The Robin Report - Issue 16 - September 2012

Ho w S Km ear Wi in art s an ll the Th d F r pag utu ive e 22 re ?

Issue Six September 2012

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vf

Who? Just the $9.5 billion largest and most diversified apparel company on earth.

By Robin Lewis

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NEW Best Practices from Kurt Salmon

Beyond Discounts and Deals: Achieving a Balanced Pricing and Promotion Strategy

I N S I D E t h is iss u e

Dear Reader

• DEAR READER......................... 2

By Robin Lewis

During the 1980s I had the pleasure of working in VF Corporation’s headquarters alongside its futureleaders. And, while the business grew from $634 million in 1980 to $2.6 billion at the end of the decade, and from a portfolio of three brands to 12 brands entering the decade of the 90s, the three most powerful competitive assets coming out of that period were:

• Vf who?...............................3

By Robin Lewis

• Q/A With Eric C. Wiseman,

Chairman, President and Chief Executive Officer of VF Corporation…...7

By Robin Lewis

•B eyond Discounts and Deals: Achieving a Balanced Pricing and Promotion Strategy ..................10

By Rob Nemett

• A Private Story ..................12

By Paco Underhill

• How Analytics Can Help a Stores-within-a-Store Strategy Succeed .............16

By Andrew Mantis

• Target

vs. Amazon: Hungry Games ..................18

By David Merrefield

•R etailers revise Their Homework on Back-to-School ............... 20

By Emily Thompson

• Why Home Furnishings Can Save Sears and Kmart… And Why It Will Never Happen.................... 22

By Warren Shoulberg

• The Back Page ............…... 24

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1. Their obsessive focus on consumers and the development of the processes for identifying them (for each and every one of their now over-30 brands); for understanding them and their desires, down to a “gnats eyelash;” and for responding to those desires when, where, how, and how often their customers desire them. And, this process is continuous

the platform to fundamentally transform the VF Corporation from a single-product branded wholesale business (e.g. jeans and intimate apparel), manufacturing domestically in its own plants, to a lifestyle brand management business that markets its brands through select retail distribution, including its own stores and online sites, around the world, and outsources its manufacturing globally as well.

These are the underpinnings, the foundation of the biggest, and in my opinion, the best apparel company in the world. It is also why they will continue to raise their own bar.

See my article and Q&A for how they intend to do so.

Also in this issue, a revealing look at Eddie Lampert’s dubious strategy to transform Sears and Kmart for 2. The decentralized, “portfolio” organization of its model: providing 21st Century survival; why Target each brand the autonomy necessary and Amazon are locked in a real vs. virtual Hungry Games challenge; to run its own “front end” of the how the back-to-school selling business; maintaining the brand’s season has accelerated starting DNA connection with its consumin August; and why going beyond ers; managing all of its innovation, product development and marketing. discounts and deals delivers a better promotional strategy. And there’s Those functions that can create more! Find out why we’re headed a synergy, providing leverage for for a privacy revolution which could each of the individual brands, such change the Internet playing field. as finance, research, sourcing, and all of the “back-end” supply chain All in all, the Robin Report continues activities, are centralized and to bring you insights from the inside operated corporately. out, with provocative, revealing and opinionated reports from the 3. The development of the best in the business. processes for linking every activity in the value chain to each and every Have a great read. consumer (the linking of #1 and #2 above). Essentially, VF has a never-ending value chain, fully integrated, virtuous cycle, starting Robin Lewis has over forty years with the consumer (their DNA’s, of strategic operating and consulting what, when, where, how and how experience in the retail and related often their desires), pausing at consumer products industries. He has point of consumption, the informaheld executive positions at DuPont, VF tion from which triggers the cycle Corporation, Women’s Wear Daily (WWD), and Goldman Sachs,among others, and to start all over again.

These are the assets that, in my opinion, both propelled its growth and provided CEO Mackey McDonald (during the 90s), and current CEO, Eric Wiseman, with

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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vf Who?

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Just the $9.5 billion largest and most diversified apparel company on earth.

Have you ever tried to skateboard down Mt. Everest in Vans sneakers? Don’t. Or, did you ever try to hike across

the Sahara desert with The North Face mountain climbing gear? Ha! Ha! And when did you last try to “hang ten” wearing Timberland hiking boots? You know, I could imagine some Malibu-surfing “stoner” trying that. How about competing in the jumping event in the Hampton Classic hunter/jumper horse Show wearing Wrangler jeans or drinking Champagne at New York’s International Debutante Ball in Lee Jeans?

They’d throw you out.

“VF Who?”

These are just five of “who” VF is. Just five of their 30-plus brands, which happen to be contributing $1 billion each to VF’s $9.5 billion coffers. That translates to about 50% of their business.

Then, of course, you could be equally ridiculous on a safari across the Serengeti wearing a Nautica sailing jacket, or taming a bull in a “rodeo ride-off” wearing a pair of 7 For All Mankind jeans. Okay, enough. I just wanted to get your attention.

But, hey, with these brands and the whole lineup of VF’s other brands (see chart 1), who knows about, or needs a VF? No wonder VF is often flying stealth, under the radar of most consumers. But, there is a very important group of people who totally know about the VF Corporation: our friends on Wall Street and investors worldwide. And VF has sure been keeping them very happy.

This global behemoth’s headquarters is tucked away in leafy Greensboro, North Carolina, where all the corporate executives kind of informally “hang,” attired in however many of those Chart 1

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By Robin Lewis

over-30 (including sub-brands) lifestyle brands that can be worn day-in and day-out. This casual culture should not be interpreted as relaxed. They are fierce competitors, but they just don’t waste any energy bragging about it. They eschew “breast-beating” to the press (except for The Robin Report), for keeping their collective heads down, focused on growth.

And grow it has, roughly doubling its business in seven years, sailing through the Great Recession with only a minor hiccup in 2009. And in 2011 it surged past its 2010 record of about $7.7 billion to reach $9.5 billion, making it the largest and most diversified apparel company in the world. Not only has it been significantly growing top-line, it’s been highly profitable as well, which, of course has made shareholders warm and fuzzy about the company (See chart 2).

And VF continues performing well even amid the economy’s sluggish first six months of 2012, with a robust 8% increase in organic revenues (excluding Timberland, which was acquired in September 2011) - or a meteoric 24% increase if you include Timberland. First-half revenue increased to $4.7 billion from $3.8 billion in the same period last year. Despite widespread economic reports suggesting another six months of continued slow macro-economic growth, VF currently expects full-year revenue growth of 15%, to $10.9 billion, with Timberland contributing about $1 billion of the growth.

In fact, during my interview with CEO Eric Wiseman for this article, I asked him if the slowdowns elsewhere in the world would be enough for him to revise his lofty projections downward for the rest of the year. His response: “It’s true that economies are slowing down everywhere. But I’m super impressed with the work our team is doing in Europe. For the first half, we had a 14% organic growth rate. So we’re not apologizing for a slowdown in our European growth rate in this environment at all! In Asia, we think we’re going to grow about 20% full year, although that’s a slowdown from our growth rate of the last few years when we were up in the mid-30s. We put a lot of thought into anticipating the slowdown as we did our plans for the year, and we’re tracking on those plans.” And he sees a lot of what they call “white spaces” (opportunities) for even greater growth going forward (read more in the Q&A).

VF distributes its brands through all retail channels, (upscale to specialty to mass and discount), as well as through its own

Source: vf 2011 Annual Report

Issue Six September 2012

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Chart 2

Source: vf 2011 Annual Report

Chart 3

Source: vf 2011 Annual Report

branded retail stores and Websites. Today 34% of its business comes from international distribution.

However, while descriptions like the “largest” and “most diversified on earth,” and quantified by the “gorilla-like” $9.5 billion in revenues, may be extremely impressive and noteworthy, and does measure VF’s premier competitive position, they are kind of meaningless without an understanding of their business model, its components, its culture and the strategic evolution driving its current dominant position and its goals for the future.

What Business Are They In?

Remember famed Harvard Professor Ted Levitt’s thesis on “marketing myopia,” in which he refers to companies that stifle growth by too narrowly defining the businesses they are in?

One overused example: if a buggy whip manufacturer in 1910 had defined its business as the "transportation business," they might have been able to make the creative leap necessary to move into the automobile business when technological change demanded it.

Not to be a victim of such myopia, when I asked Eric how he would describe VF’s business today, his answer: “That is a really interesting question. I would describe us as a dynamic and innovative growth company, that’s the best environment to work in, in our industry. And the reason I say that is because a couple of years ago, Fortune magazine and Aon Hewitt, the global human resources consulting business, conducted a survey to rank North American Top Companies for Leaders. All the typical names you’d expect were on the list; GE, Intel, P&G, McDonald’s. And out of the blue, we were in the top 25. We were like ‘Wow! How’d that happen?’ We were 22nd, and last year, we moved up to 17th. There is no other apparel company mentioned anywhere on these lists. To be 17th in the Americas is a confirmation of all of the investments we make around rich talent development here; we invest millions and millions and millions of dollars into developing our people every year, and giving them the experiences they are going to need to achieve their personal and professional potential. It certainly has paid off, because our people are delivering like crazy.”

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Then I asked how he imagined describing the business 10 years from now. His answer: “The same.” So, not only did he not too narrowly define VF’s business, (à la Ted Levitt’s thesis), Wiseman’s definition might indeed be broad enough to embrace every industry, product, or service under the sun.

Just think about his description. It contains three incredibly powerful tenets, which have driven the company to its current premier position and can certainly drive a doubling of its size in 10 years, as Wiseman projected: 1. A “dynamic” VF, (active, energetic, self-motivated, forceful) 2. An “innovative growth company” (I think that speaks for itself) 3. “The best environment to work in, in our industry” (sustains its culture and breeds visionary leaders)

Down to Earth... The Here and Now

Within this description exists the “here and now” world of what VF does on a day-to-day basis, which also provides the rather lofty platform for their vision.

According to VF’s annual report, “VF Corporation is a global leader in branded lifestyle apparel, footwear and related products, and has a stated vision of ‘building leading lifestyle brands that excite consumers around the world.’” And, from the “there and then” of its early roots when VF owned its manufacturing plants, all in the U.S.; and when its brands were categoryspecific wholesale brands (Lee Jeans and Vanity Fair Intimates), the leap to the “here and now” was enormous. While its culture did not change, its strategic DNA essentially got a transplant.

Its over 30 lifestyle brands are now sourced around the world with VF owning a mere 38 of its own factories out of about 1,500 manufacturers used annually. This transformation began in the early to mid-nineties under then CEO, Mackey McDonald; the baton was passed on to current CEO Eric Wiseman in 2008 (although he had been working alongside McDonald as COO since 2006).

The philosophical and strategic re-imagining of transforming a behemoth business like VF Corporation is one thing;

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to succeed in implementing the vision is quite another.

Without naming names, the road to what might be called a “Fortune 500 graveyard” is filled with the good intentions of just such attempted transformations. Needless to say, VF is not only alive and breathing, it’s winning all the speed and scale records.

The Core Credo “One for All and All for One” Consumer The core driver of VF’s ability to envision success factors and the transformation required to succeed in the future was, and still is, its obsession with understanding each of its millions of consumers across 30-plus brands, as “universes of one.” This was former CEO, Mackey McDonald’s reference to how VF views each and every customer. Beginning in the early 80s, VF organized its entire business around a consumer response process that has become only more sophisticated through the integration of modern technologies, including the Internet and globalization. In my opinion, no other company in this industry compares.

Through this relentless consumer focus, they spotted the “casual revolution” and consumers’ preferences for lifestyle “collections” versus single-product brands like their own Lee Jeans and Vanity Fair Intimates. And along with these changes, VF also realized the need for a more efficient and effective supply chain, including a new manufacturing strategy to be primarily outsourced and offshore.

Stepping Stones to the New Millennium

Recognizing these dynamics, VF took their decade-long “obsession” to be superior in consumer response to yet another level. Arguably the pioneer in leading-edge value chain technologies, systems and processes, VF invented the term “flow replenishment” with the launch of their MRS (Market Response System) in 1991, preempting later industry concepts, variously labeled “just-in-time,” “speed-to-market,” “demand flow,” and other such identifiers. MRS, among other attributes, cut replenishment from 90 days to one week. MRS became CRS (Consumer Response System) in the mid-90s. Elevating VF’s consumer research efforts, sales tracking and data mining, CRS essentially provided their ability to “micro-market” products to its “universes” of individual consumers.

A final and necessary step in VF’s transformation was the enormous shift of almost all of their remaining domestic manufacturing to offshore sources, which today accounts for about 95% of all VF’s production.

So VF entered the Millennium having transformed much of their business. No easy task across such an enormous organization and a culture rooted in making and selling jeans and intimate apparel. However, McDonald’s vision evolved and gained momentum, with perhaps the most significant directional shift for growth being the repositioning of the older product-driven brands and the acquisition of lifestyle brands as affirmation of his declaration: “VF will grow by building leading lifestyle brands that excite consumers around the world.”

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Wiseman Gets the Baton

Taking over as CEO in 2008, Eric Wiseman held a number of executive positions throughout VF since 1995, and as COO of the corporation since 2006, he was more than equipped to receive the baton as VF raced into the early Millennium.

Indeed, as cited above, Wiseman has accelerated the pace. While revenues “hiccupped” a decline of 6% in 2009, at the height of the recession, from about $7.6 to $7.1 billion, VF managed to bounce back to a record $7.7 billion in revenues in 2010.

And, of course, the 2011 acquisition of Timberland has now catapulted VF to its world-leading position at $9.5 billion in revenues. And Wiseman intends to double that measure to about $20 billion in 10 years, essentially taking the 800-pound gorilla up to 1,600 pounds.

How To Grow The Gorilla

Wiseman mapped out a growth strategy that will be driven by six core drivers (see chart 3):

1. Build Lifestyle Brands VF Corporation defines 'lifestyle

brands' as brands that are capable of making and building emotional connections with consumers by equipping them to do an activity they love or enabling them to express themselves individually through products and experiences that resonate with their unique identity. They consider the brands within the Outdoor and Action Sports, Contemporary Brands, and Sportswear coalitions to fit this definition. VF reports its wholesale and DTC (direct to consumer) business separately.

In 2011, the wholesale business accounted for 81% of total global sales and 19% came from DTC business. See chart 4 depicting the breakout of the percentage of business contributed

by VF’s five coalitions, including their growth rates.

Using their definition of lifestyle brands, in 2005, 35% of VF’s portfolio consisted of lifestyle brands, reaching 54% by 2010, and currently projected to increase to 75% by 2015. Interestingly, the outdoor and action sports coalition (all lifestyle brands), which contributes a whopping 48% of total revenues, and is growing at a faster rate than the other four coalitions, was a mere 2% of VF’s business a decade ago. Assuming a continuance of this trajectory, its rapid growth of existing brands, along with newly acquired brands, one could believe that this coalition will make up most of that 75% of total revenues.

2. Go Global Currently at 34% of total revenues, Wiseman projects growing the international business to 40% by 2015, primarily in Europe, China, India, Brazil, and Mexico. And a big driver of their global growth, and consistent with VF’s obsessive consumer focus, is their commitment to invest in understanding local consumers’ desires and shopping behavior across a wide and diverse range of global markets. They call it “smart localization.” And as has been proven domestically, VF views this as a huge strategic advantage.

Another big accelerant for global growth will come from the major “outdoor and action sports” brands such as The North Face, Vans, Timberland, and Kipling, as well as jeanswear: Wrangler and Lee (which launched in China in the early 90s

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Chart 4

Source: vf 2011 Annual Report

for ideas. For example, VF is the sole apparel company collaborating with the MIT Media Lab, which generates an average of 20 patents per year. As Wiseman said: “… incredibly smart people in places like MIT are working on inventions, but they don’t always know what their practical use is.

We’re trying to see how they could help us in some way; it could be in a product; for one of our factories; for our global business technology group ­– it could be anywhere.” They’ve also worked with Robert Redford and the Sundance Group for help on brand storytelling. And, their own internal VF Innovation Fund, which has funded 77 projects to date, is already beginning to provide a positive return on investment. and is considered an upscale brand). As Wiseman pointed out: “activities like mountaineering or surfing and skating, they’re global activities, so you can speak to people in many countries.”

Furthermore, these lifestyle brands fit VF’s “direct-to-consumer” strategy and expansion through e-commerce and retail stores.

3. Serve Consumers Directly With almost 1100 owned

and operated retail stores (growing to 1200 in 2012), and its e-commerce business growing at a blister ing 37% in Q2 of this year, VF’s “direct-to-consumer” revenues will reach about 20% of their total business, or around $2 billion by year’s end.

This is up from 18% in 2010.

While Wiseman pointed to the fact that VF’s wholesale business actually grew faster than its direct business over the past three years, he made it clear that where they formed partnerships, such as in China, they count their business through these partners as wholesale revenues. However, VF literally controls everything involving the brand, instructing the store’s operators on merchandise, brand positioning, fixturing, presentation, training the staff, etc. Given such control of this sort of hybrid direct-to-consumer model, I would certainly view these revenues under a “retail” definition. Thus, the 20% projected retail sales by year end could be much higher. Wiseman’s answer to what that number might be: “….. I honestly don’t know the answer to that.”

4. Win With Winning Customers Given VF’s vast knowledge of its millions of consumers across each and every one of their 30-plus brands, they are able to leverage that knowledge with their retail customers. In many cases, even their largest customers accede to the fact that VF knows more about their ultimate consumers than they do. Therefore, VF’s brands are able to work proactively as true partners, controlling and guiding much of the merchandise direction and in-store operations, including the presentation of the brands.

5. Lead in Innovation Understanding the need to grow through

market share in a slow-to-no-organic growth marketplace, VF is intensely focusing on innovation. And their approach, rather than through a “think tank” and “brainstorming” type of process, is to reach outside their walls and even outside of their industry

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6. Enable VF’s Future So, at the end of the day, and at the end of my Q&A with Eric, I asked him, “What keeps you awake at night?” And his answer speaks volumes about how he wants to enable VF’s future. He replied: “I get asked that a lot, and I always answer it the same way –­ and it’s the truth: I sleep really well. I don’t get up in the middle of the night; in the rare occurrence that I do, it’s always because of one thing: the math. Can we sustain growth of 10% a year, which is what we’ve done for the last six or seven years, since we’ve had our new strategy? Actually, we’ve exceeded that, and if we can do that for another six years, we’ll pass the $20 billion mark. So, what keeps me up is how do I take the amazing people that we have today and prepare them to be as successful when VF is that large. I know that most of the people who work here are focused on the next 12 months, not the next six years.

I worry about what tools and technologies are going to make that company execute better than we do today. And I think it’s a CEO’s job to lose sleep over those things, because if you don’t have the people ready, and you don’t have the tools ready, the trajectory will absolutely change. The future is a long way from when we started this journey; when we sold Intimates we were $4.3 billion, and we’ll be $11 billion this year, and $20 billion is a big number. Doable, and we think we can get there. I just want to make sure we’re successful when we do.”

This is the vision of a true leader, one that puts his people above himself. I’ve never heard Eric Wiseman, over all the years I’ve known him, to directly or even indirectly imply that any positive success was due to his own greatness or brilliance. It is always due to his “people.”

It is precisely that leadership quality and Wiseman's comment that “we invest millions and millions and millions of dollars into developing our people every year, and giving them the experiences they are going to need to achieve their personal and professional potential” that landed them on Fortune’s list of “best companies for leaders in America.”

And it is the reason that the VF Corporation is not only the biggest apparel company on earth, but also why they are arguably the very best.

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QA ROBIN LEWIS So, right off the bat, how the heck can one person run a $10 to $12 billion company?

ERIC WISEMAN You can't! VF has been, and I hope always will be, a team sport. When I look at the leadership teams around VF there's no question that we have really talented people, but we don't have "superstars". What we do have is people who work extremely well together, who compliment each others talents, and who are committed to the teams success. That dynamic drives whatever success we've had. And, since you know me pretty well, you obviously know that I'm not capable of "running" VF....if I was I'd have a much different balance in my life.

RL So, Eric, the numbers on VF under your watch as CEO speak for themselves, and they would say you’re doing a great job.

EW For about five years now, since we’ve changed directions corporately, we’ve been executing on the right things.

So, when you execute against the right things it generally works for you.

RL Going into the last half of this year against a rather negative global and U.S. economic backdrop, do you want to revise your earlier 15% growth projection for 2012, or at least hedge your bets, and if so, in what areas of the business?

EW Well, so far, this year is playing out as we planned it to. We get a lot of advice, of course, as we put together our annual plans. We thought this year we could grow 8% organically – we have some wrap-around from Timberland in our number – and we expected the headwinds to increase as the year went on.

Issue Six September 2012

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with Eric C. Wiseman, Chairman, President and Chief Executive Officer of VF Corporation

So here we are half way through the year and we grew 10% in the first half, which is right on what we planned. We expect to grow at less than 8% in the last half of the year, to get to an overall 8% organic growth number for the year.

I don’t know exactly how it’s going to go for the second two quarters, but we expect it to slow down for the reasons you mentioned. But so far, it has played out about as we thought, and we’re right on track.

RL Given this tough, and sure to get tougher, environment, where are the “white spaces,” the opportunities for VF going forward?

EW China, India, South America, Russia, and Turkey are geographic white spaces where we have not yet brought the full potential of our brand portfolio to life. The next big white space is taking our big brands and making them bigger. The truth is, no one ever thought that a brand like The North Face, or Vans, would be where they are today. When we bought them, The North Face was a $200 million brand, and Vans was just over $300 million. Today, The North Face is closing in on $2 billion and Vans is at $1.2 billion, and they both think they can add another billion dollars in the next five years.

These guys haven’t missed a plan since we’ve owned them. It’s an interesting point that just three or four years ago, we had one brand, Wrangler, that was a billion dollars in size; today, we have five: Lee, The North Face, Vans, and Timberland, in addition to Wrangler.

And that didn’t happen accidentally; we really focused investment on brands we thought had broad-reach capabilities, and we really drove those investments.

During the recent recession, we thought, “Let’s do something different and increase our advertising spend by $100 million, and put half of it on the global growth of The North Face and Vans,

because we didn’t think our competitors would have that size checkbook.” We took our ad spend up from $450 million to $550 million dollars in one year and focused it on a few opportunities that accelerated our growth rates.

The next big white space for us is the really interesting opportunity to develop our smaller brands like Kipling, Napapijri, and Lucy. When we bought them, they were between $50 and $70 million, and Kipling’s well past the $200 million mark now. Ten years ago, VF used to be very democratic with our resources; we took a peanut butter-spread approach across the organization. Four years ago we said, ‘No no no, we’re not going to do that; we may starve a few brands, but we’re going to go where we see the best return for our shareholders, shortand long-term.’ And we’ve really been aggressive in expanding our investment behind a few brands, and a few markets, and it’s worked really well.

RL Why the focus on outdoor action sports brands (now close to 50% percent of the business), vs. more traditional fashion and/or casual apparel?

EW Back in 2004 and 2005, we conducted very thorough strategic planning, working weekly on ‘What should VF look like in five years?’ And that effort was under Mackey’s leadership (former CEO Mackey McDonald).We looked hard at different segments of the industry, and made choices about what our shape should look like five years down the road.

One of the things we looked at was the growth dynamics in apparel and footwear.

We looked at the earnings multiples of the public companies that were in that space; we looked at the brands, and which brands had emotional connections with their consumers. We looked at the financial metrics, the returns. And out of all that, the outdoor (and action sports) industry became a place that we really wanted to be. Apparel and footwear

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QA

with Eric C. Wiseman, Chairman, President and Chief Executive Officer of VF Corporation

in that sector are worn by people when they’re pursuing their passions, whether they’re back-country skiing, mountain climbing, hiking with their children, or camping. What they wear matters to them because it has a function, and most importantly, in some cases, a lifesaving function; people develop real emotional connections with that stuff.

And we said, ‘That’s where we can grow.’

Those brands are sustainable if you can keep the emotional connection strong.

Also, it isn’t as dependent on fashion trends, and mountaineering, surfing or skating are global activities, so you can speak to people in many countries.

So we decided to acquire and build in that space. At the same time, we decided that the intimate apparel category didn’t fit that model for us. There aren’t very many global intimate apparel brands that have equal success around the world, and that’s why we got out of that business.

RL What fits in VF’s future and why?

And how does image-wear fit in your portfolio and what are its growth drivers?

EW We describe ourselves as active portfolio managers and at least once a year we go through a very formal process of looking at each business and identifying the strategic reasons that it should be a part of our future.

Image-wear is a huge winner for us; that business is very profitable and generates a lot of cash. Here’s the surprise: VF’s fastest growing brand, for the last six quarters has been Bulwark, which makes flame-resistant apparel. We sell it to the oil and gas exploration industry, power companies, linemen. I honor the brand that grows the fastest in the prior quarter by drinking exclusively out of one of their water bottles. I carry my Bulwark water bottle to every single meeting; I carry it when I speak to audiences – I put it proudly on the podium so people can see the label.

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And for the last year and a half, I have been carrying a Bulwark bottle.

RL Your direct-to-consumer business grew at a meteoric rate. With this segment expected to continue to grow faster than your wholesale business, particularly as many of your brands are selling into traditional mass and mainstream retail channels that are slow-growing, how long before over 50% of VF Corporations’ business will be direct-to-consumer?

EW We are going to open about 130 to 140 stores this year and our target has been to get 22% of our revenue from our stores. What’s really interesting is when we were at 18% three years ago, we thought we’d get to 22% really quickly.

But what’s happened is that our wholesale business, including the wholesale revenues that we make to the partners who own and operate other free-standing stores, has actually been higher than our retail growth. In China, for example, we find partners who can open stores for Vans, Kipling, or The North Face, whatever the brand is. And, when that happens, they are obviously buying the product from us. They lease the building, hire the staff, which we help train, and have their own operating system that runs their stores. But we have a lot of input into the content of the store, including the products, fixturing and in-store point of sale that we either provide or give them the design guidelines. Everything inside the store has to meet our visual standards, so we have a guide for what a North Face store or a Vans store or a Kipling store should look like, and they’ve got to meet that standard. We want it to be transparent for the consumer; it shouldn’t matter to them who owns the store – all that should matter to them is the brand experience.

We count all of that revenue as wholesale, and it’s one reason our wholesale growth rate has stayed really robust.

The wild card is the digital relationship we’re building with consumers who want to come to our Websites to hear our stories, and many of them are now buying from us online. It’s a wild card,

because we can’t control that. We want to have really rich digital content and engagement with consumers, because we have a lot of brands that resonate with young people, and it’s important that we’re relevant to them. While they’re there, you know, a lot of them want to go shopping. So, all in all we’re talking about 22% to 25% contribution, (from our direct-to-consumer business) RL Considering that it doesn’t matter whether you call it wholesale or retail since it’s really about controlling the brand and it destiny, how has your business at JC Penney fared during their business decline? And, are you committing to their major shop-inshop program?

EW The only results we’ve all seen so far are for the first quarter. And we did better in the first quarter than they did overall, so we were a positive in their mix. I don’t know about the second quarter yet. Lee is our biggest business.

Our second biggest business there is Vans; our third is our licensed sports business – all the team jersey stuff – and the fourth is JanSport. We have been part of the submission process for 2013 for the in shop in store program, and our hope is that we would be selected for that process; we’re confident that we will be. Ron has a very clear vision for what he thinks the opportunity is for JC Penney, so we’re engaged, trying to make Penney’s work. Just like we’re engaged with Kohl’s or Macy’s or REI or Dick’s Sporting Goods, trying to help their model work.

RL Why are there no full-price Nautica stores at this point?

EW We had other areas to address at Nautica first, and to the great credit of that team, they have methodically addressed them. We had an outlet operation that wasn’t operating at the right level a year ago; today it is. We had a wholesale business that wasn’t operating at its potential; and today it is. We had a licensing business there, that had a few years of going in the www.TheRobinReport.com

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We work really hard at letting the brands run their businesses, and interfere with them as little as possible so that they can achieve their own destinies. wrong direction; it’s doing very well right now. So we are actively discussing where Nautica’s full-price retail stores should be, and what they should look like, and my expectation would be in the next year we’ll be opening a couple of those.

RL Your supply chain has been a “competitive weapon” for many years according to Mackey, your predecessor.

What is your sourcing strategy, the “third way,” and why don’t you use third-party sourcing agents.

EW VF Corporation this year will sell about 450 million units of apparel and footwear. So when you divide that back into 365 days a year, we shipped, every day of the year, we have to sell and ship one and a quarter million pieces a day.

So, when we talk about our supply chain as a competitive weapon, it starts with how incredibly diverse and sophisticated we have to be to do that, and serve our customers at a high level. Doing that, we own just 38 of the factories that we operate. We use about 1,500 contractor facilities, not all at the same time, and not all year long. We have 29,000 associates. So it’s a really big, well run, complicated piece of our company.

We use very few third-party sourcing agents, only when they can do something that we can’t, or they can do something at a higher quality and lower cost than we can. We usually find that the service, quality, and cost is best if we control the whole process. And we service our customers at a very high level, with very low inventories because we have this really diverse network. The “third way” is when we utilize proprietary factory engineering and proprietary factory equipment; a lot of equipment that’s in our factories is designed, engineered, and constructed by us. We take some of Issue Six September 2012

those skills, and we’ll go to a dedicated partner, so a factory that works only on our products, and we will take what we know about running a factory, some of what we know, not all, because we have a few secrets that we keep to ourselves, and we take some of that, and teach that factory how to do it.

Because a lot of the sourced factories that we use, whether they be in Vietnam or China or wherever they are, have historically thrown labor at their problems because labor was so cheap.

Now that labor’s becoming so much more expensive, we’ve been able to help control our costs by taking some of our factory engineering skills and process skills to those factories so that they can get the kind of labor efficiency that we have in ours. In our factories in Mexico, for example, where we make a lot of our mass-channel jeans, the reason we have those factories is we can’t buy those products cheaper anywhere in the world, we’ve tried. But those factories are so fine-tuned that they produce goods at a lower price than any factory in any place in the world, and that’s why they’re part of the family.

RL According to your annual report, VF Corporation is the only apparel company to engage MIT’s Media Lab in search of innovation. What is your philosophy on looking outside for innovation?

EW We are working really hard on a robust innovation platform around VF to touch every part of the business.

And as a result of that, we’ve gone outside the industry, to partner with clever people who are doing things that may not be relevant to the apparel industry. So we are the sole apparel partner of the MIT Media Lab. There’s a lot of times, incredibly smart people

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in places like MIT are working on inventions, but they don’t always know what their practical use is. We’re trying to see how they could help us in some way; it could be in a product; ,for one of our factories; for our global business technology group – it could be anywhere.

We also worked with Robert Redford and the Sundance Group with our brand people on storytelling. We wanted to think about the next emotional level of marketing, and it’s got to get better than a flyer in the Sunday paper that says “Come buy me at 50% off.” There’s got to be a deeper emotional connection.

So who’s great at telling emotional stories? The film industry. And so we’ve been out to Hollywood, and worked with directors, and actors, and with Sundance on how to tell a really rich story. How do you grab somebody by the heart, and attract them to you?

RL Can you talk more about innovation?

EW Another example is our work on water-repellent fabrics in India with our jeans business. Most of the people in India get around on scooters, bicycles and motorcycles, and there’s a funny little season there called the monsoon season. If you’ve ever worn a pair of wet jeans, they’re just not comfortable to be in. So we’ve launched a pair of jeans that flat out don’t get wet; you can pour gallons of water on them, and it is repelled immediately.

RL Finally, what are VF’s major weaknesses and threats.

EW I think the threat is how do we stay nimble and innovative at the brand level, while the brands are part of such a large corporation? That’s something that we have to work at, or we risk destroying the entrepreneurial spirit that built these businesses. We work really hard at letting the brands run their businesses, and interfere with them as little as possible so that they can achieve their own destinies. All our brands have to learn how to stay nimble and innovative.

9

Beyond Discounts and Deals: Achieving a Balanced Pricing and Promotion Strategy

Best Practices from

Kurt Salmon

By Rob Nemett

Most retailers readily admit that the chronic use of excessive, and often unplanned, promotions can have serious consequences in terms of margin erosion and erratic sales. Still, most willingly suffer those consequences in exchange for the short-term benefits of hitting top-line sales goals and stealing share from competitors. But what many retailers fail to realize is that this continual reliance on reactive promotions comes at an even steeper long-term cost.

It often means foregoing a disciplined execution of a pricing strategy that would both enable precision and optimization, and also build customer loyalty by instilling confidence in a consistent price-value proposition.

There is nothing wrong with pricedriven promotions in and of themselves.

They can be an extremely effective way to attract new customers and drive incremental traffic. There is also something inherently exciting about a price promotion; the sense that as a customer you’re “seizing an opportunity.” Promotions condition the customer to expect the unexpected, create a sense of urgency, and can quickly deliver an increased conversion rate or larger basket size.

• The broad-brush messaging often required for promotional offers– think 50% off everything in the store –destroys a retailer’s ability to target price changes by color, style, size and location.

• What’s more, executing massive price changes creates significant demands on store labor, not to mention the costs of ad and sign production.

Of course, there is a lot of momentum behind the hyper-promotional trend: the competitive environment compels many retailers to pile on the promotions to stay in the game. Consumers have more access to information and products than ever before and as a result, they’re much less likely to pay full price for anything.

At the same time, retailers are stuck in a kind of prisoner’s dilemma. Even though most express a common desire to cut back on promotions, any one retailer who makes the first move leaves a big opening for competitors to exploit, at least in the short term.

the right set of performance objectives; a deep understanding of what motivates the retailer’s target customer; and clarity on pricing objectives in the context of larger strategic goals.

Resolve contradictory performance objectives Many retailers don’t realize it, but the very metrics commonly used to measure and manage overall performance can encourage harmful promotional excesses. Most companies, especially publicly traded companies, are understandably focused on shortterm sales and margin targets to bolster quarterly same-store sales growth and revenue. However, this emphasis on short-term top-line growth often drives behaviors that put the retailer at a disadvantage in the long term.

Nowhere was this hyper-promotional, shortsighted discounting more on display than during Black Friday 2011, as retailers fought hard for market share in that four-day period, with little attention to any lasting gains in customer loyalty or, for that matter, the profitability of the The good news is retailers don’t have entire fall season. One specialty apparel to quit the promo drug cold turkey.

Promotional pricing, when used thought- retailer discounted deeply around Black fully, can be an extremely effective way Friday to achieve triple-digit comp sales that weekend, but by offering broad to execute against a defined strategy.

However, recent promotional excesses storewide discounts that its customers may have had an adverse impact on cusinvariably applied to its most popular The key is making sure a retailer tomer behavior. Over the past few years in is totally in control of its pricing and items, the retailer not only gave up particular, retailers’ frenzied price changes promotions. It’s fine to rely on frequent margin while stocking out on some of have conditioned customers to think that promotions, as long as those promotions its best products, but as its less-popular the ticket price is not real, and cynical products had never been price adjusted have been carefully planned and are customers have become numbed to typical focused on achieving specific results. in relative terms, it was stuck with high discounts, requiring ever deeper price cuts The alternative–layering promotions levels of less-desirable merchandise in to stimulate an increase in demand.

January that had to be discounted even on top of promotions to combat the more deeply to clear. This resulted in effects of a sour economy, increased Even worse, the demands of maintaining competition or poor sales–sacrifices poor January revenue and comp sales a highly promotional stance force retailers profitability without necessarily and eventually led to a significant drop into suboptimal business practices: in its stock price. encouraging the desired long-term • Multiple offers overlapping across customer behavior.

The reason many retailers struggle channels and media result in indecipherwith such situations is because of able promotional noise, making So how can retailers strike the right contradictory performance objectives. it difficult to isolate the costs and promotional balance? A sound pricing On the one hand, short-term performance benefits of each. strategy is grounded in a well-defined expectations incent reckless promotions business strategy that is aligned with 10

www.TheRobinReport.com

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to drive to a monthly or even weekly top-line sales goal. Similarly, end of fiscal period reporting concerns can also lead to irresponsible permanent markdown practices as retailers protect gross margins by deferring permanent inventory devaluations until the next fiscal period. On the other hand, retailers are trying to embrace pro-active tactics to maximize profitability over entire product lifecycles and to attract, retain and earn the trust of profitable customers.

Resolving these contradictory performance incentives is a prerequisite for breaking out of the hyper-promotional cycle.

Understanding how target customers shop There is also something inherently contradictory about the way retailers talk about–and talk to–their customers.

Depending on which retail pricing tactics a retailer observes, one might assume there are two types of customers at opposite ends of a spectrum. At one end is the savvy customer who researches merchandise online before visiting a store, and once in the store, prowls the aisles, smartphone in hand, scanning bar codes and comparison shopping against retailers online. At the other end of the spectrum is the traditional customer, who faithfully scans weekly flyer inserts, clips coupons, and goes to the store to take advantage of a one-day or oneweekend sale.

In reality, most customers are a bit of both. Retailers revisiting their pricing strategy should understand the range of sophistication among their target customers and whether they demand clear, low prices or whether they are excited by the uncertainty and thrill associated with big promotional events.

For example, consider JC Penney’s dramatic attempts to reposition its pricing stance. To the outside observer, it would seem that JC Penney has identified its customers as more like the savvy, no-nonsense shopper. There certainly are advantages to the strategy of ultra-clarity. For one thing, it allows JC Penney to take advantage of price and markdown optimization science to drive margins. It also improves the customer experience with a cleaner merchandise presentation and clarity of offer, and it saves a boatload of

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money by eliminating hours of store labor and many pages of circulars.

But at the same time, the long-term success or failure of JC Penney and other retailers attempting to reform their pricing strategies ultimately depends on what really motivates their individual customers to browse and buy–whether or not their target customers will be happy giving up on the “treasure hunt” mentality and how compelling they find the retailer’s more transparent value proposition.

Increasingly, omnichannel retailing provides further opportunities to adapt offers to the varying preferences of individual customers. For example, the online and mobile channels make it possible to customize promotional offers down to each individual consumer.

We may still be a few years away from individualized pricing becoming a widespread reality, but retailers are already using customer data in powerful ways to localize and personalize many aspects of retail merchandising, and several are moving aggressively to shift customers’ attention from “the” price to “my” price.

Get specific: Set clear objectives for pricing actions One of the biggest mistakes retailers make is using price as a blunt instrument to “drive the business” without fully articulating a business strategy that drives pricing decisions. Again, a thorough understanding of the customer is an essential prerequisite to a sound pricing strategy. How the customer shops a given category of merchandise and how retail competitors figure into the customer’s decision process help determine the pricing approach.

Consider three key questions: • What causes a customer to browse and buy from a particular retailer rather than a competitor?

• For which products does the retailer compete on price and for which does it compete on other differentiated factors?

• Which merchandise is most sensitive to price?

No pricing approach or price optimization program, no matter how sophisticated

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the underlying technology, can succeed without being tied to a clearly articulated and well-defined strategy.

In the case of promotions, a similar lack of clear purpose marks the promotional practices of lagging retailers. Many retailers admit to a kind of trial-and-error approach–throwing out multiple offers and hoping one of them sticks. The successful promotional retailer starts from strategy and has a clear understanding of the behaviors it wants to influence with each promotion and the specific measurable results it hopes to achieve.

These goals are focused on targeted customer behaviors: • Drive profitable sales of a promoted item or promote a loss leader to build profitable baskets • Attract incremental traffic to the store or grow the baskets of customers already in the store • Get additional visits from existing customers or attract new customers • Add customers to a loyalty program or harvest more profit from existing loyalty members Similarly, clearance pricing or markdown optimization works only when the parameters are perfectly aligned with goals defined by the merchandise strategy.

The first step in solving a problem is admitting that one exists. Once retailers realize the devastating impact unplanned promotions and reactive price changes can have on their long-term profitability and price perception, they can begin putting the solutions into place to pursue more disciplined pricing and promotions. Supported by a sound understanding of their customers, a clearer sense of strategic objectives and the right internal incentives, retailers can walk away from reckless promotions and toward a more sustainable financial future.

Rob Nemett has over 10 years of experience advising the world’s leading retailers on implementing successful pricing strategies.

He can be reached at rob.nemett@kurtsalmon.com

11

A Private Story (The Names Have Been Changed to Protect the Innocent)

By Paco Underhill

I graduated and promptly rented an apartment for the summer in Boston where I had a job with a publishing company on Beacon Hill. Halfway through the summer, by what circumstances I don’t recall, Tom turned up at my door with his pregnant girlfriend seeking a place to crash. They stayed in the apartment until my lease ran out in the end of August. She found a job, he didn’t. As I left for my freshman year in college, they moved into the back of Tom’s aging farm Jeep. I didn’t see them after that. That was 42 years ago.

I am not big on reunions. I went to my high school’s 20th and got asked by some sniveling Boston Brahmin where I “summered,” and realized I had not fit in back then, much less now.

I did have a conversation with someone about Tom. Over the next 20 years I crossed paths with the same person three or four times. Each time we talked about him.

He’d been an interesting but troubled friend in my youth. Tom had arrived at our fancy New England boarding school as a shy eighth grader interested in books, politics and music. He told us that his father, who was a 63-year-old New England gentleman farmer when he was born, had been T.S. Eliot’s roommate at Harvard. That story was beyond the construction abilities of 1960’s teenage braggadocio, so we believed him.

During the spring of our junior year his father died, and Tom lost it. He failed his final exams and was told he had to go to summer school to keep up with

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his class. He returned in the fall and promptly dropped out. In our yearbook we put a picture of Tom holding up a dime (the cost of phone call back then) and a seven-digit telephone number.

The late teenage years can be a very troubled time. Paired with the political and social climates of the era, Tom’s issues were not unique, just early.

Ten percent of our boarding school graduating class that year was dead within a year of leaving school, mostly due to suicide. It was the goody-twoshoes guys that went first, having been shocked at how different the world was from what they’d been led to believe.

It got to be an itch that needed scratching. What did I know? Tom had the commonest of last names.

His family came from southern Maine.

Tom had been a junior, so I knew his age and approximate date of birth, and his father’s name and date of death.

I presumed that Tom might still be a farmer, and given the era I knew him, that his farming might be artisanal and have quirk to it. There was an old phone number and picture. I hired an online detective agency to track him down.

It took them less than 10 days to get back to me with an address in small town in central Maine. I drove up unannounced and found him. I would not have recognized him, except for his movements. The way he stood up and put his hands in pockets was www.TheRobinReport.com

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A Private Story (The Names Have Been Changed to Protect the Innocent) Continued from Page 8 so familiar. He greeted me warmly, but there was something missing.

He was living with a third wife, a young African woman, and they were growing organic vegetables for the African expat community.

During the afternoon I spent with him, I sensed an unhappy marriage.

His troubled past seemed to inflict his present and future, and this feeling was palpable. While he had not been exactly hiding, he was both pleased to be found by on old friend and more than a bit troubled by how easy it had been to find him.

privileged communication between consenting adults? Your funny picture or bad joke is someone else’s damning racist statement or misogynist rambling. Cracking into someone’s Facebook page is Hacking 101.

The big brother watching is not our government, but our marketing engines that churn away relentlessly.

I shut down my landline after 25 years when more than 90% of my calls were from telemarketers. The do-not-call list was a complete myth. Send someone a piece of mail, and you have

The big brother watching is not our government, but our marketing engines that churn away relentlessly.

We sit on the edge of a privacy revolution. The amount of publicly stored, easily accessible private data is breathtaking. Where you live, your voting record, who your neighbors are, how long you’ve lived where you live, and where you lived before, are all facts for sale. The ages of your children, what credit cards you carry, if you have a passport or library card, and any public petition you’ve ever signed; the list goes on and on. The current system assumes you have no criminal record, no arrest record, and no ill intent. If you do, then the details become more interesting.

Hire a modern detective agency and you don’t get Sam Spade; you get a desk jockey to collect a laundry list of available information. That pile has gotten bigger in an Internet era and the privacy issues we have with Google and Facebook are just the beginning.

Are they public bulletin boards or

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“the right” to call and follow up on that mailing. I got tired of insisting that if someone called me at home, I had the right to ask for and get his or her home number too.

My mailbox is stuffed with junk mail.

I get a Lands' End catalog seemingly every week. Based on the low bulk postage rates, no wonder the USPS is going bankrupt. All the duplicate mailings from the banks and credit card companies point to the lack of incentives to cull or manage their lists.

Raising the rates for bulk mail might save both the post office and our landfills.

What is most frightening though, is the naïve trust we have given the Internet. We believe that the reviews we read and the personal recommendations we get are legitimate, and seldom question their authors.

From Hotel.com to Amazon, the

review process has been grossly misused if not thoroughly corrupted.

At least magazines might do some fact checking.

We are headed for a privacy revolution. My geeky Internet pundit friends and my database marketing colleagues each, after their third martini, wonder when and how the shoe is going to drop. Is it the day America wakes up and finds that Facebook is completely uncool, or that Twitter is closed by some invasion of privacy suit where someone dies thanks to one of Spike Lee’s erroneous postings? If we shun the Protocols of Zion and harass Grove Press, or get Betty Page in front of a pornography commission, why assume that Mr. Zuckerberg can hide behind his billions?

There is no question that social media is here to stay and that online marketing and distribution are in our future. However, we have to assume that our government and courts are going to catch up. We are due for our generation’s Silent Spring and The Jungle. While our generation’s authors may not be writing books like Rachel Carson or Upton Sinclair, they may be making movies or rapping just as effectively.

Tom has not responded to my e-mails since our meeting. They could be unknowingly caught in a spam filter, or he’s telling me something.

Paco Underhill is the CEO of Envirosell (www.envirosell.com) a behavioral research and consultancy firm focused on commercial environments. His columns and editorials have appeared in The New York Times, Money Magazine, The Washington Post and The Wall Street Journal, among others. Underhill is the only foreigner to hold a position on the Board of Advisors at Hakuhodo–Japan’s second largest advertising agency.

www.TheRobinReport.com

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How Analytics Can Help A Stores-Within-A-Store Strategy Succeed

Consumer Insights from

MasterCard Advisors

By Andrew Mantis

The past several years have been rough on most retailers across all categories and levels. Some of the savviest merchants have responded to the challenging environment with a “stores-within-the-store” strategy, in which individual brands lease space and bring their own boutiques within the walls of a larger store, helping to turn that large space into a sort of mini-mall.

There has been increasing excitement about this model, and it is starting to be deployed widely in range of stores. The model is usually a specialty brand leasing space within a department store.

Though primarily seen in department stores like Macy’s and JC Penney, big-box retailers – both general, like Walmart and Target, and specialty, like Best Buy – have been using it as well.

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The increasing popularity of stores-within-stores strategy isn’t hard to understand; the hope is that the outside brand will both drive traffic into the store and provide revenue through the rent they pay for the otherwise under-utilized floor space they occupy.

Yet the model is not a panacea, and merchants need to approach it with a dose of caution and an even larger measure of analysis of purchase behaviors.

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An effective stores-within-a-store strategy depends on synergy – both between the outside brand (or brands) and the host merchant, first of all, and also among the various boutiques collectively.

The goal is for the various outlets to work together to create a compelling and unified shopping experience for the consumer, thus creating the kind of overall brand experience that results in more customers, and more purchases per customer.

Of course, there is something of an art to the process of picking the right retail partners, to arriving at both the global vision of the store as a whole and then identifying just those brands that will work best in that context. Something of an art, but as much a science, because truly successful decisions are based on hard data and the insights that careful analysis can yield.

There is a wide range of data available that can be of help to the merchant looking to host outside brands. First of all, it is necessary to begin with a baseline understanding of the store’s current performance – not just its year over year comparisons, but its performance in relationship to its local competitors, or at least, a basket of them.

We have seen retailers who were saved the expense of elaborate marketing campaigns when they discovered that what they thought were weak sales was actually a gain in market share in a weaker overall sales environment. It is only by having this kind of performance benchmark that a merchant can have a sense of what the store’s performance is and where it ought to be.

What kind of smaller stores or brands make for the best partners? Stores that are doing well, for one thing, and the same kind of performance benchmarking that merchants should use on their own establishments should be used to help identify the best of breed among prospective tenants.

Additionally, the kind of stores that are doing best can come as a surprise; they may not be the best-known brands. At MasterCard Advisors, we have discovered that small merchants have been showing stronger year-over-year growth than the larger chains for each of the last nine months.

By bringing in smaller businesses, large retailers can tap into their increased growth while adjusting a store’s mix to the tastes of the local market.

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The way different kinds of stores interact can be a surprise as well. Conventional wisdom held that people generally keep their shopping to one tier, that a high-end consumer is a high-end consumer, and so on. But in examining aggregated transaction records, we discovered something very exciting: many consumers are perfectly happy to move back and forth among tiers, depending on the category.

In fact, an average of 6.5% of a luxury shopper’s monthly spend is at bargain outlets. Likewise, value consumers are still crossing the street to make aspirational purchases on a regular basis.

What this points to is the need for the merchant to understand what his or her customers are doing once they leave the store. Where else are they shopping? What are they buying? If merchants can gain an understanding, through behavioral data, of which specialty stores their loyal customers are typically spending in when they’re not spending in their store, that knowledge can go a long way toward choosing the right brand partners. By using a large enough set of aggregated transaction data, it is possible to create a detailed behavioral model of a number of customer types, both current shoppers and desired customers. These models can be used to identify the kind of synergies that are already out there in the mind of the shopper, and need only the work of the creative retailer to bring them into the store and under its own roof.

The growth of e-commerce, the economic slowdown, the over-supply of retail square footage, all of these forces are acting to radically alter the retail environment, and the stores-within-stores strategy is one of the most exciting and creative responses we have seen. The rigorous use of robust data can turn a creative response into a winning one.

Andrew Mantis leads the MasterCard Advisors Information Solutions Merchant practice.

He can be reached at Andrew_Mantis@mastercard.com

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Target vs. Amazon: Hungry Games

By David Merrefield

Suppose a picture really isn’t worth a thousand words.

What then?

“Showrooming” happens, that’s what.

Showrooming is the consumer practice of going to a retail store to examine goods to determine more about appearance and functionality than can be ascertained by looking at product online alone. Once satisfied with the products they’ve seen in store, customers order them online to get a better price or greater selection.

Showrooming is taken very seriously by some trade channels – notably mass and consumer electronics – but there’s every reason to believe the practice will quickly spread to other retail channels, including food. Supermarket retailers in particular need to pay attention to what’s going on. Indeed, showrooming is just one of numerous e-commerce threats to conventional food retailing, all of which seem to be gaining greater traction by the day.

Let’s take a look at what one retailer is doing proactively about showrooming.

Perhaps the most dramatic action came earlier this year when Target delisted Amazon’s Kindle book reader from its stores in a bid to discourage showrooming. The action takes on greater significance with the realization that Target, with its 1,800 retail locations, is among the largest offline vendors of Kindle.

But let’s take a step backwards.

Target’s flirtation with Kindle has some strange aspects to it from the beginning. Target started offering Kindle about two years ago. To offer it in the first place was an odd decision given that Amazon is a direct competitor of Target’s on many fronts. Target might just as well have distributed coupons for Walmart in its stores, given the Amazon competitive threat.

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In any case, once in the stores, Kindle did prove to be a strong traffic draw for Target. So the wisdom of delisting Kindle isn’t immediately obvious. Possibly the delisting was in a fit of pique sparked by Amazon’s short-term offer during the last year-end holiday season of a 5% discount, up to $5, to shoppers who scanned UPC codes in a store, then used its app to research Amazon’s price and order those goods for less.

This is worth underscoring: customers can use Amazon’s app to submit orders to Amazon as they stand in a rival retailer’s premises.

The theory that Target sought to punish Amazon for encouraging showrooming is bolstered by the fact that Target continues to offer Barnes & Noble’s Nook reader and some Apple products.

Kindle continues to be widely available offline at other retailing venues such as Walmart, Best Buy and Staples.

Consumers’ potential to use mobile apps in retail stores to price-check and order product has to be the very worst scenario possible for retailers. After all, conventional retailers traditionally had the psychological advantage of more or less compelling consumers to execute a purchase from them just because they were standing in front of product they wanted, and there was no handy way for them to know whether it was well priced or not.

That advantage is rapidly vanishing.

Food retailers should make note of the fact that Amazon is a purveyor of a wide range of grocery consumables, so the knock on food retailing’s door is sounding a bit louder.

Perhaps even more ominous is the fact that grocery-delivery retailers such as Fresh Direct and Peapod already offer mobile apps that permit in-store price checking and ordering. Effectively, most products in a supermarket can

be ordered online by consumers as they stand in front of them a supermarket.

It isn’t difficult to envision the time when shoppers will go to a supermarket on a weekly shopping trip during which they immediately purchase perishable products and other goods needed for immediate use. But while in the supermarket, consumers could also scour the store to find goods needed for less immediate use – perhaps paper goods, cleaning supplies, laundry and the like – then scan and order them from an e-commerce online retailer while in the store. From a consumer’s perspective, the advantage is more than saving a few dollars. It could also be seen as a convenient way to do some pantry loading without the necessity of hoisting and transporting bulky and unwieldy items. And with free shipping, it’s a slam dunk.

Let’s take it one step further. Consumers could opt to compile shopping lists at home and submit them to price-checking web sites or apps such as Google Shopper and ShopSavvy to see which retailers price them most favorably.

This is likely to influence their shopping-destination decisions and threaten customer loyalty.

What can supermarkets do to prevent this phenomenon from sweeping away their business?

Luckily, there’s still time to find a solution. Many mobile users find price- checking and ordering apps clunky to use, while others simply don’t find comparison-shopping of any type worth the effort. Other large groups of consumers don’t have mobiles that are sophisticated enough to support apps or don’t know about them. Finally, many consumers are simply not sufficiently adept to effectively use such technology.

Food retailers stand to benefit most from these factors for the short-term

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Target Builds Sales Volume With Food

simply because it’s the most democratic of all trade channels – everyone buys food.

The longer-term solution is for retailers to block showrooming and the like by accelerating their march toward proprietary products – consumers can’t order such products from a rival online retailer.

This product shift can be accomplished in by retailers two ways. One is by leveraging manufacturers to develop product exclusively for their stores. This is done by way of Target’s “signature national brands.” Walgreens makes use of branded goods with price markings unique to itself.

A host of other retailers do much the same.

The other and easier solution is for retailers to continue the development of private label products, preferably in several tiers so up-market and value-priced goods can be in the mix.

And, of course, retailers can enter the app game to ensure that shoppers interested in their special products or private label offers – or any product, for that matter – can be obtained online and from themselves if consumers prefer.

The best solution of all is to make the store a destination shop, pulling the whole issue of price and e-commerce off the table. Food retailers accomplishing just that include Wegmans, H-E-B, Publix, Whole Foods and Trader Joe’s.

Food retailers and others who fail to face up to the showrooming competitive threat are doomed to see the effectiveness of their marketing diminish, and will find themselves engaged in a ruinous pricerace to the bottom.

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.

Issue Six September 2012

Target’s fight against showrooming presents instructive fodder about how one retailer has endeavored to conquer the problem.

But for food retailers there’s something more immediate going on: Target is emerging as a competitive threat in its own right because of its rapid rollout of PFresh grocery sections.

Let’s see how big a threat it is.

Target got off to a slow start in 2008 by adding PFresh sections to a few of its smallermodel stores. Larger Super Targets had grocery sections earlier.

But the pace of PFresh rollouts accelerated, mainly because they could be added to the existing four walls of the store: No vast rebuilds or zoning fights were required. This stands in contrast to Walmart’s largescale and costly replacement of smaller stores with behemoth Supercenters containing food sections. Walmart had to fight many a battle to accomplish the transformation.

Target now has food sections in well over half its 1,800 locations. Many of those locations are of about 135,000 square feet, net; about 12% of that space is now a PFresh featuring categories such as dry groceries, refrigerated, frozens, baked goods and produce.

Target has also developed a strong array of private label food product ranging from the upscale Archer Farms to the value-priced up & up.

PFresh presents a tightly edited selection of fast-moving products. No effort is made to offer shoppers a full supermarket line, which means PFresh is seen by consumers as a food fill-in opportunity if they happen to be in the store anyway. Again, this contrasts with Walmart’s Supercenters, which offer a limited, but full line of supermarket products.

Target achieves more than $13 billion per year in food sales, with sales increasing as time goes on.

Many food-trade observers acknowledge that Target’s sales in the food sector are substantial but, at the same time, Target stores are thinly spread across many markets, effectively limiting PFresh’s ability to divert big proportions of sales from conventional supermarket chains.

Food-sale market shares for Target tend to range from 2% to 3% in many markets, not enough to pose a worrisome threat to incumbent food retailers.

Nonetheless, with Target’s food sales pointed upward, the threat shouldn’t be ignored altogether.

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Retailers revise Their Homework on Back­to School Weather, Hesitation Delay Shopping Plans Despite an early push at retail, it seems the back-to-school shopping season is slow to gain steam, forcing many retailers to revamp their strategies to adapt. Teen Vogue’s Back-toSchool Saturday initiative on August 11 may have wooed some consumers with its discounts and retailer participation, but many trend-conscious teens have been anxious to wait until school actually starts before they commit to making purchases. As a result, some retailers like JC Penney have extended their promotions, scheduling merchandise to arrive

ts e r Fac m u s n Con Co t to f rom o r a te d p I n c o r Mo n i t o r l ye Li fe s t

tm

By Emily Thompson

Total spending is expected to reach $30.3 billion, a 14% increase – the highest since 2003.

Back-to-school is the second largest selling season, trailing only the December holidays, but apparel spending may easily remain flat compared to last year. Apparel tops the list of consumers who have a need to go back-to-school shopping: 9 out of 10 plan to buy clothes, followed by supplies (84%) and shoes (78%), according to the Cotton Incorporated Lifestyle Monitor™ survey.

year, down only slightly from 78% last year, according to Monitor data.

“Concern about rising prices means many consumers may wait to see if prices will drop before they buy,” says Kim Kitchings, Vice President, Corporate Strategy and Program Metrics, Cotton Incorporated. “But incentivized discounts might further encourage consumers to plan ahead in order to reap the savings.”

The NRF agrees that promotions are expected to play a significant role this year, not least because of Teen Vogue’s promotion. Costconscious consumers are on the lookout for deals and discounts this season, eager to keep a tight rein on household spending.

“Families aren’t opposed to spending on what they need, but parents want their children to take a good look around at what they already have before deciding what to buy for back to school this year,” said NRF President and CEO Matthew Shay in a press release.

“Retailers understand consumers are extremely focused on value and are taking this opportunity to offer substantial savings on merchandise.”

at the end of September in hopes that more fall-like weather will entice consumers to buy.

According to the National Retail Federation’s 2012 Back-to-School spending survey, conducted by BIGinsight, the average person with children in grades K-12 will spend $688.62 on their children, up slightly from $603.63 last year.

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Rising prices of non-back-to-school items are also top-of-mind and will likely have an impact on consumer budgets for back-to-school spending. Specifically, of those consumers planning to do back-to-school shopping, nearly three-fourths (73%) are concerned about rising gasoline and food prices limiting their shopping budgets for the 2012-2013 school

Promotions are one way to boost spending, especially given that apparel B-T-S spending is expected to remain flat this year, with consumers planning to spend about $227 on apparel per person.

“Essentially, retailers are competing for the same share of consumers’ wallets that they were last year, so they have to make it count,” Kitchings says.

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There is a small bright spot, though, in the impulse category; among those planning to purchase clothing for their children this back-to-school season, 63% say they purchase clothing for themselves at least some of the time, according to Monitor data.

Retailers may capitalize on this with window displays that appeal to parents as well as children; while most consumers (65%) cite what they already own and like as a source of clothing ideas, a full 43% say they are influenced by window displays, Monitor data reveal.

Whether through window displays or deep discounts, though, retailers will have to bring the “wow” factor in this extended B-T-S season to encourage beleaguered consumers to make those purchases for themselves or their children.

“For many Americans, the economic situation probably hasn’t changed much in the last year, and that has affected their outlook going into the back-to-school shopping period,” says Kitchings. “Weather is always a factor here as well. With the hot summer we’ve had, many parents are delaying purchases because it is simply too hot to think about fall clothes.”

Indeed, just 37% of consumers say they are very or somewhat optimistic

about the U.S. economy, while 48% report feeling similarly about their own financial situation.

This may result in parents’ purchasing only the essentials for their children, whether in apparel or school supplies.

Indeed, Monitor data reveal that among those planning to shop for back to school apparel, top items are expected to be shirts/tops (91%), followed by jeans (75%), socks (70%), and pants (60%).

“Socks and t-shirts are inexpensive and easily replaced, so it’s no surprise they’re both high on the list for planned purchases this fall,” Kitchings says.

While B-T-S shopping remains one holdout where brick & mortar trumps

online, 23% of consumers say they plan to shop online for B-T-S clothing this year, according to Monitor data, and that percentage may only continue to grow.

“Parents typically shied away from relying on the Internet for B-T-S shopping, preferring to take their children in-store to try clothes on,” Kitchings says. “But it’s become a great tool for parents, who can now compare prices at home before heading to the mall. And as increasing numbers of e-tailers offer discounts – whether in price or added value, like free shipping – that may encourage some to take their shopping lists online.”

For now, though, online shopping remains a secondary channel, as most parents pile in the car to head to brick and mortar stores for B-T-S shopping, enabling their children to try on clothing for size.

But only time will tell if Teen Vogue’s Back-to-School Saturday initiative has set the tone for this year’s holiday shopping season – and whether it becomes part of the retail lexicon next year.

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

The data found in this article, as well as additional relevant information, can be found at CottonLifestyle Monitor.com.

Issue Six September 2012

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Why Home Furnishings Can Save Sears & Kmart…

And Why It Will Never Happen Disclaimer: This is not another opinion piece trashing Fast Eddie – aka Eddie Money, Edward Moneyhands, Edward S. Lampert. Unlike a whole lot of other people, I get what he’s doing at Sears Holdings, which is making a lot of money for Fast Eddie – aka Eddie Money, Edward Moneyhands… well, you get the idea.

The plan is not to run a great retail institution, it’s to make a great deal of money. And by that measure, they are perhaps the most successful company in American business today.

If someone were able to analyze all of the SEC filings, reports and data coming out of ESL Holdings in Greenwich, Connecticut, it would no doubt show Fast Eddie has done quite well… for Fast Eddie.

No, we’ve come not to trash Fast Eddie, but to present a tale of whatif… what if Sears Holding really wanted to be in the retail business and operate not just one, but two strong, competitive and profitable stores?

Not only is that eminently doable, it’s quite frankly not all that hard and wouldn’t take a whole lot of capital investment. Even more amazing, what it would take are some of the very things Fast Eddie has tried, particularly in the earlier days of his ownership – back when it seemed there might have been even a glimmer of a plan to create successful retailers.

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By Warren Shoulberg

And the secret to the whole plan?

It’s home furnishings. How about that? A little context would be helpful at this juncture, by way of saying the predicament these stores find themselves in today is not just the fault of Fast Eddie. You can trace Kmart’s slow but steady march to retail doom back to the 1980s and 1990s when, as a corporation, it took its eye off its core business and began diversifying into other retail channels: books, home improvement, whatever. At the time, Kmart was the unquestioned fashion leader of the mass merchant channel and had well established itself as the place for stylish home and apparel at a price … way before Target or H&M or IKEA, or any of the other cheap chic stores discovered the formula.

Kmart’s fashion leadership, particularly in home, reached its zenith with the original Martha Stewart program of the 1990s. Kmart was a pioneer in what remains today the largest private label program in the history of home furnishings that did more to raise the taste level of Middle America than perhaps any other single cultural phenomenon, short of the Internet.

With corporate going off into assorted – and sorted – myriad directions, Kmart stopped investing in its physical plant and merchandising, and the death spiral was well on its way.

malls gradually became the province of teenage girls and shoe stores, the Sears merchandise mix – heavy on refrigerators, power tools, lawn mowers and utilitarian clothing – very quickly became largely irrelevant to shoppers frequenting regional malls. If you wanted those kinds of products, you went to strip centers and freestanding locations – exactly where Sears wasn’t.

By the time Fast Eddie came along to take over these two operations in the early 2000s, Kmart was a secondrate, tired-looking, also-ran – and Sears was the wrong store in the wrong location. But, here’s the most fascinating part of this entire equation: put the two together and you might just come up with two viable retail operations simply by rearranging the existing pieces … and buying some new light bulbs and some paint to fix up the stores.

Ladies and Gentlemen, I present to you the all-new Sears and Kmart coming to a shopping location near you. You’ll find thousands of Sears

You have to go back even further to the 1950s and 1960s to see the root of Sears’ problems, back when the great retail exodus to the suburbs began. Sears made the fatal flaw of deciding it was a department store, not a mass merchant, and set out on a strategy that sited its stores in shopping malls rather than in strip centers or freestanding locations. As the

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stores in strip centers and freestanding locations all across the country. You might remember these stores were once Kmarts.

No more. They now have a big red Sears’ logo over the front door and when you walk in, you are immediately presented with two options: to your left, occupying two-thirds of the store, is Sears Hard. It features the number-one brand in major appliances, Kenmore, which is now also the umbrella brand for small appliances, personal care products, home storage and a huge line of consumables like laundry detergent, paper goods, diapers and cleaning products. Immediately adjacent is the Craftsman-branded area, featuring power tools, hardware and a cherrypicked home improvement products area to scare the cash flow out of Home Depot and Lowe’s. And just beyond that, with its own entrance on the side of the store, is the Diehard automotive department with service bays, auto repair aisles and a Sirius XM area where you can get just about any tech gadget for your vehicle.

Back at the main entrance and to

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your right is Sears Soft, a well-edited fashion and home goods department that features tons of apparel basics like underwear, footwear, khakis, knit tops and outerwear. Lands’ End is the dominant brand, taking up more than half the space in the department.

The other portion of Sears Soft is home textiles. The Lands’ End sub-brand, Coming Home, is the star here where you’ll find some of the best values in the market on basic solid color sheets and towels.

There’s a food court towards the back of the store with a Dunkin’ Donuts, a Pizza Hut and a Pollo Loco fast food chicken outlet, perfectly mated to the demographics of the store.

Because of the utilitarian nature of most of the merchandise, the raw look of the store – bare concrete floors, exposed ceilings, funky fixturing – is a positive rather than a negative for the average shopper. Taken together, these new Sears take the number-one choices for appliances and auto repairs and combine them with the best of the big home improvement chains and Kohl’s and Uniqlo. And they do it with minimal capital investment, downside risk in fashion markdowns, or store expansion programs.

But wait, there’s more. Drive down the highway a few miles to the mall and that big box at the end of the center now seems to have a giant red K adorning it. Inside, all of the last vestiges of the lawn mowers, screwdrivers and dishwashers are long gone. Instead, the main floor has a giant cosmetics, fashion accessories, and candy and snacks area, as if one took a Sephora and mashed it up with Hard Candy makeup, Dylan’s Candy Bar and Urban Outfitters – but cut the prices by a third. Fast-moving fashion fills out the rest of the main floor with enough tops, bottoms and in-between

Issue Six September 2012

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to embarrass a Zara’s. Upstairs and downstairs? They are gone, leased out to learning centers, dental hygienists and Storage Centers of America.

That giant red K – gee, we seem to have lost the word Mart somewhere during the move – is all private label all the time. And while the markdowns are going to be tough to handle, there are no royalties to pay, and the rent from the other floors is going to help the bottom line, big-time. And suddenly all of those teenage girls are going to stop making a U-turn when they get to the end of the mall and venture into a place they wouldn’t have stepped foot into not all that long ago.

Frankly, the Kmart strategy is going to be a tricky proposition. A whole lot of smart retailers have fallen flat on their faces trying to make it in the fast fashion game.

But the Sears end of the equation is a no-brainer. Great brand names – including Sears itself – convenient locations situated near where their core customers live, and a low-risk merchandising mix are a powerful combination. The new Sears would more than pay for whatever ultimately ends up happening at Kmart.

Remember way back when to the era when Sears advertised itself as “Where America Shops”?

That doesn’t have to be just retailing history. The saddest part of all is that it most probably will.

Warren Shoulberg is editorial director of several Sandow Media home furnishings business publications and is sitting by his phone waiting for Fast Eddie’s call.

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THE Back Page

Quotes to Remember

ADAM SMITH – FATHER OF MODERN ECONOMICS --FATHER OF CAPITALISM – SAID:

“ It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”

I wonder why he said that. I guess he didn’t know about the “trickle down” effect.

IS THIS WHAT ALBERT EINSTEIN THOUGHT OF HIS THEORY OF RELATIVITY?

“ Everything should be made as simple as possible, but no simpler.”

So why do consultants work to make that which is simple, more complex?

FROM GALILEO

“ In matters of science, a thousand proclamations by so-called experts are outweighed by the humble reasoning of a single individual.” I guess that’s why Donald Trump is no scientist.

GOOD ADVICE FROM NOBEL PRIZE WINNING PHYSICIST RICHARD FEYNMAN

“ You must not fool yourself, and you are the easiest person to fool.” You can say that again.

SOME OF MURPHY’S LAWS

• A short-cut is the longest distance between two points.

• The race is not always to the swiftest, nor the battle to the strongest, but that is the way to bet.

• There is never time to do it right, but always time to do it over.

• All great discoveries are made by mistake.

Contributing Columnists Michael Coady David Merrefield Judith Russell Russ Schaehrer Warren Shoulberg Jane Singer Paco Underhill

CEO, Editorial Director Robin Lewis COO, Editor Deborah Patton Art Directors Jodi Kostelnik Steffi Sauer IllustratoRS Jodi Kostelnik, Joey Parlett and Steffi Sauer

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Copyright © 2012 Robin Lewis, Inc. All rights reserved.

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All expressions of opinion are subject to change without notice. To order a print or electronic subscription to The Robin Report, please visit our website at www.TheRobinReport.com.

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