Bear Stearns 2003 Retail Investor Outing + + + + +
By Al Berrios

Days don't get uglier than this day. It was pouring, cold, and still dark out. In order to make it to the start of the Bear Stearns 2003 Retail Investor Outing on Wednesday, October 20th, 2003, I had to leave my apartment at 6:15am in the morning to catch the 6:17am bus. Naturally, I missed the bus, so I had to walk 10 minutes to the next bus stop. (This early in the morning, Jersey City is practically the boonies).

The event was an annual thing for Bear, but a first for me - a tour of the retail stores of public retailers, and an opportunity to question senior executives while their customers were shopping in the store. We had to meet at American Eagle Outfitters store in New York City's SoHo where Laura Weil, the CFO met us with some zone VPs and the top merchandizing executive.

American Eagle Outfitters

If you're in the business of advising retailers, (like al berrios & co.) you sort of take for granted the sort of effort that goes into merchandizing. A certain display can make or break your sales per square feet. Get it right, and you can afford rent in SoHo. But merchandizing isn't about just what you see; it's also about what you hear. American Eagle Outfitters, like all other retailers we visited that day, make a huge effort to select a mix of music that encourages lingering in their stores (and hopefully, an opportunity to buy something else.)

To be honest, there's nothing particularly exciting about AEO when compared to Abercrombie + Fitch, Aeropostale, and other "A" competitors. So I asked, "what are your areas of differentiation?" Carmen Blanco, one of those zone vice presidents, said that it's about fit, design, and color. And if you know anything about the apparel industry, these are terms that specifically appeal to women, not necessarily men. The merchandiser guy put it more creatively, "It's about the personality." There's no pretension and the image is definitely more wholesome than Abercrombie. So, essentially, what AEO was telling me, the male customer, is that the only real reason I have to buy anything from your store is because there's this barely perceptible image of what my personality will be when I purchase your clothing. Riiiiiight. Maybe it could also be the really cute employees they have working there. Must be, because when it comes to fit, there's only two sizes for guys, fits and doesn't fit; when it comes to design, there's button down and tee-shirts; and when it comes to color, there's dark colors and light colors. Of course, this is not their argument, but it sure sounded like it.

The average ticket amount for this sort of retail environment is about $30 to $40 (they target mostly younger consumers and the clothing at AEO is relatively "value priced"). Like most successful chains, AEO started in the Midwest, and during their expansion, forgot about their Midwestern customer, acknowledged the CFO. So, as they attempt to remember, they're building million dollar, big city stores with a selection of merchandise virtually indistinguishable from the competition.


The next stop was Macy's at Herald Square. I grew up in New York, I've worked in several retail stores, and I even have a student who works at Macy's so my expectations weren't set too high. But I gotta tell you, what they are and what they've done in that particular store is rather amazing. Hal Kahn, a blunt-spoken, dinosaur of an executive with a thick Brooklyn accent, gave us a presentation on the 16th floor of the building. (If you're a New Yorker, you've been to Macy's and know there aren't 16 floors there, right? Well, turns out, there're 20 floors in that Herald Square building on 34th street and 6th avenue. 10.5 are for retail. 9.5 are office. The building, with 2.1 million square feet of space, is legendary for having the largest retail footprint in the world.)

Hal, the Chairman and CEO of Macy's, a division of Federated Dept. Stores, Inc., made it clear that Macy's is working hard to eliminate clutter, provide more assortment, all the while modernizing (or "mahd-nizin'") Macy's image. It's widely known that they've inadvertently accustomed their affluent clientele into shopping there only when there's a sale. As a result, those affluent folk fled to Bergdorfs and Neiman Marcus, leaving Macy's with working-class shoppers. This has resulted in out-of-control appearance, down-right nasty customer service, and deteriorated retail environment.

Hal had clearly struggled to keep the "department store" concept at Macy's relevant in the face of e-commerce and Wal-Mart. They've focused on supporting brands that traditionally sold well for them, private label brands like their Alfani, but most importantly, because they've been desperate for that "mahd'n" clientele, they've given brands like Sean Jean, Rocawear, and J.Lo major opportunities they probably would have never been given just 10 years ago. They've basically kicked out the "mature" brands for this.

Two things had always bothered me about Macy's and this seemed as good a time as any to bring it up, "Mr. Kahn, how can you call your strategy modernizing when the sales associates are twice as old as the typical associate you'd find in any store? They're rarely around when you need them and when you find them, they're barely helpful." This question was a set up. I know these associates worked on commission and my studies have shown that certain commission-based sales environments perform poorer than non-commission- based. As expected, Mr. Kahn got defensive, however, if you've shopped at Macy's, you know I was addressing a serious concern. According to Mr. Kahn, his sales force had received similar complaints, but as their most recent customer service scores would show, they're improving. I later questioned my student, a sales associate at Macy's, and he confirmed my statement. They're snappy and negatively impact the employee relations internally. But, to my surprise, Randy Scalise, Director of Stores for the entire Macy's organization, revealed something even more detrimental to a sales environment than older, commissioned employees - they were unionized. This brought everything into perspective: 1) Macy's will never be able to effectively compete with unionized sales associates destroying their profit margins; 2) Macy's will never modernize because they have a difficult time replacing their unionized sales associates and recruiting younger associates willing to put up with perpetually-disgruntled unionized labor. (I discuss my own problems with unions in the Report, "Unions: "There's nothing you can do about it").

Although Macy's spent millions redesigning much of the store interior to increase sales floor space, while improving traffic flow and maintaining density of product, (and let me tell you, it looks fabulous), they can never compete with a Wal-Mart that bans unionizing. It was as though that piece of information, though minute, has led me to believe in the death of this once great retailer. Although it hasn't happened, I wouldn't bet the ranch on this company staying competitive.

Chico's FAS

The next stop was Chico's FAS, Inc.'s store in the upper east side of New York. I can confidently say that their marketing is superb, because until that day I had never heard of this retailer for women 35-55. There wasn't anything particularly interesting about this company either. It looked like the same stuff you could find at a Jones NY (a competitor I have heard of), Kmart, or Wal-Mart. The only difference was the price, allowing Chico's to get away with targeting a consumer with about $100,000 annual income. The top sales and merchandizing executives presented along with Charlie Kleman, CFO.

The operation appeared pretty plain-vanilla - make clothes with good fits and materials for their preferred customer and make sure you understand how to sell it to her, which Chico's clearly did. They have a couple of interesting strategies, like not replenishing much of their inventory, creating artificial scarcity of top products; and decimalizing their fit sizes to address their customer's needs.

Aside from that, they seem to be making a big deal of their "magalog" magazine format catalogue, with their Dalmatian-theme and their "Passport Club", which like almost all the retailers we visited, is their version of a loyalty program.


Our next stop was lunch at "21" club, a really posh, old establishment conservative club. The food was tastier than I expected, but the presentation caused a real strain on my attention span. Kohl's president Kevin Mansell basically regurgitated stuff that had been recently in the news and other info you'd expect from one of the hottest department stores today.

Kevin pointed out that they are so big, the number of calendar days till Christmas actually made a difference to their sales performance and that their biggest value to their customers was convenience (they actually design their stores predominantly for moms shopping with kids, with 1-story location and plenty of parking located near the entrance), centralized checkouts, wide aisles, and innovative electronic signage throughout the stores. They make their retail environment a part of their customer's routine, including their merchandizing strategy (tables and towers).

Kevin talks about everything in quarters ("quahr-tahrs") and made lunch seem longer than it actually was. He was so boring, I know he said something that was extremely relevant to our understanding of his company, but I missed it. Oh well.


Our next stop was PetCo Animal Supplies, Inc., a store I found to be more interesting than I previously thought. It's a department store/supermarket for pets and when you think about the implications, you realize it's a gold mine. You want a hamster, but you don't know how to take care of it? PetCo sales associates double as pet counselors and will sell you everything you need to get started in one neat, convenient, value-priced package. (If you're just getting started, there doesn't seem to be any recognized brand names in the pet care industry, so you don't really care what you get.)

If you've got a fish, and know what you need, you will always find something more to get. And the selection, truly amazing. Who knew pets required this much stuff, but thanks to PetCo, you don't feel bad at all making the commitment. PetCo also monitors their shoppers' behavior very carefully through analysis of their sales via their PALS system. And finally, their constant tweaking of their sales floor adds incrementally to their sales.

Other details have also made a difference to this type of sales environment, such as:

1) cashiers closer to the entrance, with lower, wider counters for customer convenience;
2) "pet bars", with a variety of free dog treats, typically at the front and at dog-eye level, attract pets and pet owners inside every store;
3) pet photography adds lively color to once barren and boring stores, reminding consumers how important pets are to their lives;
4) pet salons with clear window displays, where owners can leave pets for a few hours to get groomed and massaged (creating a very lucrative business for city stores); and
5) aviaries encaged in clear-glass, so passer-byers can see birds, (or lizards, fish, etc) in action as they pass, and hopefully into, stores.

Pretty interesting way to display your merchandise, right?

Best Buy

Our next stop was Best Buy Co. Inc., a favorite of our keynote speaker, Peter Weedfald at last Thursdays al berrios & co. Event, "How to Spend a Hundred Million Dollars Reaching Consumers and Other Marketing Not in Textbooks". We were welcomed by James Damian, SVP, Experience Development Group, or basically the Chief Customer Officer and a whole bunch of store managers from NY/NJ area. Mr. Damian made sure merchandizing, in-store technology, and even the music being played in stores was conducive to lingering and spending. What he considered exciting and youthful, I considered noisy and chaotic. I enjoy a little sound, but they must have had every volume on every piece of equipment in that store as high as it could go that day.

Like all good retailers, they give customers big, bright color-coded aisl-ands set up per product category, beautifully displayed, with plenty of opportunities to play with the toys. They "effectively utilize" their street-level display windows with flat-panel Hi-Def TV to attract attention and interest. They have friendly, knowledgeable staff, but if you don't like human interaction, they also have plenty of kiosks where you can do everything from ordering online to listening to an entire CD before you purchase it. Even the application process is self-serve, as job applicants were sitting at terminals throughout the store.

One of the reasons Best Buy is so successful is because it is a non-commission environment. Employees success isn't based on volume, but service. They're regularly rotated throughout departments to familiarize themselves with every area. This strategy has been successfully employed by all truly modern retailers.

And although store managers claimed to have little to no authority to discount products, discipline workers, or be creative with their merchandizing, I had to opportunity to interview a Best buy employee who's good friends with someone on my staff. Turns out managers do discount and are as creative as they feel like with their stores. Although their priority is employee relations and customer service, who's going to tell a manager familiar with his neighborhood how things should be done? Yea, no one. Although I don't like being misdirected, I don't blame management for wanting to keep all their secrets. They're entitled.

Urban Outfitters, Inc.

Our final stop for the day was another Outfitters, this one Urban. Ted Marlow, president of urban retail for the company, greeted us with a button-down and blue jeans. Not what I expected, until he started elaborating on what they were all about. His presentation made it clear he was a no-nonsense manager. But was he getting the job done?

Urban Outfitters caters to the creative in all of us. They spread a bunch of unusual, eclectic, and vintage trinkets all over the store, create their own displays, and arrange their merchandise as though the whole company were run by a bunch of art students. It's dense and changes up to four times per year. This quirky strategy is based on attracting the browser and discoverer in all of us; the person that wants to decorate their home and wardrobe with things they won't find at IKEA.

Their sweet spot is the 20-24 crowd, who spend about $20 average per visit in their stores, and have pretty liberal parents. They actually have lounges where boys and girls can actually hang out to play video games or just chill surrounded by pitches for "College Girls Gone Wild" gear and other potentially controversial products. When I mean liberal parents, I mean really liberal.

At the conclusion of his presentation, I pretty much determined that any person that can juggle a team this creative so successfully is doing a hell of a job. Ted may have been slightly on the defense being confronted by probing analysts like myself, but who wouldn't? He presented his company (and extensive retail experience), with the sort of clear and frank discussion that's important for any company.

At 5:30 the tour ended and I must admit, the format was thoroughly engaging and worthwhile. Not only did I leave with a deeper understanding of big retailer strategies, but I also got to see consumers from the point of view of executives who don't do what I do. In addition, the format (get on the bus, get off the bus) created a very interesting opportunity to get to know your seat-mate. Mine was Pamela Diamond, a fascinating portfolio manager at a financial institution investigating her client's investments. Overall, this event merited 5 pluses (+ + + + +).


Disclaimer: The recommendations, commentary and opinions published herein are based on public information sometimes referenced via hyperlinks. Any similarities or likeness to any ideas or commentary from any other sources not referenced is purely coincidental. al berrios & co. cannot control any results occurring from advice obtained from this publication nor any opinion(s) conveyed by any reader of this publication.

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