News

Delivering Infrastructure

BY Connie Robbins Gentry

As a general rule, the distribution network of most bricks-and-mortar retailers calls for each distribution center (DC) to serve a significant number of stores. In many cases, large national chains have a handful of strategically located DCs, each serving hundreds of stores.

IKEA, the Swedish retailer that has won the hearts and pocketbooks of American consumers, is building a distribution network that stands in stark contrast to the norm. With 29 stores currently open in the United States, one might expect IKEA to operate one, possibly two, DCs. Instead, the retailer’s 40 North American stores are served by six DCs, with a seventh opening this summer in Savannah, Ga., and another under way in Tacoma, Wash.

Recently, the company announced plans to build yet another DC, this one in Joliet, Ill., dedicated to servicing the retailer’s growing Midwestern presence. In addition to two stores in the Chicago area, IKEA has stores in Canton, Mich., and Bloomington, Minn., and is contemplating how it might serve future locations in Denver, St. Louis and Kansas City—markets that are particularly well-suited to the IKEA objective of targeting trade areas with expansive drawing power.

TARGET Expanding Food Distribution

Target Corp. is constructing a new food distribution center (DC) in Lakeland, Fla. Opening in late summer 2008, this is Target’s first company-owned DC dedicated to perishable foods. Frozen, refrigerated and fresh foods will be processed at this DC, which will serve Target locations throughout the Southeast.

The Lakeland DC will be operated in partnership with Minneapolis-based SuperValu, which Target partnered with previously to distribute perishable foods throughout the Southwest. (In addition to the approximately 2,500 stores in its retail portfolio, SuperValu provides supply chain services to more than 5,000 retail locations.) In its prepared statement, Target said the company would open additional food DCs over the next several years.

However, the Joliet DC has the potential of serving a dual role. In addition to providing inventory to the Midwestern IKEA stores, this location may also become a pivotal connection point for shipments between East and West Coast stores.

“Typically we need a critical mass of four to five stores to warrant opening a DC, and our fifth Midwestern store is opening in Cincinnati,” explained IKEA spokesman Joseph Roth. “The Joliet DC is in a great location to serve our Chicago stores, and it has the added advantage of being in very close proximity to rail connections, which will reduce transportation time and costs.

“We are also building it to facilitate cross-country transportation of goods. If we ever have an issue with ports congestion on either coast, we can shift shipments to the other coast and use the Joliet DC to route the goods across the country.”

Like IKEA’s other DCs, the planned 1.4 million-sq.-ft. Joliet facility is being constructed in phases, with the 650,000-sq.-ft. first phase slated to open early in 2009. Each DC carries IKEA’s full inventory of some 10,000 exclusively designed items, totaling more than 80,000 SKUs. Shipments arrive from all corners of the globe, representing more than 1,300 suppliers in 53 countries.

In another strategically differentiating move that runs counter to the trend for taking manufacturing offshore, IKEA announced in October that its first U.S.-based furniture-manufacturing facility will be located in Danville, Va. The proposed 810,000-sq.-ft. factory is expected to open early in 2008 and will create an estimated 740 jobs.

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Weekly Retail Fix

BY CSA STAFF

THE NEWS: SAM’S REALIGNS STORE-LEVEL MANAGEMENT

BENTONVILLE, ARK. Sam’s Club is changing the management structure in its stores. In the realignment, approximately 250 positions will be eliminated, Wal-Mart Stores announced last week. The company said it’s replacing five lower level management positions at each Sam’s Club location with three new higher level and higher paying assistant manager positions.

“This is not a cost cutting effort. We expect a slight increase in payroll upon completion of this change,” said Sharon Orlopp, senior vp of Sam’s people division.

THE FIX: Differentiation would better help Sam’s

Since Sam’s decided that its refocus on the business customer was too narrow, it has sought to find ways to make its clubs more attractive to primary shoppers, i.e., women. And that’s a pretty tough row to hoe, as Costco has done a pretty good job at satisfying the club customer in general and BJ’s has been going after female shoppers for several years now, with some success.

Having fewer managers with more direct responsibility could create a tighter knit club-level management and shorten lines of responsibility and accountability. Yet, without differentiating the offering, execution isn’t going to overcome all of Sam’s challenges.

That being said, a store-level management realignment might be overlooked at other retailers, but, this being Wal-Mart, everyone has to make a big deal about it. But that’s the price you pay as the big guy on the block.

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Weekly Retail Fix

BY CSA STAFF

THE NEWS: TOYS ‘R’ US EARNINGS GAIN 40.1%

WAYNE, N.J. Toys “R” Us today posted net earnings of $199 million for its critical fourth quarter, which meant it turned a profit for the fiscal year ended Feb. 3. But special charges and gains had an impact on its numbers.

Sales for the previous fiscal annum were $142 million, the difference translating into a net earnings increase of 40.1% year over year. For the last fiscal year, Toys “R” Us posted net earnings of $85 million versus a net loss of $384 million for the previous period.

Operating earnings in the fiscal 2006 fourth quarter gained 53.1% to $571 million versus $373 million for the fourth quarter of fiscal 2005. For the last fiscal year, operating earnings were $649 million versus an operating loss of $142 million for the previous period.

THE FIX: Improved shopper experience ups comps

Of course, any observer has to take into consideration special financial circumstances. Fiscal 2006 operating earnings were positively impacted by $96 million from gains on property sales, slightly offset by restructuring and other charges. In fiscal 2005, operating earnings were negatively impacted by $410 million in costs relating to the merger of the company, as well as $58 million of costs and charges relating to contract settlement fees, restructuring and other charges.

Still, sales were trending up at last year’s end. Net sales gained 15.8% to $5.7 billion. In the full fiscal year, net sales advanced to $13 billion, up 15.2%.

Comparable-store sales for the Toys “R” Us’ U.S. division gained 0.6% in fiscal 2006, and that represents the division’s first comps increase in six years. Comps at Babies “R” Us were up 4.8% and those at Toys “R” Us international were up 2.6% for the fiscal year.

Jerry Storch, chairman and ceo of Toys “R” Us, said the company is “pleased with the strides we made in fiscal 2006 to improve at all levels of the organization and reposition the company for profitable growth over the long term.”

He said the company’s new management team has been focusing on executing a strategy that would turn the retailer into a global toy and baby products authority.

“This translated into higher overall sales, positive comparable-store sales, improved gross margins and strong operating earnings growth for the 2006 fiscal year,” Storch asserted. “The key to our strategy has been improving the customer shopping experience in our stores. We are accomplishing this by delivering a more compelling merchandise selection, better service and a cleaner and more comfortable shopping environment.”

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