The Robin Report - Issue 13 - May 2012 by The Robin Report

Evo The l Lanving dsc M&A page ap e 12

Issue Three 2012

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Dear Reader There are incredible transformative events going on in retailing today. Most of them are due to the necessity for gaining competitive advantage in our over-stored, “share wars” marketplace, increasingly exacerbated by the relentless and rapid growth of e-commerce. continued page 2

Controlling Creation to Consumption it's time

with Mindy Grossman, CEO HSN

By Robin Lewis

The mantra of the old school merchants has always been “… at the end of the day, success is all about product, product, product.” Well, several years ago that myth was shattered and the ante was raised in the apparel game by the likes of Zara, H&M, Mango, and Forever 21. And, at the time, most of the industry didn't really understand that these four brands... continued page 6

I recently toured the headquarters, broadcast studios and operating heart of HSN (Home Shopping Network) in St. Petersburg, Florida. HSN Inc. is all of it. There’s HSN across all platforms - television, online, mobile, interactive TV, gaming, all of that. Then there are 8 e-commerce and catalog brands: continued page 3

I NS I D E t h i s i s s u e • Dear Reader ........................... 1

•C ontrolling Creation to Consumption: it's time..........1 Robin Lewis

•Q &A with Mindy Grossman .............................1

• T he Omnipresent Retailer: ................................. 8 Kurt Salmon

• Diluting Cotton Content Compromises Quality and Brand Perception ...............10 Cotton Inc.

• Succeeding in a Rapidly Evolving M&A Landscape ...12 By Kathy Elsesser

• CEO Ron Johnson’s JC Penney Vision: Brilliant, Doable and a Game-Changer................. 16 Kurt Salmon

• How Supermarkets Turned Pain At The Pump into a Positive ............................... 20 By David Merrefield

• Menomonee Falling? ........ 22 By Warren Shoulberg

• quotes to remember ......... 24

Dear Reader

continued from page 1

In the late 1800s, when 60% of the U.S. population resided in rural areas, with scant access to towns and cities, people ordered everything they needed or wanted through their “Internet” at the time (the Sears catalogue). The department stores, located in the major cities, created enough compelling experiences that those rural families would travel long distances and spend the entire day at Macy’s or Marshall Field’s and others. Indeed, these stores were described as “palaces of consumption.” And, even postWWII and well into the 1970s, department stores continued to be all day outing destinations for families. Then they were not. The huge irony today is that, just as compelling experiences lured customers away from the Sears “Internet” in the earliest years, and other competitors later, until they didn’t, the department stores are finding they must once again create great shopping experiences to drag consumers away from the real Internet. This time around, however, it’s even more imperative, due to our over-competed marketplace. And, I dare say, given the knowledge and access of today’s consumer, the experiences are going to have to be overwhelming just to get their attention. The other irony, as an offshoot to this, and not yet broadly articulated, is that as these brick and mortar retailers build their “omnichannels,” they will have competitive advantage over the Internet “pure e-commerce” players like Amazon, Ebay and others. Simply put, they provide the consumer with dual access (online and offline, with the lure of an experience to boot). So, guess what? Understanding this, and witnessing the Apple experience, Amazon is opening a store in Seattle. And, Google, eBay, Living Social, Gilt Groupe and others are in various stages of considering and opening brick and mortar stores. The game-changing ironies keep coming. “Big Box” retailing is breaking down into “small box” neighborhood retailing to gain quicker and easier access to consumers, and to provide quicker

and easier access for consumers. Again, much of this strategy is driven by “share wars,” in addition to the fact that online sales are beginning to lessen the amount of physical inventory needed. What else happens in an over-stored and - stuffed world, added to by the proliferation of e-commerce, each new site offering a better “deal?” I’ll tell you what happens: It “lowers all ships.” Deep discounting accelerates, eventually driving price deflation. More outlet stores open than full-price stores. Quality and value ultimately decline. With the consumer driving all of these ironies and more, it is forcing all retailers and brands to pursue greater control over all aspects of their business so that they can respond more rapidly to the ever-increasing expectations from today’s consumers. This translates to a seamless, simultaneous, fast, flexible, transparent, collaborative, efficient and effective value chain from creation all the way through consumption. A final irony here is that this value chain model was pioneered by Zara in the 1980’s and mis-labeled by industry veterans as “fast fashion,” when its model should have been revered and adapted by all retailers, not for “fast fashion,” but to be as consumer-responsive as required to compete in the 21st Century marketplace. As always, have a good read.

Robin Lewis has over forty years of strategic operating and consulting experience in the retail and related consumer products industries. He has held executive positions at DuPont, VF Corporation, Women’s Wear Daily (WWD), and Goldman Sachs,among others, and has consulted for Kohl’s Department Stores, and dozens of others. In addition to his role as Publisher and CEO of The Robin Report, he is a professor at the Graduate School of Professional Studies at The Fashion Institute of Technology.

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with Mindy Grossman, CEO HSN I continued from page 1

Frontgate, Ballard Designs, The Territory Ahead, Garnet Hill, Travelsmith, Improvements, Smith + Noble, and Grandinroad. I was truly awestruck with what one might call their “store,” a gargantuan building that actually houses all of the mini-theatres where the television, online, and catalogue sets get changed hundreds of times a day. If more traditional brick and mortar stores viewed their businesses as “theatre” they too would be creating exciting new “sets” on a continuous basis. The high point of the visit was the hour I spent with CEO Mindy Grossman, who shared some of her views on the five years she’s been at HSN’s helm, and what’s ahead for this unique retailer. Here are excerpts of what she had to say: How the mission of HSN has evolved along with the changing retail landscape: Our original mission - of delivering the joy and excitement of new discoveries every day has not changed. We had this big audacious goal when I came in which was to be a disruptive force on the retail and consumer landscape. Now our intention is to lead and pioneer the future of boundaryless retail – a term we’ve trademarked, by the way, so no one else can use it. It’s about a world devoid of artificial barriers where collaboration and community all come together to create a unique and seamless experience for consumers.

If you’re not moving today, and not incredibly connected and inquisitive, you will be left behind in the dust. Because the pace and speed of what’s happening…things that didn’t exist 6 months ago like Pinterest. You have to be so connected. If you think you’re going to do everything yourself on an island, then you’re not being realistic. I’m a huge huge believer in strategic collaboration and win-win and not having everything invented here. You have to have great partners. You can’t let “how do I make the deal” take over the equation. On brand collaborations: We’re now Conde Nast’s largest marketing partner. What started as “they want to sell subscriptions, and I want editorial validation” has evolved to a more immersive relationship. Probably the best example is we now have the license to all Bon Appetit branded products, from cookware to small electrics to cutlery, everything. We launched the brand in January – they were simultaneously relaunching their publication, so we worked completely collaboratively – so there was a big trust factor there. We worked with editors, test kitchen, content people – Ryan Scott, their top chef, will go on air. We’ve created countless videos, recipes, test kitchen – the basis of our entire culinary experience. We’re marketing, they’re marketing, and together we're working to build another extension of a brand. Our mission is to partner and be not just a commerce or transactional partner but a strategic marketing partner for brands to tell their stories, to translate the voice of their product. And I think that’s why we’ve been able to attract brands and businesses. I say to everyone all the time when your biggest competitor is 2 and a half times your size, you are not going to win by telling someone that you can sell more of these in 10 minutes. But if you say to someone I will bring the DNA of your brand to life, I will tell your story, I will be your partner in the long term

If you’re not moving today, and not incredibly connected and inquisitive, you will be left behind in the dust.

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with Mindy Grossman, CEO HSN

and make it relevant and modern and fun and informational, treat it with respect, and create a bond with you and your consumer base, that’s a little bit more compelling. That’s an experience. On pop-up and other physical stores: People say to me, “why don’t you open up a pop-up store?” I’m not going to do that because our mantra is we want to lead, be first. But, if it’s to be the virtual iteration of a pop-up store, then I’m there. So what did we do? At NRF, we launched with Intel the first 13x8ft interactive touch wall, and we’re going to put those in environments where consumers are going to be open to experience, entertainment and interactivity. Imagine it at South by Southwest or at an airport, or the Aspen Food Festival. People can order off it. That’s the direction we’re going in. It all has to be interactive. The first one we did was on culinary, and you make a pizza with Wolfgang Puck, and you have to win points, and it’s less about how much I’m going to sell off the wall than it is about being where they are and creating awareness. On Upping The Entertainment Ante - Literally: About two years ago, Bill Brand, who runs our marketing programming business and I decided we really needed to rev up the entertainment factor, and be a part of popular culture. We needed to evolve the entertainment to the next level. We went to California and met with heads of movie studios, tv studios and music companies to educate them on HSN, who we are, who our customer is. I said to them: You want to engage women. You want to get women into your theatres, to watch your shows. We have those women, and they’re very passionate and very engaged in what we’re doing. I met with Sony, and knew they were coming out with the film Eat Pray Love. I’d read the book, and told them we would create a 72-hour extravaganza around Eat Pray Love –24 hours on Italy, 24 hours on India, and 24 hours on Bali. And we did it. We got Naeem Khan, Nicky Butler, Padma Lakshmi and lots of amazing people. We created product. We used the story of the journey as the storytelling vehicle – Sony gave us trailers, the behind-the-scenes clips, even the makeup artist who did the elephant, and we created an entire magalog, landing site, and programming. Nicki Fink of Dead-

line Hollywood credited us for driving women to the theaters on opening weekend. It was 72 straight hours around the inspiration. Once we did that, the floodgates opened. Since then we had a Disney Dreamworks thing with The Help, and Paramount with Footloose. Our most significant integration to-date is coming in June with Universal around Snow White and The Huntsman with Charlize Theron. I also wanted us to be a launch vehicle on music. Our first one was the launch of Rod Stewart’s Fly Me To The Moon about a year ago. It’s a live performance, like a concert, with a small audience of about 100 – in Rod’s case it was like a supper club. We sold 30,000 CDs in an hour. We then launched Randy Travis’s new CD, and had Mary J. Blige. With Lionel Richie, which we’re broadcasting live tonight, we’re doing a different spin on it. We want to take advantage of every screen and the social world. We have a series of bloggers. We’ll be on from 7 to 8 on Facebook in a behind the scenes look. After the show, from 9-10 there will be a post-show event on Facebook. From the time we announced we were going to do this we’ve had an additional 75,000 members on Facebook so they could see the post-show. All these initiatives serve to deepen the immersive experience of the brand. About cannibalization of television by Internet, tablet and other mobile: I am channel agnostic. The screen doesn’t matter. You can’t buy from a TV. The TV is a mechanism for us to produce and distribute the live experience. Then we take that and leverage it across the other screens. I want engagement on one of those screens, or ideally on multiple screens. Like I don’t believe that physical stores will go away, I don’t believe that television will go away. There is that woman who loves that live television experience, she likes hearing the conversation, she’s engaged, she’s entertained, she’s informed. She likes to make that appointment to view. There’s another consumer who would never do that, who wants to watch it on her own terms. She loves the idea that we have a dress shop, where she can take a style quiz, a size quiz, etc. We love both these customers. The most important thing is that wherever she goes, it’s a consistent experience with the brand. We try to make it as customized and personalized as possible. We’re trying to make it as engaging and immersive as we can, an experience. We realize that the key to our future is to maximize the experience. I don’t think it’s enough

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to be ubiquitous. You have to be everywhere, but it has to be customized. What is it about the way she’s interacting, and how can we make it as easy, simple, seamless for her as possible. We think about her every single minute. We’re starting to create exclusive content for digital. If you go to our site and the Bon Appetit, you’ll find lots of videos with recipes and videos on how to make the dish. We’re creating synergistic content that enhances the experience. If I just bought the pressure cooker from BA, then I can go online and find the demo, then find a bunch of recipes I can make with the pressure cooker. What about the gaming? Video gaming is very powerful today. Our customer is into the thrill of achievement and acquisition. She watches HSN, she’s on Facebook, she’s playing casual and social games. The biggest demographic playing social and casual games is the female ages 35-50. She’s playing Words with Friends, Bejeweled, Solitaire. We wanted to create a gaming portal called HSN Arcade. We went to Seattle and San Francisco, and met with the gaming people. The live show is streaming, and you can play one of 26 casual games at the same time you’re watching. We launched the gaming arcade June 1, and had over 35 million game plays by the end of the year. Now we’ve had 40 million. Our customer can come and win badges for things, and watch the live show while she’s doing it, so she can win things, see new items she wants to win, etc.

On Flash Sale Sites: We’re different from all those sites like Gilt Groupe. We have new product every single minute, every single hour. We have urgency all the time. But we’re not about a discount. We are about exciting great product, and our customer expects that they’re getting something valuable and for a great price/value, but not a discount. How do we do that and remain competitive? 75% of the products we sell are exclusive to us. Either the brand is, or we have something first before anyone else does, like in electronics. Today it’s no different from what you’re hearing from Macy’s and everyone else. On the HSN Customer: People have this misguided stereotype of our target consumer, like she sits around watching TV all day. Our woman works. She wants to do what she wants to do. We were in the process of turning around the business. Second, we understand consumer behavior, and we have a flexible business model. So even though she wasn’t buying selfish purchases like jewelry, she was still buying things for her family. On the Cornerstone side, though, we were very hard hit – most of those brands are luxury home goods – So when we started coming out of the recession, that business went on fire, because of what’s happened to the luxury customer. So they are back to growth mode, but they were very hard hit. So whereas most retailers are trying to get back to 2007 numbers, we’re back in growth mode.

People say to me, “why don’t you open up a pop-up store?” I’m not going to do that because our mantra is we want to lead, be first.

Issue Three 2012

Controlling Creation to Consumption: its time were redefining innovation and consumer connectivity through the redefinition of the value chain process. In fact, at the time, it’s quite possible the brands themselves did not understand the full force of their “game-changing” process. One thing they did understand, however, is that you can’t win in the apparel game solely by creating unique new styles every season (which today is just the price of entry) or launching another celebrity brand just to achieve competitive parity.

It’s Not Just Fast Fashion, It’s a Virtuous Loop Value Chain

They learned very early on how to process the ubiquity and speed of communications combined with hightech-driven, transparent, seamlessly integrated, rapid-response and totally controlled value chains directly connected and instantaneously responsive to consumers (in fact driven by consumers). They learned how to design or knock off, and deliver the hottest new looks overnight. And, not just overnight on a seasonal basis, but on a weekly basis.

However it’s emulated, the process is a never-ending value chain that is fully integrated, operating as a virtuous cycle, starting with the consumer, pausing at point of consumption and then starting all over again. And, there are three continuous and simultaneous steps in the process:

Process Innovation = Superior Product Innovation

Call it “fast fashion,” “disposable fashion” or whatever you want. But what's happening in this not-so-new-anymore business model is that it matches twentyfirst century technology with what obsessively consumptive twenty-first century consumers really want. And that's more, more, and more, faster, faster, and faster. Hey, it's the McDonald's thing! They want quantity over quality! Right? Wrong. That’s an old baby boomer notion. Today’s consumer wants it all: quantity AND quality, including great new looks, faster and more often, for the lowest possible price, where and when they want it, and, served up with an experience to boot. And that's what these four brands, as well as Uniqlo and others, are delivering.

Turning out more new lines faster may be one of the great benefits for young consumers of such a value chain process that provides Zara-like brands a tremendous competitive advantage. However, the principal elements of the same process can and must work for all retail and wholesale brands going forward. Indeed, many have emulated, and continue to emulate, the model in different ways.

Define: Identifying and defining what consumers expect from, or even desire beyond expectations of, the brand. This is ongoing, using all research methodologies, including sales tracking, in-store interaction, and testing. In essence, the real winners virtually live with their consumers, 24/7. This process continually affirms the brand’s core value, suggests improvements, and guides new value creation and innovation. A clear point of competitive differentiation for the brand is articulated. If well-executed, this process will yield a deep metaphor for what the true essence of the brand stands for and what the consumer is seeking. Develop: Developing the value starts with using knowledge gained from research to conceptually plan for new

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and/or improved value (brands/styles), then on to actual development, including the experience at point-of-sale. Also, in this cycle, the highly integrated, seamless and demand-driven “back end” segment of the chain will provide continually innovative productivity strategies, while the integrated marketing or “front end” of the chain will continually innovate or strengthen the marketing strategies. Deliver: The final cycle in the virtuous loop is the preemptive, precise and perpetual distribution of the value, along with its experience. It’s also critical that the value (brand) creator has dominant control of this final cycle in the loop. The brand creator must have control of line size, mix, frequency, flow of goods and as much of the operations as possible (sales and service), as well as its presentation and, most importantly, the experience at the point of sale. Control

The other principle element, without which this process could not be implemented, is control. The value creator and ultimate provider must have dominant control over the entire value chain from creation to consumption, (ie. Starbuck’s, Ralph Lauren, Apple, Zara). Without such control, the three-step process is not achievable. And, the process will fail to be seamless, simultaneous, fast, flexible, transparent, collaborative, efficient and effective, all necessary qualities for success. Essentially, without control, one cannot have a modern-day value chain, and such

So, the great innovation by these “fast fashion” brands was in their value chain process, not just the creation of the “hottest” new looks. While they do have their own innovative design staffs, and not all of their new styles are knock-offs, the innovative way they approach the process of making and delivering apparel, also provides superior product innovation.

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a value chain is not achievable without control. The consumer will then lose. And, when the consumer loses, the provider dies. Ralph Lauren’s declarations of “controlling his destiny,” have been, and still are, manifested by his “buying back” their many licensees (for control), continually increasing their retail business (now accounting for about 50 percent of total revenues) and insisting that his retail customers like Bloomingdale’s cede control of the presentation and operations in their designated store space. Eric Wiseman, CEO of VF Corporation, has said of his company’s brands, (which include The North Face, Vans, Nautica, 7 For All Mankind and others), “We want to continue to present the brand in ways we can control.” VF Corporation also continues to increase its retail business. HSN CEO Mindy Grossman sprinkles the word “control” throughout her numerous public presentations as in “knowing what our consumers want, where, when and how they want it, so we’ve got to create and control the distribution and experience for her.” Brian Dunn, CEO of Best Buy says of controlling the experience: “We believe that when an experience touches a customer, you must own it.” Part of the transformation of the department store business model is the continuing increase in the percentage of private and/or exclusive brands to their total business, (in our book, we estimate the percentage will reach north of 70%). Macy’s, JCPenney, Kohl’s, Target and even grocery retailer Trader Joe’s, as well as many others across all retail sectors, are pursuing this strategy, which requires optimum control over the value chain process. And, perhaps the final word on control comes from none other than Mickey Drexler, CEO of J. Crew: “I don’t ever want to be in a business where I don’t control my distribution, period, end of sentence.” When retailers and wholesalers control their value chains to implement the winning process, they reap many benefits. They eliminate costs associated with “middlemen” vendors and/or retail customers. They gain vendors’ or retailers’ profit margins, and they can better control costs in other parts of the chain. Furthermore, they can turn out more new Issue Three 2012

lines faster, providing the consumer constant “newness,” which in turn gives them greater pricing power. And, of course, proprietary brand differentiation is a major advantage in this hypercompetitive market. Finally, they control the most important part of the chain that connects with the consumer, the presentation and the total experience: the packaging it's wrapped in, the space and theatre it’s presented in, the audio-visual extravaganza that surrounds it. In short, everything that touches and compels its consumers to buy, and then gets them to come back again. The Zara Lesson For All

When a customer can visit any one of Zara's 1,600 plus stores, in 82 countries around the world, and on almost a weekly basis find completely new lines to select from, this is nirvana for millennials. Furthermore, because they know new styles are coming in next week, they are compelled to buy something they like every time they shop, at the risk of not finding it if they come back another day. And, of course, this climate of scarcity also provides Zara with pricing power, and since the flow of goods is continuous and in small batches, inventory (and, therefore its cost), is practically non-existent. In a “share wars” environment, in which one must steal a customer away from a competitor or get existing customers to buy more and/or more often, the Zara model works on steroids. The brand’s customers shop in their stores an average of 17 times a year, versus 4 for traditional retailers. In short, using Zara as an example, “control” is the operative word in describing how they are able to implement the “fast fashion” model. They are 80-90%

vertically integrated, owning and/or controlling the entire value chain from creation to consumption. Their staff of about 1000 designers and product developers is constantly checking the world for new and/or knock-off styles, and hearing back every single day from every single store manager about what sold and what didn't. They create about 11,000 plus styles a year, roughly five times as many as traditional retailers. From start to finish they are able to develop very small lots within as little as ten days, committing only 50%-60% of production in advance of the season, with the remainder manufactured on a rolling basis during season. The small lines go out every two weeks. What doesn’t sell quickly is reallocated to other stores or marked down immediately. Only 15%-20% of seasonal volume is sold at markdown prices, versus 30%-40% for much of the industry. And, of course, because of their vertically controlled value chain, they can quickly ramp up production to replace winning styles or fill in with “like-styles.” It Is About Process, Process, Process

A better-managed, high-tech-driven, transparent, seamlessly integrated, rapidresponse and totally controlled value chain, directly connected and instantaneously responsive to consumers, (in fact driven by consumers), is a win-win twenty-first century process.

And, it’s a process which can actually improve upon the old school mantra of “product, product, product,” by providing more of it, newer, faster, better, cheaper, where, when, how and how often the consumer desires it – and presented in way that creates a great and indelible consumer experience. 7

The Omnipresent Retailer: Creating a Demand-Responsive Value Chain By Steve Pinder and Jon Mays Many retailers are striving to better respond to changes in consumer demand, and it’s easy to see why: They’re pressed to reduce inventories and cut supply chain costs at the same time that the shopping patterns of American consumers have become virtually impossible to predict. Making matters even more complicated, consumers now have unprecedented access to an infinite number of products and a virtually limitless number of places at which to buy them. They expect to be able to buy exactly what they want exactly when they want it, and if one retailer can’t make that happen, another one (or a dozen others) can. That’s where a demand-responsive value chain comes in. By shortening cycle times and increasing collaboration across the value chain, retailers can ensure they have the right product, in the right place, at the right time.

1. Shortening Cycle Times

Many retailers are beginning to move production closer to home (leveraging data to inform smarter decisions on the best manufacturing locations) as a way to shorten cycle times. Shorter cycle times can improve responsiveness to demand and increase inventory effectiveness. The global product margin metric measures the cost from each point of manufacture to each point of distribution and the unique retail price from that point of distribution. Keeping this number in mind allows retailers and wholesalers to optimize total margin by choosing the best manufacturing locations based

on discrete costs from multiple points of supply to multiple points of distribution and the retail price at each point. But after a retailer’s sourcing decisions have been made, there are still several steps that can further decrease cycle times. For example, consider a retailer that sources out of China and ships its products to the U.S. by boat. The industry standard cycle time for this situation is about 65 days from purchase order to store shelf, but leading retailers have been able to cut this down to about 50 days using several creative tactics. One of the most effective ways has been to pre-position materials and capacity, which can save up to five days. Many market leaders have started pre-positioning materials, especially retailers who have large enough volumes to command the attention of mills. VF and JC Penney are prime examples. To enable pre-positioning, it’s essential to take a fabric-first approach to the product development process. Start with a careful look at fabrics used across departments and rationalize the fabric palette. This is especially useful when it comes to basics. For example, different departments may be using 10 different

Best Practices from Kurt Salmon

weights of cotton that the consumer sees as identical. By rolling this demand together into fewer core fabrics, retailers can find synergies: less risk in each fabric order with higher quantities, better leverage to reserve capacity with mills and lower costs. A mass discount retailer and a specialty apparel wholesaler both rationalized their fabric palettes, reducing the number of fabrics they used from more than 400 to fewer than 200, and saved tens of millions of dollars as a result. Another specialty apparel wholesaler created a program to help guarantee the availability of the key Italian wool it uses in one of its signature products, ensuring consistency and keeping costs down. But the challenge is not simply to reduce the number of fabrics on a single occasion, but instituting discipline within the organization to ensure fabric numbers don’t slowly creep back up. However, pre-positioning does come with its challenges. First, the ability to accurately predict global demand is essential, but is often difficult for organizations with regional buying. Additionally, it’s imperative that mills, factories and retailers have a clear understanding of where materials will be stored and who will own the fabric liability from the outset. Some retailers

Making matters even more complicated, consumers now have unprecedented access to an infinite number of products and a virtually limitless number of places at which to buy them.

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Creating a Demand-Responsive Value Chain 1. Shortening Cycle Times

2. Increasing Supply Chain Efficiency

• Pre-positioning of Materials (-5 days)

• Reducing Number of Points

• Rationalizing Fabric Palette

• Cross-Docking Products

• Staging Finished Goods Overseas (-7 days)

prefer to procure, own and store all their fabric at the factory, while other retailers contract to use a certain amount of fabric while the factory maintains ownership of it. This becomes a negotiation and strategic question about a retailer’s level of trust with the manufacturer and desire to keep liabilities off the balance sheet. In addition to pre-positioning materials, leading retailers are staging finished goods overseas, which can trim up to seven days from the average cycle. Leading apparel wholesalers and retailers store finished goods closer to production, where warehouse space is cheaper. Vendors or factories will commonly hold up to four weeks of supply, which helps reduce cycle times because orders can be filled directly from the stock instead of having to first be cut, sewn and packed.

2. Increasing Supply Chain Efficiency

Increasing supply chain efficiency can cut cycle times by an average of three days. More and more retailers are speeding up their domestic supply chain by cutting the number of stages a product has to move through or by reducing storage points. A prime example of this is crossdocking, or moving just-received shipments to another location or directly to the store rather than receiving them into distribution

Issue Three 2012

center stock. More and more retailers are cross-docking products, eliminating time spent in storage (Walmart cross-docks about 85% of its volume). And as more retailers jump onto the cross-docking bandwagon, it will become more of an imperative for suppliers to support the capability as well.

3. Collaboration Across the Value Chain

Improving collaboration helps increase visibility into demand and creates a sense of shared accountability for decisions across the value chain. While increased collaboration is not a new topic, it is increasingly important as the value chain becomes ever more complex. Leading retailers have excelled at removing the barriers to collaboration and creating trusted relationships with vendors, but others are struggling and missing out on tremendous flexibility and savings as a result. Improved collaboration means that factories develop core competencies that allow them to provide better service. Some factories are capable of taking POS data from retailers and creating forecasts for replenishment orders, which saves time and reduces supply chain work-in-process. For example, JC Penney sends POS retail data directly to the factories, which enables factories to forecast demand, buy fabric just in time, and cut it to a particular SKU or size immediately. The factory can

3. Collaboration Across Value Chain • Factories Get POS Data, do own forecasting • Reduce Organizational Levels, create cross-functional teams

then speed the process even further by shipping the finished garments directly to JC Penney stores. Achieving improved collaboration does require overcoming a few hurdles. First, a lack of crossfunctional teams, processes and calendars makes collaboration difficult. Second, the right organizational design must be in place to facilitate, instead of hinder, the easy sharing of data between retailer and vendor. Tiered organizational structures that introduce unnecessary levels between the supplier and the point of demand add complexity and make it harder to share data. But despite the potential difficulties associated with creating a demandresponsive value chain, it’s something retailers cannot afford to ignore. The modern consumer already expects access to whatever she wants, wherever and whenever she wants it. And the trend is only intensifying as more exclusive and custom products add complications in forecasting and distribution. The implications to a retailer’s operations, from product development through supply chain and marketing, are significant. But even more significant is the cost of not developing a demand-responsive value chain. Together, Steve Pinder and Jon Mays have over 20 years of experience advising the world’s leading retailers. They can be reached at steve.pinder@kurtsalmon.com and jonathan.mays @kurtsalmon.com.

Diluting Cotton Content Compromises Quality and Brand Perception By Emily Thompson A year ago the rising costs of materials, labor and fuel put pressure on apparel brands and manufacturers to maintain margins and pass minimal costs onto the consumer. In re-thinking sourcing strategies, many brands sought to cut corners by substituting cotton with synthetic fibers. Cotton, a mainstay of apparel, had historically high prices last year. One year later, the landscape is different and so is the consumer perception of quality; begging the question, is there a higher cost for diluting the touch and feel of cotton? The run-up in cotton fiber prices a year ago was mistaken by some as the sole reason for increased apparel costs at retail. Indeed, the jump to $2.43 a pound on the A Index was unprecedented. However, other factors, such as: increased labor costs in textile manufacturing regions; increased fuel costs; the increased price of fibers competitive to cotton; and a 15-year cycle of deflationary apparel pricing in the U.S. all played a part in the slightly elevated prices consumers are seeing at retail. At the retail level, apparel prices in-

creased year-over-year 4.2% in February, the most recent data available. Interestingly, although apparel prices have increased over the last few months, consumer demand for apparel has shown signs of resiliency. In January, when prices were higher than in February, the U.S. Department of Commerce reported consumer apparel spending was stable on a priceadjusted basis relative to a year prior. Cotton fiber prices have also stabilized, which could lessen some pressure on

Consumer Facts from Cotton Incorporated Lifestyle Monitortm margins and retail prices. New York cotton futures have been trading at levels between 85 and 95 cents per pound, down from the A Index world value highs of $2.43. An increased supply of cotton on the market may further ease, or at least maintain stability of, the price of cotton fiber. “The peak in last year’s prices coincided with the time period when farmers were deciding what crops to plant,” says Jon Devine, lead economist for Cotton Incorporated. “As a result, farmers planted a record amount of cotton for the current crop year, and a record cotton harvest is forecast. The high prices, though, led to some declines in world cotton consumption, and this cycle ensures that fiber supplies will be relatively plentiful.” While cotton economics adjust to supply and demand updates, consumers are still feeling a pinch at retail counters. Among those who have purchased apparel in the past six months, nearly seven out of 10 say prices increased from last year, the Cotton Incorporated Lifestyle Monitor™Survey shows. And, while the U.S. economy continues to expand − adding 227,000 jobs in February, and pointing to a positive outlook for the remainder of 2012 – consumers are less optimistic about their personal economic situation. “Higher price tags are still a concern,” says Kim Kitchings, Vice President, Corporate Strategy & Program Metrics. “Consumers are coping with increased costs for household goods, and most feel fairly pessimistic about their personal finances. We saw a decline in the percentage of those who feel very or somewhat optimistic about their personal economic situation – from 50% in 2010 to 46% in 2011

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that 62% of consumers agree that cotton clothing is higher in quality than synthetics. The association of cotton with quality, and the importance of quality to postrecession consumers, is borne out in their willingness to pay more for cotton apparel. In spite of pessimism about their personal financial situations, more than 6 out of 10 consumers (63%) say they would prefer to pay a slightly higher price to keep cotton from being substituted with synthetic fibers in their jeans. The sentiment follows for other cotton apparel items: T-shirts (58%), dress shirts (52%), and sweatshirts/ hoodies (50%).

– and that can certainly affect their shopping habits.” Those consumers who are shopping for new apparel also seem concerned about the quality of their purchases. Fifty-four percent noted that many of the clothes that used to be made from cotton now seem to be made from other fibers, indicating that they are aware of fiber substitutions by some manufacturers. In denim jeans, perhaps the most iconic item of cotton apparel, some manufacturers have added as much as 15% to 30% polyester in an effort to keep costs down, in a move that saves from 15 to 20 cents per jean in production. While this may have been a necessary experiment when cotton fiber was more than $2.00 a pound, is it a false economy now that cotton is trading for less than $1.00 per pound? The answer lies in consumer perception and their willingness to purchase “diluted” denim. “Responses to Lifestyle Monitor™ survey questions show that 75% of consumers say cotton and cotton

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blends are their favorite fibers to wear,” says Kitchings. The survey further reveals that nearly 6 out of 10 consumers are bothered that brands and retailers may be substituting synthetic fibers for cotton in their T-shirts (58%) and jeans (58%), followed by sweatshirts/hoodies (52%) and dress shirts (52%). Compared to a few months ago, significantly more female consumers are bothered that brands and retailers may be substituting synthetic fibers for cotton in their dress shirts (46% to 52%), dresses (39% to 49%), and skirts (38% to 47%). “Consumers are noticing the difference cotton substitutions make in the look, feel, and durability of their clothing, and these tactile characteristics affect their perceptions of quality for garments and the brands that sell them,” says Kitchings. Quality is of key concern to recessionbattered consumers, evidenced by the fact that 73% of respondents tell the Monitor survey that they expect to wear clothing longer, and 58% currently define “quality” as “durable” or “long-lasting.” The survey also reveals

“Over the past few months, the number of respondents willing to pay more to keep cotton in their apparel has increased an average of 5 percentage points across apparel categories, with dresses highest at 10 percentage points,” says Kitchings. The textile supply chain is undeniably complex, with a range of businesses fulfilling specific functions, and a multitude of factors affecting each link on the chain. The collective effort, however, is simple: give the people what they want. Cotton prices are stable and supplies forecast as ample; consumers have a heightened sense of quality, which they associate with cotton and cotton-rich apparel. In the current climate, substituting synthetics for cotton may save a few cents per unit, but at the expense of diluting brand perception in a highly competitive marketplace. Is it worth it? Emily Thompson is the Associate Director, Editorial at Cotton Incorporated, the research and marketing company representing upland cotton. For more information TM on the Lifestyle Monitor Survey, please contact her at ethompson @cottoninc.com. The data found in this article, as well as additional relevant information, can be found at CottonLifestyleMonitor.com.

Succeeding in a Rapidly Evolving M&A Landscape By Kathy Elsesser These are exciting times in the financing and mergers markets, with several key themes influencing the consumer retail space, and exciting opportunities for high growth and emerging companies.

Also, acquisitions of private companies have rebounded significantly and were up approximately 10% last year. We expect this trend to continue driven by exceedingly low interest rates.

become increasingly crowded. In 1998 there were only 13 retailers with more than 300 stores. Today that number has doubled and 11 of those retail chains have more than 800 stores – a fivefold increase.

Financing Markets

Despite better-than-expected economic data and positive news from Europe, interest rates remain near all-time lows.

This retail development has far outpaced population growth in all age and demographic categories. Today the US has 7 times the retail space per capita of Western Europe!

During the financial crisis, we saw GDP growth plummet 0.3 and 3.5% in 2008 and 2009, respectively. Then 2010 saw a rebound of 3.0%, and 2011 exhibited progressive improvement. This year and next are expected to deliver stable growth, due in part to a belief that the unemployment rate will continue to decrease albeit at a relatively slow rate. This increasing growth and stability has pushed equity market performance up almost 10% so far this year. Against this positive macro market backdrop, consumers continue to spend, while saving less. In addition, investors have become less risk-averse. These combined factors have resulted in retail stocks outperforming the market by 8% last year and 9% YTD. High growth retailers like Francesca’s Collections and Michael Kors have had even more spectacular performance.

And private equity firms have more than $300 billion of uninvested equity capital. With the economy growing (albeit slowly), jobs increasing, the equity market rallying and the merger market poised to continue to grow thanks to low interest rates and a significant amount of money available from private equity funds, this is a good backdrop for growing companies.

The Consumer Retail Landscape

Let’s begin with the scarcity of growth. The retail landscape has

As a result of this “overstoring,” and the fact that there is a lot of competition and not enough differentiation, fewer and fewer retailers are able to grow at 15% or more. Anyone who is able to accomplish this today is truly extraordinary. The effects of technology on the consumer cannot be underestimated. E-commerce is changing the way consumers interact with and buy products, and making brands more important than ever. Increased Internet penetration globally represents massive

The merger market peaked in 2007 at $4 trillion and dropped by more than half by the end of 2009. In 2011, merger volumes were up 6% to $2.5 trillion, but transaction volumes as a percentage of the overall market remain low at 5% (vs. a long term historical average of 6.5%.) We expect merger volumes to increase as the broader market continues to rise.

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potential for the e-commerce market as people shift offline activities online. The global ecommerce market is expected to more than double over the next 8 years from $1 trillion in 2011 to $2.2 trillion in 2019. This represents a compound annual growth rate of 11% - more than double the expected growth rate for worldwide retail sales. This will be driven in part by the rapidly growing number of smartphone users across the world, in particular in the BRIC (Brazil, Russia, India, China) countries. And mobile innovations such as smartphones and tablets have surpassed PC computers in unit shipments and are expected to soon outnumber PCs. A quick look at Amazon will validate this belief. The number of shoppers per month on Amazon’s site is tremendous. Its sales growth

In 1998 there were only 13 retailers with more than 300 stores. Today that number has doubled and 11 of those retail chains have more than 800 stores – a fivefold increase. - from a startup in 1995, an IPO in 1997 with $150mm of sales to more than $34 billion in sales today – is nothing short of meteoric. This type of growth going forward will be driven by the intertwining of mobile, social and local innovations. A concrete example is Facebook – one of the first innovative concepts combining mobile technology, social networks and local communities – which surpassed Yahoo, Microsoft and YouTube as the #2 most visited

site in the world after Google. While Facebook’s direct involvement in e-commerce transactions is limited today, any business should evaluate a marketing strategy on such a powerful social network platform. “Social Distribution” on social networks should be a powerful marketing channel for many years to come. The emergence of the Internet has increased transparency and truly empowered consumers. As the online experience becomes more enhanced, personalized and convenient, more consumers become connected, driving rapid e-commerce growth. Even the affluent, who traditionally enjoyed the service and customization offline shopping provides, are now online. Almost 20% of affluent shoppers and 27% of ultra high net worth customers have engaged in mobile commerce.

The Importance of Brands

Mid-tier department store sales have been flat and mall square footage growth has turned negative - while branded apparel sales have accelerated. Why? Brands that matter to the consumer have the ability to move across geographies, categories and platforms (i.e. online). They can go to where the customer is when she wants

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Succeeding in a Rapidly Evolving M&A Landscape them. Some of the world’s most iconic brands – like Nike and Coke - have proven that they are far more powerful than the outlets that sell them. That is even truer today as technology continues to change consumer behavior. So what could success for every retailer look like?

In recent years several retail entrepreneurs have won big in the public markets. Kevin Plank at Underarmour and John Idol and his team at Michaels Kors took their companies public for different reasons, but have enjoyed wonderful success - as have their investors. These success stories make investors open and willing to seek out

and embrace the next new great growth company. Let’s talk about one particularly interesting case study, and what we can learn from it.

Lululemon

Lululemon has really been one of the most successful apparel launches of the past decade. Chip Wilson had a vision. He saw women becoming more powerful, both financially and socially. He saw the health and wellness trend and wanted to help women look good while they became more fit. He believed they would pay a premium for it and he was right. The small Vancouver company with a big vision began to grow rapidly and Chip decided to sell a portion of the company to a private equity firm. He wanted to diversify his risk and it was becoming too much for him to manage alone. The investor helped bring in experienced management and positioned the company for the public markets- one goal of Chip’s was to give back to all those who helped create Lululemon. Bob Meers, the previous CEO of Reebok was part of that team. Back in those days Chip often talked about Meers coming in as "my Chevy - steady and safe to get me through the IPO." As the company continued to propel forward he brought in Christine Day to be his "Lamborghini." Chip had a vision and strategy, and we helped translate that into investor appeal. By focusing on yogainspired apparel in conjunction with the newest innovations in technical athleticwear, we worked together to help investors see real white space in the retail sector instead of just another niche yoga com-

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pany. In its early stages LULU showed proven results with a growing store base and potential for category expansion into running gear, casual wear, and menswear, all of which showed great promise for the brand. At the time of the IPO in 2007 many people in the US still had not been to a store (there were only 57 total stores, most of which were in Canada), but investors were getting very excited about its potential. Many naysayers, however, thought his grassroots, guerilla-style marketing could not be scalable. Although we discussed other approaches, he was unwavering in his determination to provide a unique "un-retail" retail format. Once again, he was right.

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Conditions around the IPO were not ideal. Markets were depressed during the road show, which is not the situation you want to be in. But, investor demand was strong: Over 90% of the investors who had met management placed orders. The $377 million IPO was heavily oversubscribed with 450 institutional investors, and ended up pricing 64% above the midpoint of the original range. Keep in mind this was after a marketing period where retail indices were down 9 out of 10 days. It says a lot about the company, its vision, and management team. Today, growth is just tremendous. Expectations are extremely high for this brand, and the company

has a track record of delivering exceptional results. The stock has returned over 600% since its IPO. It is currently trading at a price/ earnings ratio of over 60 with a market cap of more than $10 billion, an all-time high. I hope that the next Lululemon is reading this article right now. In order to get there, be true to your vision, know what you know and get experienced people to assist you in the areas you don't, and never look back. It can be a fun ride. Kathy Elsesser is Managing Director and co-head of the Global Consumer Retail Group in the Investment Banking Division at Goldman Sachs.

CEO Ron Johnson’s JC Penney Vision: Brilliant, Doable and A Game-Changer (That was my story, and I’m still sticking to it!) When old hippies get together, if one of them says: “I was there,” the rest automatically know the “there” was Woodstock, the three-day outdoor rock festival in upstate New York attended by 400,000 people in 1969 that defined a generation. Well, if Ron Johnson, new CEO and team, accomplish what he envisions for a completely transformed JC Penney, and in three years no less, I will be able to say “I was there.” And, about 700 other media, analysts and notable industry attendees will know I meant the “Jobsian” launch presentation on January 25th. I won’t go through a description of the event because it’s been more than adequately covered by every major print and broadcast medium. In a word, to call it “Jobsian” is an understatement. And, a “Woodstocklike” defining moment for a new era of retailing is totally appropriate. Ron Johnson was JC Penney’s Jimi Hendrix. But, it wasn’t the jaw-dropping presentation and stage setting that fired me up. It was the content. Crisply, clearly and logically, Ron Johnson explained how he and his new team at the top were going to completely transform the department store business model into a unique, new retail model, how they were going to establish the JC Penney brand as not just “…America’s favorite department store,” but “… America’s favorite store, period.” He reflected on how back “in the day,” (the 1960s), department stores had it all. Using Dayton’s as an example, he said they were an “unbelievable experience,” describing how families would spend the entire day. But, “department stores, in some ways, are lost in the landscape.” He then went through the

By Robin Lewis

sector’s share loss over the past 20 years, much of it going to specialty stores because consumers prefer those brands and the experience over what he referred to as “tired stores,” “stale presentations,” “ not the newest products,” and “zero integrity in pricing.” Emphasizing the pricing issue, Johnson said, “People are disgusted with the lack of integrity on pricing.” Further pondering the whole sector’s share loss he said: “department stores have all the competitive advantages: low real estate, big marketing budgets, lots of space,” concluding, “something is fundamentally wrong here.”

six transformative strategies. And, perhaps missed by some, all six were inter-connected, integrated, so that when implemented, there will be an enormous synergy. And, who will be the beneficiary of this synergy? The consumer, of course, and thus, the JC Penney brand. The combination of the following six elevates the consumer experience, providing a compelling reason for consumers to make the JC Penney brand a destination. The six strategies were: product; price; personality; presentation; promotion; and, place. Johnson started with what he called “fake prices,” marked way up just

In essence, Johnson is betting that consumers will welcome the simplicity and fairness of this strategy. And, by the way, I’m doubling down on his bet. Another comment regarding specialty stores and a lead in to one of his transformative strategies, he said, “In an Internet age where you can have exactly what you want with one keyword, people won’t tolerate big stores. You have to break it down for them. When we want a great product today, we go to a specialty store like J. Crew, or H&M.”

The Transformative Strategies So, in “praise of fresh air” (the day’s theme), on a “Jobsian” inspired big stage, in an equally inspired “breath of fresh air” theatre, surrounded by a crisp blue sky with gently drifting white clouds, Ron Johnson laid out

to be caught in a vortex of continuous markdowns (in hundreds of ingenious ways), and therefore, in his opinion, driving the consumer crazy in hundreds of different ways. He said at one point, “The fundamental flaw of department stores is the pricing strategy.” Worse, as he counted 590 separate sales last year, the average customer only purchased four times a year. “So customers ignored us 99 percent of the time,” he said. And, in their analysis, they found that on average, consumers were forcing prices back down to their premark up levels. Noting that about 75% of their products were selling at a 50% discount, he said, “I thought to myself, this is desperation.”

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And I believe he started with his pricing strategy, because directly or indirectly it currently has tremendous negative impact on the other five strategies. As he said, “Now most things are on 60 percent markdown, and every time we do that, we’re discounting Penney’s brand,” (which falls under the “personality” initiative). Over time, it also affects product and private label and brand strategies, certainly promotion (marketing, advertising, etc., always on sale), as well as presentation. So, his belief that the “shell game” of pricing is driving consumers crazy, and that they understand the fair value of things, thus end up paying only what they consider fair, has led him to a three-pronged “fair and square” pricing strategy: 1) pricing all goods at about 40% lower than where they start currently (beginning 2/1/12); 2) Themed promotions 12 times a year (vs. the current 590), and 3) “bestprice-Fridays,” promoting sales on the first and third Fridays of every month to clear slow movers. In essence, Johnson is betting that consumers will welcome the simplicity and fairness of this strategy. And, by the way, I’m doubling down on his bet. Of course, this strategy by itself is not enough. While it will reduce current promotional marketing spending from about $1 billion a year to $80 million a month, the consumer has got to have other reasons to leave the Internet and come to the stores. So, they are going to physically restructure all 1,100 stores over a three year period, converting them into compelling shopping experiences where consumers will wander through about 100 “power” branded shops that will be visually inviting, well-lit, uncluttered with fewer racks, and well-curated with interestingly displayed merchandise. The 100 best brands deserving of a shop means that roughly 300 brands will be shed from their current stable. Johnson said, “We want private brands, not private labels,” indicating they will likely only retain wholesale brands with great equity as well. They will also pursue other brands that can add

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exciting shops in the stores, such as their recent deals with Nanette Lepore and Martha Stewart. They’ve had successful shops with MNG by Mango and Sephora as well. So, ironically, this new “building of boutiques” will take a direct shot across the bow of the very guys that stole department store share over the past 30-40 years: the specialty chains. Essentially, the newly retrofitted stores will look like enclosed “mini-malls.” And, promising to be the most exciting and fun attraction in this new shopping extravaganza will be what they are calling a “Town Square.” Not to be unveiled until 2015, enough was said to understand that this will be like a place of learning (genius bar anyone?), a place to hang out, maybe for a coffee or to watch an event, or whatever. If done right, consumers shop through the “main street” of shops ending up at “Town Square.” The whole brand, JC Penney, becomes a compelling experience, so much so that consumers will come more often, stay longer and spend more. And, by the way, Johnson’s intentions for Martha Stewart do not disappoint the speculations in my recent blog: It’s a Good Thing: Martha Stewart and JC Penney. Finally, to pull all of this together into one powerful re-positioned JC Penney brand is a re-imaging across the entire spectrum of marketing. Think “back to the future” Americana modernized. From JC Penney’s original Golden Rule store as the genesis of today’s fair and square commitment, to a square redframed logo with patch of blue in the upper left corner with “JCP” white

lettering (depicting the American flag, also “fair and square”), and, to crisply cool and quirky advertising inspired by Norman Rockwell’s iconic art illustrations on the covers of the Saturday Evening Post of yore, with a dash of modern Target-like humor. They’ve also retained TV star Ellen Degeneres to be their spokeswoman and to be tied into other advertising and TV events. As Johnson said, “We’re fine with growing old. We’re not fine with growing stale.” And, new President Michael Francis, former Target CMO, pointed out that with the elimination of the enormous time staff spends on the hundreds of promotions and the complex pricing system, they can now focus on brand building.

What Are The Odds?

As always strategy is one thing, execution is another. Enormous implementation challenges await Mr. Johnson and team. His huge bet on consumers’ embracing “fair and square” pricing may be the biggest. Right on its heels would be the transformation of stores into small, specialty-type shops, and its relevance in smaller markets and stores. The curating of merchandise from 400 to 100 power brands (including the 17

retention of new brands), and the updating of current merchandise is a huge undertaking. The re-imaging and marketing strategies seem to be fairly well on the way, and in my opinion, powerful and refreshing, and which I believe consumers will find compelling. Another significant challenge will be to transform the organization. Without a doubt, this grand transformation will result in culture shock for many within the company. So, to lead its successful implementation is going to require not only a “buy-in” from the actual “doers,” but clear and continuous top-down communication and education so that everyone understands how to do it. Finally, regarding the pricing gamble, if they lose some customers addicted to the current department store promotional madness, I believe they will win more back in the long run. So, what are the odds? Ron Johnson declared: “I know with every bone in my body that we will make this America’s favorite store.” If so, there will be a 7th “P” not yet articulated: “perfect.” I’ll double down on that.

A Final Déjà vu Moment

Long ago I began ranting about the department store business model, and why, year over year for more than the last 30 years, they were losing market share, and mainly to the specialty stores. It even led to an analysis in my co-authored book: The New Rules of Retail, in which we devoted a chapter to the very subject of specialty stores having a strategically superior business model. But, we then commented on how the department stores could not only beat the specialists in their own game, indeed they could win the consumer on a lot of additional fronts. Ron Johnson’s model is its definition. It is enormously aggressive but, if successful, could very well transform the entire sector.

HERE COME THE PENNEY NAYSAYERS While the buzz of its transformational strategies is still hot, it’s my pleasure to share with you some of the more interesting and provocative comments (both critical and positive) that have come my way. I must say that anecdotally, the naysayers largely outweigh the fans, particularly on the pricing strategy.

I guess you can tell I’m not too fond of the new pricing strategy at JC Penney. I wonder how much research they really did on this. However, even though the pricing part of this is going to fail miserably, the other initiatives – streamlining brands, redoing stores – will be great for the company.

As always, I urge all of our readers to share their opinions with us. And, as you can see, we respect the confidentiality of those writing in. I have given some of them names that I feel portray their point of view, and I also counter-pointed some of their points.

I hear what you’re saying about sales – but, don’t forget they are going to have 12 monthly themed promotions and best price Friday sales. So maybe you’ll race over there for your towels every 1st and 3rd Friday of the month. In fact when consumers understand that big sales are going on at JCP those two days, I think they will make it a destination --- even Kohl’s core customers are likely to check it out --- and while they are there, the big monthly theme promotions will be focusing on stuff throughout the store ---and over time they are also going to be surprised by a much more enjoyable shopping experience and a simpler more exciting branded mix of merchandise, inviting boutiques to wander through, finally to reach a “town square” where all kinds of fun things will be happening. It’s the whole integrated package. Not just product, not just pricing, not just personality (new image), not just presentation, place and promotion (marketing) --- it’s the whole thing.

I also believe there are some great learning points for all of us. And, I’m sure Ron Johnson and team will read them with serious interest. So, here we go. New York Nitpicker writes:

My sister buys a lot of things in JC Penney, and she doesn't fit their core profile at all. She buys because the sales are great. I actually buy towels there, because they have great towels. I buy them on sale, because it gives me the feeling that I'm winning something. If they didn't go on sale, I'd just procrastinate. It will annoy me if they don't have the sales anymore. If I see towels that used to be regularly priced at $10 now priced at $6, I'm going to think they're worth $6, not $10. And I know product, and I understand the pricing game. Still, the psychological pull of pricing and sales is very strong, and the practice has been going on for so long people are trained, addicted. And I disagree that people know the worth of something.

Robin’s Response:

From an industry executive in the Midwest:

I went to a JCP tonight to see what it would look like. First, bravo to execution in visual presentation. This store was in a new strip location, the floor sets were crisp and 90 percent were executed visually. I liken it to the way Bloomingdale’s looked when Gould took over the store. Similar to what Hicks did at Footlocker. Both had a positive

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impact on sales. But those two scenarios did not change pricing, only better story-telling and cleaner stores. So the store itself looked good. Windows were underwhelming and too sparse. That will have to change—it just looks like a knock up of target. When I asked sales people what there was on sale I got responses all over the board. One said nothing, we don't do sales any more...at the other end of the spectrum, another explained the EDLP and best price concept well. Although one person said it’s not sale, it’s clearance. And when I asked the difference, she said that’s just the stuff we want to get rid of. For day one of a major change I would give the response a solid B-. Some of the sales associates were a bit confused with what it all meant, and would bring another over to explain and then that one would bring another. One guy in the shoe department was amazing and passionate about no more coupons... seems like they had indoctrinated him in a small room with someone doing scream therapy like in the ads---and it worked. Although in shoes there were no "best price" items. My instinct is that the "Best Price " concept will work. Price optimization tools will drive prices low on first markdown and will drive velocity engagement and margin. The stacks which read: “best price 7 dollars and up”...may become a bit hard to manage as the 7 dollar items sell through and only the 10 dollar items are left on the table and the customer says.."hey." As to the “what’s” on special for the month...that will do okay...the prices are good but not incredibly compelling. My sense is they will have okay velocity the week the book drops and have a demand curve which starts to dip week two and perks up at the end of the month

Issue Three 2012

if they do a "Feb specials end in three days" kind of advertising or mailers. But that would ad SGA, so oops-- probably not. Where the potential Achilles heel lies is in the other products priced at the EDLP-- like polo shirts etc., where 25 dollars or 40 dollars for a handbag doesn't seem like a bargain or an amazing price. So net net...best looking floor set I have seen at JCP-- ever....great housekeeping in general....pricing strategy...well, if I were from Missouri --- I would be saying what? Show me. from mr. cheers:

In its purest sense the pricing policy is in my opinion not sustainable. They may have to do some changes and will try to cover up by saying we are still within the core of our idea....Cleaner stores and better stories always work. However, it does take away the excitement of a great find. And value beyond the every other Friday thing could become problematic...this is unless the "best price" option increases its penetration and cadence...that would be a "tweak" which can help. U.S. retail is competitive and dynamic...think of all the emotion of feeling good when you shop... bargains are a key part of that. He also hit all audiences, leaving less room for naysayers internal or externally. The logic is simple and that always works. It’s a more exciting presentation, creating an aspirational environment, better prices and lower SGA and a BHAG (big, hairy, aggressive goal) to boot. In a vacuum his strategy is perfect. In reality it will have bumps. But if they stay the course for 3 years they will in 5 years have what they want. Happy to have someone be a catalyst

for change in an industry which needs to be reinvented. Now...let’s have a vision session... what if it works and there is a JCP model on one side and Amazon on the other. What are the changes in the other sectors adjacent above and below? That is the key. A final note from Anonymous:

I think that they're all great ideas -particularly ceasing the ridiculous manipulation of regular and sale prices. (By the way, given how Johnson publicly characterized JCP's past pricing practices, I think he was just begging for an investigation by the FTC or by some activist state attorneys general.) A number of stores have tried easing addicted shoppers off the discount needle. Who knows, maybe he can be more successful. However, you gotta remember, he now has the competitive of online pricing. As to the concept of shops within the store, I understand his desire to hearken back to the old days -before specialty stores. Of course, I'm all for anything that adds excitement to an otherwise bleak landscape. However, as Newt is finding out, it's hard to go back to the 1980s. It's now 30 years later and specialty stores have already taken the business and are in place and well-established. What he's describing is that a department store becomes a mall within a mall. It'll be like those little Russian dolls. If you keep opening them you get to what -- Vladimir Putin in his bathing suit? Anyway, I think Johnson gets an "A" for effort. If he can pull it off, I'll be amazed -- and very, very impressed! Most importantly, I'll always remember that “you was there!”

How Supermarkets Turned Pain At The Pump into a Positive By David Merrefield There’s something unnerving about the volatility of petroleum prices. First they’re up, then they’re down but somehow the downs aren’t ever as big as the ups and fuel prices continue their upward climb. Recent weeks have brought another upward move for gasoline and other fuels. Clearly, fuel prices are picking the pockets of consumers to the point at which a large minority of them are changing how they’re stocking their pantries. Those consumers are making every effort to drive fewer miles, to shop less frequently, and to turn to hard discounters. They’re also on a constant quest for price breaks at the pump. What impact is this having on the conventional-supermarket retail channel? Oddly enough, many supermarket chains have turned high fuel prices to their advantage. They’re pumping up renewed attention on promotions that couple consumers’ supermarket food spend with a chance to earn substantial discounts at the gas pump. To cite one example, Kroger Co., the nation’s largest conventional super market operator, offers its customers

a discount of 10 cents per gallon or more on a fill-up of 35 gallons or less with each $100 of supermarket spend. Supermarket spending is stored on shoppers’ store-loyalty cards in the form of points to be redeemed at the pump later. In many areas, the Kroger discount is available at Shell stations. Additionally, Kroger operates more than 1,000 fuel stations itself. It gives larger discounts at its own pumps in exchange for high food-spend rates, so the promotion results in circular spending. Kroger is far from alone in offering such a program. Other players include Giant, Stop & Shop, Safeway, Winn-Dixie and a host of others. Most are now focusing renewed marketing efforts on the programs, even adding a slate of fast-changing “bonus” items that carry with them extra points upon purchase. Generally, large-scale retailers operate some or all of the fuel promotions themselves, but a third-party administrator, Austin, TX-based Excentus Corp. operates similar programs for smaller retailers under its Fuelperks brand. Typically, gas stations not operated by the supermarket chain pay the retailer 3.5 cents for every gallon redeemed. The retailer funds the cost of the balance of the discount. The fuel-price promotions are a shrewd play because they cater to shoppers’ emotions. Consumers -- particularly American consumers -- have come to believe that cheap

and plentiful fuel is their birthright. They feel betrayed somehow when that’s proven not to be the case. But to their rescue are the supermarket promotions that allow them to pack their shopper-loyalty cards with points. When those cards are inserted into a fuel pump -- voilà -the price of the fuel drops right before their eyes. A small win for the shopper, it seems. Some food shoppers realize they might get the same saving by patronizing hard discounters or hewing more closely to sale items for their food purchases, but some swoon before the fuel promotions anyway. One avid user of Kroger’s fuel promotion in Atlanta said that he uses the promotion nearly every time he fills up. “With gas prices going up as they are now, I’m much more diligent about getting the points and using them,” he said. He’s particularly pleased that Shell gas stations participate in the Atlanta market since he prefers to use his Shell-branded credit card. Krogerbranded stations don’t accept the card. Asked if he sees any downside to the promotion, he acknowledged it’s possible that grocery prices are pumped up a bit – no pun intended - to cover the cost of the promotion, but he can’t be sure of that: “Prices at the supermarket go up so fast it’s difficult to know just why, but it probably has something to do with promotions. I don’t really care. I have to buy groceries and gas anyway. I like the points.” He also said it’s necessary to remember to use points before they expire

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every month. He said Kroger cashiers are good about reminding him when it’s time to redeem points. A shopper in Seattle is a big fan of Safeway’s fuel promotion. She redeems the points exclusively at Safeway-brand fuel stations because those stations sell Diesel fuel, which her car uses. Many other stations don’t offer Diesel, she said. She perceived no downside to the promotion because she sees Safeway as the low-price grocery leader. Conversely, a shopper in Manassas, VA, who generally shops discounters Aldi, Food Lion and dollar stores, went to a Giant supermarket to take advantage of the fuel promotion. She said she left without completing the shopping trip because the prices were comparatively high: “I saw it was no bargain to shop there to save some money on gas. The prices they charge for the food is not worth the gas money that could be saved.” Similarly, a shopper in Staten Island, NY, said she’s well aware of supermarkets’ fuel promotions, but has never used them because they don’t appear to offer large enough savings to be worth the trouble to obtain them. From food retailers’ point of view, the promotions have advantages that aren’t readily visible to consumers. They’re finding that fuel programs are useful in competing with hard discounters and other food retailers that don’t offer fuel at all, and by giving a price edge against membership clubs and convenience stores that do. Kroger CEO David Dillon told a securities analysts’ meeting that high fuel prices are “more positive than not” for the retailer. Walmart Stores may be losing some ground to conventional supermarkets partially because of high fuel prices. A large proportion of Walmart’s big-box units depend on drawing

Issue Three 2012

consumers from a catchment area up to 60 miles away from the store to produce a sufficiently large shopping pool. Shoppers now weigh the cost of travel against potential savings. Many opt to shop nearer home. Walmart has launched a fightback strategy by offering its own periodic cents-off fuel promotions in some regions and by ramping up its move to small-box retailing. The flea-sized Walmart formats are seen as a means to put a Walmart outlet close to the countless number of consumers who don’t intend to travel far to shop -- not unlike how conventional supermarkets and drug stores have been sited for generations. The potential success of Walmart’s fledgling small-store strategy remains very much up in the air. Consumers in the U.S. aren’t the only ones that have a chance to lower their fuel costs by shopping at supermarkets. The same phenomenon is playing out in countries as distant and far-flung as Australia, New Zealand and those in major parts of Europe. In the U.K., something of a “war of the hoses” periodically erupts with chains such as Tesco, Sainsbury and Morrisons vying to hand food shoppers the largest fuel discount. So far, Tesco seems to be the winner since it captures the largest amount of money consumers spend on petrol in the entire nation. Supermarkets’ innovative approach to cashing in on rising fuel prices illustrates as well as anything a basic fact of retailing: Stores that recognize not only what consumers want, but the need to help them overcome a vexing issue, are likely to be the winners. 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.

Charging Up: A new Frontier for Fuel Promotions? A fair number of supermarket chains are tinkering with the offer of electric-car charging stations. The charging stations may be free standing in a supermarket parking lot, or may be part of a supermarket’s gas station. Chains offering a few electric-charging stations include Kroger, Publix, Bristol Farms, Giant Eagle and Whole Foods. Typically, supermarkets permit free use of the charging stations for the amount of time it takes to complete a grocery-shopping trip. Kroger, though, has said it’s expanding its charging program to eight supermarket locations in northern Texas following a successful experiment in Roanoke, VA. Kroger too intends to keep car-charging free for the moment, but says that in the future, a fee for charging will be imposed. When that happens, will electricity join petroleum products as an element of supermarkets‘ fuel promotions?

What the hell is the matter at Kohl’s? The big mid-market retailer – practically the poster child for successful retailing for at least the past two decades – has very suddenly and just as shockingly hit a major wall, with all the lackluster financial and performance trimmings. Sales are off, comps are off and, guess what: The bloom is off too. Kohl’s has done a terrific job over the past 20 years of staking out its place at the heart and soul of the American middle-income shopper. Sure, some of that success was based on timing. The ongoing death spiral at Sears, uninspired merchandising at Penney, and a Macy’s that has taken forever to find its way after countless rounds of consolidation confusion all contributed to creating the void that Kohl’s very adroitly filled, thank you very much. But Kohl’s has not just been a lucky recipient of being in the right place at the right time. It has done very many things very right: • Kohl’s real estate strategy has been brilliant. While its competitors were anchored down in big dumb malls, it was siting stores in easy-to-get-in-and-out-of strip centers, where its customers shop. • The stores themselves preached the gospel of easy shopping. Each store had two entrances, the quicker to get to from your car, especially in the cold-weather climates were Kohl’s was born. • Inside, the stores were designed for effortless shopping, with a simple racetrack layout and low sightlines so you could practically see the back of the store from the front door. • Central checkouts, a feature pulled from the discounters at the other end of the strip, were a welcome relief for shoppers used to making their purchases at sometimeshard-to-find and always-hardly-ever-manned cash register locations scattered wherever. • The merchandise assortment itself, a carefully crafted mix of national and private brands, was well-edited and focused on key core categories: footwear, the cornerstone of the old department store model; jeans and casual wear, what America actually wears; and

soft home, a traffic builder that has proven its worth for generations. • And finally, there was the promotional strategy. Taking another page from Retailing 101, Kohl’s made that page bigger, splashier, shinier, bigger still and, most importantly, overflowing with giant numbers with enough percentage signs to fill up a semester of high school calculus. So, where did it all go wrong? Well, before we go any further, let’s get one thing straight: It hasn’t all gone wrong. We’re not talking about a total meltdown here or an irreversible catastrophe. I’ve interviewed Kevin Mansell, now the President and CEO of Kohl’s, over the years and he’s a smart, competent guy who, along with his management team, will fix whatever’s broken there. But, using home as a microcosm for the store in general, it’s clear that they have some work to do to get back to where they want to be. It’s going to take a little time. But if I were living and working up in Menomonee Falls, Wisconsin, these are some of the areas I’d be looking at:

Promotional fatigue. Kohl’s has been crying wolf on sale for decades and it’s quite possible the consumer is starting to see through all of those percentage signs. In a recent flyer, Kohl’s touted the following promotions: 50% Off 1-Day Sale; Extra 30%, 20% or 15% Off Everything when you used a Kohl’s credit card; Up to 80% Off on Gold Star Final Clearance; 60-70% off on Further Reductions Taken; and $10 Kohl’s Cash for Every $50 Spent. AND THAT WAS JUST ON THE FRONT PAGE OF THE CIRCULAR! Every shopper loves a deal and it’s been at the heart of the Kohl’s strategy forever, but even an insane shopper eventually starts to question the legitimacy of a store’s prices when there’s so much promotional noise. It’s what Ron Johnson is counting on to save Penney, though he may find the other extreme doesn’t work either. Kohl’s has hinted in recent public announcements that it could be doubling down and getting even more promotional as a way to pull itself out of its slide. Frankly, I’m not even sure how that is possible, but clearly something has to be done to bring some credibility back to the store’s pricing policies. Kohl’s Kash ain’t going to kut it forever.

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By Warren Shoulberg

Maybe that ratio needs to be rejiggered again. JLo might work wonders in junior sportswear but maybe not so much in sheets and towels. Are there stronger alternatives out there for Kohl’s? Maybe, but it’s certainly worth listening to what suppliers have to say. In housewares, national brands are the building blocks of categories like small electrics and cookware. Yet Kohl’s has invested heavily in proprietary labels like Food Network and Bobby Flay. Those are both great brands and the understanding is that they do well for the store. But perhaps a broader balance might work better.

Every shopper loves a deal and it’s been at the heart of the Kohl’s strategy forever, but even an insane shopper eventually starts to question the legitimacy of a store’s prices when there’s so much promotional noise. Product Development. Like many successful retailers, Kohl’s is increasingly starting to believe its own propaganda, I mean press, about how good it is and how it knows better than anybody else, including its suppliers. The same thing happened a few years back at Target with a very similar result. By becoming so insular and closed to merchandising suggestions from the outside, Kohl’s is missing out on opportunities that a broader base of resources and knowledge can bring to it. Vendors have their own agendas and frankly they are not always right on what a store needs. But when the merchants at Kohl’s keep saying no to new ideas, those new ideas are brought someplace else instead and some of them work quite nicely once they’re there – at Kohl’s competitors.

The Brand Mix. Right now Kohl’s is very heavily into private and captured brands, especially in home. That was not always the case over the years as the store balanced national labels with its own.

Issue Three 2012

Ease of Shopping. Kohl’s has become a little less easy to shop these days. The aisles are little more crowded, the housekeeping not quite as fastidious and it sure looks like some of the fixtures are higher than they used to be. I’m even seeing some Kohl’s these days with just one entrance. This is all the more the pity, because Kohl’s is not just competing against other stores when it comes to making the shopping experience easier. Now it has to go headto-head with Amazon and the rest of the online guys who are quickly clicking their way into the heads of customers looking for the easy way out. And with a resurgent Macy’s and a restrategized Penney both making the middle of the market a much more competitive place, Kohl’s no longer has soft stores to go up against. None of these things are retail life-threatening. There are lots of operations out there that wished this were all they needed to fix. But fix them is exactly what Kohl’s has to do if it wants to regain its luster. The back page of that Kohl’s circular I mentioned before has 17 lines – that’s more than 500 words – of small print explaining, qualifying and generally confusifying all of the promotions mentioned in the big type. If you need that many words to explain yourself to your customer then maybe sour cheese is not the only thing that smells bad coming out of Wisconsin. Warren Shoulberg is editorial director of several Sandow Media business publications for the home furnishings industry and vividly remembers how excited he was the first time he walked into a Kohl’s store.

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Quotes to remember

Robin Lewis and Michael Dart, in their seminal study of modern US retailing, examine why and how the industry is quickly evolving — and what it will take to be successful in this new world. Critics and industry leaders agree: The New Rules of Retail is a mustread for anyone interested in the industry. Available at Amazon.com in hard cover or Kindle form, and at a book-store near you, or on our website at www.TheRobinReport.com.

THIS HAS GOT TO BE WHY WE SEE SO MANY MORE SUCCESSES AROUND THE WORLD

“ To succeed in life, you need two things: ignorance and confidence." - Mark Twain

WHERE YOU’LL FIND “OLD TIME RELIGION” “There are no atheists in a fox hole.” - John Downey AGE DOES HAVE ITS ADVANTAGES

“ Age appears to be best in four things - old wood best to burn, old wine to drink, old friends to trust, and old authors to read.” - Francis Bacon APPLAUD THE “UNREASONABLE PERSON”

“ The reasonable man adapts himself to the world around him. The unreasonable man persists in his attempts to adapt the world to himself. Therefore, all progress depends on the unreasonable man.” - George Bernard Shaw

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