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Steve & Barry's Rules The Mall


Steven Shore and Barry Prevor love to fill a void -- about 3.5 million square feet of it. That's how much space Steve & Barry's University Sportswear took in U.S. shopping centers last year, the most of any mall-based chain.

The co-CEOs soaked up that space by opening 62 supermarket-size stores, almost doubling their outlets in one year, to 134. The privately held chain, which lures shoppers with casual clothing priced at $7.98 or less -- a 40% discount to prices at Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) -- plans to operate more than 200 stores by yearend. The key to the rapid growth: a highly opportunistic business model that relies on aggressive incentives from mall owners, creative apparel sourcing, and virtually no advertising. "They are the most talked-about retailer in the mall industry," says Norman Peters, senior vice-president for real estate at Cafaro Co., a Youngstown (Ohio) mall owner. "They're on everyone's list [of preferred tenants]."

Steve and Barry, both 42, opened their first store near Philadelphia's University of Pennsylvania in 1985, while Prevor was getting an undergraduate degree at its Wharton School. The childhood friends sold university-logoed sportswear at prices that easily undercut the expensive gear at college bookstores, doing so well that they opened stores in a handful of other university towns and then in malls. The chain, based in Port Washington, N.Y., now offers humorous T-shirts and an increasing amount of basic clothing for men, women, and kids, such as jeans, cargo pants, woven shirts, and jackets. What really draws shoppers, though, is decent quality at such low prices. "Nothing beats $7.98 except free," says Florence Luka, 37, flipping through racks of shirts at a Steve & Barry's in West Dundee, Ill.

How can Steve & Barry's charge so little? One reason: the cut-rate deals it negotiates with landlords. Most of its stores are in middle-market malls, which have seen rising vacancies, due to the closure of regional discounters, department store consolidation, and loss of business to powerful off-mall retailers. "Some of these [mall owners] are desperate," says Deutsche Bank (DB) real estate analyst Louis Taylor. So as the chain's popularity has risen and store size has increased, it has been able to negotiate lease rates that are less than half those of most mall tenants, says Prevor.

SAVVY PURCHASING

Low rents are hardly the only way the men keep costs low. While malls usually give new tenants allowances of $20 to $30 a square foot to build interiors, the popularity of Steve & Barry's has allowed the chain to command "build-out" fees as high as $80, considerably more than actual costs, says Ivan L. Friedman of Retail Consulting Services Inc., which advises retailers on real estate issues. That's enough to cover a store's initial inventory, lowering operational costs further, he adds. Prevor denies that mall payments exceed actual interior costs. Even so, he says, there's no question the fees "fuel our growth."

Steve & Barry's also saves money in purchasing. It buys direct from overseas factories, like many others, but cuts costs by accepting longer lead times. It also saves by offering steady production throughout the year rather than seasonal ramp-ups. The chain cuts expenses further by deft navigation of import quotas and duties, says Prevor, who can rattle off such rules the way a tax lawyer does the Internal Revenue Service code. That's why it buys more from factories in Africa and less from China than many rivals -- most African countries face neither U.S. quotas nor duties. Advertising isn't an expense Steve & Barry's wrestles with, either -- it relies mostly on word of mouth. Salaries are modest, and a third of its 220-person headquarters staff are recent college grads.

Can Steve & Barry's retain its edge? Prevor says he wants to maintain the 10-year compounded sales growth rate of 70%, aiming for 568 stores by 2008. (The chain is profitable, he says, but he won't give figures.) Leaving aside the operational challenges, Marshall Cohen, chief retail analyst for researcher NPD Groups Inc., notes that the company's model is easy to copy -- and Wal-Mart and Target could match its prices on key items. A Steve & Barry's stumble, though, would make many mall owners unhappy. Especially the ones who are helping to bankroll its growth.

By Robert Berner


American Apparel's Future
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