The Robin Report - Issue 11 - January 2012

Issue One 2012

h a t c h i n g n e w i n s i g h t s

www.TheRobinReport.com $10

Marty Staff has had a fascinat-ing 30-plus-year career in the industry, including stints at Bloomingdale's, Ralph Lauren, Calvin Klein, Hugo Boss, JA (Joseph Abboud) Apparel and, most recently, American Apparel. We met with Marty at his regular table at the Soho House, a private club in Manhattan’s meatpacking district, and got his take on how the business has changed, the state of inno-vation, and what it will take to succeed in the next phase of retailing’s evolution.

Q. How did you get into this industry?

A. I graduated from Dartmouth College in 1972, and I honestly didn’t know what to do, so I moved back to NY, where I was from, and went to Bloomingdale's to work as a salesperson for a few months. My first day was September 3, 1973. I thought I would be the smartest person at Bloomingdale's, and when I got there, everybody was smarter, quicker, better looking, funnier, and knew more than me - it was this magical time there.

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Just like the original “Pacman” of the earliest video games, chomping through all of the pac-dots to vic-tory, Amazon appears to be rapidly chomping its way to becoming the biggest store on earth by taking on every product and service category within its reach.

AMAZON From Earth’s BiggEst BookstorE to thE BiggEst storE on Earth?By Robin Lewis

The fact that we’re living in arguably the most disruptive, game-changing period in the history of retailing should be quite obvious to all by now. Just as technology (including

the Internet), globaliza-tion and unfettered

competition have provided consum-

ers with total power over all consumer-

DeAr reADer

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with Marty Staff

HAppy New yeAr!

www.TheRobinReport.com2

facing industries, those very same tools and dynamics must now be used by industries (includ-ing retailers), to fundamentally transform their business models, or those businesses will simply disappear. Jeffrey Bezos, founder and visionary leader of Amazon.com, the subject of this issue’s feature story, understood these global, game-changing dynamics earlier and better than anyone else, as evidenced by Amazon’s continuing warp-speed growth. The Internet is, indeed, nothing more than a “tool.” So, when I hear people say the Internet is changing the face of retailing, I disagree. Jeffrey Bezos has single-handedly changed and continues to change the face of retailing through his profoundly visionary use of the Internet as a tool. Furthermore, to define Amazon as a retailer is a misnomer. It is a vast, limitless marketplace within which any product or service under the sun can be bought, sold, auctioned off or traded. Its only limit is the limit of Bezos’s imagination, which in 18 short years has achieved Amazon.com’s $50 billion in annual sales and the number one share – 35% - of e-commerce sales. Staples is number two with roughly a 10% share. Ironically, Amazon also seems to be one step ahead of the all mighty consumer. In fact, one could say Amazon almost single-handedly changed the way consumers shop, and continues to come up with innovations that influence changes in shopping behavior. However, Bezos is just getting started. Since every day is “Day 1” for him, and since the Amazon.com business

model has no boundaries, he can credibly declare: “tomorrow the world.” We hope it will spark your imagination and hopefully illumi-nate some of the strategic changes and growth possibilities in your own business. Also in this issue, and consistent with the most disruptive, game-changing period in the history of retailing, Dana Wood describes how Tom Ford is making some new rules in the beauty business. Warren Shoulberg defines the transformation that is going on at Restoration Hardware. Cotton Incorporated has some interesting insight on changing consumer shopping behavior, and Jane Singer gives us consumer and associates’ perspectives on the phenomenal service efforts at Best Buy.

Reprinted here is my blog on the Martha Stewart and JC Penney deal, and what I believe is just the beginning of the runaway expecta-tions the industry has of Penney’s new leader, Ron Johnson. Finally, anybody who knows Marty Staff, former CEO of Hugo Boss and JA Apparel, could not really say his name without a knowing grin about the fact that you never quite know what you’re going to get, although you do know you’re going to get some game-changing ideas. So, I advise you to read us from cover to cover or from web page to web page, and I guarantee you will learn something new.

I N S I D e t H I S I S S u e

• DeAR ReADeR ...........................1

• AMAZON FROM eARTH’S BiggeST BOOKSTORe TO THe BiggeST STORe ON eARTH?......1 Robin Lewis

• Q&A WiTH MARTy STAFF ….......1

• CHANNeL-SuRFiNg:ReCeSSiON-eRA QueST FOR DeALS CONTiNueS ................. 6 Cotton Incorporated

• THe SeCReT iS iN THe DATA: DeLiveRiNg WHAT CuSTOMeRS NeeD & DeSiRe ........................8 Unique Solutions

• ReiNveNTiON HARDWARe .....10Warren Shoulberg

• Five KeyS TO SuCCeSS WiTH A SLiMMeD-DOWN iNveNTORy ............................12 Kurt Salmon

• WHAT DO yOu geT WHeN yOu CROSS LuxuRy SpeND WiTH DiSCOuNT BuyiNg? AFFiNiTy pLAyS! ......................19 MasterCard Advisors

• iT’S A gOOD THiNg: MARTHA LOveS JCpeNNey .................. 20 Robin Lewis

• CuSTOMeR SeRviCe MAKeS BeST Buy A BeTTeR Buy …..….22Jane Singer

• FORgeT BeNTLey. THe NeW NAMe iN pReSTige iS…FORD?...24 Dana Wood

• HOW ONe SMART COMpANy gOT iT ALL WRONg............... 26 David Merrefield

• QuOTeS TO ReMeMBeR……... 28

DeAr reADer continued from page 1


Issue One 2012 3

My first boss was Julian Geiger, of Aeropostale. He was brilliant – had a couple of master’s degrees, he had great taste, and was crazy, funny, irreverent. One day after I was there about a month, he said to me, “I want you to set up some sweaters.” And in came about 2,000 sweaters in about 15 colors, and it was my job to make sure this color would look good next to another one. To me, it was the most exciting thing I’d ever done. It was art. And then the customers came by and started buying them. It was immediate gratification! For the next seven years, every time I got bored, Bloomies was smart enough to promote me. I was in men’s, kids, home, women’s apparel – it was a wildly satisfying career. I was one of the chosen few to have a fast track career. In the last couple of years there, I got friendly

with Ralph Lauren. He was starting a children’s business at Bloomingdale's, and I got to work with him and his team. That year his men’s business was only $50 million. He then hired me to be head of sales. I stayed for about 7 years.

Q. After Ralph Lauren, you worked for Calvin Klein and then Hugo Boss?

A. Calvin realized Ralph’s business was eclipsing him. So he staffed his whole place with Ralph Lauren people. One by one they all left except me, because I loved Calvin’s aesthetic. I was Senior Vice President of Retail Development and Licensing, and my job was to get him into the retail business, to get him a stronger licensing base, and really to speak for him with the stores.

Then three or four years into it, Calvin said he wanted to get back into the men’s business. I convinced Calvin that we should license mens-wear, and the only candidate was GFT. I eventually ran Calvin’s business at GFT. I worked with Calvin for a total of 10 years. I left Calvin when Hugo Boss asked me to be CEO. Boss went from $70 million and no profits to $350 million and very profitable. As you know, I flew a little too close to the sun. I decided I would run the world, on an unauthorized basis. I didn’t fully understand what was happening, but I did know that I had absolute clarity of vision of what the brand may be, and that I might not always have that, so I figured I would step on the gas and do it. My predecessors didn’t understand

there was a relationship part of the business. The company wasn’t well liked, and the consumer thought Hugo Boss was Miami Vice, so I became the face of the brand. I did it better than I thought I could have. Then one day my German boss said “This isn’t about Marty, this is about the brand.” By the way, he was right. We would do crazy things. The first year, I inherited a Hugo Boss sponsorship with the Sundance Film Festi-val. I went the first year, and we got nothing for the sponsorship. I couldn’t even get in to see the movies. So the next year we took the sponsorship money and instead rented a house nearby and held parties. All the celebrities had nothing to do at night, so it really put the Hugo Boss brand on the map. For a publicly-held company, it broke all the rules. One GQ ad with all the prep would

with Marty Staff

" One GQ ad with all the prep would cost $75K. So I cancelled one ad and bought 100 helicopter trips for the buyers."


cost $75K. So I cancelled one ad and bought 100 helicopter trips for the buyers.

Q. Do you believe that we’re heading into a period of great innovation?

A. I think the pendulum is swinging back to art from science or financial engineering. I was with Brendan Hoffman last week, CEO of Lord & Taylor, he’s thinking of putting C-Wonder outposts in his stores. C-Wonder is a store started by Tory Burch’s ex-husband, and he uses words in his ads like Joy, Cherish…they’re wonderfully magical, emotional words. I think the fact that there’s an emotional attachment is resonating - the idea of re-injecting art into what you do and having the concept be really legitimate. I’m wear-ing these jeans today. They’re from a store called 3x1, started by a fellow named Scott Morrison. You pick out a denim you like, a grommet, a stitch color. There are 15 or so tailors there who make the jeans. If you go to Macy’s and ask the sales-person “What kind of denim is in these jeans?” They wouldn’t even know what denim is. But you ask Scott, he’s got 20 bolts of fabric, all rarified, it becomes curated, art, and it’s an experi-ence. Everyone is marketed to so constantly that you have to wade through too much to find what’s authentic. When I walk into a store these days, I look for something that resonates in an authentic way. Every year, I buy my wife about 50 gifts for Christmas – the Orvis this, the LL Bean that …This year, I called up a resort in Anguilla that we love and asked them to send me some sand, because she loves the beach. I called up my vet and asked about animal rescue places because

I want to support them, even work there. People are looking more for that kind of stuff.

Q. The Price-Value relationship is a topic that is on everyone’s mind these days. What must consumer-facing businesses and brand managers keep in mind regarding price, and what does value mean today?

A. I think consumers are starting to understand what’s real and authentic, and what’s just body covering. I think that’s part of the reason for Gap’s demise. What Uniqlo is doing is pretty great, and it’s going to hurt Gap the most. Uniqlo product is better made, at better prices, with a lot more attitude, which is the real deal. Value means it’s got to be the best made garment for the price it’s being sold at. For $295, these 3x1 jeans that I’m wearing were made by artisans, and are absolutely worth it. Conversely, if you go to one of the chain stores, and pay $39, for a pair that’s going to fall apart and made like crap. Two-thirds of American dress shirts are made by the same company in Asia. The difference is fabric and make, but it’s also brand equity. Calvin Klein, Calvin and Donna Karan made great contributions to how men should dress. Calvin and Giorgio Armani Collezione were made in the same factory at GFT. Calvin would put his collection suits at $1,000 and Armani for $1,400. Same mills, same people making them.

Q. Do you think the department stores like Macy’s and JC Penney are now able to evolve their busi-ness model into experiences, great experiences for customers?

with Marty Staff

" One of the reason the Internet is getting so big is that the shopping experience is getting lost."


Issue One 2012 5

A. I think it’s really difficult. When I started in the business, it was independent specialty store-based, which has clearly disappeared, for all the reasons we know. It used to be conventional wisdom that multibrand stores were safer than monobrand stores. That’s no longer the case, because mono-brand stores invest so much in marketing. So multibrand stores are in peril. It used to be that big suppliers would work with specialty stores to provide credit, but that’s all dried up with the new financial systems at these public companies. So the businesses moved to the big department stores, which appeal to the lowest common denominator. There’s really very little localization of buying. Macy’s is trying, but I think it’s been with limited success. One of the reason the Internet is getting so big is that the shopping experience is getting lost.

Q. Will Ron Johnson transform JC Penney, as opposed to just improving the experience? I ask this on the heels of what he did with Martha Stewart – is that a forerunner strategy?

A. I think it’s interesting that the biggest retailer in New York City is now Apple, and the store on 60th St. and 5th does more business than Bloomingdale's does. Part of what he did at Apple was to change the entire mindset of the organiza-tion. I think that Penney’s is now being run by someone with a very different mindset than his people. If anyone can do it, it’s probably him. But it’s going to take a while. The apparel sector isn’t growing much, so it’s really a market share thing, so it will probably be at the expense of Macy’s. The Martha Stewart purchase is a shot across the bow of the boat, to let them know they’re in business. I don’t think it was a tired deal. I think it will give a legitimacy to Penney. When I walk into a Penney store, I can’t find one woman’s item I want to buy.

Q. You’ve spent most of your career in men’s products. What can you tell us about how male consumers behave, how they dress, how they shop - and is this changing?

A. America is a casual society, and I don’t see that ever changing. Men define themselves by their family, job, hobbies – not their clothes. Within that, though, there will be little pockets of fash-ion, with men looking to express themselves a bit more, and in a bit more authentic way, and in a way that’s a bit more personalized. Like you can buy a pair of Converse sneakers, and custom-ize the colors. What I think is not going to be successful is the boring sameness you see in most stores. Guys shop when they have to, and the process is painful. There are some exceptions to that, of course. Bloomingdale's jeans depart-ment is a fun place to shop. Brooks Brothers has done a great job bringing back to life a heritage brand without making it too young.

Q. Don’t you think if stores are going to drag people away from the Internet, they’re going to have to have a compelling in-store experience?

A. Every time Apple comes out with a new product, I purposely don’t preorder it, because I want to go to the store and be on the hunt for it. When you finally get it, you feel so great that you finally have it. When a designer delivers a line to a new store, you don’t have that, but I think you’re going to have it in the future. I think bricks and mortar is going to become a portion of the presentation of product to the consumer, but maybe not even the primary portion. At some point, Amazon’s going to have to customize. So many people are buying gift wrapped things from Amazon, everyone’s tree will have the same gift wrap under it.


CHANNel-SurfINg:Recession-eRa Quest foR Deals continues By Emily Thompson

With a focus on shoring up house-hold savings in the face of still high unemployment and renewed fears of a European recession, American consumers have become increasingly deal-driven at the registers. Once drawn to mass merchants for their consistently low prices, consumers are now searching across channels, and of course across the Internet, to find the best price for their cloth-ing purchases. But will this trend continue as the economy improves? “We’re seeing the emergence of a new consumer – one who isn’t driven by brand or channel but rather compari-son shopping and price,” says Kim Kitchings, Senior Director, Corporate Strategy and Program Metrics, Cotton Incorporated. “These consumers may have previously favored mass merchants, but are now doing their research online to find the best price and letting that dictate where they shop, whether at chain stores, specialty stores, or even department stores as the case may be.”

On average, consumers spend approximately $53 per month on clothing, which is down significantly

from the average spent during the same time period in 2008 ($76), 2009 ($64), and 2010 ($60). These figures represent an overall decline of 30%, according to the Cotton Incorporated Lifestyle MonitorTM Survey.

“Today’s consumers are keeping a strict eye on expenditures,” Kitchings says. “Not only are they spending less on apparel each month than they have in years past, but they are also planning those purchases to ensure they stay within budget.”

Over time, Monitor data reveal, the percentage of consumers who plan their apparel purchases has increased significantly. In 2008, 65% of consumers planned their purchases; today, 71% say they do so. Accord-ingly, the percentage of consumers who buy on impulse has dropped, from 35% in 2008 to 29% in 2011. As consumers changed how they spent their money on ap-parel, it should come as no surprise that they changed where they spent their money, too. What gains mass merchants had seen before 2009 evaporated in the aftermath of the recession. From the first nine months of 2008 to the same period in 2009, the

percentage of consumers who preferred to shop at mass merchants for most of their clothing increased across several categories: from total consumers (24% to 27%) to those ages 25-34 (23% to 27%), and even impulse shoppers (23% to 27%), all turned to the so-called “big box” stores in search of the best deal.

“During this time period, comparable store sales for Walmart were increas-ing, while many other retailers were facing decreases,” says Kitchings. From the first nine months of 2009 to the same period in 2011, however, those gains mass merchants saw simply disappeared, as consumers looking for bargains went elsewhere. The percent-age of total consumers who preferred to shop at mass merchants dropped from 27% to 24%, as did the percent-age of those ages 25-24 (27% to 22%) and impulse shoppers (27% to 22%).

Consumer Facts from Cotton Incorporated Lifestyle Monitortm


Issue One 2012 7

Both Walmart and Target struggled with negative or volatile same store sales, a possible result not only of consumers’ shifting behaviors, but also from more competitive pricing in other channels, like chain stores, department stores, and specialty stores. But mass merchants still have their devotees; Monitor data show the percentage of men who prefer to shop for apparel at mass merchants held steady from 2009 to 2011, at 28%, as did the percentage of consumers ages 13-24 (21%), and those making less than $25,000 a year (38% to 39%). “For some groups of consumers, the convenience of mass merchants may be a significant benefit,” Kitchings says. “These types of stores have a wide range of inventory for those who prefer ‘one-stop-shopping,’ and consumers trust that they’re getting a good price.” Other consumers on the hunt for the best deal have turned to chain stores, which have become an attractive alternative to mass merchants. The first nine months of 2008 to the same time period in 2011 saw gains in the percentages of women (22% to 25%) and consumers making $50 - $74,000 a year (27% to 32%) who prefer to shop for most of their clothing there, the Monitor survey reveals. “Over the past few years, chain stores have become more price competitive, and have offered more fashionable apparel lines, in some cases partnering with high-end designers or celebrities,” Kitchings says. “And some consumers have responded with their wallets.” Other consumers, however, have turned online for the best deal. Despite the logistical difficulties many e-tailers face, the percentage of consumers who shop for most of their clothing online is growing slowly but steadily, from 4% in 2008 to 6% in 2011. But many of these consumers still harbor concerns about the process, from

shipping costs (89%) and clothing quality (81%) to the company’s return policy (80%) and the inability to try on the clothing (74%). And a full 71% remain concerned about the security of using their credit or debit cards online, according to Monitor data. Yet e-tailers have also ramped up their online presence, offering consumer reviews, product close-ups, and in some cases, even social media capabili-ties. Levi’s® made headlines in 2010 when it announced its “Social Shop-ping” initiative, which essentially added sharing capabilities to each product it carried online. Now Face-book users could like specific products online and share those with friends. Making the online shopping experience easier and more social has resonated with consumers, who shopped online in droves over the Thanksgiving weekend, including Cyber Monday. A report from IBM Benchmark reveals the average online order rose 2.6%, to $193.24 on Cyber Monday. About 80% of retailers offered online deals,

and 6.6% used a mobile device, up from 2.3% in 2012.

With optimism for the U.S. economy growing – even in light of the extreme volatility in Europe – the question remains whether consumers will shed their bargaining habits in favor of their pre-recessionary spending behavior.

As Kitchings notes, “The last three years have really challenged consumers to do more with less when shopping for apparel, and only time will tell if this shift is permanent or if brands and retailers will entice the customer to spend more.”

Emily Thompson is the Associate Director, Editorial at Cotton Inc., the research and marketing company representing upland cotton. For more information on the Lifestyle MonitorTM Survey, please contact her at ethompson@ cottoninc.com

MAKiNg THe ONLiNe SHOppiNg expeRieNCe eASieR AND MORe SOCiAL HAS ReSONATeD WiTH CONSuMeRS, WHO SHOppeD ONLiNe iN DROveS OveR THe THANKS-giviNg WeeKeND, iNCLuDiNg CyBeR MONDAy.


Serving customer needs is much more complicated today. There is greater competition than ever before. Today, we also have consumers who know that they can demand more value and they are getting what they demand. Fortunately, we also have technol-ogy that is giving businesses - particularly retailers - the tools to meet this demanding environment.

The collection and analysis of customer data has been the corner-stone of the marketing concept and selling things that people need. Market research programs have become a common tool for most companies seeking to understand what consumers want. The prob-lem with this kind of data is that it is at best an aggregate snapshot of a group or groups of people. Understanding the requirements of a specific individual was rarely a possibility within the execution of a typical market research study. Technology, however, has altered our ability to understand individual consumers. It has allowed us to make predictions and suggestions

based on individuals rather than groups of individuals. Amazon.com spearheaded the concept of capturing data relevant to individual needs. Launching as a small bookstore originally, Amazon began selling online and quickly grew to one of the first big companies to sell goods over the Internet. Amazon quickly diversified by adding other items, such as VHS tapes and DVDs, music CDs, software, video games, electronics, MP3s, cloth-ing, furniture, toys and even food items. Its secret was not selling books and products. Its secret was in capturing the data to target and track what the profiles are of users searching for various products. Other companies have observed Amazon’s success and have worked to extend the understanding of individual needs and requirements to other categories. A case in point: Have you ever bought clothing you knew you would end up return-ing? Have you ever left unworn clothing hanging in your closet for

months? Maybe it just didn’t fit properly…but nothing seemed to fit perfectly in the store at the time and you needed something "now". This is a reality for many consumers. Consumers need a curator to help them navigate throughout the shopping experi-ence and receive a personalized shopping guide with a list of recommendations of best-fitting, ready-to-wear styles based on specific size and shape. That guide is available now! Understanding individual needs based on the data from individuals — a sort of individual buying guide — is exactly what Me-Ality by Unique Solutions provides. Me-Ality takes the process of understanding and delivering on individual needs to a new level. How do they do it? They do it by gathering and analyzing data. Fully clothed, a consumer enters into the size matching station and stands still for about 10 seconds while the scanning wand rotates around the consumer's body. The size matching station registers some demographic information to complement the assessment of the consumer's measurements. Exact body measurements are captured and then matched to the sizing specifications of apparel brands in the database. Me-Ality holds the largest database of body measurements that reflect the true size and shape of a person’s body. This data is the key to advancing the ability of brands and retailers to deliver on what consumers want, and it will change the way consumers shop.

tHe SeCret IS IN tHe DAtA: DElivEring What CustomErs nEED & DEsirE By Dr. Larry Chiagouris

the secret to the success of most businesses can be found in the wisdom of one of the most successful retailers of all time -- the legendary Ray Kroc, founder of McDonalds. He described his business and its success several years ago with the philosophy that guided his life. He noted that his business was "to serve the needs and desires of our core customer base."


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Understanding the consumer’s profile gives the retailer the opportunity to create feature products that satisfy the consumer, resulting in fewer returns. Me-Ality brings qualified, educated customers into the store ready to buy products. This service introduces customers to new brands they have never tried before and encourages people to try on apparel in the stores, which is an important step in making a sale. Based on Me-Ality’s data, brand clients can better plan where they can make product changes to their current designs to better fit more of the consumer population. They can analyze the size data against a specific consumer demographic to better manage their inventory and develop new products that fit specific consumer groups. Demographic and measurement data used by the apparel brand enables better target marketing to different audiences. The brand client is able to determine who fits their brand, where they live, what their ethnicity is and how old they

are. Through this targeted market-ing, Me-Ality creates a positive shopping experience before the consumer even enters the store. Service like this can increase store and online shopping revenues and eliminate costly returns. By empowering the consumers with what looks best on them, the retailer can better suit their needs, and manufactures and brands can create products that are in high demand. In Robin Lewis’ book The New Rules of Retail, he predicts that there will be an explo-sion of retailers competing for a limited pool of consumer dollars and higher costs of entry for sellers. Me-Ality provides the tools so that consumers and retailers participate in a win-win exchange of goods and services during this expected "explosion." In the future, this will change the way consumers shop. This will also change the retail and branding landscape in the delivery of consumer needs and wants. This is a fit all businesses need and desire to succeed!

Larry Chiagouris has been called “a branding guru”, an “All-Star marketing strategist”, and “a consumer behavior expert” by the media. His opinions on modern marketing practice have appeared in hundreds of media outlets throughout the world, including the Today Show, Fox News, and The Wall Street Journal. He has authored more than 50 articles and books addressing marketing and retailing issues. He currently holds an appointment as Professor of Marketing at the Lubin School of Business of Pace University in New York and is President of BrandMarketing Services, a marketing consultancy. He holds a Ph.D. in Marketing and Consumer Behavior from the City University of New York. He has served as a member of the Board of Directors of the American Marketing Association and as Chairman of the Advertising Research Foundation.


reinvention HardwareBy Warren Shoulberg

The world of retailing is filled with some astonishing tales of stores being reinvented, transforming them-selves into entirely different species. Banana Republic started life selling safari jackets in funky jungle-like locations with jeeps crashing through the front window until it turned to metrosexual ware. Before Marvin Traub & Co. arrived, Bloomingdale Brothers was a low-end discount department store where the Little Brown Bags were little brown bags. And Abercrombie & Fitch used to cater to the adventurer crowd who wouldn’t know the difference between a Cosmopolitan and a cosmetologist.

To that list, Gary Friedman is in the process of adding Restoration Hardware.

What began as an eccentric version of a local hardware store founded by Stephen Gordon in the early 1980s in Eureka, CA is now arguably the most watched retailer of home furnishings in the country. And now Friedman wants to take that transformation one step further: He wants to be the next Ralph Lauren.

But, wait, we’re getting ahead of our story. A little history first. Resto – that’s what everybody in the trade calls it – evolved from that single store into a chain of close to 100 units by the late 1990s, going public in the process. The merchandise was a slightly bizarro collection of mission furniture, kitchen gadgets, cleaning supplies, and nostalgia-ridden toys and gewgaws. And it didn’t work.

Expensive real estate in fancy malls, low average tickets dominated by $6 gadgets and a wildly inefficient foot-print spread out all over the place drove the stock into the toilet and the profits went to…well, you can follow this metaphor, I’m sure. Eventually Gordon phased out/was phased out, landing at Robert Redford’s Sundance Catalog, where he remains today. Enter Gary Friedman. The long-time number two at Williams Sonoma, he was generally credited with creating the modern Pottery Barn, the one that influ-enced the home business in the 1990s more than any other single retailer in America. He was also credited with being never able to get his boss Howard Lester to hand over the corner office at WS. Friedman moved across the bay from Sonoma’s offices to Resto’s, and in fact overlapped with Gordon for a short time, a pairing that no doubt was as un-comfortable as it looked to outside observers. After Gordon’s exit, Friedman did a little of this and a little of that but it didn’t add up to a whole lot. Resto went private, which was a good thing because it hadn’t made any money since the invention of the metric wrench. For a few minutes, Fast Eddie Lampert of


Issue One 2012 11

Sears circled, threatening to buy Resto, seemingly to have it do for home what Lands End was supposed to be doing in fashion.

Finally, come around 2008 when the bottom fell out of the world, Friedman decided to go for broke. Out went the doodads and metal cleaners. Next went the mission furniture, to be replaced by a curious mix of vintage inspired dressers and couches in recycled wood and antiqued leather. While every retailer in the country was in a mad rush to trade down, Friedman went the other way. “If we’re going to go out, we’re going to go out in style,” Friedman told me in an interview at the reopening of the Flatiron store in Manhattan, the first unit to fully embrace the new look. The reinvention of Resto was on its way. That process reached its next level just a few months ago with the opening of the company’s Los Angeles flagship on the west side near both the Beverly Center and the home district adjacent to the Pacific Design Center. As an extra little ironic bonus, the store is housed in the failed flagship of the Williams Sonoma Home chain created by one Howard Lester. I’m sure that had absolutely nothing to do with the site selection process. Not that you would recognize any similarities between the former and the latter. The Resto store is painted dark gray and is entered through a courtyard that used to be the parking lot for the previous tenant. Inside is the latest iteration of the Resto look: More vintage wood, aged leathers, reproduction decorative

accessories, some one-of-a-kinds and, at least for the holidays, a broad selection of grab-and-go gifts and items that capture the spirit of the original Restoration product mix. The store is magnificent, brilliantly merchandised, and skillfully decorated. From over-scaled wall clocks and six-foot tall Eiffel Tower replicas to aluminum desks and chairs authentic right down to the riveting, the store is the most evocative single voice in home right now. But wait, there’s more. As Resto gradually winnows down its store count concentrating on larger, destina-tion-driven flagships, it has stepped up its direct sales effort with slick catalogs the size of medium-sized city Yellow Pages and an increasingly sophisticated website that takes a backseat to nobody in home.

And that’s where you’ll find Gary Friedman’s Ralph Lauren persona. The new catalogs feature a heavily romanticized portrait of Friedman along with a healthy assortment of Friedspeak, philosophical meanderings and quotations on taking the home road less traveled. Ralph couldn’t have said it better himself.

The transformation of Resto is, if not completed, certainly dramatic. Which raises the question of what’s next. Already, every home retailer and supplier in the space – from Target to Macy’s and even to a little operation called Pottery Barn – has jumped on the Resto look much as everyone jumped on the Pottery look in the 1990s. Talk about reproduction. In the meantime the company investors announced last fall they were considering taking Resto public and released some numbers that showed it making money, a sight as rare as some of the one-of-a-kinds on the selling floor. Can Friedman continue to keep Resto one step ahead of everybody else? Can he keep the Ralph thing going long enough to become a household name? Will it go public again and fall prey to short-term stockhold-ers who don’t want to hear about long-term strategies? Most importantly, perhaps, can Gary Friedman prove that Resto is not a one-trick pony and that it can continue to reinvent itself to fit the times? Don’t bet against him. After all, he’s got just the right Hardware for the job.

Warren Shoulberg is Editor Director for several Sandow Media business publications and buys more things at Restoration Hardware than he probably should.


fIve KeyS TO SuCCeSS With a sl immED-DoWn invEntory By Jon Mays and Brooks Kichel

The growing emphasis on ever-leaner retailing means the days of hedging inventory bets with colossal surpluses are gone for good. The costs of inventory mishaps—both in terms of actual bottom-line economics and brand experience for customers—have driven many retailers to signifi-cantly reduce their inventories.

Meanwhile, it’s grown increasingly difficult to predict the actions of American consumers, whose intentions are less and less corre-lated to their actual behaviors since the recession.

While most retailers have cut their inventories accordingly, lead-ing retailers are optimizing their remaining inventory to get the most bang for their buck.

aggrEssivEly sharE invEntory aCross ChannElsTruly sharing inventory across channels creates the opportunity for tremendous customer experience benefits and can help avoid having to mark down large amounts of leftover merchandise. From a customer experience per-spective, shared inventory increases the likelihood that a customer will be able to purchase a product in a particular size or color, regardless of channel. For small bricks-and-mortar locations, sharing inventory can open up a whole new array of choices for customers. Sharing inventory also allows retailers to buy generally wider, shallower assortments—offering

more products and with less risk that there will be huge amounts left behind to discount. Nordstrom increased its inventory turns from 4.84 to 5.41 by sharing its inven-tory across channels.

PrEParE For aCCEl-

EratED innovationConsumers have become increas-ingly accustomed to a constant stream of new, innovative products. Fast-fashion retailers are a popular example, but this desire for fresh products permeates the entire retail and consumer products sector, from televisions to coffee pots. Offering the latest and greatest can help entice consumers to shop more frequently, and failing to do so will drive them to competitors. But introducing new products—and

Best Practices from Kurt Salmon

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Issue One 2012 13

exiting old ones—also creates com-plicated situations for merchandisers. Of course, a deep understanding of the marketplace is essential to being able to anticipate when a new product or trend is going to come along. From there, it takes careful planning and collaboration to be able to move that new inventory through the supply chain while exit-ing old products across channels.

BEt Big WhErE it

mattErs As retailers trim inventory levels, many are tempted to cut from the top—slicing from the highest-per-forming stores and styles. Instead, many would be better served by supporting the highest-performing stores and styles with additional inventory and trimming from their lower-performing counterparts— in essence, throwing good money after good.

Cutting from a low-performing style or store can cause only so much additional damage, while supporting high performers has the potential to significantly boost sales. In Kurt Salmon’s work with leading retailers, we have yet to find a situation where a client over-bet on a high-performing style or store.

Understanding each store’s markets and core assortments will help inform the decision on where to bet big while limiting risk.

invEst in CorE

assortmEntsAs inventory dollars shrink (in part because of rising production costs in China), merchandising execu-tives are increasingly tempted to spread out those dollars among a wide array of styles. Resist this urge and instead focus on support-ing core offerings. Most retailers will be unable to compete with behemoths like Amazon.com that offer a virtually endless collection of products—and trying to compete can be extremely brand-damaging. Spreading inven-tory investments too thin can result in a broad assortment, but with little inventory across it. In this situation, core products will rapidly sell out, leaving customers disappointed, hurting the brand.

Instead of trying to be a jack-of-all-trades, retailers who understand their core customers’ needs and wants can tailor their assortments to focus on what that customer is most likely to purchase and then invest heavily in those products.

managE invEntory FurthEr uPstrEam When working with a pared-down inventory, it’s essential to limit the amount of time that inventory isn’t available for sale. This is accomplished through increased collaboration between planning, buying, sourcing and supply chain functions, and by utilizing a more sophisticated, streamlined supply chain. Above all else, this supply chain must be flexible and demand-responsive. Some retailers are turning to near-shoring, or produc-tion in Central or South America, to accomplish this. One option is to produce small quantities of each style close to home, testing them in-store and online and then send-ing larger orders of popular styles to China, as Nine West does. On the other hand, retailers could use near-shored facilities to produce quick reorders of popular products mid-season. But flexibility isn’t just about product—it’s also about timing. It’s important to have the supply chain capabilities to deploy inven-tory to different parts of the country at different times. For example, it may be critical to deliver lawn and garden products to the South-east in February, but those same items may not be needed in the Northeast for several more weeks.

Retailers have already been asked to work with less, but many can do more with their pared-down inventories —armed with a deep understanding of their core customers and a solid set of internal processes.

Together, Jon Mays and Brooks Kitchel have more than 30 years of experience advising industry leaders on their inventory management strategies.

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iNSTeAD OF TRyiNg TO Be A JACK-OF- ALL-TRADeS, ReTAiLeRS WHO uNDeRSTAND THeiR CORe CuSTOMeRS’ NeeDS AND WANTS CAN TAiLOR THeiR ASSORTMeNTS TO FOCuS ON WHAT THAT CuSTOMeR iS MOST LiKeLy TO puRCHASe AND THeN iNveST HeAviLy iN THOSe pRODuCTS.


Furthermore, one might say that it is Amazon, not the Internet, that is changing the face of retailing today by changing the way consumers shop and buy. If the Internet is a funda-mental globally disruptive, game-changing event, then Amazon is its most disruptive pioneer.

The company has singlehandedly changed consumer behavior: “running an errand” replaced by “going online”; instantaneous price-shopping from one location; actually bringing retail closer to a perfectly competitive marketplace. Amazon also paved the way to meteoric e-commerce growth for all other retailers by making consumers comfortable with it. Conversely, Amazon has already put Borders and other retailers out of business. Who’s next? Or who will be forced to completely change its model in order to survive?

Indeed, the Internet by itself is just a tool, albeit one for which its uses are still being discovered, with Amazon leading in such discovery.

Bezos has stressed the point that Amazon must provide enormous added value to change consumers’ shopping behavior. In fact, early on he called the Internet “a primitive infant technology.” By now, of course, Amazon has taken that technology light years beyond its infancy, but, would concede there are light years remaining for its growth.

So, how big is Mr. Bezos’s vision of the “biggest store on earth?” Who knows? And I would suggest that even he does not have a volume number in mind. Currently, Walmart holds the “biggest” position, at almost $450 billion, against Amazon’s $34 billion in 2010. However, one must note that “Pacman” has grown a blistering 300% since 2006, (vs. Walmart’s growth during the same period of 21%), and is expected to hit about $50 billion in sales in 2011. And, while Walmart has 200 million visitors a week, Amazon is now hosting over 300 million per month, based on comScore estimates, and saw its traffic rise by 15% on Black Friday weekend. Amazon

now has an over 20% share of total worldwide e-commerce traffic. Also, more than half of Walmart’s revenues come from groceries and other non-discretionary items, categories that Amazon has not even attempted to break into.

And, as far as Bezos is concerned, it is still “Day 1” at Amazon, as quoted in his 2010 Annual Report letter, which contained, as do all his Annual Letters to shareholders, a reprint of his original 2007 “Day 1” declaration.

So, how long does it take a $50 billion business, growing at a 300% pace every five years, to reach $400 billion in sales? You do the math. Answer: it’s about 8 years.

Furthermore, Amazon is growing beyond just being the biggest store on earth to being the biggest marketplace on earth where anybody and every-body can set up shop.

“gEt Big Fast” anD “omni-PotEnt – izE” thE ConsumEr

As pointed out in Robert Spector’s book Amazon.com: Get Big Fast, Bezos, from Day 1, focused on two things: 1) getting “big fast;” and on 2) making Amazon the “most consum-er-centric company on the planet.”

Founded in 1994, Amazon went public in 1997, and by 1999 its stock had rocketed up 5600% without making a penny in profits. When asked at an annual shareholders meeting when they would be profit-able, Bezos’s response was deafening in driving home his crystal clear, long term vision and how he planned

AMAZON From Earth’s BiggEst BookstorE to thE BiggEst storE on Earth? continued from page 1

WhilE amazon’s First slogan “Earth’s BiggEst Book-

storE” DiD DEsCriBE thE BusinEss thEy WErE in, it DiD

not DEsCriBE thE vision oF thE BusinEss thEy arE

BEComing. that vision, as DEFinED By amazon’s

FounDEr anD CEo, JEFF BEzos, haD no BounDariEs,

anD aPParEntly still DoEs not. Books WErE alWays

Just thE BEginning in BEzos’s minD.


Issue One 2012 15

to fund it. First of all, he did acknowl-edge to all shareholders and investors that he understood the imperative that long term a business must trade on a reasonable (price/earnings) mul-tiple, and that market cap must reflect the current and present value of future cash flows.

Having given that nod to the tradi-tional investing mindset, he then very clearly stated his strategic vision: that Amazon was focusing on investing in all of the “insurmountable opportuni-ties” provided by the Internet, where e-commerce sales were growing at 2300% a year.

Essentially, from a fiercely competitive perspective, he was saying that he intended to rapidly scale the business in the wild new Internet frontier, where survival of the fittest was a harsh reality.

In short, “get big fast” was his mantra (also an imperative to accomplish his vision). And, Amazon would not turn its first profit until the third quarter of 2001, however meager at $350K, or 3% of net sales.

His long term vision continues to this day, extending out even longer. Quarterly earnings are not the drivers of his vision. Investing in “getting big fast,” is. Share gains now mean prof-its later. His belief is that first movers can get big fast if they focus more on gaining share of a totally new market than worrying about revenues.

Now, 10 years since turning its first profit, and some 18 short years into the wild west of the Internet, Amazon continues to make money, albeit not

much: a five year operating margin of only 4% vs. an average of 6% for department and discount stores. So, it’s apparent that Bezos believes there is still an enormous number of “insurmountable opportunities” in e-commerce, as Amazon keeps investing in acquiring, expanding and innovating itself to ever-greater volume and share. And, those invest-ments pay off in another way. With no physical stores and faster invento-ry turns, Amazon’s five-year average return on invested capital is 17% vs. traditional retailers’ average of 6.5%. This gives Amazon a market value of $100 billion, which is about equal to that of Best Buy, Staples, Target, Sears, JC Penney, Macy’s, Nordstrom and Kohl’s combined.

And, if there is any doubt about share dominance, check out the accompa-nying chart and Amazon’s whopping

number one share of e-commerce sales at 35%. The “runner-up,” Staples at 10%, is not even close. Also notice that Walmart and Sears are the only traditional, broadline retailers that even made the cut, so to speak.

By the way, another strategy often used by Amazon, particularly for new products like the Kindle or Fire e-readers, is to set an opening price below cost, in effect, losing money to grab dominant share of market “fast,” knowing they will make it up on book sales. They will also use hot selling items as “loss leaders” for the same objective: remember the pricing “share wars” against Walmart and Best Buy over flat screen TVs.

hoW to DEFinE Big anD Fast

So, how does one define “big” and “fast?” Well, both are relative.


Many would say that at an estimated $50 billion in 2011 sales and having grown at the rate of 300% over five years, Amazon is certainly big and has grown really fast, at least for a retail business. However, relative to Walmart, Amazon is not yet that big. On the other hand, compared to Walmart’s early days following its launch in the 1960s, Amazon’s scale speed is mind-warping.

To put it in a more understandable context, think about the fundamental new retail model facilitated by the Internet, (kind of like from horse and buggy to automobiles). For roughly 50 years Walmart has grown primarily by opening new stores and/or selling more goods out of existing stores. Both require huge invest-ments in money, human capital, and time. Conversely, Amazon’s stores already existed, housed in the mil-lions of personal computers around the world - located not across the street but adjacent to each consumer’s keypad, literally at their fingertips. Thus, Amazon reaches a vast global audience, instantaneously, from one central location, with most of its costs fixed (except for order fulfillment and customer service).

Think about it. Just as Henry Ford introduced assembly line production of automobiles and got “big fast” to own the number one share of that new frontier, Bezos is doing

the same in the new Internet frontier. But, rather than manufacturing more cars faster, or opening one or more physical stores as fast as Walmart may be able to, Bezos can literally put anything and everything known to mankind into the Amazon market-place instantaneously, and for incred-ibly low costs. And then,of course, Amazon delivers whatever is ordered, often the very next day. Thus, it gets even bigger, faster. Bezos’s vision has no end, because the Amazon model is limitless. thE omniPotEnt ConsumEr

Bezos’s other mantra: making Amazon the “most consumer-centric company on the planet” is the abso-lute driver of every new technology, system, process, and web innova-tion that Amazon creates under their “SOA” (Service-oriented architecture), which they initiated early on, and which has now become the buzz-phrase around the Internet.

In last year’s annual report Bezos writes: “Many of the problems we face have no textbook solutions, and so we – happily – invent new approaches. Our technologies are almost exclusively implemented as services: bits of logic that encap-sulate the data they operate on and provide hardened interfaces as the only way to access their functionality. This approach reduces side effects and allows services to evolve

at their own pace without impact- ing the other components of the overall system.”

At the end of the letter he says: “As always, I attach a copy of our original 1997 letter. Our approach remains the same, and it’s still Day 1.” And, his first two commitments read: “We will continue to focus relentlessly on our customers,” and, “We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.”

Bezos has also said: “When people ask me if our customers are loyal, I say, ‘absolutely, right up to the second that somebody else offers them a better service.’” Bezos repeats: “that we were going to obsess over our customers and not our competitors.”

And, following is a sentence out of Amazon’s general description of their business: “We seek to be Earth’s most customer-centric company for three primary customer sets: consumers, sellers, and enterprises.” Here again, this statement embodies Bezos vision beyond just Amazon as a store to a mega-marketplace, as he includes “sellers and enterprises” as customers he aims to please.

...Relative to Walmart, Amazon is not yet that big. On the other hand, compared to Walmart’s early days following its launch in the 1960s, Amazon’s scale speed is mind-warping.


Issue One 2012 17

And, of course, all three customer sets can be pleased by Amazon’s superior execution of convenience, price and service, comprising the most significant competitive advan-tages for Amazon. While the conve-nience of Internet shopping works for all competitors, Amazon has not only aggregated the broadest selection of merchandise ever on one site (truly a one-stop shop), it is also quickly and easily navigable (no more than three clicks to find anything). Further, they invented “1-Click” checkout and an online system that permits customers to exchange unwanted gifts before they even receive them.

While all Internet players have pricing advantage over traditional retailers, (also enhanced, so far, by not having to collect state sales taxes where they have no physical presence), Amazon has further advantage, again, by the ability to leverage their scale and sheer breadth of products to win share by losing margin, potentially to be offset by higher margins in other categories.

Bezos also had a philosophy about competitive pricing that was indica-tive of his visionary way of thinking. In the Spector book, when asked if he worried about online shoppers having ready access to information that lets them compare prices among all retailers, he answers: “…it’s a concern in one sense, but it’s a concern in the way that gravity is a concern for Boeing.” He goes on to explain this will be the way of e-commerce. “Customers are going to have near-perfect information. The merchants who don’t understand this, and don’t build their business

plans on that basis are, I think, going to have the most problems.” And, are they ever.

Service in retailing has many components, and while e-commerce cannot provide the human “touch” of sales associates in a physical store (although it’s hard to find), they can make up for it in other ways. And, Amazon is always raising the bar. Not only the convenience, 1-Click checkout and return/exchange pro-cesses mentioned above, but, Amazon knows who you are, what you like, when you bought something with suggestions for new selections and generally their site is customized for you.

And, if you have any issues/prob-lems, the site makes it quick and easy for resolving them.And, by the way, if a consumer cannot find what they want from Amazon.com or any of the other sellers, brands, and/or retailers on the site, Amazon’s “All-Products Search” search engine will locate it elsewhere on the Web, and the consumer might often be led to a competitor’s site. Of this, Bezos said also in the Spector book: “In the categories where we are selling things directly, if we can’t be competitive, then we shouldn’t be standing in the way of our customers” – consumer-centric, indeed.

And, just as quickly and easily as you can navigate, select and purchase anything you want, wherever you are, Amazon can deliver it, free of shipping charges, over night through their Amazon Prime program. This capability is largely made possible by Amazon placing their roughly 15,000 U.S. distribution centers

in close proximity to UPS shipping facilities. By the way, Amazon Prime is another example of Amazon forcing the entire industry to change.

I must say, however, that while the on-site shopping and buying process is convenient, quick and easy, the visual presentation of the brand and its marketplace is very utilitarian, and frankly very stale when compared to most other e-commerce sites. If Amazon has some research that found consumers identifying the look and presentation as compatible with their image of Amazon as a low price commodity provider, so be it. On the other hand, as they expand their marketplace, including more upscale brands, they would be well-advised to re-image and modernize the style and look of the site.

tomorroW thE WorlDamazon acquires uPs, Controls the Entire Publishing industry, launches thousands of neighbor-hood showroom stores


Does this sound a lot like vertical integration? It sure does. And, I believe Amazon through Bezos’s vision is going to pursue such strate-gies in several areas. If you think about “preemptive distribution,” as defined in our book The NewRules of Retail, Amazon can “retail” the entire world. It is a key tap away, 24/7, in front of millions of consum-ers’ faces, first, faster and more often than its physical competitors, and can deliver over night through their proximity to UPS. Well, why not acquire UPS (market cap of $69 billion)? Think not? Think again.

Actually, Amazon is also redefin- ing “competition.” If Amazon is a marketplace, (or “mall,” using the vernacular), no one is a competitor. Or, maybe everyone is a competitor. Amazon will allow anybody, including competitors, to sell in their marketplace. Furthermore, the Amazon brand image integrity does not confine it to serving just one consumer segment. It’s a truly democratic model, conceivably offering everything from discount to luxury sector goods without tar-nishing its image. Amazon founded the MyHabit upscale designer flash sale site, which competes with Gilt Groupe, Rue La La and others. By the way, as Gilt Groupe approaches $1 billion in sales and gains interna-tional coverage, don’t be surprised if Amazon acquires them. Having tested consumer desire for flash sales through MyHabit.com, why not own the market leader, just as it tested Amazon customer appetite for shoes before acquiring Zappos?

And, regarding the second of the three “new rules” in our book: value chain control; what about

Amazon’s recent launch of its hard copy and electronic book publishing business? Headed by a publishing industry veteran, Laurence Kirsh-baum, it is already wooing best- selling authors. As it grows that busi-ness, Amazon has the potential to dis-rupt and change the entire publishing value chain, beyond just the retailing link it has already altered. One of Amazon’s top executives was quoted in the WSJ: “The only really neces-sary people in the publishing process now are the writer and reader.” Whoa! Are we talking the “way of the buggy whip” here, for traditional publishing houses, agents, printers, etc.? Well, this is all about value chain control and dominance as well as gaining greater preemptive distribution capabilities, as outlined in the book.

What other industries might Amazon disintermediate, vertically integrate and control? Use your imagination and while doing so, keep in mind that Bezos’s vision and the Amazon business model have no limits.

Finally, and the third of our “new rules,” as a pure e-commerce model, Amazon has so far not been able to provide consumers a neurologi-cally connecting, real-world, physical experience. And, while they have succeeded in creating a great experi-ence online around service, conve-nience, and price, the “touchy-feely” all senses environmental experiences provided in physical stores, like Abercrombie & Fitch, or Apple, for example, simply have not been possible online.

Well, I believe that is about to change. And, I believe that Walmart and many other brick and mortar retailers will soon feel that “Pac

Man chomping” sound on their back-side. One reason: with some 15,000-plus distribution centers in the U.S. (10,000 internationally), and with the state sales tax break soon to disappear, how can one not see a simple and logical extension of those centers into small neighborhood showrooms, stocked with samples of local consumer preferences, (since Amazon’s data base is said to be larger than that of the Pentagon with knowledge of what brand of jeans a working mom in Molina, Illinois wears)? And, there might be screens for further shopping and ordering, all in an experiential environment: cof-fee, music, and so forth? In fact, if you cannot imagine this, a former top executive of Walmart has confided that this is one of Walmart’s biggest fears. On top of the threat of Amazon competing in the behemoth’s own “back yard” so to speak, with brick and mortar stores, Bezos’s Day 1 vision means Amazon will certainly continue to add products and services at a blistering pace and into infinity, because the business model has no limits.

Are you beginning to get the concept of no speed limits and no size barriers for Amazon? Indeed, their logo with the curved arrow under the letters of Amazon, starting under the ‘A’ and ending under the ‘Z’, was specifi-cally designed to indicate everything from A to Z. Interestingly, it looks like a smile.

Amazon, as the biggest river in the world, now has its name attached to an Internet phenomenon on its meteoric rise to becoming the biggest marketplace on earth.Welcome to “Day 1.”


Issue One 2012 19

It’s commonly assumed that the creep-ing social stratification that’s widely written about crosses over to the retail sector, with the higher-end consumer shopping exclusively at luxury retail outlets and the lower-income buyer shopping at discount stores. In fact, our analysis of anonymized transaction data at an aggregated level is painting quite a different picture. This aggregated data consists of segments of anonymized transac-tions with similar spending patterns, matched against categories of retailers. Not only do high-end shoppers tend to “cross the street,” buying designer clothing at a luxury department store, but spending on school supplies and household goods at a low-end depart-ment store or eating at a quick-serve restaurant; but over a six-month

period in 2011, in our analysis of aggregated transactions at 20 high- end brands, we found that a remark-ably consistent portion of spend by regular shoppers at high-end stores was at discounters. A number of factors may be driving this. Our data for the aggregated high-end shopper segment is showing that this segment, which shops at brand name luxury stores, also spends on aver-age 6.5% of overall spend at bargain outlets. They also actually shop more frequently at discount stores. They may be buying their apparel at a high price point at luxury stores, but they’re also going to the discount department stores for their everyday spend, and eating at

inexpensive food chains. We can also conjecture from what we’re seeing that discount and “aspirational” shoppers are buying luxury brand goods in addi-tion to lower price point merchandise. We’re calling these crossovers “affinity plays” – high-end shoppers still have an affinity for bargain hunting and spend segregation, and lower-end shoppers still want their brand names and luxury. This suggests a sort of democratization of the shopper mentality, fluidity between high end and low end, which has consigned pure snob appeal to the memory of a pre-recession mindset. In short, few shoppers are chasing snob appeal, even if they can afford it. Some retailers have made it their business to shift their merchandising to take advantage of the crossover shopper – appealing to both a desire

for luxury or brand image and a need for a lower price point. What they offer is a fun, bargain-rich shopping experience as well as fashion-

able merchandise. We’ve found through looking at aggregated transaction data that this marketing strategy holds broad appeal for both ends of the market. What can this aggregated data tell us about crossover shopping? These customer segments that spend at high-end retailers and are also consistently spending 6.5% of their total credit card spend in discount department stores, may be doing it to quench a thirst for bargain hunt-ing; or to segregate their spend; or to segregate their spend so that they use discounters for everyday-type purchas-ing. With the knowledge from our aggregated sample, we can infer that

there is enough movement between these sectors that retailers may gain significant advantage by teaming up with one another to attract customers. In other words, partnerships between luxury and discount merchandisers would probably encourage greater overall spend in the current economy. The possibility of expanding partner-ships between brands, as well as using analytics to help retailers across the spectrum make informed decisions about stocking and geographic plan-ning, appears to be a winning strategy in cultivating these crossover shoppers. What can discount retailers do to encourage their high-end crossovers to put more items in the basket? This is just one of the lenses through which we approached this research. Could a discount marketer that appeals to the aspirational shopper actually shift market share away from a luxury outlet? And vice-versa? We think this is very likely. Discount retailers that manage to be “cool” for upscale shoppers -- by creating shop-ping experiences that make bargain hunting fun and aesthetic -- will clearly win out in this affinity play over those who simply offer “cheap.” Accepting and understanding the new reality of shopping fluidity can help inform big brand retailers and discounters alike. If retailers pay attention to the data analytics on what their customers buy, when, and where, they can strategize to capture shifting consumer senti-ment, align their products with market demands, and achieve better returns.

Andrew Mantis leads MasterCard Advisors Information Solutions/ Merchant practice. He can be reached at Andrew_Mantis@ mastercard.com

wHat do You Get wHen You Cross LuxurY spend witH disCount BuYinG? Affinity Plays! By Andrew Mantis

Consumer Insights From MasterCard Advisors

High-end shoppers still have an affinity for bargain hunting and spend segrega-tion, and lower-end shoppers still want their brand names and luxury.


It’s a good thing for Martha (to use one of her signature phrases). It’s a good thing for JC Penney. And it’s a good thing for Macy’s, which I’ll get to in a minute. I’m writing, of course, about JC Penney’s acquisition of roughly a 16% stake in Martha Stewart Living Omnimedia Inc., which means the retail giant will be installing Martha Stewart shops inside JC Penney stores beginning in February, 2013, following the expiration of Martha’s contract with Macy’s. From a financial perspective, though the terms of Martha’s deal with Macy’s are not public, the $38.5 million buy-in from Penney’s was certainly not a bad thing for MSLO. And for JCP to make that kind of investment, they must have an idea that’s it’s a really good strategic move. First of all, from the few hints and statements that have been put forth by Penney’s new CEO, Ron Johnson, there is no way he plans on implementing a “tired formula,” as some have called it. Nor is Martha Stewart a tired brand, even though it’s bounced around for some time. In fact, according to Robin Report home furnishings columnist Warren Shoulberg, who is also Editor-in-Chief of HFN, Editorial Director of several Sandow Media business publications, and one of the most knowledgeable experts covering the home sector, the MS brand continues to be one of the most underrated in the home business. And, it did find a refreshing, well-positioned home at Macy’s where, according to most sources, it was doing quite well. So, I don’t believe Martha would team up with JC Penney solely for financial reasons. I believe Ron Johnson had conversations with Martha Stewart about the strategies that would fuel his vision, and in which her brand would play an exciting new role: “…I’m not here to improve, I’m here to transform…” As reported, Penney’s envisions bringing “a comprehen-sive retail experience featuring Martha Stewart products, know-how and advice.” These will be Martha Stewart stores within Penney’s, but run by associates trained by the brand. And, I can see this expanding into cooking classes and why not Martha’s restaurant, and other “Martha-isms,” a term of Mr. Shoulberg’s. Home and garden apparel anyone?

By the way, the reason I believe Martha leaving Macy’s will also be “a good thing” for Macy’s, is that it provides the opportunity for them to pursue a brand or designer who is perhaps better aligned with their sought-after younger consumers. Johnson has taken a lot of barbs from pundits, teasing about how he would translate the Apple “genius bar” in JC Penney. In fact, Bloomberg Businessweek ran a cartoon parodying such attempts and how they would look like within the store. Well, Johnson may not have genius bars in Penney’s, but he might very well have Martha-trained associates as little geniuses on All Things Martha. And, for those of you who think this was a weak opening act for his grand new vision for JCP and the department store business model, I believe it’s not even close to being the whole act. On January 25th we will likely hear about all three acts and how a newly transformed JC Penney is going to look. And, I wouldn’t be surprised if he’s going to talk about acquiring and/or leasing space to “star” brands or designers who, like Martha, will provide their own shops, maybe even run by their own brand “geniuses.” So, imagine an enclosed “mini-mall” with all kinds of events, restaurants, and theatre: JC Penney as a destination for experiences, and within that destination, branded shops of all kinds. Following the Sephora and MNG by Mango models, and soon to be Martha Stewart boutiques (and maybe restaurants?), they could lease space to brands such as Soma, which matches their core consumer sweet spot, and others. Why not? Those apparel specialty chain brands get hundreds of new locations for very little capital investment, and Penney’s traffic. What a synergy. And, then of course, why not roll out their own private branded specialty chains like Arizona and others? I wonder if Apple would find some of their locations attractive for leasing space? Are these ideas way out there? Sure they are. Would they be enormously costly to pull off? Sure they would. Would they take a long time to implement? Of course. Would they be “transformational?” BINGO!!!

It’S A gOOD tHINg: MArtHA JCpeNNey Reprinted below is Robin’s recent blog on the just-announced deal between JCPenney and Martha Stewart.


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Robin – I've got to say that this is the first one where I think you've wandered way off course. Where's that cynicism we all know and love? You've laid out a wonderful set of aspirations for JCP. However, unless you have access to some inside info on Johnson's plans, I don't see how he he's going to pull off the program you've outlined without investing billions in the reconfigura-tion -- and then, god knows how much in the market-ing needed to lure customers. It would take Johnson years to get those kinds of broad changes in place. Martha's done her bit on TV, at Kmart, Home Depot, and Macy's -- and, of course, Alderson State Pen. By the time Johnson got this going, Martha and the brand would be about 867 in dog years. What do they say about new tricks? I'm just not sure that it's possible to freshen her up for yet another rebirth. My impression is that it was really the Macy's team that was designing (or at least directing) the merchandise for their stores. Everything else that she's been doing on her own hasn't changed since the 1990s. Basically, if Newt Gingrich had gone into retail, he'd be Martha Stewart. Moreover, the JCP Board is presumably paying Johnson a fortune to win over the same demographic that went nuts over the Apple stores. You note that Macy's is targeting a younger customer. Why is John-son targeting an older customer who is more likely looking for "geriatric" than "genius" bars? Maybe

she's an acquired taste, but for "excitement," there are a number of women who come to mind before Martha Stewart. And, in conclusion... if Johnson is such a master, you'd think he would orchestrate this a little better. Assume that he has in mind the great makeover you've described. I would think that Martha Stewart would be just a small -- and one of the less exciting -- parts of it. Why not wait six more weeks to be able to trumpet out the broad strategy -- and generate real enthusiam among investors and the vendor community? I must say, as a mouth-watering appetizer, Martha's right up there with a lettuce wedge. Where I do agree is that, in the end, Macy's will be much better off. They've got excitement and energy going for them, are in the forefront of every technol-ogy, and much more than anybody else, seem to embrace retailing as theater and entertainment. So, in the end, JCP's move just leaves me scratching my head -- and a number of other body parts. Most humbly yours,Bruce Wayne P.S. One of my partners felt strongly that I'd be nuts to put my name on this. So, given his sentiments -- and the remote chance that Martha is planning to invite me for the Holidays -- I probably should keep my identity hidden.

Robin’s Response:I must say, all of your points are valid (and we love the humor), except among consumers, the MS brand is still powerful. So, everything you say will turn out to be right -- ho-hum at best, failure at worst --- unless what I’m predicting is carried out by JCP. And, you’re

right about the investment --- huge --- including major store overhauls, etc. But, hey, this is what the guy promised and what everybody expects, so I guess I’m rolling the dice on his declarations. We’ll also hear him on the 25th of January with the whole enchilada.

Below is a response we received from a prominent retail consultant who, understandably, shall go nameless, and who took issue with Robin’s bullish view of the MS/JCP deal.


CuStOMer ServICe MAkeS BeSt Buy A Better BuyBy Jane Singer

On Black Friday morning I wasn’t feeling well, so cancelled my plans for the rest of the day, and went back to bed. When I turned on the TV, nothing happened. Sick as I was, I needed a working television. Some-how, I got myself together and walked over to Best Buy. To buy a new TV. On Black Friday in Manhattan. What was I thinking?

It was midday, and the store was crowded with shoppers clutching their circulars, competing for what was left of the doorbusters. There were lines everywhere. I was not looking for a doorbuster, just a basic television at a reasonable price, which I knew I could get at Best Buy. I’d looked online before leaving home just to get a sense of how much this outing would cost. I got to the store, commandeered a sales person, asked a couple of questions, chose a televi-sion that seemed to be the right size and price and told the sales person I needed to get out of the store quick-ly. The sales person escorted me to a counter, the TV boxed and in hand, and told me I’d be the next customer. My transaction completed, I was

in and out of the store in ten minutes. Ten minutes.

I’d been to Best Buy many times before, both in store and online, but never really thought much about it. It is a place to buy consumer electron-ics -- a category that is not particu-larly exciting for me. It is convenient, the assortment is good, and the brand image is OK – neither compelling nor negative. It never occurred to me to think of Best Buy as a store with good customer service. I know from my experience working with retailers that good service can be a distinct competitive advantage. Now I was both intrigued and impressed with Best Buy. How did customer service fit into its strategic mix?

Standard and Poors recently described Best Buy as the “best-of class U.S. consumer electronics retailer based on its digital product focus, knowl-edgeable sales staff and effective marketing campaigns.” I decided to do some stealth shopping to see how Best Buy was delivering on “knowl-edgable sales staff” and other parts of the value equation, and talked with dozens of customers and associates about their experience at Best Buy.

My overall impression was good. The sales associates I spoke and shopped with were energetic, fairly knowledgeable, upbeat and helpful.

Many of them were relatively new to Best Buy and had been on the floor for three months or less. Several approached me as I was looking around and asked, “Can I help you?” None were disappointed or discon-certed when I said I’d like to think about it. One associate was pleased to be in television/home electronics because it accounted for the most significant percent of the store’s sales. She was not on commission, but her management knew how much she was selling.

One associate who helped me had only been on the floor for three days, but she was smiling and knew the key talking points: “LEDs have a clearer picture than LCDs, it is a newer technology, LEDs are thinner, use less energy, last longer…” “Samsung is the best television made today.” DeIivery options were explained clearly and cheerfully. I could “take it with me, have it delivered free, which would take a few days, or have it delivered immediately for $30.”

Best Buy associates get a week of training. Most work part time. Many are students, and have flexible, school-friendly schedules. During training they are taught category essentials and general customer service tactics. Most did not see themselves on a career path at Best Buy or in retail, but, were positively affiliated with and proud to be working at Best Buy.

One associate in Best Buy Mobile was especially knowledgeable. In addition to her engaging performance about why I should shop Best Buy for a phone vs. Verizon or other mobile retailer -- she explained perkily that Best Buy has a better selection, non-commissioned staff, competitive pricing and back up service and protection. She then checked my


Issue One 2012 23

Verizon contract on the spot to tell me when I was due for a new phone. She explained the difference and some feature benefits between a Droid and an iPhone. She had started in security just a few months before, but her manager “pulled her out” because she had “too much personal-ity not to be on the floor.” In addition to personality, she had sufficient knowledge (which she got in a one week training program in Boston.) Ten minutes with this young woman convinced me that I was better off buying a new mobile phone at Best Buy than I ever would be at Verizon. Customer service as a competitive advantage in the computer department was more difficult to assess. One shopper told me he buys all of his Apple products at Best Buy because of the convenience and service war-ranty back up. Two women I spoke to had just purchased a laptop and were waiting 30 minutes for the installation of software. They were happy to wait and preferred Best Buy to online shopping of any kind because they wanted to see, touch and feel the products. For them, Best Buy was a destination. “They have everything.” Yet another loyal Best Buy customer suggested that I shop at the Apple Store but buy at Best Buy. He told me that I’d get better prices, service and protection at Best Buy.

A UPS guy in his neat brown uniforms told me he shopped “by SKU” at Best Buy to search for the best price, then purchased at Amazon, letting UPS deliver it to his house. For him, Best Buy is a mere laboratory to search and research items. Another consumer agreed: “I buy everything at Amazon. It’s cheaper. And, because I always go above the $25 minimum, I have it all shipped free to my sister’s house in New Jersey so I don’t pay sales tax.”Surprisingly, none of the customers or associates I spoke with mentioned the Geek Squad, Best Buy’s technical service and support department which pre-dates Apple’s Genius Bar. Geek Squad is a store within a store at Best

Buy. Its branding – logo, typeface, associates uniforms, and overall iden-tity is completely separate and distinct from Best Buy. If you see a Geek Squad trademark vehicle on the road you might not recognize it as a part of Best Buy. The Geek Squad website includes the Best Buy logo only at the very bottom of the home page. There was only one tiny promotional offer for the Geek Squad, “Bundle and Save,” in this week’s pre-Christmas Best Buy circular.

Geek Squad agents, who are self- taught and have technical certification, arrive at Best Buy with significant technical knowledge, so no special training is either required or provided by Best Buy. Each one I spoke with seemed confident and competent (“we can fix anything!”) and invited me to bring my computer in for a free diagnosis. Most customers seemed generally trusting and appreciative of the Geek Squad, although one was concerned that they would be overly expensive and might even invade computer privacy. Geek Squad agents assured me that while they might be able to see files in my computer, they are not able to open files. Overall, the Geek Squad did not appear to be a significant factor in either destination or purchase decisions.

Best Buy has stiff competition in price sensitive categories and therefore currently faces distinct challenges. It has had to cut prices just to remain competitive and to draw traffic. It recently adjusted its earnings estimates after third quarter net income fell 29%, missing analyst expectations.

The question remains: in an era of ever increasing price, can superior

customer service translate to increased profits at Best Buy? As consumer electronics, mobile phones and computers become increasingly complex, there is a need for a better shopping experience and supporting technical service which can engage consumers at the store level and give them the knowledge they need to select the product that is right for them. Superior customer service is just one part of an overall good shopping experience. And, it is the most difficult part to deliver consis-tently and across a store network. Morningstar noted recently that “Best Buy provides a shopping experience that mass merchants and online retailers cannot presently match…”

Good customer service is one key to distinction for Best Buy going forward. Whether it can translate to increased profit and value over time is unclear. But, for now, I can say that Best Buy has me convinced. My stealth shopping suggests that Best Buy has a good training model. In this difficult economy, there is an abundant pool of capable people who are willing to work part time, are engaged with technology and anxious to learn. Certainly there will be a significant segment of consumers who need and appreciate service and will form bonds with a store who can deliver it consistently. Will they pay more for it? Likely not too much. And there’s the rub.

Jane Singer is a consumer product marketing consultant specializing in branding and marketing strategy. She has held senior executive positions at BBDO, Bozell Worldwide, Grey Advertising, and Marc USA, and has worked with clients including Kmart, Neiman-Marcus, Rite Aid Drug Stores, Office Depot, The Sports Authority, Visa, Liz Claiborne, VF Corporation, and Gold Toe Socks, among others.

Standard and Poors recently described Best Buy as the “best-of class U.S. consumer electronics retailer based on its digital product focus, knowledgeable sales staff and effective marketing campaigns.”


Before he left the planet, when he wanted to make the point that he considered something seriously chi-chi, Andy Warhol would describe it as “up-there.” And, as I recently scrolled, ever so slowly, through the stunning Tom Ford Beauty website, I couldn’t help repeating the Pop Art God’s ultimate thumbs-up catchphrase: “This stuff is up-there,” I marveled to me, myself and I. “Truly, genuinely up-there.”

Of course, I already knew it was up-there; unless you’ve been living under a rock, it’s nearly impossible to miss the collective oohing and aahing over Ford’s niche-luxe scents, and, as of Fall 2011, his 132-sku cosmetics collection and tightly edited – but serious – range of skincare. Launched under the auspices of the Estée Lauder Cos. Inc., and the stewardship of group president John Demsey, the buzz has been deafening. In great part, the hoopla over the newish beauty brand – his first Signature fragrance, Black Orchid, hit the market in 2006 - stems from the global obsession with Tom Ford himself. Yes, there are designers of equal fascination and rock star status (Karl Lagerfeld and Marc

Jacobs topping that list), but none has controlled his image, nor fiercely guarded his commitment to luxury, in quite the way Ford has. Case in point: In this era of live-streaming fashion shows, instanta-neous blog postings and TwitPics from the tents, Ford issued a Fort Knox-tight embargo on images of his first collection of womenswear, which debuted to an elite cadre of Anna Wintour-level media types for the Spring/Summer 2011 season.

Despite the grumblings of press who weren’t invited to the presenta-tion, Ford’s bold move was widely viewed as a game-changer. And it’s in this same wholesale bucking of the prevailing market wisdom – that both a creator and his product need to be everywhere, and at dirt-cheap “masstige” price points – that Ford is pumping much-needed vitality, and maybe even a glimmer of hope, into prestige beauty. “Tom is incredibly friendly, person-able and charming – when he wants you to see him,” says Demsey. “He’s not about all-access, all the time. I know that’s counter to the way the world is going right now, with 24/7 saturated media, and 24/7 saturated celebrity, and 24/7 fast fashion and everything on a street corner, and everything online. But Tom holds it back. And what he chooses to reveal, and when he chooses to reveal it, is incredibly luxurious, high-quality and sexy.” So let’s take a look at what Ford has chosen to reveal, and when – and where - he’s chosen to reveal it. Bear with me; at first blush, the product assortment and distribution are un-orthodox, especially for an industry that doesn’t often break rank with the

traditional ways of doing business. After creating a limited-edition “Tom Ford and Estée Lauder” collection of makeup in 2005, shortly after he signed a licensing agreement with the company, Ford dove into scent cre-ation. His Signature fragrances (in ad-dition to Black Orchid) include Tom Ford for Men, Grey Vetiver, White Patchouli and Violet Blonde, and are sold in roughly 2200 doors in close to 40 countries at price points from $45 to $145. Simultaneously, Ford was crafting his Private Blend scents, a cache of 10+ unisex, artisanal offer-ings, which retail from $195 to $475 and are confined to just 225 doors. A Private Blend Lip Color Collection, unveiled in 2010, marked Ford’s solo foray into makeup. Right out of the gate, the highly pigmented, $45 lipstick, which was a hit in its tiny, 100-door distribution, embold-ening Team Tom to roll out color, as well as the treatment items, in a much bigger way this year. Well, the collection itself is substantial; the distribution is microscopic. It’s on counter in just 35 doors globally, including Bergdorf Goodman, which sold $52,000 worth during a Ford in-store in early November. Even at price points like $190 for the Daily Moisturizer and $78 for the Traceless Foundation, that’s a hefty number of units.

Without question, the makeup is glamorous. Evoking a glossy, Studio 54, Jerry Hall-at-her-peak vibe, it draws on the principles of facial contouring. Having studied architec-ture before shifting gears to fashion design, Ford believes in creating symmetry, and emphasizing a woman’s best features. And his skincare, though streamlined, is steeped in Lauder’s world-class R&D.

fOrget BeNtley. THe NeW NAMe iN pReSTige iS…fOrD?By Dana Wood


Issue One 2012 25

But it’s the Private Blend fragrances that really speak to the sophistication of Ford’s taste. Each more beautiful than the last, the collection, comprising such heady concoctions as Bois Marocain, Italian Cypress and Azure Lime, is much more in step with the hand-crafted offerings of a Frédéric Malle or a Maison Francis Kurkdjian than any department store block-buster. And for his efforts, Ford has nabbed several FiFi Awards. “If you look at the way the business has evolved, we’ve stayed true to the unique, prestige, new-luxury paradigm of being super-selective with our Private Blend fragrances,” says Demsey. “We are basically selling one of the most expensive fragrance collections in the world – in the best stores, with a high-service component as well as a branded Tom Ford environment. And what we were able to establish, almost immediately, was a brand presence and position for Tom Ford in the beauty space, and true credibility in fragrance as a tastemaker, and an arbiter of overall style.” In a sense, Ford has married the craft of perfume-making – and $45 lip glosses - with the potential for explosive global growth. Currently, estimated worldwide sales are $150 million, but that figure is expected to climb to $400 million within five years. “It’s very interesting,” says Demsey, “that it took Tom Ford, a guy not in the beauty business, a guy not even perceived as being in the beauty business, to bring the prestige back to prestige.” Still, not every industry veteran views Tom Ford Beauty, or at least the makeup, as the second coming. One prominent prestige retailer told me that she doesn’t at all consider it her “dream get,”

and has a lengthy list of brands she’d prefer to add to her lineup first. There is, of course, every chance that my retailer pal is reacting to the less than stellar track record of the designer makeup category. Although it would seem like an automatic slam dunk – color attached to a thriving fashion house – it’s a category riddled with flops. To wit, Calvin Klein and Ralph Lauren are just a few of the marquee names who couldn’t make makeup work. He admits he’s biased, but Demsey is convinced that the Tom Ford brand can, with a continued influx of coveted product and a meticulous roll-out to hyper-selective distribution, stand alongside the two unequivocal hits in luxury designer beauty – Chanel and Dior. “I think that, inherently, what Tom’s doing is good for beauty because he’s bringing the role of aspiration, and selectivity, and point of view, back into our business,” says Demsey, “It’s really a good story. We didn’t even realize how good of a story it was until we were three-quarters of the way through it. We knew the work was amazing, but it’s not like we sat down and said, ‘This is the master plan.’ It truly came out of Tom’s in-stinct, and a solitary vision in the face of everything else that was going on in the world. The ex-citement is back in beauty now.”

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

tHe tAkeAwAyS

BACK THe RigHT HORSe: One can only assume how many designers approach Estée Lauder Cos. Inc. for licensing deals. But in signing Ford before he’d even launched his namesake women’s fashion line - and sticking with his ultra-selective ethos throughout the economic collapse and explosion of fast-fashion - Lauder took a risk that paid off.

gO gLOBAL STRAigHT OuT OF THe gATe: Building a made-in-America brand? There’s no reason why it has to have its strongest foot-hold in the States. Even though Tom Ford hails from Texas, his lengthy tenure at Gucci Group, and the fact that he lives in London, means his appeal is international. Accordingly, Lauder has sprinkled a few doors here, there and everywhere.

Mix up THe MANDATe: While the thread of intense luxury is woven through every Tom Ford Beauty sku, there are sub-collections that are ultra-niche (i.e., the Private Blend fragrances) and those that are more commercial (e.g., the makeup and the Signature scents). As long as the inherent codes are there, brand lovers will respond.

FeAR NOT HeFTy pRiCe TAgS: It took guts and prescience to read the luxury tea leaves. But from Dubai to Mumbai, there are monied consumers all over the world, and they can’t get enough of their favorite brands.

ReiN iT iN, MeSSAge-WiSe: A constant Twitter feed? Facebook page with 10 zillion fans? That’s so 2011. The pendulum is officially swinging in the other direction. And at the end of the day, beauty is about aspiration, glamour and a little bit of mystique, not meaningless 24/7 communication.


HOw ONe SMArt COMpANy gOt It All wrONgBy David Merrefield

SuppOSe yOu’Re THe CeO OF A SuCCeSSFuL, MuLTiNATiONAL FOOD ReTAiLeR. yOu’ve HAD gOOD LuCK OpeNiNg STOReS iN NuMeROuS COuNTRieS, MANy WiTH CuLTuReS MuCH DiFFeR-eNT FROM THAT OF yOuR HOMe COuNTRy. You’ve decided the time is right to roll out a fleet of stores in yet another country, this time one that has a culture quite similar to your own. You’re confronted with many questions to be answered and deci-sions you need to make, such as: • Should you conduct consumer

research, or just send a team of executives to the target country to examine the situation on the ground?

• Will you develop a store format

similar to the type of shopping experience in the target country, or a brand new format?

• Will you source product for the

new stores from a third-party distributor while the format is being fine-tuned, or will you spend vast sums developing your own distribution and production prior to opening a single store?

If you chose the first, more cautious approach in each of these questions, then clearly you’re not the chief executive of Tesco, nor would you have been the architect of its adventure in America.

Tesco is a huge multinational food retailer with impeccable credentials when it comes to operating stores in a variety of locations. Based in the UK, it is the world’s fourth largest retailer that sells substantial amounts of food. With worldwide annual sales of more than $92 billion and about 5,400 stores, it trails only Walmart Stores, Carrefour and Metro Group. Tesco operates with success not only in its home country, but at least 15 others -- countries as diverse from one another and from the U.K. as China, Hungary and Turkey.

So when the idea of opening stores in the United States arose, it prob-ably seemed like a fairly simple piece of work to then-CEO Terry Leahy, given the cultural similarities between the nations. To set the table for what Tesco wanted to do -- develop a new-style store format that could quickly roll out across the entire nation -- Tesco formed “Project Aquarius,” a team of 50 or so executives, which in 2006 was dispatched to the region selected for the first stores, southern California. There they were to get to know some families and to discover what they would like to see in a different sort of food store. They did that, and then recom-mended their envisioned format -- destined to be known as Fresh & Easy -- a convenience-store-like format of modest size, 10,000 square feet to 30,000 square feet. In those spaces, they felt, should be a range of high-quality fresh- prepared meals, pre-packaged

produce, a small grocery line, wine, and beer. All stores were to have customer-operated check-out kiosks only. The new store, although different from anything in the market, would lift a page or two from the Trader Joe’s and Whole Foods play books. Fresh & Easy was positioned as the answer for consumers who might like to quickly grab a few items for a meal or two at home, but who also wanted restaurant quality. During the development stages of Fresh & Easy, Tesco made considerable efforts to keep its plans secret, even going so far as to construct a prototype store in Santa Monica, CA that was enclosed in a larger building to protect it from prying eyes. It also quietly bought up scores of store locations and started work on an 800,000 square foot distribution and pre-pack center. The idea was to be able to quickly roll out stores, all of which would be supplied by the distribution center. Eventually, though, plans started to leak out by way of securities analysts and trade publication interviews. It became known that Tesco intended to open stores in the desert southwest at first, then quickly move to open many stores in population centers around the nation, hoping to reach sales of more than $1.6 billion with 10,000 stores in five years or so.


Issue One 2012 27

Conventional supermarkets were to be overwhelmed by this juggernaut.

All those activities were to be fueled by an initial investment of more than $430 million, and an ongoing significant-investment commitment each year thereafter. Thus armored, the first Fresh & Easy stores opened late in 2007 in southern California.

Today -- more than four years in -- Tesco has lost hundreds of millions of dollars in the U.S. The most recent fiscal year produced losses of about $250 million on sales of $545 million. Far from opening thousands of stores, its 180 units are all in California, Arizona and Nevada. Some stores have been shuttered and “mothballed” awaiting an upturn in business.

Many Tesco shareholders are loudly calling for Tesco to abandon the U.S. Investor Warren Buffett, who owns 3% of the company, has called Tesco’s decision to come to the U.S. “foolhardy.” How did a smart company such as Tesco get it so wrong? Most likely, the seeds of failure were sown when the executives were sent to the U.S. to plumb the cultural depths. It’s a vain pursuit to ask consumers to declare what they want in the absence of being able to show them some alterna-tives. Consumers didn’t tell Apple they wanted an iPad, but when shown one they were all over it. Moreover, the stores were differ-ent enough from those consumers

knew to seem odd. Early versions of Fresh & Easy stores were seen as “cold,” lacking decor. They were small. Product lines were seen as too limited. American shoppers tend to distrust pre-packed produce. Un-familiar brands were offered. Many customers were reluctant to operate the self-serve checkouts, yet no alternative was offered. In all fairness, Tesco’s timing for the new stores – just as the U.S. economy collapsed -- was hor-rendously unfortunate. Conversely, it could be argued that the Fresh & Easy format, premised on the offer of giving consumers high-quality fresh-prepared meals at home, might prosper by catering to the new frugality the recession ushered in. Perhaps the overriding downside of the format is that it’s an urban store planted in a car culture. The format forced a second shopping trip on consumers to pick up the balance of what they wanted for their pantries. The format might have done better if located in a dense urban area where shoppers on foot might welcome the chance to get high-quality meal solutions. Finally, the cost of failure was greatly multiplied for Tesco because of the expense of building a distri-bution center in southern California, and of planning more for northern California and Phoenix. Instead, Tesco could have used third-party distribution to avoid being placed in a “do or die” situation. What can be done to salvage Fresh & Easy? Tesco has made a number of moves intended to fix the most glaring deficiencies of the stores.

Newer stores tend to be larger, trending toward the top end of what was planned, decor has improved and bulk produce was brought in. The self-serve-only checkout scheme may change because it’s under siege in California, which has a new union-backed state law prohibiting self checkout in stores selling alcohol. So far, the tweaking hasn’t been sufficient to stem the tide of losses, although Tesco recently issued a third-quarter report stating that total sales grew by 26% and comps rose by 11.9% in the period. Neither dollar amounts nor profitability was given, however. A number of management changes have been made. Tesco has a new CEO, Philip Clarke, who has frankly acknowledged that he needs to take a look at Fresh & Easy to assess its future. The executive who led the California consumer-research team has left the company. For the near term, it looks like Tesco is digging in. It still has plans to open about 50 new U.S. stores per year with the hope the economy recov-ers sufficiently to permit success to finally overtakes the venture. Tesco doggedly predicts break-even could be achieved in two or three years. Nonetheless, it might be foolish to wager that Tesco is in it for the long term. The lights may yet go out in America.

David Merrefield is principal of DRM Initiatives, Inc., a retailer consulting group. He is the former Vice President and Editor of trade publication Supermarket News. He is based in New York City.

CEO, EdItOrIal dIrECtOrRobin Lewis

COO, EdItOrJudith A. Russell

art dIrECtOrsJodi Kostelnik

Steffi Sauer

IllustratOrsJodi Kostelnik, Joey Parlett and Steffi Sauer

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QuOteS tO reMeMBer

CONtrIButING COlumNIstsDavid MerrefieldWarren Shoulberg

Jane SingerPaco Underhill

Dana Wood

advErtIsING salEs aNd ratE INfOrmatION

[email protected]

220 East 54th Street, Suite 1E, New York, NY 10022Phone 212.750.5405 www.TheRobinReport.com

DOeS THiS STATeMeNT FiLL yOu WiTH A LOT OF TRuST iN OuR FiNANCiAL iNDuSTRy?“ I simply do not know where the money is……” said CEO of MF Global Jon Corzine, of the $1.2 billion that went missing from now-bankrupt MFG’s customer accounts.

WiTH CApiTALiSTiC LeADeRS LiKe CORZiNe, WHO NeeDS SOCiALiSM, ACCORDiNg TO MARgAReT THATCHeR: “ The problem with socialism is that eventually you run out of other people's money.”

iT ADDS MuCH gReATeR vALiDiTy TO THe SuggeSTiON OF puTTiNg yOuR MONey uNDeR yOuR MATTReSS FOR SAFeKeepiNg

ARe yOu SuRe yOu ARe ReADy FOR THiS? THe FOLLOWiNg QueSTiONS ARe FROM LAST yeAR'S HigH SCHOOL eQuivALeNCy (geD) exAM. THeSe ARe geNuiNe ANSWeRS FROM 16 yeAR OLDS:

Q. Name the four seasonsA. Salt, pepper, mustard and vinegar

Q. What is the fibula?A. A small lie

Q. What happens to a boy when he reaches puberty?A. He says goodbye to his boyhood and looks forward to his adultery

Q. What does 'varicose' mean?A. Nearby

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The Robin Report - Issue 11 - January 2012

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