REINVENTING THE STOREHow smart retailers are changing the way we shop
A moment of silence, please, for those fallen on retailing's battlefield. A drumroll, perhaps, for the list of Chapter 11 casualties, lengthened in just the past few months with the names of Caldor, Bradlees, Jamesway, Edison Brothers Stores, and Hastings Group. With the critical Christmas season just getting under way, merchants from discount chains to specialty apparel stores are already reporting some of the bleakest sales figures in years. Retail sales sank 0.2% in October after a dismal 0.1% rise in September. The doleful roll call is certain to grow longer still.
Pundits point to the usual enemies to explain the carnage: a slowing economy and a strapped consumer. And this would not be the retailing business if somebody didn't blame the weather: This year, a warm fall had shoppers shrugging at sweaters and hats. Economic woes, at least, are real enough. Factor in car leases, and consumer debt has hit an all-time high, stealing 16.6% of disposable income to cover monthly payments. And with big employers, including 3M and AT&T, announcing yet more job cuts, consumers aren't in much of a mood to shop. Consumer spending increased 2.9% in the third quarter--paltry compared with the 5.1% jump in 1994's end-of-year spending spree.
The economic jitters are bad enough. But retailing faces far more fundamental problems of its own. Simply put, this is an industry that has lost touch with its customers. The consumers who made shopping a recreational sport in the 1980s now have less time, less money, and less stomach for the whole experience. With 75% of women working full or part time and still shouldering most of the family chores, consumers have become precision shoppers. Over the past 15 years, they have cut down from three mall visits a month to 1.6. And instead of stopping by seven stores at a clip, they're down to just three. ``Besides being tightfisted, the consumer is increasingly stressed out and has lower tolerance for all the imperfections of retail,'' says Mona Doyle, president of Consumer Network Inc., a Philadelphia market-research firm that surveys shoppers.
Those imperfections are legion: Selections are unsatisfying, prices unappetizing, service unsatisfactory, and hours and locations inconvenient. From cars to food to clothes, shopping is a pain. But it doesn't have to be that way. As America's savviest retailers are demonstrating, customers will still buy from someone who can offer them what they want, when they want it, where they want it--and all at the right price. In sector after sector, innovators are using knowhow, technology, customer focus, and merchandising muscle to strip retailing of expense, annoyance, and inconvenience.
The approaches of these master merchants aren't all the same. Some hyper-efficient operators, such as Wal-Mart Stores Inc. and Home Depot Inc., are expanding their offerings and shrinking their prices. Single-minded specialists, meanwhile, dominate narrow categories such as sunglasses or pet food with the deepest selections and competitive prices. Still other retailers are staking their claim to convenience, whether it's McDonald's Corp., making sure you can buy a Big Mac wherever you happen to be (box), or CUC International Inc., letting you shop by phone for everything from a new car to a vacation. There are even signs of life among department stores. Despite soft apparel sales, they've defended that market from specialty retailers (page 96).
``SEA CHANGE.'' These creative retailers are combining with the brutal pressures of the marketplace to drive out the slow, the old-fashioned, and the inefficient. Familiar formats that endured for decades--supermarkets, hardware stores, discount stores, travel agencies, car dealerships--are being transformed or superseded. From vast megastores to tiny one-product kiosks, new kinds of outlets are springing up that look nothing like the stores of 10 years ago. ``There is a sea change in the configuration of retailing,'' says Isaac Lagnado, principal at New York consultant Tactical Retail Solutions Inc. ``The innovative retailers are the ones that are taking market share from everybody else.'' Not all the new formats will succeed, but as retailers grapple with change, these innovators point the way to the re-storing of America.
In almost every category, the answer to the question of what the consumer wants is disarmingly simple: more for less. Wal-Mart and Home Depot became national powerhouses based on this simple insight. They did it by relentlessly cutting costs at every stage, from manufacturer to store shelf--and by demanding help from their suppliers, who became increasingly dependent on them as they grew in size and clout.
Since 1984, Wal-Mart's expenses have shrunk from 19.1% of sales to just above 15.8% over the past 12 months. With yearly sales approaching $100 billion, slated to grow to $200 billion in five years, those savings add up fast. And the contrast between retailing's quick and its near-dead is stark indeed. Bradlees Inc. lumbers along under an expense ratio of 29.4%; Caldor Corp.'s is 24.4%. Both regional competitors are now in Chapter 11 bankruptcy proceedings. Kmart Corp. devotes 22.2% of its sales to expenses.
Wal-Mart figured out early on that most of any item's cost gets added after the product leaves the factory and moves through the supply chain. Cost savings came by forcing suppliers to replenish inventory only as it was depleted, by cutting the number of steps on its way to the shelves, and by whittling down suppliers. That efficiency has forced other retailers to struggle to meet Wal-Mart's standards for low prices--or die. ``They are exactly where manufacturers were 15 years ago,'' says Robert C. Blattberg, executive director of the Center for Retail Management at Northwestern University's J.L. Kellogg Graduate School of Management. ``What the retailing business has been doing over the past five years is driving out costs.''
There's no doubt that retailers need to go through a shakeout before the industry can prosper again. With 18.6 square feet of space for every person in the country--more than double the level of 20 years ago--there are simply too many stores. In 1974, each square foot generated an average of $175 a year in sales. Now, it brings in just $166.
But even as the number of stores declines, those that remain will get bigger. The ``big box'' or ``category killer'' has already made its mark in some segments, such as discounting and toys. Now, the approach of offering mind-boggling assortments of a familiar product at a reasonable price is spreading to some surprising categories. Superstores devoted to single lines, from pet food to baby items to books, abound. Where does their market share come from? Out of the hides of traditional stores, which have already ceded entire departments such as appliances, books, and sporting goods. ``You're going to see the same thing happen to other categories,'' says Thomas I. Rubel, managing partner at consultant Management Horizons.
Already, Home Depot is moving from its standard 103,000-square-foot format to superstores of 135,000 square feet. Office Depot Inc., the dominant office-supply superstore, is experimenting with a 45,000-square-foot store in Las Vegas that will dwarf its standard 30,000-square-foot layout. Barnes & Noble Inc., the $1.6 billion New York-based book chain, is building 30,000-square-foot superstores.
And successful big-box operators are looking to apply their formulas to new categories, especially ones that have failed to keep pace. With 83 new stores this year, Home Depot is still growing fast in hardware and home improvement, but sales and earnings over the past four quarters have been uneven. Now, it hopes to become a dominant retailer in another fragmented market--home decorating--with its new Expo stores. The 130,000-square-foot stores offer do-it-yourselfers access to designers as well as good prices on everything from window treatments to granite countertops. The first three Expos have opened in San Diego, Atlanta, and Westbury, N.Y.
NO-HAGGLE PRICES. Circuit City Stores Inc., the $5.6 billion electronics giant based in Richmond, Va., is applying its big-box knowhow to the most universally despised shopping experience in the land: buying a car. Its four CarMax auto superstores, which sell used cars only, are based on no-haggle pricing, plenty of selection, and great service. Shoppers browse through the offerings from easy-to-use computer kiosks that print a photo, price, and specs for any car selected. They also print the row and parking space, so shoppers don't get lost in the enormous CarMax inventory of 500 to 1,000 cars.
While the car shopper is taking a test drive, CarMax computers complete a credit check and prepare the paperwork for an auto loan. Meanwhile, mechanics look over the customer's current car and provide a written offer that's good whether it's traded in on a CarMax replacement or not. The process can take less than an hour. Each car comes with a 30-day guarantee, with extended warranties available. ``We were looking for other opportunities to make an impact in a major market,'' says W. Austin Ligon, Circuit City's senior vice-president in charge of CarMax. ``Large-volume products, whether they are electronics or automobiles, are going to sell very well in a superstore environment.''
Rivals say CarMax cars generally cost $200 to $300 more than the same thing elsewhere. But customers say the service, environment, and warranty make it worthwhile. Kent McCammon, a 29-year-old securities analyst in Virginia Beach, drove two hours to the Richmond CarMax to buy a late-model Ford Bronco. ``I don't think it was a bargain, but it was exactly what I wanted,'' he says. ``I didn't want to visit every car place and bargain. I hate dealing with that.'' Circuit City says its four CarMax locations are still experimental, but analysts expect it to go national with up to 50 locations. That would represent a potent threat to traditional car dealers, who get half their net profits from used-car sales. Even more frightening: Negotiations for a Chrysler new-car franchise are under way.
Car dealers aren't the only ones whose way of selling is being challenged. Gary E. Hoover, who sold his Bookstop superstore chain to Barnes & Noble in 1989, was also casting around for a new superstore idea. ``I went looking for an industry that was big and growing and hadn't had any marketing innovation for many years. All my research kept leading me to the travel industry,'' he says. ``Its marketing methods are out of the 1950s.''
Last year, the 44-year-old Austin (Tex.) entrepreneur started TravelFest Superstores Inc. to offer one-stop shopping for the leisure traveler. TravelFest customers can pick up visa applications, travelers checks, luggage, and gadgets, as well as newspapers and magazines from around the world. ``Everything you want or need is here,'' says John W. Schwartz, a 40-year-old nurse. Schwartz was at the Austin TravelFest checking out books, maps, and videos on the Czech Republic for a trip next spring.
TINY KILLER. Like most superstores--but unlike most travel agencies--TravelFest is open seven days a week, from 9 a.m. to 11 p.m. ``Travel is about discretionary income,'' says Hoover. ``And most discretionary income is spent on the weekends.'' Hoover says sales at his two Austin stores, with a combined 16,000 square feet, run $10 million to $20 million a year, with 80% of that coming from tickets and reservations.
Toys `R' Us, Bed Bath & Beyond, and Office Depot have shown that providing depth of selection and a great price in a single product category can be a powerful concept. But that doesn't mean category killers all have to be cavernous concrete hulks. Despite its tiny kiosks, Miami's Sunglass Hut International is a classic category killer--with a sharply narrower focus. With 1,600 locations throughout the U.S., Canada, Europe, and Australia, Sunglass Hut is still growing fast. Sales have jumped from $100 million three years ago to $244 million this year. Earnings have soared almost ninefold, from $3.2 million to $28 million, while the stock has quadrupled, to the mid-20s, since 1993.
The category it's killing is tiny, but like any other superstore, Sunglass Hut offers convenience, one-stop shopping in its category, and a competitive price. ``People's time is so limited, they don't want to walk through a maze of categories,'' says CEO Jack B. Chadsey. ``If they're looking for electronics, they're going to go to an electronics specialty store. Sunglasses are no different.''
Just a lot smaller. At 150 to 400 square feet, Sunglass Hut stores can often be found in mall kiosks. But they stock 1,000 different kinds of sunglasses, compared with a rack or two at most other stores. The chain's most successful location, at London's Heathrow Airport, does $3 million worth of business a year in just 300 square feet. With the operating efficiencies that come from size, Sunglass Hut can offer low prices. ``No one undersells Sunglass Huts,'' says Chadsey. ``We won't allow it.''
But shoppers aren't concerned just with price. They're equally stingy with time. Although consumers have shown they won't overpay, they've also shown they'll pay a fair price for a product, location, or approach that saves them time. That's especially true when it comes to food. Boston Chicken Inc. has expanded--from $5.2 million in sales in 1991 to almost $100 million last year--on the belief that just because families don't have time to fix home-cooked meals doesn't mean they don't want to eat them. To its original rotisserie chicken, Boston Chicken has added meat loaf, ham, and side dishes ranging from mashed potatoes to steamed vegetables to salads. ``We sell the kind of food Mom would make if she were around,'' says Chairman and CEO Scott Beck.
Supermarkets, the staidest of stores, are also waking up to the demand for prepared meals. Consumers spend just 55 cents of every food dollar in the supermarket, down from 70 cents 30 years ago. Byerly's Inc., a $250 million Minneapolis chain, has long specialized in premium service at a price. One of its most profitable areas is prepared food: It carries an array of ready-to-eat entrees, such as salmon with mango salsa for $4.55. Byerly's recently announced a plan to add a Wolfgang Puck Pizza Express, complete with a wood-fired oven. ``We are better at answering the question, `What's for dinner?' than anyone else in town,'' says COO Dale Riley.
Wal-Mart, meanwhile, could end up doing to the grocery business what it has already done to discounting. As growth slows at its original discount stores, Wal-Mart is unrolling its next concept: the 188,000-square-foot supercenter that grafts a giant grocery onto the discount store. Wal-Mart will have 239 supercenters in place by yearend and an additional 80 or 90 next year.
For old-line grocery chains, the implications are enormous. Wal-Mart is already the second-largest player in the fragmented grocery industry, in which the top 10 chains control less than 30% of the market. In discounting, Wal-Mart alone has a 43% market share. ``We're going to go through another evolutionary round,'' says Douglas J. Tigert, a retailing professor at Babson College who has completed a study on the impact of Wal-Mart's supercenters. ``When all the shooting is over, in six or seven years, we're going to have 20% fewer supermarkets.'' Shrugs Wal-Mart CEO David D. Glass: ``We're going to continue to increase our market share. Where it comes from, I'm not sure.''
ARMCHAIRS. A few retailers are even trying to make shopping fun again. Tandy CEO John V. Roach set out in 1992 to create a chain that's part retailer, part theme park. Incredible Universe stocks more than 85,000 product models--TVs, VCRs, camcorders, computers, software, home audio, and home appliances--in stores of 185,000 square feet. Each has a rotunda stage for product demonstrations, karaoke contests, laser shows, plus a restaurant and a day-care center. Each outlet generates $55 million to $65 million in first-year sales.
Incredible Universe isn't profitable, and sales at its 17 stores were down 5% in the third quarter. But analysts agree with Roach's premise: Too much of retailing is boring, or worse, unpleasant. ``They've got to create a reason for consumers to shop,'' says Kellogg's Blattberg. Barnes & Noble has applied that idea to its superstores, with their reading nooks and armchairs. ``We think we've turned book-buying into a form of recreation,'' says CEO Leonard Riggio. Partly because of the chain's impact, the average time spent in a bookstore has doubled to 36 minutes a visit in the past three years.
The great unknown for retailers is the often heralded, not-yet-arrived era of online retailing. Few services have attracted much volume, and anyone who has stared for long minutes at the hourglass icon on a screen knows why. But almost everyone agrees that with improved technology, the day is near when many products will be ordered online from home.
Retailers who want to know what that day may mean for their businesses have only to look at CUC International. This year, CUC will sell more than 10,000 cars, book $400 million worth of airline tickets, car rentals, and hotel reservations, and offer its customers a choice of 429 different TV models. Yet it has no warehouse, no stores, and no inventory. Instead, it has a giant database on 250,000 products. Customers dial in to operators who search the database for them by model number, manufacturer, or feature. The merchandise is shipped direct from the manufacturer.
CUC prices products almost at cost, meaning that, even with a shipping charge, it can almost always beat store prices. In fact, it doesn't care whether customers place an order or just use its price to get a better deal elsewhere. Revenues, which have doubled in four years, to an estimated $1.3 billion for 1995, consist almost entirely of annual membership fees. ``The intellectual premise was to offer the right product at a cheaper price with full comparison shopping,'' says CEO Walter A. Forbes, who helped found the company in 1973, after the idea was tossed around at a dinner at Harvard business school.
CUC--formerly Comp-U-Card--was originally planned as a computer service, but Forbes abandoned high tech in favor of the phone. More recently, CUC has added interactive offerings through most of the online services, and it has moved a version of its service to the Internet. Peter Evans, a stock trader in Ellensburg, Wash., has ordered everything from washing machines to computers from CUC, mostly online. ``Time is part of it,'' he says. ``But to tell you the truth, they have better prices.''
And here's the beauty part: Forbes points out that as other retailers' fixed assets--bricks, mortar and inventory--get more expensive, CUC's assets--computers, databases, and telecommunications equipment--are getting cheaper. That's a trend that every storekeeper has to think about as another lean Christmas season approaches.
INTENSE FOCUS: SUNGLASS HUT: Offers nothing but sunglasses-from locations in malls, airports, and anywhere else that has enough traffic. Half its customers seek it out; half are drop-ins. Number of stores: 1,600 worldwide. 1995 sales(est.): $410 million
THE CAR STORE: CARMAX (CIRCUIT CITY): Applies the ``big-box'' concept-big selection, good service, and decent prices. Inventory of 500 to 1,000 used cars, compared with 150 for most dealers. Entire transaction, including financing, can be done in an hour. Number of stores: 4 in Southeast, 2 more expected next year. 1995 sales(est.): $288 million
THAT'S ENTERTAINMENT: INCREDIBLE UNIVERSE (TANDY CORP.): Combines the size and breadth of a superstore with the glitz of a theme park. Sells electronics, computers, and appliances amid product demonstrations, karaoke contests, and laser shows. Number of stores: 17; as many as 10 planned for 1996. 1995 sales(est.): $725 million
AT YOUR SERVICE: BYERLY'S: Upscale supermarket chain that offers rushed shoppers lots of prepared foods. Other touches: carpeting to deaden noise and candy kept well out of reach of kids. Expanding to Chicago from Minneapolis home market. Number of stores: 10, with 3 planned for 1996. 1995 sales(est.): $250 million
NO BRICKS, NO MORTAR: CUC INTERNATIONAL: Sells everything from cars to airline tickets by phone and online. Operators search a database of 250,000 name-brand products, which are shipped directly to the customer by the manufacturer. Number of stores: None. 1995 sales(est.): $1.3 billion
EVERYTHING IN ONE PLACE: WAL-MART STORES: Supercenters add 50,000 square feet of grocery space to the discount store. Half the food shoppers buy other merchandise, boosting discount-merchandise sales by 25% to 30%. Number of stores: 239 by yearend, 80 to 90 more next year. 1995 sales(est.): $13.5 billion (supercenters only)
By Mary Kuntz with Lori Bongiorno in New York, Keith Naughton in Detroit, Gail DeGeorge in Miami, Stephanie Anderson Forest in Dallas, and bureau reports
Updated June 13, 1997 by bwwebmaster
Copyright 1995, Bloomberg L.P.