lower initial mark-up on items in order to be more value priced, and perhaps avoid taking clearance at the end. Or, manufacturers are developing product at lower price points from the outset. Perhaps they are settling for less or maybe slightly de-specing the goods. Or, of course, a little of both.

Either way, it means that customers will have access to lower priced products earlier in the season. On the downside, it means retailers like Nordstrom will need to sell more pieces to keep up, which has been a constant issue in apparel retailing for the last decade as access to lower priced manufacturing has driven price deflation.

We also look at this in the context of some other trends we note of late:

• The advent of private sales at luxury goods retailers has created the notion of a secret sale within the store. The sales can be targeted via direct mail to their better consumers or through a “wink-wink” system in-store.

• The growth of on-line purveyors like the Gilt Groupe (which is worth its own blog) has made access to luxury goods on sale an everyday phenomenon. There seems to be a growing list of manufacturers who will supply goods through the on-line channel.

It is clear that retailers are going to have alter their approach to business in many fundamental ways if they hope to get a piece of what continues to be a dramatically reduced pie. Pricing strategies and pricing integrity will play a crucial role in the future. While we can admire Abercrombie’s steadfast refusal to discount, it is also fairly evident that they are falling on a mighty big sword (with comps down a staggering 30%). It is not at all clear that their customer base will come back even as they have maintained brand integrity.

Has retail gone on permanent sale or will we see pricing recover along with the economy?

Your thoughts?

Monday, June 22, 2009

Eddie Bauer Files Chapter 11; Ruehl to Shut Down

“…every new beginning comes from some other beginning’s end” -- Closing Time

At first glance, these stories don’t seem to share too much in common other than being the latest casualties in a brutal recession. While retail sales have been hit hard in general, apparel retailers have taken an even greater toll -- perhaps the biggest surprise is that we haven’t seen more bankruptcies and closures. Behind the curtains, though, both have lessons to tell, not entirely related to the recession.

For Eddie Bauer, this filing almost seemed inevitable. After emerging from the Spiegel bankruptcy in 2005, the company has struggled to regain its prominence as a specialty apparel retailer. With Spiegel, the company grew far too fast and lost direction, moving away from its outdoor performance roots towards casual apparel. As an independent company, it experienced further bumps along the way, moving too far fashion forward at times, then perhaps too conservatively as it struggled to regain its way. The company lost focus and its soul along the way.

With full disclosure, we had the opportunity to work with Eddie Bauer around two years ago, helping the management team craft an interim strategy. With Neil Fiske’s arrival, he developed a direction that simultaneously invoked the company’s (and its persona, Eddie Bauer) strong outdoors heritage while also attempting to move it forward as well. What the company couldn’t afford was this current economic downturn. Executing a turnaround with razor thin margin for error isn’t easy (and nearly impossible) in trying times.

What is particularly encouraging about this particular Chapter 11 announcement is that it stands in marked contrast to other high profile filings recently. Rather than simply disappear from the retail landscape (think Linens ‘n Things, Circuit City, Sharper Image and a host of others), Eddie Bauer may actually emerge as a significantly stronger company that has a full opportunity to regain its prominence. While Chapter 11 is never a good thing (particularly for all current company stakeholders), in this instance, new proposed ownership is in place with some interesting stipulations: while there is still conflicting stories about how many stores will close—from none to up to a third, expect a significant number—the opportunity to get out of bad leases is too attractive to pass up in a filing.

More significant, however, is the private equity firm’s stated intention to finance this deal in cash, which would allow a re-emerged Eddie Bauer not to be crippled by debt, which was the cause of many a highly leveraged company’s collapse in prior times.

Though details are few and much still needs to be approved, we take this as a very positive sign of what re-constituted retail companies might look like in the future. Eddie Bauer still has a long way to go…but it begins with solid assets of real brand equity and an eponymous founder who doesn’t need any embellishments on his legend. We think the company now has a real shot to emerge as a multi-channel model for retailers in the future.

Ruehl, which announced it is shutting down its 29 stores at the end of the year, represents one of the few brand stumbles for its parent Abercrombie & Fitch. They are masters of brand building, creating their namesake brand from the ruins of a stodgy hunting brand, turning it into a hip brand for teens. They did it again with the development of the Hollister brand, bringing the same sophistication to the surfwear look. When it came time to develop Ruehl, their track record certainly suggested success. We first covered Ruehl in Retail Watch of December of 2004 (time flies in the retail world). Now, after five years, they seem to be throwing in the towel.

While Abercrombie knows how to build brands, our big concern for Ruehl (and Gilly Hicks which is their other developmental brand) is that brand building at Abercrombie is becoming too formulaic: the mysterious store front, the brand back story, the dimly lit store (we needed coal miners’ hats to see), the expensive merchandise and the beautiful but less than helpful staff…can easily describe any or all of their formats. In the case of Ruehl, the brand story takes us to Greenwich Village and a uber-hip townhome. The store was so hip that it disguised itself as a store, a novel idea but not exactly welcoming. Once in, the product never really distinguished itself from the flagship brand, and didn’t justify the more premium pricing. We actually think they were making progress during our many visits but apparently the brand was destined not to move much past a niche. We suspect we will continue to see the Ruehl brand exist (perhaps as a premium sub-brand for leather goods) within the A &F family.

We think the larger issue for retailers right now is how much they will be able to continue the push for format diversification, which was all the rage in better times. For Abercrombie, their insistence to resist discounting and maintain brand integrity is noble but is also leading to staggering sales decreases, as they now have recorded eight straight months of -20% or more comp store sales numbers. They are tightening the ship, and Ruehl may be the first casualty. We have higher hopes still for Gilly Hicks (with 15 stores) given that it goes after a different segment than Ruehl. But, perhaps the tried and true brand formula needs tweaking?

What is the lesson that ties Eddie Bauer and Ruehl together? While their paths and history are very divergent, clarity of brand positioning for the consumer emerges as a paramount theme. Eddie Bauer had a solid brand at one time, then let time and competition slowly erode it. For all of its promise, Ruehl never really founds its niche. While a well-positioned brand may not entirely protect a company in trying times, it certainly represents the foundation for long-term survival.

Thursday, June 4, 2009

From the country that brought you slow food…slow retail?

During our recent trip to Italy, we stumbled across a retail marketing idea that really made us think. And, given the current retail climate, any retail promotional idea deserves an opportunity. Italy brought us the slow food movement, rebelling against fast food. While it has been slow in building in the U.S. (Alice Waters of Chez Panisse is a big proponent), it does seem to be picking up steam. So, if we have slow food what about slow retail?

At the Freddy store we studied while visiting stores in Milan, Italy (did we mention this was tough work?), we stumbled across their campaign offering a “slow movement of shopping”. The idea is basically as follows:

  • The more time you spend in the store, the more money you save. Spend 10 minutes in the store and get 10% off. Twenty minutes, 20% off and 30 minutes, 30% off.

We are intrigued by this idea on several fronts:

  • Data suggests that there is a correlation between time spent in retail stores and money spent. The more time, the more money.

  • Given the promotional thrust of most retailing today, it may just be another, more creative way to market a discount.

  • But (and a giant one…), that time needs to be productive time for the customer. If it is time spent finding a parking space, finding an item or waiting in line to check-out, it can quickly become a negative.

As creative promotions go, this one makes you think. Besides the logistical difficulties of actually tracking time spent, there is something compelling about a retailer who encourages customers to really understand their offer.

In the case of Freddy, this really does seem to make sense. We would kind of liken them to the Lululemon of Italy. They specialize in what they call the art of movement, creating stylish clothing for yoga, ballet and active pursuits. They were the official sponsor of the Italian Olympic team in Beijing as well as the upcoming Vancouver winter Olympics. Like Lululemon, it does take more time to explain technical product and there is a passion for what they sell that does encourage more time spent in the store.

How slow retailing gets balanced against our fast-paced lifestyles is the real challenge. Our research indicates that customers have been shopping less stores and spending less time while shopping. But, there are certainly experiential retailers that would seem to buck the trend.

What’s your point of view? Besides the inevitable slew of Italian jokes—and yes, we can attest that it almost impossible to get anything done in Italy in less than 30 minutes…is there merit in encouraging customers to spend more time in the stores?

Monday, January 19, 2009

Three’s Definitely A Crowd—Perhaps Two Is As Well

Nearly a decade ago, we published a somewhat controversial article entitled Three’s A Crowd. The simple premise—the retail world was getting cluttered with too many also-ran retailers and that it was getting increasingly difficult to survive if you had the third, fourth or fifth market share in a particular category.

Come 2009, this premise seems wistfully nostalgic. While we were prescient at the time, it is now obvious that only the top retailers in a category will survive. But, the last six months brings an even scarier premise—what if there’s not even room for two? The very high profile bankruptcies and subsequent liquidations of Circuit City and Linen’s & Things are stories of the demise of the number two specialty players in their respective categories. In categories as large as consumer electronics and home furnishings, we are now left with just one (albeit sizable) specialist. Kay Bee Toys is now also completely defunct leaving us with one standalone toy big box retailer. In book retailing, the troubles at Borders perhaps challenge whether there is still room for two brick and mortar book retailers.

What’s changed? There are two significant factors that appear to be at work outside of a historically dismal economy. The first is that competition has been redefined by the tremendous influence of mass retailing. In just about every category, Wal*Mart and Target wield enormous influence and market share. The second key factor is the Internet, which offers customers instant access to dozens of choices. While market share may not be huge yet in any given category (books are a notable exception), it is growing fast and absorbing demand.

We are about to enter a period of significant closures and consolidations as retail spending contracts and we work our way through an excess of retail stores. Survival needs to be foremost in any retailers minds. But, at a minimum retailers need to think now, more than ever, of creating innovative strategies that are not simply trying to copy the competition. The ultimate failure of Circuit and Linens had much to do with the inability to carve out unique space relative to Best Buy and Bed, Bath & Beyond.