The Robin Report - Issue 1 - October 2010

Issue One October 2010

r e t a i l , f a s h i o n , b e a u t y, c o n s u m e r p r o d u c t s , s t r a t e g i e s , t a c t i c s , c o m m e n t a r y

Welcome to the inaugural issue of the robin report. We are honored to have you on our list of readers and promise to deliver strategic insight to you each month covering the most important and timely events in the marketplace. And, we’re also dedicated to providing a level of relevance to your business that you just won’t find anywhere else, period.

As a part of our mission of being a unique, leading knowledge source, you will find our style sometimes irreverent, acerbic, provocative and on occasion even contentious. And, if we ruffle any feathers, so be it. There are more than enough ho-hum, same-old/same-old news and information sources out there.

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ROBIN REPORTThe

Dear reaDer…

GROWTH “BY A THOUSAND cUTS”So, what’s a retailer to do? If you are Chicken Little and believe the sky will fall again, you will need the staying power to manage the deflation of your business down to some unknown bottom, and in an unknown time frame. If you are a Bluebird of Happiness, and think the worst is over, I suggest you take a couple “downers” to bring you back into reality. Then you will probably be


Q & a W i t h t e r ry l u n D g r e n

Terry Lundgren, Chairman, President and CEO of Macy’s, answers questions about the state of the economy, how Macy’s will deal with it through the Holiday season, the many new initiatives put in place a few years ago and how they are perform-ing, potential new strategies and his vision of Macy’s evolution into the future.

Q: �First�of�all,�with�the�digestion�of�the�May�Co.�acquisition,�and�your�re-positioning�around�the�“My�Macy’s”�strategy�in�early�2008,�it�appears�in�the�first�half�of�this�year�that�Macy’s�is�on�a�positive�growth�trajec-tory�–�and�this�taking�place�during�the�Great�Recession�that�we�are�still�“slogging”�out�of.�Of�the�“My�Macy’s”�initiatives,�which�do�you�believe�to�be�the�one�most�responsible�for�your�growth?�Whose�shares�are�you�captur-ing�and/or�how�much�are�you�increasing�transaction�size?


“ cHIcKEN LITTLE” OR THE “BLUEBIRD OF HAPPINESS?”Is the economy a case of “chickens coming home to roost” to a double-dip recession and a possible deflationary cycle, or a several- year-long “slog” that forces us to accept the fact that slow-to-no growth is our new economic reality, the so-called “new normal”?

In other words, is the sky going to fall (again), as Chicken Little would have it, or are the Bluebirds of Happiness getting it right when they persist in chirping that we’re in recovery mode, albeit a slow one?

But first, how did we get into this mess?


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ROBIN REPORTThe

Copyright © 2010 Robin Lewis, Inc. All rights reserved. Copying or reproducing, by any means whatsoever, of The Robin Report, or any distribution hereof, in whole or in part, without the express written consent of Robin Lewis, Inc. is strictly prohibited. The Robin Report is published monthly for senior executives in the retail, fashion, beauty, consumer products and related industries. The mission of The Robin Report is to provide new strategic insight into major industry and business events. It is intended to be concise for quick reading, provocative to stimulate thought, and humorous for fun and enjoyment. The opinions expressed herein are not, and should not be construed as investment or other advice. All expressions of opinion are subject to change without notice.

ceo, eDitorial Director

Robin Lewis

coo, eDitor

Judith A. Russell

art Directors

Jodi KostelnikSteffi Sauer

contributing columnists

Warren ShoulbergPaco UnderhillDana Wood

collaborative partners

Herbert Mines AssociatesKurt Salmon AssociatesMasterCard Advisors

aDvertising sales anD rate information

[email protected]

ThE ROBIN REPORT220 East 54th Street, Suite 1E

New York, NY 10022Phone 212.750.5405

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i n s i D e t h i s i s s u e

• DEAR READER ……....................1

• “ CHICKEN LITTLE” OR THE “BLUEBIRD OF HAPPINESS?”....…1

• GROWTH “BY A THOUSAND CUTS”.....………………………….1

• Q&A WITH TERRY LUNDGREN…1

• JAPAN’S ILL-TIMED SALES TAx AND DEFLATION ………………. 8

• WHERE IS YOUR NExT CEO?........................... 10Herbert�Mines�Associates

• RETAILERS REvEAL LOCALIzATIONSTRATEGIES…………………….. 11Kurt�Salmon�Associates

• BYE BYE MAD MEN AND THREE MARTINI LUNCHES.……15 Paco�Underhill

• LIGHTS…CAMERA…MIRACLE CREAM! ..............… 16Dana�Wood

• YOU SAY ExCLUSIvE, I SAY ExCLUSION: LET’S NOT CALL THE WHOLE THING OFF…….. 17Warren�Shoulberg

• WHAT, HOW, WHY AND WHERE ARE THEY BUYING?.…18 MasterCard�Advisors�Merchant�Solutions

• QUOTES TO REMEMBER…….. 20

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Ours is stuff we don’t want you to read because you have to, but because you can’t wait for the next issue. Ours is stuff we want you to get “worked up” over.

By the way, we will shortly be alerting you to the launch of our website, with all kinds of bells and whistles, including a treasure trove of knowledge from the archives of our collaborative partners Herbert Mines Associates, KSA (Kurt Salmon Associates) and MasterCard Advisors. Down the road, we’ll be conducting webinars, sending out timely blogs and all sorts of other interesting things. In this out-of-the-starting-gate issue, you will be hit with the two most important things in your business right now: the economy as either “Chicken Little” or the “Bluebird of Happiness” sees it; and, how in the heck are you going to grow in this mess, much less survive. We are suggesting the growth route, but advising to be prepared for the Imperial Chinese torture method of “death by a thousand cuts,” because it’s going to be very slow and very painful indeed. But, don’t despair: we do, in fact have some great ideas for growth. Read it and you might sleep easier tonight. We were also lucky enough in this issue to steal a few minutes of Macy’s Chairman, President and CEO Terry Lundgren’s time to comment on the economy, and how Macy’s will navigate through it both short- and long-term. He also gave us some great insight into some of the major strategies they are pursuing: the “My Macy’s” localization strategy, leasing space to specialty retailers; more private and exclusive brand building; the further integration of their online and offline distribution platforms; and, hints of their potential outlet store and global strategies. Going forward, we intend to have these front page interviews in each issue, with top executives of major companies across all consumer-facing industries. You’ll also find in this issue, as in all future issues, major “nuggets” of knowledge from contributing experts in retailing, branding, specific industry sectors, and consumer behavior, among others. Additionally, there are no greater experts in their field than our collaborative partners, who have offered to contribute articles from their considerable knowledge bases for each issue. Lastly, our “Quotes to Remember” page will stop you

just before your brain gets all jammed up with the great knowledge we’re shoving in there. It will lighten the load, make you laugh, cry, or just plain leave you with a smile on your face. Finally, I want you to know who our Board of Advisors consists of. Yes, to impress you, but, also to thank them for their endorsement of our providing knowledge you cannot get from any other source. We are honored, indeed humbled, to have on our Board: Paul Charron - former CEO Liz Claiborne; Michael Coady – former CEO Fairchild Publications; Neil Cole - CEO Iconix; Jane Elfers - CEO Children’s Place; Don Franceschini - former CEO Sara Lee Apparel; John Fleming - former EvP, Wal-Mart; Joe Gromek - CEO Warnaco; Mindy Grossman - CEO HSN; Ken Hicks - CEO Footlocker; William Lauder - former CEO Estee Lauder; Terry Lundgren - CEO Macy’s; Alexis Maybank – Founder and CEO Gilt Groupe; Mindy Meads – co-CEO Aeropostale; Carol Meyrowitz - CEO TJx; Allen Questrom - former CEO JCP, Federated, Neiman-Marcus, and Barney’s; Judith Russell – Executive Editor, the Apparel Strategist; Steve Sadove – CEO Saks Inc; Denise Seegal, former President and CEO, vF Sportswear Coalition, Burt Tansky - CEO Neiman-Marcus; Mike Ullman - CEO JC Penney; Eric Wiseman – CEO vF Corporation; Tom Wyatt - President Old Navy. And, of course, our four collaborative partners are also on the Board: Herbert Mines Associates; KSA and, MasterCard Advisors.

Have a great read, and see you next month. My very Best Regards,

Robin�Lewis�has�over�forty�years�of�strategic�operating�and�consulting�experience�in�the�retail�and�related��consumer�products�industries.�He�has�held�executive��positions�at�DuPont,�VF�Corporation,�Women’s�Wear��Daily�(WWD),�and�Goldman�Sachs,�among�others,�and��has�consulted�for�Kohl’s�Department�Stores,�and�dozens��of�others.�In�addition�to�his�role�as�Publisher�and�CEO��of�The�Robin�Report,�he�is�a�professor�at�the�Graduate�School�of�Professional�Studies�at�The�Fashion�Institute��of�Technology,�where�he�teaches�the�thesis�of�his�book,��The�New�Rules�of�Retail,�co-authored�with�Michael�Dart,�Partner�and�Managing�Director�at�KSA.�The�book�will�hit�stores�later�this�year.�

Dear reaDer…

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October 2010

ROBIN REPORTThe


> Continued from page 1

A:��My Macy’s is all about localizing our merchandise assortment to the customer’s preferences in each store location. This can mean carrying a different range of product sizes from store to store. Or different brands. Or different colors or fabric weights. It means emphasizing contemporary brands and styles in stores where the customer is more contemporary, while also being more traditional in stores where the customer is more traditional. We really are molding our assortments around the customer. She is at the center of our decisions. As you note, we have been outperforming most of our major competitors. And we’re doing it by having the right product in the right place at the right time for each customer. This sounds so elementary, but it really is a complex process that requires a large amount of human intel-ligence (in our case, a total of 1,600 experienced merchants) based in every local market. We have invested significantly in My Macy’s and we’re seeing the return on that investment. Customers are coming to Macy’s first because they see themselves in our assortments. There is no technology that can tell you what the customer wanted and you didn’t have in stock. Having these experienced merchants in our stores, talking to customers and our best sales associates is the best way to address this opportunity.

Q: How�do�you�view�the�economy�through�the�Holidays?�Do�

you�find�it�as�“unusually�uncertain”�as�Ben�Bernanke�recently�described�the�economy?�And,�if�so,�how�promotional�are�these�last�two�quarters�going�to�be�-�more,�equal�or�less�than�last�year?�And,�how�do�you�manage�your�inventory�in�such�uncertainty?

A: Let me start by noting that we don’t have a crystal ball. We did have a very successful spring season and we have a lot of momentum as we enter the fall season. So we are optimistic. And we think we can be successful in growing sales in 2010 with inventory levels below our growth curve. We are editing our assortments for growth. In particular, My Macy’s gives us the opportunity to reduce a store’s inventory of those goods that do not sell well, even while we are bringing in fresh new receipts of the best-selling goods and those most wanted in a particular store location. We see our promotional levels roughly equivalent to last year. But the key really is to have the right goods for the customer when she walks into a store. We want her to say,” I love this store. Macy’s gets me. This is My Macy’s.” I have consistently said that we do not need our customers to spend more money for us to grow successfully…We just need them to spend more money with us.

Q: �You�recently�appointed�Molly�Langenstein�as�EVP�of�fashion�and�

new�business�development,�including�responsibility�for�procuring�lease�business�opportunities,�to�fill�any�“white�space”�as�Jim�Sluzewski�put�it,�and�referring�to�specialty�businesses,�niche��categories�that�take�a�special�expertise,�(eg.�would�be�your�Sunglass�Hut�and�Motherhood�Maternity�shops).��Could�“white�space”�also�refer�to�less�productive�space?��And,�what�depart-ments�would�those�be�and�what�product�categories�would�be�at�the�top�of�the�list?�Accordingly,�since�department�stores�have�been�losing�share�in�intimates�for�some�time,�how�would�you�view�leasing�space�to�retail�specialty�brands�like�Victoria’s��Secret�and�others?��

A:��First of all, Molly is very talented and she will be very helpful at identifying “white space” opportunities. We define “white space” as gaps in our assortment – product that the customer wants and expects us to carry but that we might not have today. We fill that white space in a variety of ways. We do it through exclusive arrangements with market brands, in which well-known brand names like Tommy Hilfiger, Ellen Tracy, Kenneth Cole Reaction and Sean John are available only at Macy’s, as well as at the designer’s own specialty stores. We do it by partnering with resources to create something bold and new, as we did with Iconix and Madonna on the new Material Girl juniors brand. We do it through great private brands. A good example of that is the new Slade Wilder private brand we launched this fall in young men’s. These two brand launches, Material Girl and Slade, are going after the young consumer who is currently shopping specialty stores in the mall. Fashion and value are key require-ments for this young consumer and we apparently got both right because we have had an incredible response thus far. In other cases, we do it with leased departments in categories that require specialized expertise, as is the case with Sunglass Hut and Motherhood Maternity. Our goal is to have the best fashion brands, great quality and obvious value for our customer at Macy’s. We have various ways to fill white space, which gives us flexibility in how we innovate to satisfy customer demand.

Q:�Conversely,�do�you�see�a�time�when�Macy’s�might�roll�out�retail�specialty�stores�with�your�private�or�exclusive�brands�as�the��nameplates�–�a�chain�of�INC�stores�for�example?�

A:� Right now, specialty stores are not part of our growth plan. We believe we have much greater growth potential by integrating our department stores with online selling – driving store customers online, and online customers to the stores. Building this omni-channel strategy is an important subject for us now and for the foreseeable future.

Q: It�was�reported�in�WWD�that�23%�of�your�merchandise�revenues�come�from�your�exclusive�brands�and�19%�from�your�private�brands.�How�high�do�you�see�both�going?�

A: Frankly, that’s up to the customer. We believe we have significant upside growth potential for both private brands and exclusive brands with market resources. But we don’t have a specific target in mind. The customer will decide. We will never add a designer brand or celebrity line to our assortment just because it’s exclusive. The product must be right and there must be a long-term vision for the brand with both creative and production talent backing up the vision.

Q: Are�you�tracking�the�performance�of�your�“localization”�program?�Do�you�have�any�quantification�that�you�can�share?

A: The measure really is in our comp store sales growth versus our competitors. My Macy’s localization really isn’t a “program” or an “initiative.” It is the way we run our company. We track our comp store sales and compare them to our competitors,

Q & a W i t h t e r ry l u n D g r e n

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none of whom have a systematic approach to localization.

My Macy’s is our sustainable competitive advantage.

Q: As�major�retailers�including�JC�Penney,�Best�Buy,�Wal-Mart�and�your�own�Bloomingdale’s�roll�out�smaller�“neighborhood”�free-standing�stores�to�gain�closer�access�to�their�consumers,�and�also�providing�the�consumer�convenient�access,�do�you�have�a�Macy’s�smaller�store�strategy,�particularly�since�you�are�perfect-ing�“localization?”

A: There really is no such thing as a “typical” Macy’s. We have a handful of stores in the 25,000 to 50,000 square foot range. We have free-standing furniture galleries in the 75,000 square foot range. We have mall stores in the range of 150,000 to 225,000 square feet. We have grand flagship stores with more than a million square feet. And we have a robust e-commerce capability with zero square feet of selling space. The size of a box isn’t the issue. The issue is how you use your assets to deliver what the customer wants.

Q: Speaking�of�“localization,”�what�about�globalization�for�Macy’s�–�where�and�when?

A:��As you know, Bloomingdale’s first international store opened in Dubai this year under a license agreement with a very strong lo-cal partner there. We are learning a lot from that experience. At some point in the future, I expect we will take advantage of other opportunities internationally for both Macy’s and Bloomingdale’s. But for the time being, we’re focused on our existing stores, the Internet, and the omnichannel opportunity.

Q: As�you�know,�many�retailers,�including�your�own�Bloomingdale’s�

are�opening�outlet�stores�for�growth?�Is�there�an�outlet�business�in�Macy’s�future?�

A: Maybe someday. But right now we’re focused on launching this outlet concept at Bloomingdale’s, which we are doing with four stores this fall. Once we have some learnings from the Blooming-dale’s Outlets strategy, we will figure out what’s next on that front.

Q: �And,�how�can�one�call�them�“outlets”�today�when�everybody�is�making�“outlet-only”�merchandise?�Accordingly,�what�impact�is�the�growth�of�off-pricers,�outlets,�value�Internet�players�(eg.�Gilt�Groupe),�as�well�as�all�the�diffusion�or�sub-branding�being�done�by�designer�brands�etc.,�having�on�your�ability�to�launch,�sup-port�and�price�brands?�How�do�you�deal�with�the�challenges�they�present�going�forward?

A: Well, all of these channels were in business during the first half of 2010 and we had wonderful results and captured market share. I think the more a big, well known brand like Macy’s can personalize the shopping experience the better chance you will have at fending off all forms of competition. Regarding Blooming-dale’s Outlets, we will carry a combination of clearance from

Bloomingdale’s stores and online site, as well as merchandise sourced especially for the outlets. We think we can deliver great value with a fashion orientation that’s associated with Bloomingdale’s. At Macy’s, the focus is on strong fashion, great quality and obvious value. Brands are important, and we at Macy’s carry some of the best. But in the end, the product has to be right – on trend and at the right price point. You can’t just slap a brand label on a garment and expect the customer will accept it. The brand has to be genuine, and the goods have to be right. It all comes down to product and people.

Q: Of�your�considerable�initiatives:�localization;�developing�and�growing�private�and�exclusive�brands;�leasing�space�to�compatible�retail�specialists;�marketing�Macy’s�as�a�national�brand;�accelerating�your�pursuit�of�e-commerce�and�elevating��the�shopping�experience;�it�could�be�argued�that�they�are�all�moves�away�from�the�traditional�“department�store”�model��as�we�knew�it�in�the�last�century.�Do�you�agree,�and�as�these�strategies�and�others�evolve,�give�us�your�vision�of�what�the��new�model�and�Macy’s�will�look�like�a�decade�from�now?

A:��The department store was developed, grew and flourished in the United States in the 19th Century because that’s what the customer wanted. Those department stores that have survived the decades did so by keeping pace with customer needs and preferences. We think of Macy’s today as the Great American Department Store because we have kept alive our heritage while also changing for the future. The department store concept gives us a lot of room to adapt. We learn from our customers every day and we must continue to apply those learnings to evolve our business. We must not be afraid of change. We have to embrace it. At Macy’s, that means continuing to innovate, continuing to test new ideas, and continuing to experiment. Macy’s has survived and thrived for 152 years. By adapting to the current demands of our customers, we can be here 152 years from now if we keep the customer at the center of all decisions. Having one National Macy’s brand name with 800+ locations and capturing customer data from experienced merchants and planning execu-tives about local customer product demand is an entirely new business model for any large scale retailer. Bloomingdale’s does this very well also but we only have 41 stores and we are pas-sionate about knowing who our customer is in each location.

Q: What�would�be�your�biggest�challenge�and�impediment�to�achieving�that�vision?�

A: Anything is possible if we continue to attract, develop and retain the best people. Macy’s and Bloomingdale’s are known for hav-ing the best people in retailing at every level. And leveraging this talent is why we are successful today. The talent that fuels My Macy’s is a great case in point. Even with 9% unemployment, there is a war today for the best talent. We have to keep fighting to attract the best and the brightest individuals into the retailing and fashion industries. Macy’s, Inc. is already at or near the top of many of the lists of preferred employers. We cannot become complacent in this regard. Our entire industry must stay focused on our talent needs and do everything we can to attract, retain and grow the best and the brightest. RR

October 2010

ROBIN REPORTThe

“cHIcKEN LITTLE” OR THE “BLUEBIRD OF HAPPINESS?” > Continued from page 1

Well, even though you’ve read or heard a thousand different takes on it, here’s my back of the napkin quickie as context for the rest of the article. It was a result of a toxic combination of what Warren Buffet called Weapons of Mass Destruction, or derivatives leveraged to the moon (sliced and diced by the “masters of the universe,” spreading the risk around the world), along with a borrowing binge by consumers and our government against collateral that didn’t exist, or at most, was over-inflated, all to fuel massive over-consumption. Call it a “house of cards” or a “bubble.” Who cares? One collapsed, the other popped.

Then there was the short-lived ebullience, among many, late last year and into the first quarter of this year, over what seemed to be an emerging recovery. This enthusiasm began to fade, however, in the wake of a lot of negative second quarter economic data and discouraging third quarter forecasts, resulting in uncertainty over where the economy is headed. And uncertainty closes pocketbooks and shuts down business growth investment.

cLOSED POcKETBOOKS AND SIDELINED cAPITALGDP growth has proven to be a weak tailwind for these “birds.” From the robust 5% growth in the last quarter of 2009, with its hint of turnaround, it dropped to 3.7% in the first quarter of 2010, yet still offered hope for a sooner-than-later recovery (see Chart 1). Now second-quarter growth has been revised downward from 2.4% to under 1.6%, as we head into the third quarter, the all-important back-to-school season for retailers. And, while third-quarter GDP was originally estimated to grow by 3.3%, the most recent revisions have it at 2.3%, bringing back the doomsayers, speculating on the possibility of a “double dip” recession and even deflation at worst, or at best, years of clawing our way back to economic health.

Contributing to the weakness in the GDP numbers is that inventory building, after many quarters of reduction during the downturn, represented a substantial 2.8% of the 5% growth in the last quarter of 2009, and 2.6% of the 3.7% GDP in the first quarter of 2010. For the second quarter it is just slightly over .6% of the 1.6% growth. On top of the re-stocking of inventory, which is now likely over, growth was also assisted by federal and state stimulus dollars, which are now being pulled back.

So, as we head into the last half of 2010, the fate of the economy is going to be left in the hands of consumers. And that is not a pretty picture. Unemployment is “sticky” at 9.5%, (see Chart 2). The University of Michigan Consumer Confidence Index is at a very weak 67.8. Housing prices and mortgage values are still under water. The National Association of Home Builders previously expected there would be 467,000 contracts for new home construction this year, but are now projecting 375,000, an almost 20% reduction.

It’s not surprisingly therefore, that consumer spending growth was an anemic 1.4% in the second quarter, down from 1.9% in the first, and is on track to drop to 1.25% in the third. Consumers have been using their excess cash to pay down debt or increase savings. Household savings, on the other hand, increased to 6% of income, up from an average of 5.5% in the last three quarters. Consumer debt has been dropping for 20 consecutive months. Hey, you can’t have a buzzing U.S. economy, or even the beginnings of a recovery, when consumers, whose spending collectively represents 70% of GDP, are squirreling their money away, and worse, not binge-borrowing to support binge-buying.

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JULY 2008 TO JULY 2010


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Speaking of which, spending could actually head further south when one considers the increase in personal bankruptcy filings. According to the American Bankruptcy Institute, personal bankruptcies increased from 598,000 cases in 2006 to over a million in 2008, a 77% increase. The figure is expected to rise to 1.6 million in 2010. Finally, and ironically, businesses are reporting record-breaking earnings. Over two-thirds of the companies in the S&P 500 reported second quarter earnings that were at least 40% higher than a year ago, though sales were up only 9%. Much of the earnings gain was from cost-cutting, including layoffs. The bad news is that, unlike in the past, these companies are not rushing to use those earnings to build more capacity, hire workers back, or acquire new businesses until they can project a positive return of consumer demand and spending. This is the proverbial “what comes first, the chicken or egg” conundrum. ROcKS AND HARD SPOTS AND NOWHERE TO HIDE

And, if you think you just read the whole script, not so fast. It’s not over until the “fat hen sings,” in keeping with the metaphor, and boy have we got more. Adding to the angst of uncertainty, who really understands what impact all the new financial regulations will have? First off, how many new government “regulators” will police the industry, at taxpayer expense? And, how big

an army of new regulation specialists will the financial firms need to hire to analyze and implement the regulations? I hear thousands on both sides. The good news: new jobs. The bad news: more “non-rain-making” bureaucrats. How will new capital requirements impact lending and investing? What will be the effect of new transparency requirements on positive risk-taking? And how on earth do these firms replace the billions of dollars of revenue from trading and hedge fund businesses they will be forced to shed? And, at the end of the day, as “all ships” in the financial industry are lowered, there will no doubt be less capital for lending to Main Street, i.e., consumers and small businesses. Since small busi-nesses are responsible for an estimated 60% of new job creation, and consumers 70% of GDP, this does not make for smooth sailing. Oh, and what about lower ships equal lower tax revenues for federal, state and local governments? What a train wreck waiting to happen. But, that’s not all folks. Even more non-value-creating bureaucrat jobs will be created in human resources departments across all industries to make sense of and calculate the costs of the recently passed health-care overhaul. Better those functionaries poring over 2000-plus pages than me! And, what happens if they find more costs in those pages? Does it lead to more cost-cutting in other areas of the business, such as more job cuts, or higher prices, or both?

CALL IT A “HOUSE OF CARDS” OR A “BUBBLE.” WHO CARES? ONE COLLAPSED, THE OTHER POPPED.

Of course, we are all waiting for the decision of whether or not The Bush Administration’s tax cuts on personal income, dividends and capital gains, due to expire in January, will be extend-ed. What effect will that decision have on consumer spending? Last, but by no means least, are the truly scary murmurings of a vAT (value-added tax), or a tax that is applied to each step in the supply chain where value is added, starting with the ingredient product, then the manufacturing process, and, finally the finished product at retail. Regardless of the complexities and issues surrounding the debate, two things are for certain: a portion of this tax is added on to, and, therefore raises the final sales price; and, its enactment is probably not a question of if, but, when. Most countries in the industrialized world have vATs, why not us? Well, all I can say is that this had better be one of those “cans they kick down the road.” Talk about shooting a sputtering economy in the head! We can turn to Japan for that lesson. (See Japan sidebar, page 8)

DEFLATION WITHOUT TAXATION?Is it possible we could experience deflation without such taxation? On the supply side sits the match that can light the deflation fire: according to a recent Nomura Securities report; “the U.S. economy continues to operate with a staggering amount of spare capacity – unemployed workers, idle trucks and factories, etc.”

Jan Hatzius, Chief Economist at Goldman Sachs, agrees. In an August 6 Wall Street Journal article, he said that this kind of extra capacity impedes companies from raising prices, and therefore increases the risk of deflation. “The prospect of substantial inflation seems very remote, but the prospect for deflation is far from remote. A double dip is certainly possible, but not likely.” Hatzius also said “It’s plain

> Continued

October 2010

to see there’s a ton of slack in the economy. We’re not managing to gener-ate enough demand to absorb all these productive resources in the economy.” On top of his Goldman Sachs credentials, Hatzius snagged the top spot in a recent ranking of Wall Street economists, and has been honored for his ‘uncanny’ economic forecasting that anticipated the global financial crisis. His dire view is based on the fact that, not only has there been a slowdown in consumer spending, consumers are using their remaining cash to add to their savings, which was 6.4% of income in June compared to pre-recession levels of 1% - 2%, and to pay down debt, which has been dropping for 20 consecutive months.

Looking ahead into 2011, Hatzius revised his GDP estimate from 2.4% down to 1.9%. He also projected unemployment to hit 10% in the second quarter of next year.

Just to toss another heavyweight’s opinion into the ring, Bill Goss, who heads up the $239 billion Pimco Total Return Fund, was quoted in another WSJ article last month: “deflation isn’t just a topic of intellectual curiosity, it’s happening,” citing an annualized 0.1% decline over two years in the consumer-price index. “It’s an uncertain world that’s tipping toward deflation.”

And, a final and serious conundrum for retailers, and one which further complicates the deflation issue, is the

fact that China’s manufacturing sector, where many of the products we consume are produced, has been pressured by workers to increase wages, which is happening. Ingredient product prices and transportation cost are volatile, with severe upward pressure. As these increasing costs are passed along to retailers, are they going to be able to pass them on to consumers, when consumers will be expecting lower prices? Who will blink first, retailers or consumers? You know my answer.

LOTS OF QUESTIONS – FEW ANSWERSAs of this writing, there are many more questions than answers regarding what consumers, businesses, and the government will or can do to clean up this unprecedented economic mess. Will consumers crawl deeper under the covers and stuff more of their money under the mattress? Will they continue to spend, however frugally? And, what in the world is our largely dysfunctional government going to do about our unprecedented debt level? Having used up the conventional tools of lowering interest rates and fiscal stimulus, the Fed and Administration are running out of options. Do they dare cut spending, increase taxes (or both) in an economy that’s on the edge of another “dip,” and possibly even deflation? Remember, this is a mid-term election year! Do they attempt another stimulus plan, piling on more debt, when the first one did more propping up than stimulating? Do they cut taxes? Are cash-fat businesses going to invest in growth, build more capacity, hire more workers? Will banks ease lending to stimulate small business growth or easier credit for consumers, all when uncertainty reigns about how much demand is going to return in the marketplace, and what our government intends to do on all fronts? “Chicken Little,” indeed, and it seems as though the Bluebird’s chirping grows weaker and weaker. Perhaps it’s the other end of the bluebird that will be dropping something on our heads as he flies over. I hope not. RR

ROBIN REPORTThe


Japan’s ill-timeD sales taX anD Deflation

Over the past couple months the “D” word, Deflation, has been popping up with increasing frequency across all media. A “double-dip” recession would be bad enough. A deflationary spiral would be down-right horrendous, and extremely difficult to pull out of.

Japan provides a good example. In 1997, the country’s economics ministry misread an increase in exports, business investment and consumer spending as indicators of recovery from their almost decade-long recession, even though unemployment remained very high. So, anticipating a turnaround, Japan felt it was time to get its fiscal house in order after years of debt- driven stimulus. In short, they cut spending and increased taxes, which knocked the economy right back down. Worse, however, was the increase in consumption tax from 3% to 5%, which according to many economists triggered deflation, which the Japanese continue to struggle with today. Deflation occurs when there is over-capacity of supply and declining demand. Suppliers begin reducing prices to stimulate demand to get rid of the excess. Weakened buyers expect suppliers to lower prices even further, and continue to keep their wallets closed. As this deflationary cycle ripples through the entire economy, all ships get lowered, and the problem is, that no one can really forecast the bottom. Further, when interest rates are close to zero, (as they currently are in the U.S.), the ability to stimulate lending, borrowing and spending is limited. RR

> Continued from previous page

9


GROWTH “BY A THOUSAND cUTS”> Continued from page 1 able to manage your business into a long, tougher-than-ever “new normal.” Regardless of your outlook, either situation, going forward, would more aptly be called growth“ by a thousand cuts,” - very slow and painful, indeed, just as the real “death by a thousand cuts” was for victims of torture back in the day of Imperial China.

Even more resonant for our reality today is that it also refers to creeping normalcy – stuff happening so slowly that everyone begins to accept it as the new normal. Sound familiar? And, if you’re a retailer, and therefore on the “front lines,” we might be talking a million cuts. And, I do not mean price cuts here, although, we know there will be more of those as well. What I mean is that, with the unemployment needle stuck around 10% and consumption driving 70% of GDP, achieving growth over the next several years will likely be slower and tougher than ever, on all fronts. THERE IS GROWTH AFTER DEATH Regardless of whether the economy sustains a deadly double-dip, or deflation, either of which will kill more retailers and drive the survivors to shrink their businesses even further, at some point the marketplace will stabilize, albeit at a lower bottom and at a slower pace.

In the short term, there may be no growth at all, and perhaps a decline. But what about the long term? Without being flip-pant, why should achieving growth be any different over the next couple of decades than it was for the past quarter century, even during the booming economy?

What am I talking about? Well, it’s hard for me to remember when businesses

were not competing for market share in a slow-growing, over-stored industry. Over the years, I have been relentless in my characterization of our retail indus-try condition as a never-ending round of “share wars.” However, it is exactly how retailers and all consumer-facing industries are going to have to compete in the U.S. marketplace, long into the future.

the “share Wars” DrillTo grow in “share wars,” one must either attract a consumer away from a competitor or get one’s own consumer to buy more, and/or more often from their current retailer. And, the only way to accomplish either of those growth options is to provide either the competitor’s consumer or your own something newer, and/or better, and/ or cheaper, and/or more often, and now more importantly it must be an overwhelming experience, where, when, how and how often they want it. And, the last piece of the drill is to remember that it’s much less costly to get your existing customer to spend more with you than to gain a new consumer, and one existing customer is worth more to your bottom line than three new consumers. Having said this, it’s a no brainer that whatever you do to get deeper into your existing customer’s pocketbook is also likely to be compelling enough to attract your competitor’s customer. So, in the end it is not either/or, it’s a win-win.

“investment-lite” proDuctivity groWthAs I already mentioned, I am not talking about more cost-cutting here. It’s been done to the bone across all industries, and you can’t cost-cut your way to growth.

I’m also not saying that capital expenditures and investment for growth should not be made in these uncertain times. However, with the certainty that even when some demand does comes back it is going to be at a lower than pre-recession level, investing in opening new stores or any other capital expenditures must have long-term, relatively risk-free strategies that support such investments. Domestically, the share war winners are going to employ “Investment Lite” strategies that increase the productivity of their existing space for little capital outlay, which some are already doing. These strategies have the power both to increase the “spend” of existing customers and to create a synergy that will steal new consumers away from competitors. In fact, these IL strategies, whether or not those implementing them realize it, have the power to fundamentally transform current retail and wholesale business models as well as the structure of the industry.

> Continued on page 12

DOMESTICALLY, THE SHARE WAR WINNERS ARE GOING TO EMPLOY “INvESTMENT LITE” STRATEGIES THAT INCREASE THE PRODUCTIvITY OF THEIR ExISTING SPACE.

October 2010

ROBIN REPORTThe


WHERE IS YOUR NEXT cEO? Herbert�Mines�Associates

Where are retail’s hottest new CEOs coming from? We talked with Hal Reiter, Chairman and CEO of Herbert Mines Associates and the go-to man for C-Suite executive searches. His answers may surprise you. Our industry is in one of the most difficult – some say downright transformational – periods in its history. How is this manifesting itself as companies search for leadership? Companies – particularly the publicly held ones - have a wish list. They want an incumbent CEO with prior experience in a publicly held firm. They’re set on hiring the Meryl Streep of retailing, the established star whose versatility, ability and performance are unquestioned. They want the whole package: Wall Street smarts, financial shrewdness, leadership acumen, expertise in the public arena and skill in investor relations as well as operational and merchandising savvy. Not always a realistic order. Why not? The talent is out there; but the reality is that at any given time and for diverse reasons such as non-compete clauses and compensation, only a handful of sitting CEOs of publicly held companies are officially “in play.” We are increasingly exploring beyond the pool of known candidates to find the potential contenders who are off the radar, maybe even outside the industry. Are clients coming around to the new reality? Many are. We just completed a research study that examined CEO turnover in public retail companies over the last five years. We found that while 58% of CEO hires were internal promotions, a growing number - 42% - were external hires. But the most startling finding was that a mere 7% of external hires were CEOs with prior public company experience. And a significant number are coming from

outside retail – a potentially good trend, in my opinion. How is your approach to the executive search changing, and why? We have a position spec, that’s our bible, and it tells us the type of candidate we need to identify and surface. If it’s a CEO search and it’s not confidential, we will interview people in the organization to gain insight into the Gestalt of the company, to learn about the firm’s culture. We then incorporate that knowledge, our expertise and intuitive understanding of the process and other important ingredients into our spec, to generate our list of candidates.

How do you identify the best candidates? We’ve gotten increasingly creative, which is a really fun process. The key to a high-level search is unearthing the hidden gems, for example the undiscovered #2s who have the heart and the head AND the smarts and shrewdness to move into a CEO position. For example, when we were doing the Pier 1 Imports CEO search, we identified Alex Smith, one of several #2s at TJx. He possessed all the traits that Pier 1 required. He was -- and is – creative and innovative, with a keen grasp of the financial world. And because he came out of the home business, he knew the product, the multi-store environment and the culture. And the timing was perfect; Alex was at the right tenure in his career to become a CEO. And he’s doing a great job: Pier 1’s stock price has more than doubled since he took the reins. What about personality and the “hip” factor? What “soft traits” make a great cEO? CEOs need to be good listeners and inspire and engender trust and resourcefulness. That means no micromanagers; the most successful CEOs give their people latitude, support and

trust – as well as the tools and resources - to do their jobs. And especially in this climate, CEOs need to have a sense of urgency and the ability to respond rapidly to changes in the marketplace. And in the retail industry, they also need good taste and a sense of style. How important is engagement, ease and comfort with social net-working and the new technology? Especially in the retail business, the CEO has to be the face to the outside world, to represent the corporation across all social networking platforms. The CEO must understand the youth culture and grasp both today’s technology and the cadence of change. He or she has to expect that things are going to move faster than anticipated. You have to be flexible, adaptable, ready and able to embrace and exploit new business models. The bottom line: you can’t be mired down in traditional notions of how to do business. RR Harold�D.�Reiter�is�the�Chairman�and�CEO�of�Herbert�Mines�Associates,�the�leading�executive�search�firm�specializing�in�C-Suite,�senior�level�and�corporate�board�placement�for�fashion,�retail,��e-commerce,�food,�chain�restaurant�and�consumer�product�companies.�Hal�and��his�colleagues�at�the�firm�have�secured�top-tier�executives�for�an�impressive�roster�of�blue�chip�clients�including�Barneys�New�York,�Wal-Mart,�Avon,�Macy’s,��Starbucks,�Rue-La-La,�Chico’s�and�Pier�1.

11


ONE SIzE DOESN’T FIT ALL Top Retailers Reveal Localization Strategies Kurt�Salmon�AssociatesBy Christina Bieniek

Throughout the year, Kurt Salmon Associates has discussed numerous localization topics with the industry’s leading retailers. Not surprisingly, a few key themes emerged from nearly all the conversations we had with top executives. Regardless of industry segment or brand positioning, there are three key insights for successfully implementing a localization strategy. Here is what we found.

1. it’s all about the local customer.No matter how comprehensive the plan, a deep understanding of the local customer is the linchpin of a successful localization strategy. The time-honored approach of overlaying store performance data with customer demographics, which provides only a rough sketch of the local customer, just isn’t enough anymore. Localization demands that retailers then fill out this sketch with psychographic and behavioral details. Ultimately, it is the richer, more complete picture of the local customer that reveals actionable insights.

For example, one specialty apparel retail executive noted that “age is no longer important to us. It’s all about how she sees herself. It’s about attitude. What this means is that we have to understand her at the local level in order to tailor the type of product and service she is offered.”

2. localization involves more than just merchandising and inventory management.Across all retail segments, we found that nearly 30% of retailers in our study had a full localization program in place for assortment planning and inventory

management. However, a myopic focus on these functional levers limits a retailer’s ability to see the often larger opportunities that come from a holistic approach to localization.

The more sophisticated retailers become, the more they recognize the benefits of pulling more than one lever to truly impact the customer experience. Leading retailers understand that the strategic value of localizing isn’t one size fits all, even within a segment. They are tailoring strategies around customer service, seasonality, even store design. Each localization strategy, then, must be tailored to the respective business and the needs of its local customers.

One approach is to test various formulas. The leadership team at one international specialty brand told us they were testing lots of different things: “We have already

rolled out localized markdowns because we saw that as successful. Now we are testing localized marketing and we have given the stores control over determining a specific promotion.”

Retailers who have developed and implemented a holistic strategy have been incredibly successful. Recent ex-amples in the marketplace are Macy’s, Lululemon and Kroger, a regional grocer.

3. it’s easier said than done.Localization touches all the key drivers of a retailer’s business. Because of this, it can be remarkably powerful in yielding benefits across key financial metrics. Retailers have begun to realize the importance of integrating consumer insights into the business from top to bottom, and many leading players have already begun to implement localization strategies. They are designing new processes, developing new tools (from spreadsheet solutions

to more sophisticated, customized software packages) and tailoring their organizations to clarify ownership over new responsibilities.

However, localization can also be incred-ibly complicated and difficult to implement successfully, requiring supporting tools, organization and new processes. Ultimately, it will involve collecting and integrating disparate data, analyzing it to develop real insights, and finally to feed that intelligence back through the operations.

Importantly, as with any large-scale implementation, localization should be tested first (in a few stores, across a few categories) to determine what works and what doesn’t before it is scaled. The need for a unique plan for each retailer is paramount. Nearly all retailers we spoke to emphasized the importance of establishing variables and parameters

early on, defining success metrics and building consensus among cross-functional executives before kickoff.

Because a successful strategy impacts so many aspects of the company, leadership must be involved from the start. In fact, having CEO sponsorship is key. A senior executive at a leading national big-box retailer explained, “We have made a commitment and set the expectation that localization is going to happen; it’s that important. This is more than a process change. This is a shift in mindset—a shift we all have to make, starting with leadership.” RR

Christina�Bieniek,�partner,�authored��this�article�and�oversees�Kurt�Salmon’s�localization�research.�Clementine�Martin,�manager,�also�contributed�to�the�work.��They�can�be�reached�at��[email protected]�&�[email protected].

THE TIME-HONORED APPROACH OF OvERLAYING STORE PERFORMANCE DATA WITH CUSTOMER DEMOGRAPHICS, WHICH PROvIDES ONLY A ROUGH SKETCH OF THE LOCAL CUSTOMER, JUST ISN’T ENOUGH ANYMORE.

October 2010

ROBIN REPORTThe

GROWTH “BY A THOUSAND cUTS”> Continued from page 9

Department stores as mini-malls

All space is not equal in its contribution to top and bottom line productivity and growth. During the recession, of course, average sales per square foot at most retailers has fallen. However, even before the downturn, retailers could typically identify three levels of retail space productivity: under-performing, performing on an acceptable average, and out-performing. And, because traditional department stores have always been, well, departmentalized, boosting productivity was done by replacing the products in under-performing or even acceptably performing space with like (but hopefully better-performing) product. Now take a look at what’s going on at Macy’s and JC Penney. It seems they’re looking at their space differently, almost

as a mall owner would. They’re now leasing space to high performance retail brands such as Sephora, Mango, Sunglass Hut, Motherhood Maternity and others, which is what the real estate guys do on a day-to-day basis.

However, unlike mall owners, I view the moves by these department store merchants as powerful long-term strate-gies. Certainly Macy’s must have that view, having recently appointed an EvP of fashion and new business development (which includes responsibility for procuring lease business opportunities). As they put it, they will be pursuing retail specialty brands in niche categories that can fill their “white space.” I assume that also means as replacements for less productive existing space. This strategy is potentially powerful enough to alter the retail landscape as we know it. It may drive the transformation of the traditional department store business model as we know it and have been condemning to death for years. First of all, this strategy creates a powerful synergy, in that the potential business for

the retailer and brands working together is greater than the sum of the two working separately. Mango for example, has its core “youngish” fast-fashion loyalists, a consumer segment JC Penney does not attract. Mango on the other hand, gets “Investment Lite” real estate in high traffic malls, where their customers and potential new customers hang out. The synergy: JCP pulls in new young consumers seeking Mango, who may also buy a pair of Arizona jeans as they’re walking through the store. Mango gets national coverage, quickly and less capital in-tensive, and will likely attract JC Penney customers they would not otherwise have gotten. Further, the combined brands en-hance the shopping experience, thereby strengthening each brand’s consumer connections. The same synergy works for Sephora and the brands leasing space in Macy’s. While this leasing model is not new, and there are many earlier examples of restaurants, spas, and other services and product categories, I believe it will accelerate in part due to the need to find “investment-lite” ways to substantially boost productivity. Further, in the past,


it was pursued opportunistically. My view is that the real winners will see its powerful potential and develop it strategically, as evidenced by the Macy’s appointment. Finally, I would be remiss if I did not mention that that Sears in Costa Mesa, CA recently leased 43,000 square feet of space to fast-fashion retailer Forever 21. That space will comprise 14% of the total store when it opens early next year. Then, just a few weeks later, Sears announced the opening of an Edwin Watts golf shop in its store in Westfield Hawthorne mall in vernon Hills. While I would like to dig into CEO” Eddie” Lampert’s intentions, whether they be based on sound strategy or just a “Hail Mary” pass, or his pass to a lifeboat off the Titanic. I’ll save it for another time. Anyway, I see no reason why the space-leasing strategy could not be expanded to include strong national wholesale brands such as Ralph Lauren and others, who prefer to control and manage their brand and imagery wherever they are located. My end vision of the transformed department store as “mini-mall” would be similar to what Selfridge’s has done to its London store. I know this is old news to some of my past readers, but because of the moves that are now taking place, I can actually see that model evolving in the US.Selfridge’s dismantled the departmental structure years ago and reorganized around lifestyles. It pursued compatibly positioned brands and leased space to them, and positioned Selfridge as a “go-to-first destination” for entertainment, food, events or just as a place to hang out. private anD/or eXclusive branDing

Growth of private label or exclusive branding is another IL strategy that not only provides differentiation, it also gives the retailer more control over the merchandising, line mix, size specs, and seasonal flow. It allows for more

efficient, flexible and responsive line and production cycles, enabling more frequent new lines. It also gives brand owners control over presentation and the entire brand experience. Such control also enhances the ability to “localize” merchandise offerings according to local tastes, which Macy’s is effectively implementing. Further, when we return to turtle-paced growth, owning the better part of both the wholesale and retail margins will help profit growth a lot. This pursuit of private and/or exclusive brands has been going on for several years, but has recently accelerated. JC Penney, Kohl’s, and Macy’s have publicly stated that these brands account for well north of 40% of sales. It’s estimated that Target’s own apparel brands account for over 60%. This strategy also fits well within the “enclosed mini-mall” vision, attracting more traffic with special, unique and locally appealing goods. going global

Not so “Investment Lite,” but, imperative, and a huge growth opportunity, is global expansion. This is one of those long-term investment commitments that although not without risks, holds much greater upside potential for growth than any U.S.- based strategy. It’s not simply the need for growth that presses a sense of urgency with regard to global expansion. The world has become “flat,” and so inter-connected in all ways, that if brands and retailers fail to gain a preemptive presence globally, they will find their home-based positions severely weakened. Consumers and their lifestyles now transcend international borders. They are globally “mobile,” literally and electronically, therefore, brands must be distributed to wherever their customers are. Furthermore, the brand experience must also be consistent worldwide.

Adding urgency to preemptive global expansion is the fact that the infrastructures in many countries are still relatively fluid. As they begin to mature, the opportunities will have declined, and in some, may simply be gone. The challenges of expanding internationally are many, and vary widely, depending on the myriad political, economic, social, consumer, and marketplace issues of the host country. An equal number of issues exist for the business choosing to expand globally.

Among the “first movers,” or sector preemptors, in global expansion have been the luxury businesses, such as LvMH and its 50 brands, Gucci, Armani, Prada, Calvin Klein, Ralph Lauren, and others. What’s happened to-date is just the tip of the iceberg.

> Continued

13


IF BRANDS AND RETAILERS FAIL TO GAIN A PREEMPTIvE PRESENCE GLOBALLY, THEY WILL FIND THEIR HOME-BASED POSITIONS SEvERELY WEAKENED.

October 2010

ROBIN REPORTThe

With more technologically advanced and easier global distribution capabili-ties, as well as increasing wealth in many of the emerging countries, particularly China, the luxury and volume-priced brands and retailers are simply accelerating their expansion. Also among the first movers are the high-volume hyper-markets, Carrefour, Wal-Mart, and Tesco. Most of these companies are experiencing much more rapid growth in the non-US portion of their businesses. The emerging and rapidly growing middle classes in developing countries will be a major catalyst for global expansion. These markets are ripe for many of the more mainstream brands and retailers such as Gap, American Eagle Outfitters Inc., The North Face, and Abercrombie & Fitch. Even Macy’s is reportedly considering China as a potential global expansion. Others, such as Lee and Wrangler jeans, Levi Strauss & Co., Guess Jeans and Nike footwear are already established in many of those markets and will continue to expand. Among all the emerging markets, China is a primary target with its middle class projected to reach almost 800 million people by 2020, according to a recent study by the Asian Development bank. India, with the second-fastest-growing middle class populations, projects growth to over 600 million by 2010. Gap’s Asia-Pacific region head, John Ermantinger, spoke of his firm’s China strategy in a 2010 WWD article. Of Gap’s $14 billion plus in sales, roughly 10 percent comes from its international business. However, they expect China to become the “cornerstone” of its global strategy. Ermantinger clearly sees Gap preempting its competitors. He stated: “There are a lot of brands in China, but in our space, there is not an American representation yet, so Gap is looking forward to being that authentic purveyor of casual apparel.”

Nike has reportedly gained the largest share of athletic footwear in China, having reached almost $500 million in annual sales. Guess Jeans anticipates a five-fold increase in stores from 40 to 200 between 2010 and 2015. Iconix envisions the number of Candies’ stores growing from 50 to 500 over the same period. And, vF Corporation projects a 40 percent increase in the distribution of its Lee and Wrangler brands through its roughly 400 stores and more over the next five years. The urgency for US retailers to implement international expansion has never been higher. In those countries experiencing the highest and sustainable rates of growth, they provide an open “field”

for those seeking early preemption of dominant share. How long the opportunity lasts before market “ congestion” sets in, is an unknown. So, every consumer business should have a matrix of global markets priori-tized by market attractiveness (e.g. size, growth, competitive intensity etc) for their products and services, the potential mix of distribution options for that market (including all of the latest digital platforms) and the investment required to support different options. Those that succeed in executing against these global priorities will be those that thrive. And, the capital investment, even while struggling in a weak domestic market, will have been worth it. RR


HOW LONG THE OPPORTUNITY LASTS BEFORE MARKET “CONGESTION” SETS IN, IS AN UNKNOWN. SO, EvERY CONSUMER BUSINESS SHOULD HAvE A MATRIx OF GLOBAL MARKETS PRIORITIzED BY MARKET ATTRACTIvENESS


15


BYE BYE, MAD MEN AND THREE MARTINI LUNcHES Hello...Place Marking?By Paco Underhill

The only place where traditional advertising is prospering is in the Mad Men series on AMC. It showcases a bygone era when men wore suits to the office and drank alcoholic beverages at lunch, and few women occupied an executive suite. Hefty magazines, fat newspapers and seven minutes of advertising for every thirty minutes of broadcast television has led us to a culture where 70% of our GDP is based on consumer spending. Even more frightening is how our media culture has trained the rest of the world to aspire to consume the way we do. A seven-year-old from the favelas of Rio has almost the same vocabulary of brands as a child of the same age living in Grosse Pointe.

At the start of the recession, many Americans woke up and realized their debts, houses, cars and waistlines were too big and we needed to go on a diet. Call it a recalibration. Our relationship to advertising and media is going through a similar transformation.

We as Americans will still spend. We’ll eat and drink, clothe our children, take vacations, fix up our homes and drive our cars. We just won’t spend the same amount of money as we used to. Roughly a third of American households have gone through downward mobility – from uber rich to rich, middle-class to lower middle-class. The rest of us have learned that conspicuous consumption is bad manners and that if we ask for a discount we often get it. Our perception of what something is really worth has gotten very fuzzy.

We are still vulnerable to advertising messages, but thanks to changes in our media viewing and reading habits, the way we take in those messages has

changed. In a sense, the old-fashioned media and advertising business made the same mistakes as the music industry —being closer to the creators of products than the end consumer. Nielsen ratings and circulation data are even more suspect now than they were twenty years ago.

The shake-out for retail, consumer durables and apparel has been particularly hard. Smart marketers have reallocated their budgets, and the traditional tools of 20th century marketing have suffered. Television is awash in low budget “reality” programming, and even NASCAR, the nation’s most popular sport, is retrenching.

The Sunday New York Times is positively anorexic. The idea that you can charge five dollars for something that weighs a third of what it did three years ago is a question many readers are asking. The Sunday Times Magazine, once filled with fashion brand ads, is a quarter of its former size. The newspaper and magazine world are in free fall, with declining ad pages. The Wall Street Journal is one of the few newspapers whose circulation has actually shown a modest increase. Almost every other major newspaper in the country is reporting double-digit declines in circulation.

It isn’t as if marketing has disappeared, but those dollars are going to other places as our global marketing community adds 21st century arrows to its quiver. One of those new tools is what we are calling Place Marking. It is taking a brand and putting it physically in a high-traffic location. It’s a new kind of retail. Place Marking can be temporary. Target puts up a Pop-Up Store at a location that may be open for a month, or just few days. Uniqlo, when it did its store launch in Manhattan, put shipping containers into Union Square Park. This concept of portable retail—pioneered by the merchants that followed the PGA Tour selling golf clubs, or a Grateful Dead

tour peddling Jerry Garcia t-shirts—is a natural evolution.

Brands have decided that they need a place where they don’t have to make love through an interpreter – or the traditional multi-brand store. The M&M Store in Times Square, The Nintendo Store in Rockefeller Center, The Prada Store in Soho, and Marc Jacobs’s invasion of the West village are all examples where brands have chosen to go to high-traffic locations where they can find their customers and set up temples in which they have complete control. Some of the aforementioned places sell product, and a few may even make some money, but this is secondary to the brand placement.

One of the best examples is the Samsung Experience in the Time Warner Center in New York City’s The Shops at Columbus Circle. It’s a store where nothing is for sale. It is meant to be an exhibition of the brand. The store is a reallocation of advertising and media dollars that are now paid out to a landlord and an interested staff. This idea came from a Korean consumer electronics company, who, in twenty years, has gone from being a manufacturer of cheap Tvs to one that is eclipsing Sony as the largest manufacturer of consumer electronics and appliances in the world. At the Samsung Center, because nothing is for sale, the interaction between staff and visitor is a free and easy exchange > Continued

October 2010

ROBIN REPORTThe

of information. The average time spent in the location is more than the average 12 minutes that characterizes the specialty retail visit. It is a playpen filled with brand actors. It could be a young man showcas-ing how a laptop and a DJ’s mixing board intersect. The visitor is invited for quick les-son in Hip Hop. A display at the front of the store showcases the newest washing machine technology, which uses ionized bubbles as its medium – and less water and soap. At the back is a complete Samsung kitchen with coordinated appliances, with a look a feel closer to a luxurious Toll Brothers model home than an appliance section at Lowe’s.

Samsung Experience employees report the puzzlement and sometime anger when shoppers reach for their wallet and find out they can’t use it.

Place Marking is changing the rules of retailing. At a time when vacant retail litters our commercial landscape, in places where you can find the right traffic, the prices per square foot are going through the roof. To turn a Yogi-ism around – it’s so crowded that everyone wants to be there. RR

Paco�Underhill�is�the�CEO�of�Envirosell�(www.envirosell.com�)�a�behavioral�research�and�consultancy�firm�focused�on�commercial�environments.�His�first�book,�Why�We�Buy,�was�an�internationally�bestseller.�Call�of�the�Mall,�released�in�2004�is�a�humorous�walking�tour�of�an�American�shopping�mall.�His�columns�and�editorials�have�appeared�in�The New York Times, Money Magazine,The Washington Post�and�The Wall Street Journal,�among�others.�Underhill�is�the�only�foreigner�to�hold�a�position�on�the�Board�of�Advisors�at�Hakuhodo—Japan’s�second�largest��advertising�agency.�His�latest�book�published�in�July�of�2010�is�entitled�What�Women�Want.�It�is�not�a�sex�manual.

LIGHTS...cAMERA... MIRAcLE cREAM!the biggest brands in the beauty business are clamoring for a slot on the home-shopping channels.By Dana Wood

As a kid in upstate New York, Mally Roncal watched QvC with a degree of fervor most little girls reserve for their Barbie dolls. Some day, she mused, when she grew up to be a big, strong makeup artist, she’d look into those cameras, tune out all the hoopla bustling around her in those cramped and klieg-lit Pennsylvania studios, and completely connect with her legions of customer-fans. And in forging those bonds, Roncal would not only sell millions of Mally Beauty volumizing Mascaras and High Shine

Liquid Lipsticks, she’d become wildly famous in the process. Clearly, Roncal’s crystal ball was working; her pint-sized vision has been realized in spades. Despite the nay-sayers, she decided to bypass traditional retail channels and — gasp — launch her line on television five years ago. Given her background as the go-to makeup girl for celebs like Angelina Jolie and Beyoncé, the fact that she didn’t go the Barneys and Bergdorf Goodman route, but opted instead to be beamed into heartland living rooms, was a risky move indeed. “I’m really proud about that, because I did get lots of opposition from my quote-unquote super-chic friends,” Roncal says of her unorthodox master plan. “They said, `Are you out of your mind? You’re selling makeup next to yard art?’ But I knew that was the future. I knew it.” It isn’t hard to remember the days when it was considered decidedly uncool for beauty brands to attach themselves to home shopping channels at all, much less debut on them. But circa 2010, it’s standard operating procedure for even superstars to sink into those cozy couches and sell, sell, sell. Case in point: Hip-hop high priestess Mary J. Blige, whose new My Life scent bowed exclusively on HSN in August, replete with a customer call-in

from a dear old pal, Oprah Winfrey. “You know I’m not a perfume girl,” Winfrey reminded Blige. “But I can’t wait until I get the Shower Cream.” (Though Winfrey isn’t keen on scent, lots of other ladies evidently are: Blige sold 60,000 bottles of fragrance during her six-hour appearance, shattering prior HSN fragrance records and making it among the most successful prestige fragrance launches ever.) So why the collective change of business heart? Why does no one in the industry bat a false eyelash at home shopping rosters that include major department- and drugstore brands? In the QvC corner, we have Clarins, Clinique and Neutrogena. In the HSN corner, it’s Lancôme, Benefit and The Body Shop. Of course, for every giant there are approximately 20 or 30 tinier players. But the fact that Clinique and Lancôme are now playing in this sandbox speaks volumes. Without question, the numbers are the chief lure. Approximately 20 percent of HSN’s $2 billion 2009 sales were generated by beauty. And although beauty accounted for a smaller chunk of QvC’s $7.4 billion 2009 sales — 14 percent — that’s still big business. Still, there’s more to this story than just money and exposure, especially for the industry’s big guns. One could



YOU SAY EXcLUSIvE, I SAY EXcLUSION: Let’s Not call The Whole Thing OffBy Warren Shoulberg

We are right smack in the middle of a massive wave of exclusive merchandising. You can’t swing a dead hang tag these days in any decent sized store in the country and not find some brand or label (and they are two very different things, you better believe) that isn’t available anyplace else.

They can be brand new brands like Material Girl -- the Madonnaized program at Macy’s -- or names going around yet one more time, like Liz Claiborne at Penney. They can be

well-known personalities such as Martha Stewart – here, there and many wheres -- or head-scratchers like Jaclyn Smith at Kmart. They can be meaningless like Canopy at Walmart or totally meaningless like Whole Home at Sears.

Companies like Iconix have more than two dozen individual names available and if you ask real nice we’re sure they’ll come up with one just for you.

There are private labels, house brands and captured names, not to mention restricted, conflicted and afflicted brands. And you know what? Many times in many cases for many stores, the whole thing makes a lot of sense. For all the obvious reasons, it’s good to have stuff that nobody else has.

> Continued

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argue, for example, that a brand with Neutrogena’s history, reach and, let’s face it — ad budget — would have little to gain by occasionally popping up on QvC. After all, the trusted skincare powerhouse is already on television in a major way in an endless rotation of 30-second spots featuring a galaxy of fresh-faced stars. But when a brand like Neutrogena wants to tell a more complicated story — say, about its Dermatologics range of slightly pricey, ramped-up retinols — there really is no better way to get the job done than by chattering away with a highly trained, lively-at-two-in-the-morning spokes-host. Apart from the fame, the ability to speak at length — sometimes passionately and well, sometimes not — is the real draw

for beauty marketers itching for air-time. “I didn’t want to launch in stores because I felt that my products were so special that they really needed to be�discussed,” says Roncal. “And on QvC, you’re able to tell the story.” Of course, elaborating on key benefits and demonstrating primo application techniques is only half the battle. There is a tremendous amount of planning and execution that goes on both before and after those cameras roll. “People think you go on for five minutes and make a million dollars,” says Ramy Gafni, who’s been selling his Ramy Beauty line on QvC for seven years. “But it’s not like that at all, unless you’re [Bare Escentuals CEO] Leslie Blodgett and you’ve already built your business. It’s a lot of work.” It also takes inventory: product has to be sitting

happily in a warehouse somewhere before any mouths start moving. For beauty purveyors like Gafni, who haven’t yet made it to the “Today’s Special value” stratosphere alongside Roncal and Blodgett, the upward climb to more shows and more opportunities to strut their stuff is grueling, but ultimately worth it. “When I’m assigned a buyer who really likes my line, they put me on once or twice a month,” he says. “There are people who go on a lot more, but I’m happy with that. The power of television is unbelievable.” RR

A�beauty�journalist�for�over�20�years,�Dana�Wood�has�served�as�Beauty��Director�for�both�W�and�Cookie�magazines�and�has�written�for�numerous�national�publications�including�Glamour, InStyle, Harper’s Bazaar�and�Self.�She�also�spent�several�years�in�the�Luxury�Products�division�of�L’Oreal�as�Assistant�Vice�President,�Strategic�Development.�Her�first�book,�Momover:�The�New�Mom’s�Guide�to�Getting�It�Back�Together,�was�published�in�2010�by�Adams�Media.

“‘ARE YOU OUT OF YOUR MIND? YOU’RE SELLING MAKEUP NExT TO YARD ART?’ BUT I KNEW THAT WAS THE FUTURE. I KNEW IT.”

October 2010

WHAT, HOW, WHY AND WHERE ARE THEY BUYING? Sharpen your insights and boost your marketing power to protect and grow profitabilityMasterCard�Advisors��Merchant�Solutions

The changes that have hit retailers and service merchants in the past two years have only intensified the foundational need to maximize revenues, improve operational efficiencies, and forge

brands that continue to attract and retain customers. Making decisions in this rapidly changing marketplace requires high-resolution insights. Putting new strategies into practice profitably requires deeply informed marketing capabilities.

MasterCard Advisors Merchant Solutions offers US merchants in the retail, dining, travel, and entertainment industry categories access to a broad range of information, analytics, and targeted marketing solutions.

What makes aDvisors merchant solutions Different?

robust Data. Advisors Merchant Solutions information, analytics, behavioral segmentation, and modeling capabilities are based on quantitative insights derived from billions of identified transactions processed each year from the 340 million MasterCard-branded credit, charge, and debit cards issued in the United States. Our information products provide a view of overall spending activity, including estimates for spending via other payment forms. Significant investment in cleansing and organizing this data has created a unique data platform— reflecting actual spend behaviors. And because the platform is refreshed with new data every single day, it is always up-to-date.

ROBIN REPORTThe


That is, with one very huge proviso: It has to be stuff that somebody actually wants.

And that’s the part of this whole exclusive thing that I don’t think a lot of merchants take into account when they plan out their merchandising strategies.

All of that exclusive merchandise not only has to be good, it has to be better than the stuff excluded to make room for it.

So, if you’ve dropped Wamsutta solid color sheets because many of your big competitors are carrying them too and then replaced them with Wally’s solid color sheet program, maybe that’s exclusion. You’ve stopped carrying one of the longest-running, best-selling solid color programs in the history of the home textiles business and replaced it with a brand nobody’s ever heard of, created by people who were probably designing underwear three weeks ago and not supported by anybody else anywhere.

Hmmmm?

Not only that, but when you think about it, it’s totally inconsistent with retail strategies at the corporate level. Look at Macy’s – I don’t mean to pick

on them but they really are becoming the poster boys for this sort of thing.When Macy’s decided it needed the strongest brand it could support, out went Burdines, The Bon and all the rest. In came one name: The name that everyone knew, the one that could be broadly supported, the one with the parade and the Miracle on 34th Street and all the rest. That was a smart move and I think it will ultimately pay off for the company and in fact probably be the savior of the Great American Department Store. But then to take those 800 stores with the same name and put in lame brands that sound like B-List Italian movie stars just doesn’t make sense. I don’t get it.

Car manufacturers came to the same conclusion that Macy’s did about the big picture. Instead of trying to support multiple brands that had increasingly fragmented customer bases -- not to mention decreasing ad and marketing budgets – they made the decision to consolidate around their strongest brands… the ones people really wanted.

Too many retailers today are practicing the politics of exclusion when they go for exclusives. By laboring over private labels and avoiding the obvious choices,

they run the risk of selling what they want, not necessarily what their customers want.

Look at Sony. This is a brand you can buy in all sorts of retail channels, from the neighborhood Duane Reade to the most exclusive and expensive home theater specialist in town. The consumer gets Sony. The consumer wants Sony.(And by the way, whatever problems Sony is having these days has a lot more to do with its product development than with its distribution strategy.)

When department stores were just becoming department stores around the beginning of the Twentieth Century, a fellow by the name of Marshall Field – maybe you heard of him? – had a pretty simple strategy: “Give the lady what she wants.”

Without exclusion...except for the rather obvious one of Marshall Fields’ name no longer on the store. Macy’s took care of that too. RR

Warren�Shoulberg�is�the�editor�of��a�leading�home�furnishings�business��publication�and�has�been�writing��about�retailing�and�the�home�business��for�longer�than�he�cares�to�admit.


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granular geographic anD time perioD insights. The volume of underlying spend behavior data—including several years of historic data—is vast. This scale enables us to “drill down”—with statistically robust confidence levels—to very granular views of spending behavior in a specific geography or time period. Whether that involves providing estimates for aggregate spending in a specific category on a single day some nine months into the future, or a measure of your market share in just a single zIP Code, such granular data brings real precision to insights.

a “Whole Wallet” view. Our solutions are driven by understanding cus-tomers’ spending behavior both at your stores and locations and across thousands of other merchants. This “whole wallet” view provides far richer insights into the needs, preferences, and propensities of your target customer segments than can be provided by views based on their spending with you alone.

Our solutions can be used to improve business performance in many different ways. MasterCard Advisors customers have used Merchant Solutions to:

• Benchmark sales performance and market share relative to the competi-tion— enabling you to monitor, query, and analyze your sales performance relative to your competitive set across a variety of key metrics (including total sales, average ticket,and average

purchase frequency) at national, state or even individual DMA or MSA level on a quarterly, monthly or weekly basis.

• Retain and grow customer profitability

in the face of competition by understanding how customer loyalty is shifting on a segment-by-segment basis over time and quantifying its impact on sales. By using a more complex analysis you can follow the migration path of different customer groups over time and quantify the impact of changing behaviors on their total spending with you.

• Track marketing impact by using zIP

Code area or custom geographic level reporting to quantify the effects on market share of different local marketing, promotional, store design, or merchandise mix decisions.

• Evaluate the performance of existing

sites and identify the best possible locations for new sites by using a powerful combination of trade area analytics, “best customer”geo-profiling, and measures of spending intensity and market share in their category. Trade Area Analytics leverages behavioral profiles of your customers to identify those areas with high numbers of prospective customers. Total spending and competitive intensity measures, combined with drive time analysis and trade area mapping, identify the best locations from which to maximize your market penetration most efficiently.

• Acquire new customers more effectively, or win back lapsed customers who are still spending strongly in the category, using direct marketing campaigns that reach the cardholders most likely to respond. Custom selects and behavioral modeling ensure that a merchant’s message reaches the very best prospects and delivers superior marketing ROI.

• Attract more valuable customers

through sophisticated and precise customer segmentation. By comparing the profiles of high-value segments loyal to your business with those segments that are loyal to your competitors, you can derive valuable insights into the key drivers of brand differentia-tion—and inform winning strategies to attract more valuable customers.

These insights can be supplemented with our direct marketing programs. They enable you to direct your offers and promotions to the very best customer prospects among the millions of cardholders of participating issuing banks. Customized spend-behavior propensity models and geographic selections are applied for each target customer segment in every campaign— lifting your response rates, driving incremental sales, and enhancing ROI. These marketing programs are particularly effective when deployed for targeted customer acquisition campaigns or lapsed customer reactivation. Comprehensive campaign tracking and ROI analysis are conducted through the MasterCard network and included in the deliverables with each engagement.

MasterCard Advisors provides payments consulting, information, analytics, and customized services to financial institutions and their merchant partners worldwide. RR For more information on Advisors Merchant Solutions, please contact: Andrew�Woodward�at��[email protected]�or�Chris�Alfonso�at��[email protected]

October 2010

“failure to prepare is preparing to fail”

HOW TRUE - OUT OF A BEST SELLING NOVEL BY DON WINSLOW

Outside of a dog, a book is man’s best friend. Inside of a dog it’s too dark to read – Groucho Marx

WE CAN ALWAYS DEPEND ON GROUCHO FOR A FEW LAUGHS

Lawyer asks woman why, in her will, she requests her ashes be scattered over Bloomingdale’s. Response: “That way, I know my daughters will visit me twice a week.”

OH, THE GOOD OLD DAYS – WHEN WOMEN USED TO GO TO THEIR

FAVORITE DEPARTMENT STORE TWICE A WEEK!!

“In theory, there is no difference between theory and practice. In practice, there is.”

WHO ELSE BUT YOGI BERRA

QUOTES TO REMEMBER

“There’s a chance that you get hit by a car. There’s a chance you get a disease. But, they are chances. But, there’s also a likelihood that the [financial] covenant will be worked out, as it has in the past;” As quoted in WWD by Dov Charney, CEO of American Ap-parel, regarding their odds on going bankrupt.

OKAY DOV – BUT I’D RATHER TAKE ODDS ON GETTING HIT BY A CAR.

“I don’t want to abolish government, I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.” Grover Norquist, President of Americans for Tax Reform.

GO GROVER!! AND, IT’S NOT JUST ABOUT TAXES. IT’S DYSFUNCTIONAL, PERIOD!

“A government that robs Peter to pay Paul can always count on Paul’s support.” George Bernard Shaw

DOES THIS SUGGEST SOME OF THE POLITICS GOING INTO THE MID-TERM ELECTIONS? HELLOOOOO!

“I don’t give people hell, I just tell them the truth and they think it’s hell.” President Harry S. Truman

“GIVE EM’ HELL HARRY” – ONE OF THE GREATS

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The Robin Report - Issue 1 - October 2010

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