Extracting Retail Dollars
American Eagle Outfitters operates 833 stores in 50 states. With 925 women’s specialty U.S. stores under the Chico’s, White House/Black Market, Soma by Chico’s and Fitigues names, Chico’s has more stores than American Eagle. Pacific Sunwear has even more stores than that: 852 Pac Suns, plus 116 Pac Sun outlets. Then there is Gap with 1,199 U.S. stores. Corporate Gap also operates 949 Old Navy stores and 495 Banana Republics.
How many stores can a premier lifestyle retailer open in the same or overlapping markets without cannibalizing itself? How do retailers that have tapped all or at least the lion’s share of the retail markets in the country continue growing?
“Theoretically, once an upscale, lifestyle retailer opens 600 to 650 stores, it may begin to consider its mall market mature,” said one VP of real estate for a growing soft-goods specialty retailer with several hundred U.S. stores. “At that point, a retailer may begin to look at other formats—like lifestyle centers—for growth. Often, the retailer’s trade areas will begin to overlap with its existing mall stores,” said the retailer, who asked not to be identified.
Other options, of course, include inventing new store concepts that can market a new position.
Even though retailers such as Chico’s and Gap have developed additional store names, all of their brands seem perilously close to, if not wildly beyond, the 600- to 650-store limit theorized by the retail real estate executive.
How can some retailers get away with this? Who can? Who can’t?
“It depends on the retailer,” said Robert Draizen, managing director with Robert K. Futterman [RKF] & Associates, a New York City-based broker specializing in retail. “One of my clients, a furniture retailer, looks for the critical junction in a trade area. Then it’s one store and done.”
Another RKF client—Solstice, a high-end sunglasses retailer—might do multiple locations within a 10-mile ring, continued Draizen. “For Solstice, it is all about people seeing the brand and the sunglass concepts in the store,” he said.
Chief among the deciding factors for Solstice is the availability of a high-end mall or lifestyle center in the market with co-tenants such as Ann Taylor and Chico’s. “It’s a case-by-case decision, but I can see doing two centers like this within one trade area,” Draizen said.
As senior VP of retail services with the Bannockburn, Ill., offices of CB Richard Ellis, Jim Sakanich represents both Chico’s and White House/Black Market and knows their approach to markets.
When presented with a new store opportunity, said Sakanich, both Chico’s and White House/Black Market will evaluate the stores they already have in the market or nearby. Next, they will develop a sales model that takes into account other tenants going into the project and the market demographics. Then they factor in cannibalization: how much business a new store here would take from existing stores in the area. Using that estimate, the model computes net new sales for the new store. Finally, the retailers judge whether or not the net new sales number justifies the expense of the new store.
“Suppose the average annual sales for a store in the chain totals $2 million,” Sakanich said. “Say the research estimate comes in at $3 million. The cannibalization estimate might reduce that to $2.5 million. You would open that store. If the number comes back a little under the chain average, you would have to think about it. If the estimate is well below the average sales figure, you won’t do it.”
In other words, retailers will sometimes double up in markets if their market models indicate that another store can extract additional dollars from the market at a reasonable cost.
Weekly Retail Fix
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.
Weekly Retail Fix
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.”