Can Uniqlo Succeed in the US?

Uniqlo, a division of Fast Retailing, is the largest apparel retailer in Asia.   Headquartered in Japan, Uniqlo (pronounced You-nee-klo) actually manufactures a majority of its clothes in China.   Known for its affordable bright-colored basic, the company aspires to be the largest apparel retailer in the world.  However, Uniqlo has encountered challenges expanding into Europe and the United States.   The firm opened a number of stores in the UK a decade ago, but then had to close many of them a few years later.  Still today, it has not been able to match the dominant home-grown rivals in Europe: Zara and H&M.   In the United States, Uniqlo operates seven flagship stores (3 in Manhattan, 3 in surrounding communities, and 1 in San Francisco).   The firm plans to open 10 more stores in the United States this fall.  However, Business Week recently noted that Uniqlo's July earnings report noted underwhelming performance in the US operations.  

What's the challenge for Uniqlo?   Clearly, cracking the already crowded casual apparel market in the US will be difficult for any new player.   Many companies jockey to attract budget-conscious young consumers interested in fashionable apparel.   Promotions and discounts are rampant, making it hard to sustain gross margins.  Moreover, young consumers prove incredibly fickle at times; today's high-flying retailer can quickly become yesterday's news.  

Uniqlo may be facing another challenge though.  It may not have a clear brand identity.  In this article for Racked.com, Kerry Folan argues that Uniqlo has not quite decided what it wants to be: a fashion brand such as Zara or H&M, a "blue jeans and basics" company such as the Gap, or a performance/technology apparel player such as Under Armour or even Lululemon.  The company has had incredible success with performance apparel actually, though many know it for the affordable and bright casual basics stacked to the ceiling at its flagship stores. For instance, the company's Heattech apparel has sold over 100 million units.  Heattech apparel actually helps to warm you up and keep you that way if you are outdoors on a cold day. 

Many Americans do not know much about Uniqlo.  I would concur with Kerry Folan's assessment.  The firm needs to establish a clear brand identity if it is to succeed in the United States.  Zara has excelled by entering the US with a clear positioning as a "fast fashion follower" with reasonably affordable price points.  Uniqlo must make some clear and perhaps difficult choices.  It would help if they clarified that brand identity before the next wave of new store openings, many in high rent urban locations. 

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Buy Online, Pick Up in Store - A Surprising Result for Retailers?

Many retailers now offer an option known as Buy Online, Pick Up in Store (BOPS).   What impact does that have on sales?  A new study by Kellogg's Antonio Moreno and Dartmouth's Santiago Gallino has uncovered a surprising result.    They studied one year of data from a housewares retailer with more than 80 locations in the US and Canada.   The scholars compared the behavior of individuals who had the BOPS option with those that did not (either because they lived far from one of the retailer's locations, or because they lived in Canada, where the retailer did not offer the BOPS option).  What did they find?  Online sales actually fell at the stores offering the BOPS option!  However, revenues overall rose for the retailer.  What happened and why? 

In this article on Kellogg Insight, Moreno explains, "We started thinking about what in the operations literature could possibly explain this behavior of people going more to the stores after this option was available, and that was when we came up with the idea of reliability of inventory information."  When customers shopped online, the BOPS system enabled them to see if items were in stock at that moment at a local store.  Knowing that, many of them simply went to the store to check out the item firsthand before committing to the purchase.  BOPS gave them a line of sight into inventory and item availability that they did not have in the past.   

As evidence of this effect, scholars found that many online shoppers were abandoning online shopping carts with items in them.  They had investigated, in other words, but not completed the purchase.  Yet, revenues at brick-and-mortar locations rose, suggesting that many shoppers then visited the stores and completed a purchase.  Moreno notes, "The most surprising thing to me was that online sales went down when the customers were given more options.  If you’re a customer and were planning to buy online, now you have even more reasons to [do so], because now you could buy online and pick up in the store.  We thought it would make the online channel more attractive, but what happened was that it led to this shift towards brick-and-mortar stores, which is a good thing for the company."  

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Starbucks, Price Decreases, & Game Theory

Business Week has an interesting article about the recent decision by Starbucks to cut prices on its coffee sold in grocery stores by $1 per bag.  According to the article, "Last quarter the company collected about $380 million from sales outside its cafés at an operating margin of 25.5 percent. At that level, the coffee empire is making a profit of about $2.55 per bag. Take away $1 per, and Starbucks would have to sell 65 percent more bags to book the same amount of profit." 

Wow... could Starbucks really generate that many more sales to make up for the lost margin?  Unlikely.   The article tries to offer another explanation, citing Columbia Professor Rita McGrath.   Here's an excerpt:

It’s not clear Starbucks will sway that many customers quickly. But the company could be betting on widening income inequality—what academics call “the hourglass economy.” The theory is: Major retail growth has been—and will continue to be—at the low and the high ends of the socioeconomic scale. Starbucks already has plenty of $6 barista-brewed drinks to capture the top of that market, but a bag of $10 coffee is very much in the middle, according to Rita McGrath, a professor at Columbia Business School.

I respect McGrath's work a great deal.  She's a terrific strategy scholar.   However, I don't understand this point.  How is cutting the price of a bag from $10 to $9 enabling Starbucks to tackle the "low end of the market"?   That's some view of the low end!  The article continues by citing the fact that lower-end rivals such as Maxwell House, Folgers, and Dunkin' Donuts have cut prices this year as costs of coffee beans have fallen significantly.  Here's another excerpt:

And here’s where a little game theory comes into play...By committing to lower prices (and not using coupons or sales), Starbucks is sending a signal, McGrath says. It’s serious about the low end of the market; Dunkin’ Donuts, Folgers, and other competitors can either trim their margins further or give up volume. Either way, they lose. So does Starbucks, at least in the near term. But with savvy hedging and customers lining up for expensive lattes—including increasing crowds in China—it can stand the pain for a while. And it is betting it is more efficient than its competitors. As McGrath says: “If you can run economically enough to make money at the lower price, you’re simply taking money out of your competitors’ pockets.”

Again, I'm not sure that I understand or agree completely.    If Starbucks was clearly the low-cost competitor, I might understand this explanation.  It would be using its scale economies and cost efficiencies to attack its higher cost rivals.  However, do we really believe Starbucks is the low-cost player in this market?  That seems unlikely.   Perhaps another explanation is that, after Dunkin' and others cut prices this year, the gap between Starbucks and its lower-priced rivals became too large.  Starbucks' differentiated, high quality product could justify higher prices, but not that much higher.  The gap in price had simply exceeded the difference in perceived value (or willingness-to-pay) between Starbucks and other coffee rivals in the grocery aisle.  If it didn't address that issue, it would have ceded a great deal of volume to competitors.  Differentiated players always have to be careful that their price premium doesn't grow too high, exceeding the excess value that customers perceive in their product vs. rivals' products. 

If Starbucks, on the other hand, is truly just going for share at the low-end of the market, then I don't understand the logic of the strategy.  Why would a differentiated player cut its margins and try to compete directly with low-cost players?   Why compromise its premium positioning?  I don't think Starbucks is doing that... I don't see them getting into a price war in the grocery aisle just to inflict pain on their rivals.  The coffee industry is an attractive one, particularly at the higher end of the market.  Why would a market leader spoil that market by triggering an unnecessary price war?  That would be bad strategy. 

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Ron Johnson: The Heat is On

The pressure continues to escalate on J.C. Penney CEO Ron Johnson.   In this week's New Yorker, James Surowiecki writes about the struggling retailer (thank you, James, for the shout-out).   Meanwhile, on CNBC, former J.C. Penney CEO Allen Questrom speaks out about the situation.

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Ron Johnson's Three Mistakes at JC Penney

The turnaround at JC Penney has definitely not transpired as CEO Ron Johnson expected.   Sales have plummeted, the firm has reported huge losses, and the company's cash position has deteriorated.  Johnson came on board just a short time ago to much fanfare.  He enjoyed a successful career at Target, and then he had launched Apple's retail stores with Steve Jobs.   He came to JC Penney with high hopes of engineering a major turnaround.   He announced a major new pricing strategy and plans for changes in the layout/design of the stores.  Customers didn't flock to his stores; they fled.   The stock has taken a beating lately.

What went wrong?  I think Johnson made three major mistakes:

1.  He changed the pricing strategy BEFORE changing the merchandising strategy.   He wanted to move toward an everyday low pricing strategy, and away from constant discounting.  However, he needed to change the merchandising and store design strategies FIRST before he could try to do away with promotions and discounting.  Johnson needed to create a different shopping experience, and then having done that, he could have perhaps persuaded customers to shop without waiting for discounts and sales.

2.  He did not manage expectations well.    He was hired with great fanfare.  He talked  boldly of a new strategy for the retailer.  Perhaps he should have remembered the old adage:  under-promise and over-deliver.  

3.  He didn't recognize the difficultly involved when trying to change ingrained habits.    His customers were very accustomed to shopping in a certain way.   Asking them to shop in an entirely different manner, almost overnight, would be too much of a shock.   At the same time, he didn't have the new merchandising strategy in place that might attract different customers to his stores.   Habits die hard.   The firm learned a hard lesson there.

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Is The End Drawing Near for Sears?

The Wall Street Journal reports today that Edward Lampert, whose hedge fund ESL Investments Inc. controls over 50% of Sears' shares, will be taking over as the CEO of the company.   Lampert merged Sears and K-Mart several years ago, and he has been Chairman of the company since that time.  He succeeds a former IBM executive who ran the company for the past two years.  Before that, Sears had an interim CEO for three years.   Hmmm... That's a pretty long period of instability at the top, and now we will be continuing with a person at the helm who lacks retail industry experience.   Can Lampert turn this ship around, or is it too late?

Same-store sales have decreased for six straight years.  Sear lost $441 million through the end of the third quarter, and it expects to lose roughly $300 million in this quarter. Concerns have been raised about liquidity at Sears.  The firm is clearly in rough shape.

What should they do now?   I think Sears really has to think long and hard about what assets it has that are truly valuable and distinctive.  It's future must rest on building around those assets.   What is valuable and distinctive?  Craftsman and Kenmore appear to fit the bill.  Perhaps Lands End does as well.  After that, it's not clear that the firm has a future.  So, if I were thinking about the future strategy, I would be thinking about those three brands, rather than trying to preserve the entire traditional department store business.  Maybe the future is in small stores and/or an online retail presence that just sell Craftsman, Kenmore, and related brands, with Lands End sold off to another clothing catalog retailer.  For certain, the future does not seem to bright for the traditional brick-and-mortar business that they have been trying to preserve for years, amidst a clear and tragic decline. 

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Struggles at Build-a-Bear

The Wall Street Journal reports that Build-A-Bear, the once high-growth retailer, has begun a search for a successor to founder and CEO Maxine Clark.  The company has struggled recently, even closing some locations.   What happened to this retailer, which had been growing rapidly and profitably several years ago?

Build-A-Bear offered a unique retail concept.  It truly provided an "experience" for the customer, not just a set of products.  In that sense, it should have been insulated a bit from the pressures that other children's toy retailers faced from internet retailers such as Amazon.  However, I think Build-A-Bear's growth strategy had some weaknesses that are not uncommon in retail.  First, it grew very rapidly, opening stores in malls throughout the nation.  However, the appeal of Build-A-Bear was, in part, because it was a destination.  You don't go to such a store on numerous repeat occasions.  You go rather infrequently - special occasions mostly, like birthdays and holidays.  When you have so many stores, it's hard to support them all given that you don't have customers coming back again and again each month.

Second, Build-A-Bear didn't innovate enough with regard to the store experience.  Children did not see or do unique things over the years; they were doing precisely what they had been doing on prior occasions.  That inability to innovate the experience meant that repeat visits were increasingly unlikely.

Third, the tie-ins to movies such as Smurfs are great; they produce a surge in sales.  However, you have to pay royalties on those products, and then you face the challenge of continuing to grow revenues after those movie promotions have ended. 

Finally, the company didn't generate enough of a powerful razor-and-blades business model to truly drive the type of profitability that they hoped to achieve. Compare them to American Girl.  In that case, young girls play with those dolls often, and they come back to the stores, catalog, or online store to buy new accessories, clothing, and other products that can be used with the dolls.   Build-A-Bear did not have that type of powerful razor-and-blades model.  Yes, kids bought outfits for the bears when they made the bear.  However, children didn't tend to come back often to buy other accessories.  Bears aren't like dolls, after all, in that they aren't played with repeatedly in the same way.  

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Retailers, Black Friday, & A Prisoner's Dilemma

We've certainly heard a great deal over the past few days about the controversy surrounding the decision by many retailers to open on Thanksgiving evening.   Regardless of where you stand on that issue, you should ask yourself:  Are these retailers actually generating incremental sales and profits by opening at 8pm on Thanksgiving or at midnight, as opposed to early on the morning of Black Friday?   Perhaps they are, but I suspect that they are simply shifting sales which otherwise would have occurred on Black Friday or thereafter.   People aren't buying more items overall this Christmas; they are simply buying them a bit sooner as a result of the Thanksgiving day openings. 

Why are firms pursuing these policies if they are unlikely to drive incremental sales and profit?  I think it's because the retailers are caught in a prisoner's dilemma.  If they all chose to wait and open on Black Friday at 6:00am, they would be better off as a whole.  However, each retailer is worried that it will lose out if it remains closed while rivals open on Thanksgiving night.  Therefore, each retailer opens up earlier and earlier, for fear of ceding sales to rivals. 

How can firms extricate themselves from this losing proposition?  Well, the retailers cannot legally collude to shift openings back to Black Friday morning.  However, they can try to achieve some form of tacit collusion, or they can try to influence and signal to one another in a way that leads to cooperative behavior for the greater good.  Typically, such cooperation emerges if you have a strong market leader who can influence the behavior of smaller rivals.  Could Wal-Mart serve that function?   It seems unlikely, because even though they are enormous, rivals would probably jump at the opportunity to steal sales from them.  That's why we probably will see this trend of early openings continue, though it may not be enlarging retailer profits by much at all. 

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Retailers, Showrooming, and Mobile Apps

Keith Anderson of RetailNet, a leading retail market research firm, tweeted an interesting story today about Wal-Mart's mobile app.   We all know that brick-and-mortar retailers have been fighting a growing "showrooming" trend - the notion that consumers visit stores to see, touch, and interact with a product, but then purchase on-line from an e-commerce company such as Amazon.   Retailers have been working hard on strategies to counter that threat.  Wal-Mart recently updated its app to improve the "Store Mode" element.   That aspect of the mobile app tries to help consumers navigate the store to find what they desire.  The "Store Mode" includes the local advertising circular, a shopping list function, maps of the store layout, and a QR code scanner.   What is interesting about the results to date for this updated app?  According to this article, Wal-Mart reports  that, "12% of its m-commerce sales occur while customers are in stores, showing that consumers are using their smartphones to buy from Wal-Mart what Wal-Mart does not have in stock, or perhaps purchase an item they don’t feel like carrying home, like a big-screen TV."   In sum, a strong mobile app may help protect against the tendency for consumers to drift toward Amazon or another online player for their purchases.

We all know that many retailer apps left a great deal to be desired over the past few years.  However, they have been improving.  Retailers have added functionality that does help consumers navigate the stores more easily and much, much more.  For instance, take this initiative at Nieman Marcus, described in this article on springwise.com:

The US luxury retail store is now trialling its NM Service app, which provides sales associates with consumer data they can act upon in real time. Developed by Signature Labs Inc, the app can be downloaded for free from the App Store. Customers can then select to “opt-in” to participate in the service, and a sensor at a Neiman Marcus store will detect when they walk through the door and launch the app. NM Service will provide information on new products and future events taking place at the outlet, as well as listing the sales staff currently instore. Those sales assistants can also have a version of the app tailored to them, alerting them when a participating customer enters the store. Sales assistants will also be presented with information on the customer’s previous purchases at Neiman Marcus outlets and their online shopping history, and the app will display an image from the customer’s Facebook page so that they can be easily identified. Both customers and sales associates are able to send messages to each other.

These two examples stand at opposite ends of the spectrum: Wal-mart is the classic low-cost player, while Nieman Marcus is a highly differentiated luxury retailer.  However, these examples demonstrate that mobile strategies can be used not only to protect against the disruptive threat of online commerce, but also to enhance the in-store shopping experience.  People still enjoy visiting brick-and-mortar stores to see, feel, and try on items.  If retailers can enhance that visit and provide customers the information they want when they want it, they can compete more effectively not only against online players, but also against their direct brick and mortar rivals. 

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JC Penney vs. Zara: How to Reduce Markdowns

Frequent markdowns can eat into a retailer's margins quite substantially.  No wonder, then, that Ron Johnson - the CEO of JC Penney has tried to wean the department store off of its reliance on discounts and sales.  We all know, however, that he has had limited success to date.  In fact, sales have plummeted as customers have revolted at the dramatic reduction in sales and markdowns. 

Let's compare JC Penney to Zara for a moment.  Zara is a Spanish apparel retailer that has done remarkably well over the past decade or so.   Zara manages to offer fewer markdowns than many rivals, and when it does discount its clothing, they price reductions are smaller than those offered by competitors.  How does Zara do it?  They pursue a "fast fashion" strategy, whereby they make smaller batches of fashion items - a substantial percentage of which they make in their own factories.  They change their product mix often, and they react quickly to changing trends and consumer tastes.  Customers know that many lines of clothing will have limited numbers of items, and that those items may not be on the shelf one month later.  As a result of this nimble strategy, Zara minimizes the downside of "fashion misses" in their product line.  Because they don't produce huge runs of some of these items, they have much less inventory left over if a new product is not a hit with consumers.  Therefore, they have less of a need to mark down those clothes.  

In short, Zara has reduced its dependency on markdowns, but they have not done it simply by declaring that there will be less discounts.  They have built an entire strategy that makes it much less likely that they will need to discount items.  JC Penney hasn't yet built that comprehensive strategy to support its  new pricing policy.  As a result, JC Penney has struggled. 

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See's Candies Moves East

This week Fortune features an article about the planned eastward expansion of See's Candies.  For folks on the west coast, you are quite familiar with the See's chocolate shops and airport kiosks that sell fresh delicious chocolates.  The company does not have any shops east of the Mississippi though.  That will change over the next few years, according to plans described in the article.  The company, owned by Warren Buffett for the past forty years, aims to expand with up to 30 new stores in the eastern part of the United States in upcoming years. 

The See's expansion offers some interesting challenges.  First, the company will have to introduce themselves to those on the east coast and deal with existing luxury chocolate brands such as Godiva that have a significant share in that region.  Second, the supply chain will be a challenge.  The chocolates do not have preservatives.  Thus, they have a short shelf life.  The company will need a factory close to its east coast locations.  Third, the firm must expand its appeal young mothers, according to its new head of marketing, Tracy Cioffi.  She notes, "We can't focus on great-grandma anymore." 

As I read the article, I kept thinking that the company could learn a great deal from another highly successful California retailer that expanded eastward after many years of focusing on the west coast.  That company would be Trader Joe's.  The firms have much in common:  fiercely loyal customers, longtime employees who enjoy working there, strong profits, and a reputation for quality products.   Trader Joe's found success on the east coast through a careful and methodical expansion strategy, rather than rushing to open tons of new stores all at west.  It appears that See's will do the same.  The article mentions that See's uses pop-up stores to test new locations before committing to a new store.  That makes a great deal of sense too. 

Still, the company will face challenges.  On the west coast, the firm generates a great deal of revenue through on-line and phone orders.  The stores help build the brand, and they encourage people to try the product.  Yet, the company depends on on-line sales to achieve strong profitability.  It will need to do the same on the east coast, but without the long-time customers who know the firm well and have been ordering particular chocolates by phone or on-line for years.

One final note: I learned in the article that Lucille Ball trained at See's plant for her famous chocolate factory scene on the hit show, I Love Lucy.  Here's that classic clip:

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Taking Best Buy Private

The Wall Street Journal reports this morning on Best Buy founder and ex-Chairman Richard Schulze's plans for the struggling electronics retailer.  As you probably know, Schulze hopes to take the company private.  The paper reports that Schulze "envisions a turnaround plan for the electronics retailer that involves cutting prices to better compete against Amazon and other online retailers while ensuring that the in-store customer-service experience is as good as Apple's according to people familiar with the matter."   Naturally, such a plan to lower prices, while not reducing costs aggressively, will shrink profit margins.

We need to know much more about this turnaround plan before being able to evaluate its prospects thoroughly. However, this initial news has not put investors and analysts at ease (understandably).   The Wall Street Journal cites skepticism from Sanford Bernstein's retail analyst Colin McGranahan, who says, "As long as the top line is slowing you have to cut costs at a similar rate or your cash flow starts to suffer." 

Beyond the simple math problem cited by McGranahan, the strategy may be flawed.  Schulze appears to be trying to compete on price, while offering a premium experience a la Apple.  However, we know that Apple achieves that premium experience by spending generously on branding, training, design, and the like.  There is no free lunch.    They make up for higher costs in some areas by charging premium prices.   Schulze appears to want that premium experience, but if he doesn't get strong pricing, how will he generate decent profits?  The risk here is clear.  Could Best Buy end up stuck in the middle?   They might not have the cost structure to compete with Amazon, nor the premium image and experience to compete effectively with Apple. 

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Stumbles at JC Penney

As we all know by now, Ron Johnson's first moves at JC Penney have not gone smoothly (to say the least).  He put forth a bold new pricing strategy that left customers befuddled, and those consumers simply stopped shopping at his stores.  Sales dropped sharply, sending the stock tumbling.   Now the company has announced a shift in pricing strategy.  They've made it simpler.  The firm will cut prices across the board, while moving to a two-tiered pricing structure:  EDLP on most items, with sharp discounts on clearance items. 

Many people have criticized Johnson's pricing maneuvers.  Rather than focusing on the CONTENT of his pricing strategy, I'd like to comment on the TIMING of his moves.  According to the Wall Street Journal, Johnson's longer term strategy for the retailer is to focus on creating a "department store full of vendor-branded and themed boutiques." The company launched its first such boutique yesterday in Manhattan - a jeans boutique featuring Levi's, Arizona, and iJeans by Buffalo.   My question is this:  Wouldn't it have been more effective to launch the boutiques FIRST and then move to a new pricing structure?   Didn't the firm need to get the store layout and experience improved FIRST and then try to wean customers off of constant discounts?   I think the timing issue, in a way, is a more interesting strategic question than the issue of precisely how JC Penney should price its items. 

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Supermarkets Losing Market Share

The Wall Street Journal reported that supermarkets are losing market share in the United States.  Traditional supermarkets -  such as Jewel, Stop & Shop, or Albertson's - accounted for nearly 2/3 of all grocery sales in the nation a decade ago.  Today, those supermarkets generate only 51% of all grocery sales.  Where have the grocery shoppers gone?   Mass merchandisers (Target and Wal-Mart), Pharmacies (CVS, Walgreen's), and warehouse clubs (BJ's, Costco, and Sam's Club) have all taken a bite out of that pie.   Target, for instance, recognized that food may not be very profitable, but it generates traffic.  When people come to the store more often, they buy other higher margin items.   Traditional supermarkets are also feeling their profits squeezed because many are "caught in the middle" between premium players like Whole Foods and hard discounters such as Aldi or Dollar General. 

Interestingly, I read another article in the Wall Street Journal recently about Target collaborating with Neiman Marcus on some special designer collections to be sold in both chains.  It is a unique collaboration.  Target, of course, is pursuing this type of strategy because they continue to try to seek unique items for their stores.  They don't want to simply be selling the same items that you can find at Kohl's, Wal-Mart, etc.   That makes a ton of sense.  However, that triggered a thought in my mind... why don't more supermarkets pursue such strategies?  Why aren't more traditional supermarkets trying to create unique product lines that can't be found elsewhere.  A few players have done this successfully (think Trader Joe's and Whole Foods).  However, the mainstream supermarkets don't do this much at all.   They ought to be doing that, because otherwise all they are doing is competing on price.  The struggles recently at firms such as Supervalu show that price competition can be deadly. 

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Making the Novel Seem Familiar

I've just finished reading New York Times journalist Charles Duhigg's new book, The Power of Habit.  I enjoyed it a great deal (full disclosure: Charles was my student 10 years ago at Harvard Business School).   Duhigg has a terrific chapter focusing on the predictive analytics function at many corporations, including Target.  Many of you probably read an excerpt from the book which appeared in the New York Times.  That excerpt discussed how Target tried to determine which female shoppers were pregnant so as to begin marketing key products to them before their babies were born.  As we all know, predictive analytics has become a crucial area of focus for many companies.  They can't seem to find enough talented folks who can mine data, conduct sophisticated analyses, and distill key insights.  

Duhigg makes a key point though.  Simply identifying people who are likely to want to purchase your product is not enough.  You have to entice them by "making the novel seem familiar."   It turns out that we are more likely to adopt a new habit if the behavior seems familiar to us.  Duhigg uses the example of a new song.  We tend to listen to music that has some key similarities to music heard often on the radio.   We tend not to listen to dramatically different songs.  Thus, radio stations sandwich such new songs between two tunes that are very familiar.  That tactic entices us to give that new song a shot.  Similarly, Target doesn't just come right out and bombard those pregnant women with a ton of ads and coupons for baby products.  They have come to realize that these women may not want retailers to know that they are pregnant, or they might be alarmed that a company could have figured this out.  Thus, retailers sandwich such targeted marketing between ads and coupons for other products unrelated to pregnancy and children.  They make the novel seem familiar.  It turns out that this tactic often works when it comes to getting us to adopt new habits, in life and in business.

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Bed Bath & Beyond Acquires Cost Plus

Bed Bath & Beyond has announced the acquisition of Cost Plus, a specialty food and home furnishings discounter. At first glance, one might wonder why a firm facing increasing competition from online players such as Amazon would double down in brick and mortar stores. Let's take a closer look. First, I find it interesting that the two firms were working together a bit over the past two years. Bed Bath & Beyond had opened several in-store Cost Plus shops in the past few years. It seems like a very good strategy to date a bit before getting married. More firms should pursue this strategy before major mergers. One might ask, though, why they needed to merge if they were working together effectively through a strategic partnership. That's a tough question to answer from the outside, but perhaps there are additional forms of cooperation that could not occur efficiently without a merger. Let's hope so. Finally, Bed Bath and Beyond seems particularly interested in Cost Plus because it mainly sells unique food products tht cannot be found at other retailers. It seems that thy view the proprietary product line, particularly in food items, as protection against online rivals such as Amazon. This move to proprietary items is a major trend tht will continue as retailers fight the "showrooming" threat.

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The Shops at Target

As we all know, mass merchandisers and department stores face stiff competition these days.  Online retailers continue to disrupt the brick-and-mortar retailers.  Moreover, many of these firms face intense price competition with their rivals, and they sell many items at steep discounts.  For years, Target has fought to differentiate itself, to do more than just sell the same goods others do.  They have tried to avoid direct price competition on some items, by selling exclusive designs and premium private label products not found at other retailers.  Now, they have launched Shops at Target - an interesting innovation in the mass merchandiser industry.  According to the company,

Through this ongoing program, Target will partner directly with the shop owners of specialty stores and boutiques to co-create affordable, limited-edition collections for its guests.  The first flight of The Shops at Target features five exclusive collections from five U.S. specialty stores: The Candy Store, Cos Bar, Polka Dog Bakery, Privet House and The Webster.

The innovation here is that Target is NOT partnering with well-known designers in these situations.  They are partnering with small, independent specialty shops.   In so doing, they avoid the competition to sign up those well-known designers, while also offering something even more unique and off-beat.   After all, other retailers have raced to sign up designers for exclusive collections, imitating Target's strategy.  As that has happened, the expense associated with this "arms race" has become quite high.  This strategy tries to find a way to move beyond that arms race.

 The limited-edition nature of the collections seems intended to drive traffic too - "Come now to see what's here, because it won't be here for long."   As we know, increasing frequency of trips is crucial for retailers.  When a shopper comes more often, they tend to buy other items perhaps not on their list.  In the end, the question will be:  Will shoppers pay premium prices for these products, and will Target be able to avoid deep discounting associated with slower-moving items in these collections? 

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Growth Lessons from Gilt Groupe Co-Founders

Alexis Maybank and Alexandra Wilkis-Wilson are the co-founders of Gilt Groupe, a company that specializes in online sales of luxury apparel at discount prices.  Maybank and Wilkis-Wilson described to Forbes why they have been so successful.  At first glance, they seem remarkably similar.  They even look alike!  However, the two co-founders argue that their differences make them stronger.  However, it's not just that they have different strengths, but that their abilities and personalities are quite complementary.  One plus one equals three, if you will.   Here's an excerpt from the Forbes article.  A short video is below as well.

“It’s very much like discovering your latter-day stunt double,” Maybank says of finding the right cofounder. Wilkis-Wilson is detail-oriented, a task-master who keeps everything running according to schedule, while Maybank is a self-described “big picture thinker” who is referred to throughout the new book, out in stores this week, as the “impulsive” one. “Our differences haven’t just made us a much stronger team but they’ve allowed us to see what we’re missing and who [else] we need to bring around us as part of our founding team.”

The story, though, is not as simple as selecting a partner who is different than you.  You definitely need someone who shares the same passion for a particular product, technology, or business model.  Both co-founders need to care deeply about what they are doing.   They have to be passionate about the broader purpose of the enterprise.  Moreover, they have be able to communicate well with one another.  In this case, the training at Harvard gave them a common language system that certainly facilitated their communications with one another.  Finally, both parties have to share a similar work ethic and willingness to carry their share of the load. Once you have those foundations in place, then the complementary strengths can become a huge asset. Without that foundation, though, simply finding someone with complementary skills won't lead to success.

 

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How To Anger Your Best Customers

Have you ever become angry when you paid full price for an item, and then learned that the company had put that item on sale shortly after your purchased it?   We have all been there.   Now scholars have examined the long term effects of such deep discounting. 

Kellogg School of Management Professor Eric T. Anderson and MIT Professor Duncan I. Simester conducted a study to examine whether such deep discounting angered customers, particularly the company's best customers.  Beyond creating anger, they wanted to know if that negative emotional reaction affected long term sales.  Here's what the researchers did, according to Kellogg Insights:

"Anderson and Simester worked with a retailer that specialized in selling durable goods, like software, electronics, apparel, or books. In the past, the retailer had typically kept prices high but frequently offered small discounts and the occasional deep discount. Anderson and Simester worked with them to create test catalogs to determine whether and which customers would be antagonized by price changes. (Most of the retailer’s customers purchased via catalog at the time of the study.) The two types of test catalog were mailed according to the regular schedule and included 86 products, 36 of which were discounted by varying amounts depending on which test catalog people received. The deep-discount version offered the 36 items at an average of 62 percent off, while the shallow-discount version offered an average discount of 34 percent."

The scholars studied customers who paid full price for items and then received a catalog offering steep discounts.  “When you look at this segment of customers, what you see is that a substantial portion just stop buying,” Anderson said. “We call this the boycott effect.”   Customers offered the steep discounts placed substantially fewer new orders than those people who were offered smaller discounts!  Customers who received the steep discount catalog placed 14.8%  fewer subsequent orders than those who received the shallow-discount version. Moreover, many people who were offered subsequent deep discounts simply ordered nothing at all in the months that followed.   It turns out the "boycott effect" lasted for awhile.   The scholars found that customers who reacted poorly to the steep discounts tended to buy less items from that retailer for the next twenty months! 

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Transformation at J.C. Penney

Laura Heller has written an article about the transformation taking place at J.C. Penney.  Heller's article, which can be found at Forbes.com, describes the firm as "the most interesting retailer of 2012."  As you probably know, the company recently hired Ron Johnson, the former leader of Apple's retail stores.  As CEO, Johnson has set out to remake J.C. Penney, and he's hired some talented folks to help him (including a senior executive from Target, where Johnson worked prior to Apple).   

So far, Johnson's team has redesigned the logo, hired a new spokesperson, invested in Martha Stewart's company and launched a design partnership with Nanette Lepore.  Perhaps most significantly, the company is overhauling its pricing strategy in a dramatic way, and it's redesigning the in-store experience.  The company will be reducing prices significantly on many basics, relying less on weekly sales, and keeping prices at the same level for a month at a time on many items.  It's not quite everyday low pricing (EDLP), but it's a shift away from the usual high-low pricing strategy that many retailers employ.   In terms of the in-store experience, the firm will be introducing many "stores within a store" - with each mini-store associated with a key brand.  Heller rightfully points out that it will be fun to watch these changes unfold, and to see if they succeed.

What's clear to me is that the department store format is crying out for re-invention.  Whether or not these changes all succeed, Johnson is right to try rethinking the department store concept.   In a world of massive discounting, outlet store malls in every state, and rapid e-commerce growth, department stores have to change their approach.  It will take more than a new store experience though.  The firm will have to offer exclusive products as well, so as to avoid pure head-to-head competition with rivals.  Moreover, it will have to define itself clearly vis a vis its rivals.  For years, the company's positioning and target market has been a bit  murky.   That will have to change too. 

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