News

Private equity could ramp up ROI by emphasizing brands, customers

BY CSA STAFF

By Todd Maute, [email protected]

Back in March, Bloomberg ran a story headlined, “Private Equity’s $36 Billion Retail Bet Not Going So Well.” In a nutshell, this piece catalogued how investment firms like Bain Capital had poured large amounts of money into brick-and-mortar chains in the run-up to the recession, only to be met with lackluster results.

“The private-equity model — load up an acquisition with debt, cut costs and take it public — hasn’t gone according to the usual script with most of Bain’s retail acquisitions … Of the eight largest retail private-equity buyouts during [the pre-recession] period, only Dollar General Corp., a chain of discount stores acquired by KKR & Co., has gone public,” the story noted.

And to be sure, specialty retail category killers like Toys “R” Us, Sports Authority, Petco, and Guitar Center do indeed face some killer competition from Amazon and other Internet retailers. The collapse of disposable income that occurred in the wake of the financial meltdown only made things worse for brick-and-mortar stores, because harried shoppers quickly realized they could save both gas money and time by shopping online instead of driving out to the mall or the local retail strip.

And yet there happens to be more to this story.

Examine some of the more successful investments in retail by private equity firms and you will find they often share something in common — namely, a sharp focus on the customer and the brand.

This is actually a departure from the norm, because private-equity’s usual model for investing in retail tends to be mostly a backend affair. These savvy firms certainly employ some of the best in the business when it comes to ramping up efficiencies and reaping the benefits of scale. But while customers might feel the beneficial effects of these backend changes in their pocketbooks, they do not feel them in their hearts. After all, these changes are all about saving money by scrutinizing headcount, systems, real estate, warehouses, the supply chain and the like.

But what happens when PE firms focus on both the backend and the customer side of the business? The story of New York City pharmacy chain Duane Reade helps illustrate the potential upside of such a comprehensive approach. As you might remember, PE firm Oak Hill Capital sank millions of dollars into Duane Reade after acquiring the chain and eventually launched a major push to burnish the brand and remake the customer experience inside its well-located stores. The effort entailed, to name a few, the rollout of new store designs with wider aisles and hip, appealing décor and signage; shopper-friendly changes to the pharmacy (where the intimidatingly high counters were lowered amid a revamp of the overall look and feel); the introduction of store-within-store prestige beauty counters and, in select locations, features like beer growlers, sushi counters and frozen yogurt machines; and the launch of a host of high-quality private-label brands such as DR Delish.

When Walgreen Co. moved to acquire Duane Reade in 2010, the deal gave Oak Hill a return of about 1.5 times its approximate $400 million investment in the pharmacy chain. Given that just a few short years prior to this, New York consumers almost universally gave Duane Reade’s customer experience a thumbs down (or worse, depending on their mood) this was a remarkable success.

These kinds of strategies involve a broader view of what constitutes an asset on the balance sheet, a tacit realization that brands can be every bit as valuable as real property. Indeed, Oak Hill arguably transformed the chain’s nameplate from something approaching a liability to an asset admired by both consumers and retail insiders alike. Today, in fact, Walgreens is rolling out Duane Reade’s brighter, more relevant store brands across its portfolio.

Dollar General’s story is similar. Acquired by KKR in 2007 (right as the U.S. economy was about to go into free fall), the chain needed some work on the customer side, and KKR rose to the task. Among other changes, it moved to make the stores “fresh, bright and clean” and rebranded them with shiny yellow carts and baskets, as well as signage that made shoppers feel smarter and savvier for spending their money in a value-retail format. Much like Duane Reade’s revamp, this effort included revamped store formats, wider aisles, speedier checkout and new offerings, along with a raft of profit-boosting, private-label brands that were predictably popular with Dollar General’s throngs of bargain-hunters.

The result? Dollar General’s November 2009 IPO was the biggest of its kind in nearly 14 years.

The moral of such stories is clear: By shifting their focus to the customer-facing side even as they ramp up efficiencies on the backend, PE firms can put themselves in a better position with respect to the eventual ROI. This is even more important now that we have entered the age of Amazon, eBay and the commerce-enabled smartphone. In fact, the trend toward omnichannel retail, which so heavily emphasizes the importance of a uniform approach to customer service and the customer experience regardless of whether you’re selling online or in the store, means that retailers everywhere are working hard on being more precise about the customer-facing side of the business. Chains that neglect this do so at their peril, whether controlled by private equity or not. Indeed, market surveys show that shoppers now rank the customer experience as the No. 1 factor that determines whether they will be loyal to a particular brand.

The customer-facing side of the business is neither a static nor an inconsequential part of this puzzle. Rather, retail brands should be viewed as strategic assets with potentially every bit as much value as, say, machinery and equipment, real estate or inventory. If that sounds like an exaggeration, imagine what the IP of a brand like Coca Cola would fetch on the open market. Likewise, some would point to the manifold threats now facing brick-and-mortar retail. These are certainly real and worth contemplating, but most of us feel in our gut that retail stores will always be around in some form or fashion. Rather than defining retail as a potential “bad bet,” in other words, PE firms could instead focus on holistic approaches to these investments. Bargain-hunters get a rush by finding a good deal in a pleasant and easy-to-shop store. Likewise, savvy PE firms, by focusing as much on brands and customer as they do on the systemic side of things, stand a good chance of emerging from retail deals with hefty returns — and winning smiles.

Todd Maute is a partner at branding agency and retail design consultancy CBX. He can be contacted at [email protected]. CBX continues to work with Duane Reade on its private label, store design and other branding initiatives. The firm has not been involved with Dollar General.


More Web Exclusives/Guest Commentaries

keyboard_arrow_downCOMMENTS

Leave a Reply

No comments found

Polls

Consumer confidence is high. Is that reflected in your stores’ revenues?

View Results

Loading ... Loading ...
News

Perry Ellis International launches golf apparel e-commerce site

BY CSA STAFF

Perry Ellis International has launched a new e-commerce site dedicated to selling Callaway Golf Apparel. The callawayapparel.com site offers U.S. and Canadian customers a fully-branded, state-of-the-art online shopping experience, and will be available throughout Latin America by mid-November.

"Callaway continues to be a leading premium performance golf brand worldwide and this e-commerce initiative provides yet another way to market the brand at every touch point, developing cutting-edge systems for engagement and customer satisfaction," commented Oscar Feldenkreis, president & COO of Perry Ellis International.

The e-commerce site will also include behind-the-scenes videos, style and golf tips, social media outreach initiatives, as well as a full collection of men’s and women’s shirts, pants, shorts, outerwear, rain gear and belts for sports enthusiasts, golfers and non-golfers alike.

Callaway apparel can also be purchased at major retailers and green grass distributors, including Belk, Bloomingdale’s, Dillard’s, Golfsmith, Nordstrom and Rochester Big & Tall, as well as major golf resorts including Pebble Beach, La Costa, Troon North and Disney Golf Shops.

"We are excited to continue strengthening our partnership with Perry Ellis International," stated Mark Leposky, SVP of global operations for Callaway. "They are leaders in the golf apparel industry and we have utmost confidence that this new dotcom initiative will be successful and mutually profitable for both our companies. We look forward to seeing it unveiled."

Perry Ellis International is a leading designer, distributor and licensor of a broad line of men’s and women’s apparel, accessories and fragrances, as well as select children’s apparel. The company’s collection of dress and casual shirts, golf sportswear, sweaters, dress pants, casual pants and shorts, jeans wear, active wear, dresses and men’s and women’s swimwear is available through all major levels of retail distribution.

The company, through its wholly owned subsidiaries, owns a portfolio of national and international brands, including: Perry Ellis, Jantzen, Laundry by Shelli Segal, C&C California, Rafaella, Cubavera, Ben Hogan, Centro, Munsingwear, Savane, Original Penguin by Munsingwear, Grand Slam, Natural Issue, Pro Player, the Havanera Co., Gotcha, MCD, John Henry, Mondo di Marco, Redsand, Manhattan, Axist, Farah, Anchor Blue, Miller’s Outpost, Tahoe River Outfitters, Original Khaki Company and Techworks. The company also licenses trademarks from third parties, including Nike and Jag for swimwear, and Callaway, PGA TOUR and Champions Tour for golf apparel.

keyboard_arrow_downCOMMENTS

Leave a Reply

No comments found

Polls

Consumer confidence is high. Is that reflected in your stores’ revenues?

View Results

Loading ... Loading ...
News

Shoppers’ spending intentions contradict NRF holiday forecast

BY CSA STAFF

Shoppers responding to a recent National Retail Federation survey said they expect to spend slightly less this holiday season in contrast to an earlier economic forecast by the trade group which indicated spending during November and December would rise by 3.9%.

The discrepancy between the two figures relates to the manner in which the information was collected coupled with the fact that shoppers’ stated intentions often differ materially from their actual behavior. Even though the recent survey of shoppers shows a 2% decline in average spending per person the 3.9% growth figure for the November and December timeframe is still valid because economic conditions are far from the levels seen in 2009 when sales actually declined.

“Though the foundation for solid holiday season growth exists, Americans are questioning the stability of our economy, our government and their own finances,” said NRF president and CEO Matthew Shay. “We expect consumers to set a modest budget for gifts and other holiday related purchases as they wait and see what will become of the U.S. economy in the coming months.

Average spending per person this holiday season will decline 2% to $737 from $752, according to the survey of 6,415 consumers conducted October 1-8 by Prosper Insights & Analytics. Conversely, an earlier forecast conducted by NRF based on a wide range of data from the U.S. Commerce Department forecast holiday spending, as defined as the months of November and December, would rise 3.9%.

Regardless of whether either number proves accurate, the more recent survey sheds interesting light on the rapidly evolving behaviors of shoppers in the digital world. For example, more than half of survey respondents said they plan to shop online this season with the average person completing about 39.5% — the highest level ever — of their shopping online. NRF’s digital division, Shop.org, is forecasting online sales will grow between 13% and 15% to as much as $82 billion.

A key enabler of the increased digital activity will be mobile devices. The survey showed that more than half (56.3%) of holiday shoppers say they own a smartphone, and more than one-third (34%) own a tablet — both significantly higher than this time last year. Of those who own a smartphone, 53.8% will use their device to look up store hours, compare prices and purchase products while 63% of tablet owners will use their device to shop, compare prices and look up product information.

While the digital shift is undeniable, two key variables with the potential to exert a powerful impact on spending involve the budget impasse in Washington and the steady decline in gas prices.

For the first time, NRF asked holiday shoppers if the political gridlock in Washington around U.S. fiscal concerns would affect their holiday spending plans and about one third said the situation would somewhat or very likely affect their spending plans. When asked specifically about the overall state of the economy and how it would affect their spending plans, more than half of consumers said the economy would in some way impact how they spend this holiday season. Specifically, 79.5% plan to spend less overall, looking to cut corners and tighten budgets where they can, according to the survey.

Of course, personal financial circumstances tend to be the prime determinant of how much an individual spends during the holidays. So with the price of gas falling steadily and some forecasts calling for sub-$3-a-gallon prices soon American consumers could get a meaningful psychological lift just when retailers need it the most.

keyboard_arrow_downCOMMENTS

Leave a Reply

No comments found

Polls

Consumer confidence is high. Is that reflected in your stores’ revenues?

View Results

Loading ... Loading ...