Trends: Strategic Thinking
Investors want retailers to grow. Period. End of discussion. Grow or investors will dump your stock and find another company willing to do what is necessary to grow.
“Wall Street pressure to increase the pace of growth is leading retailers to develop endless streams of new concepts and to roll them out fast,” said Andy Graiser, co-president of DJM Realty, a real estate disposition company with offices in Melville, N.Y., Los Angeles, Chicago and Boston. “I have never seen so many store concepts hitting the market at one time.”
In response to pressure from investors, retail executives also continue to probe, question and reformulate store site-selection and asset-management strategies by tapping into increasingly sophisticated marketing information about who buys what and where those buyers live. Retail market consultants today not only tell retailers what their customers want to buy, they can even figure out how far they will drive to buy it. Ever more sophisticated software systems can ferret out dense pockets of customers and speed the process of opening multiple stores, sometimes across dozens of individual markets.
Start With the Customer, Not the Shopping Center
“The scientific way to open stores is to find the customers first, and then to think about store design and asset management,” said Tom Buxton, president and CEO of Fort Worth, Texas-based Buxton, a market-research and site-selection consultant.
While many retailers would insist that they always search out customers first, Buxton believes it’s more common for retailers to put stores in new shopping centers on the recommendations of local brokers. That’s not scientific enough for Buxton. “You have to find a dense population of customers who buy your products and locate in the center of that population,” he said. “If you do that, you can’t help but succeed. We recently worked with a retailer that opened over 500 locations in a year. We found the customers and then the sites, and every store was a success.”
Who was that? Buxton won’t say.
He will discuss how his firm finds customers. “We buy data,” he said. “There are 111 million households in the U.S., and we have proprietary data on 500 million households. That means we’ve looked at every household in America five times. We can tell you which people in those households buy which products in retail’s 89,000 product categories.”
Real Estate as a Revenue Engine
“The retail industry has shifted from emphasizing same-store growth with modest store expansion, to much higher levels of expansion,” observed Peter West, VP of marketing with Accruent, Inc., in Santa Monica, Calif. “That has made real estate the revenue engine behind retail growth today.”
Take Family Dollar Stores in Charlotte, N.C. With 7,000 stores, Family Dollar adds 600 to 700 stores per year to its roster, a task that requires finding and evaluating 2,000 sites.
Accruent’s Real Estate Performance Management enterprise software manages this kind of high-speed retail expansion. Components of the software manage different stages of the real estate life cycle: from market planning and site selection, through construction and grand opening, to lease administration, maintenance and disposition.
The practical result is to tie internal and external real estate teams into effective partnerships. “At Family Dollar, for example, about 250 employees work in the real estate organization in finance, construction and maintenance,” West said. “They deal with about 1,000 people outside the company—architects, contractors, brokers, attorneys and service providers. Our enterprise software automates the process of moving the right information to the right people so that people have the information they need when they need it.”
Second-Generation Stores and Swift Market Penetration
The pace of retail store growth has outrun shopping center development, said Graiser of DJM Realty. As a result, retailers have had to develop skills in buying second-generation space—space already used by another retailer.
“What makes this strategy important to retail real estate departments is the possibility of finding packages that penetrate markets fast,” Graiser said. “Instead of taking a second-generation store here and there, retailers can buy into markets that might have taken years to develop in the past.”
For example, Graiser points to Office Depot’s acquisition of many Kids “R” Us locations. “With these acquisitions, Office Depot penetrated a number of markets all at once,” he said.
In addition, by opening several stores in the same region all at once, it becomes possible to spread marketing and distribution costs over all the stores instead of dumping them onto one store.
Why isn’t this done more often? “Many retailers think that you have to buy entire portfolios of second-generation stores,” Graiser explained. “But you don’t. You can bring in disposition companies to help dispose of the stores you don’t want. You can bring in a co-investor and split the portfolio between you. What you really have to do is think creatively about exit strategies for the stores in the portfolio that you don’t want.”
Retailers have begun to go beyond demographics into psychographics when building out new stores, said Rick Davis, CEO of Dallas-based DAVACO, Inc., a firm that manages high-volume rollouts, retrofits and new-store construction.
The focus on psychographics informs DAVACO’s approach to site selection, store design and build-out by considering the attitudes, values, lifestyles and tastes of the individual markets around the country.
“We partner with retail clients to gain greater insight into the psychographics of markets,” continued Davis. “After site selection, we can design, build and merchandise stores that appeal to the psychographics of the customers who will shop this store. It is a proven method for replicating a retailer’s best stores.”
DAVACO has taken this concept national, with more than 600 employees located coast to coast in more than 100 major cities. Drawing on its far-flung national network, the company has managed rollouts and retrofits touching as few as a couple of dozen stores and as many as several thousand stores.
Just like Graiser, West and Buxton, Davis ties his company’s approach to retail markets to the key need that’s driving retailers today: the need to grow.
“In the end,” said Davis, “our strategies have taken shape in response to the attention that Wall Street focuses on the financial results of publicly held retailers.”
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.”