The Robin Report - Issue 6 - May 2011 by The Robin Report

Issue Six 2011

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IS THE LIZ CLAIBORNE BOARD MISSING IN ACTION? By Robin Lewis

Dear Reader Hindsight is so easy. By definition, it’s correct – 20/20 in fact, as the old saying goes, so I take neither credit for nor pride in analyzing and assessing the key events that have transpired at the Liz Claiborne Corporation since Bill McComb became CEO in November 2006. I also take no pleasure in telling this somewhat tragic story. Those of us who grew up in business with this company, including the many people I talked to while writing this article, remember its heyday. We recall the days when its management could do no > Continued on Page 2

wrong, from the designer herself dressing the exploding population of professional women in the Eighties, to Paul Charron skillfully crafting a portfolio of 40 brands that grew sales to $5 billion and promised to take the company into the new century and beyond. However, this story, which is still being played out, must be told. It contains strategic and tactical perspectives that are applicable and relevant to all businesses, and that every CEO and Board member should keep in mind when steering a corporation through good times and bad. To the casual reader, the headline “Is the Liz Claiborne Board Missing In Action?” might suggest that I place

This question, asked with increasing frequency across the apparel and retail industry, refers to the Liz Claiborne Inc. Board of Director’s apparent tolerance of 14 consecutive quarters of per-share losses. Annual revenues of $5 billion when CEO Bill McComb took the helm in November 2006 have plunged by half, and are still dropping. Annual earnings of $2.13 per share in 2006 have been followed by losses in each of the subsequent four years, finishing 2010 under water at -$2.34 per share. The stock, priced at $43 when McComb took over, is trading at around $6, resulting in an 85% drop in market capitalization, from $4.4 billion to $600 million. Adding insult to injury, the rating on the company’s bonds has recently been dropped to ten notches below investment grade. Although the economic downturn is partly to blame, it’s not the sole culprit. LCI’s performance has been dismal even compared to the other large apparel companies in its peer group.

After this article was first published on our website on April 28, 2011, Liz Claiborne CEO Bill McComb responded with a letter posted to his own company website. To see some of the comments he made pertaining to the article and our subsequent reponse, please visit www.therobinreport.com.

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I N S I D E this iss u e

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• Dear Reader ..........................1

the blame of Liz Claiborne Inc.’s precipitous and rapid sales and earnings decline solely on the Board’s shoulders. Nothing could be further from the truth. Whatever the outcome in a company, the “buck” always stops on the CEO’s desk. The article tracks and highlights the significant and cascading series of events that, in my opinion, cut sales in half, caused four straight years of net losses, and resulted in a stock price and market capitalization that are mere shadows of their former selves. It explains how many of the wrong decisions made at the wrong times were due, from my perspective, to a combination of CEO inexperience in the apparel and retail industries and his arguable lapse in keeping or hiring executives who did.

Robin Lewis

• IS THE LIZ CLAIBORNE BOARD MISSING IN ACTION? ..............1 Robin Lewis

• luxe Redux ............................8 Kurt Salmon

• BE CAREFUL WHAT YOU WISH FOR ...............................9 Robin Lewis

•N ow You See It, Now You Don’t ….......................10 MasterCard Advisors

• Q&A With Hal Reiter ...........12 Herbert Mines Associates

• En vironmentally Unconscious ....................14 Warren Shoulberg

• All I Ever Wanted Was Green Skin ..........................16 Dana Wood

• the sky’s the limit................18 Paco Underhill

• quotes to remember……...20

However, there are two “bucks” in any public company. The other buck, the one that stops on the Board’s conference room table, is its duty to shareholders. At each major decision-making juncture, the Board’s apparent unanimous support was puzzling. Thus, I headlined the article questioning its “whereabouts,” because at the very least, I wondered how its members could preside over such a prolonged, continuous and steep decline of the business without taking some drastic corrective action. Many businesses hid their woes behind The Great Recession, and indeed, some of them were legitimately exacerbated by the crisis. However, in the case of Liz Claiborne, as measured by three other major corporations within its peer group VF Corporation, Phillips-Van Heusen and Polo Ralph Lauren, the company descended deeper and faster into the recession than its peers, and continued its decline to this day, even as the other three paralleled the economic

recovery and continue on an upward growth trajectory. Therefore, it’s reasonable that one could question the strategic decision making at Liz Claiborne. So, what’s the end game? How does it play out? Will the company stabilize revenues and profitability with its four direct brands, which include Kate Spade, Lucky Brand, Mexx and Juicy Couture, and find a path for profitable growth? Will JC Penney be successful with the flagship Liz Claiborne brand, and exercise its option to acquire it in five years? Will strategic buyers end up “cherry picking” the company? Or, will a private equity firm see it as an acquisition opportunity? There’s another story here, and that’s how bloody difficult this business can be. To all of you in the trenches day in and day out, running companies or parts of companies, dealing with intensifying competition, consumer fickleness, technological changes, and economic headwinds, my hat’s off to you. Enjoy the read.

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

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IS THE LIZ CLAIBORNE BOARD MISSING IN ACTION? All of this raises some important questions. How much of the company’s misfortune has been due to mismanagement of the business? Why would McComb, with no prior experience in apparel, fire so many experienced executives so soon after starting the job, not replacing some of them and replacing others with people having had no prior apparel experience? Why, when the company was already having financial problems, did he bring in the expensive, wrong-for-the-consumer designer Isaac Mizrahi to revamp the flagship brand? Why has there been hardly a peep out of the Liz Claiborne Board of Directors? What can the Board possibly be thinking? Indeed, is the Board MIA? It does seem that the lights are on, but no one is home. Despite three years of plummeting results, the Board renewed McComb’s contract in 2009 for three more years. Last August, Board Director Arthur Martinez, in a rare statement, told the Wall Street Journal: “If the company continues to show losses a year from now, absent some cataclysmic economic event, we would be obliged to question the leadership and the path that we are on. For now, though, there is an overwhelming vote of confidence in the strategy set forth by Mr. McComb.” One must wonder if Mr. Martinez had as clear a view of the failure of one strategy after another as the accompanying charts so clearly convey. The same article quoted McComb himself as once describing board members as having “brass balls and brass bras” for sticking with him, an apt observation given the situation. Even more so when one considers that the same company directors responsible for hiring McComb in 2006 are still serving on the Board today. As we approach the August 2011 “deadline” Mr. Martinez was referring to, things have not improved. McComb has recently lowered profit targets for 2012. Just-released first quarter 2011 results show another loss, this time of $.88 per share, below Wall Street estimates. Kohl’s has announced it will drop Claiborne’s Axcess brand, which

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does about $70 million in sales. Juicy Couture, once a meteoric growth engine, continues to falter, as do the Mexx and Lucky Brands, though they are reportedly in turnaround mode. At half its pre-recession size, LCI looks more like a holding company with four disparate, non-synergistic retail businesses, the Liz Claiborne brand now on license to JC Penney with option to buy in five years, and Mexx with no presence in the U.S. So, as each major strategic initiative during McComb’s tenure failed to gain traction, one must wonder what the turnaround growth engine will be going forward, assuming there is to be a future in its current state. It remains to be seen just how “brassy” the directors’ balls and bras are, and how long they can remain silent and passive – or missing.

Unfortunate Timing In all fairness to Bill McComb, I believe it is important to note the timing and circumstances of his hiring. McComb’s prior job was as Group Chairman at Johnson & Johnson, most recently overseeing their orthopedics business. Earlier in his fourteen years at J&J, he managed brands such as Tylenol, Motrin and Clean & Clear. So, he was arriving at Liz Claiborne with no apparel industry experience, nor had he ever served as a CEO. And, of course, the Great Recession was around the corner. The recession was only one of the challenges facing McComb as he took the helm in late 2006. At the time, the company’s brand portfolio included the flagship Liz Claiborne brand, representing an estimated 30% of total sales, and over 30 other brands, including such names as Kate Spade, Juicy Couture, Lucky Brand, Mexx, Monet, Claiborne for Men, Ellen Tracy, Laundry, Enyce, JH Collectibles, and others. At about the same time, there were some major strategic shifts in the department store sector. Stores like Macy’s, the Liz Claiborne brand’s largest customer, were accelerating their pursuit of private and exclusive brands and shifting their focus

to a younger, more updated and “modern”— vs. a traditional, more classic — customer. For all wholesale brands, especially those in the Liz space, these moves were, and still are, a big deal. These changes to the department store business model, largely to survive, were also the reason that LCI and its peer group (VF Corporation, Phillips-Van Heusen and Polo Ralph Lauren) had been, and, in the case of the other three, still are, evolving “hybrid” business models comprised of a portfolio of wholesale and specialty retail brands, the balance of which somewhat parallels the department stores’ evolution towards a greater mix of private and exclusive brands. Over time, it is not inconceivable that these giant former totally wholesale businesses will realize the majority of their revenues generated by their retail businesses. The operative phrase here is “over time.” McComb’s inexperienced misunderstanding of some of these seismic shifts taking place in the department store sector, and how the tandem evolution of the

However, as clear and strategic as his revolutionary vision may have seemed, one cannot implement such magnitude overnight, particularly with only six months in the corner office and having fired the experienced professionals who were his most direct and knowledgeable link to the company’s most important customers, the strategically evolving department stores that would soon rank among his greatest challenges.

Then... wholesale/retail model was evolving, became apparent when he waffled on how to position the Liz Claiborne brand in his fundamental new strategy direction, and how he abruptly put his wholesale brands up for review, as put forth in mid-2007. These misunderstandings would ultimately prove fatal to the future of the flagship brand in department stores.

The Original Grand Strategy Midway into his first year as CEO, McComb announced the reorganization of the business around “partnered,” or wholesale, brands, including Liz Claiborne, and “direct brands” (also called “power brands”) Juicy Couture, Lucky Brand, Kate Spade and Mexx. The primary growth strategy would be in support of the direct brands, whose potential would be realized through expanded marketing, capital investment and new store openings.

in some ways would draw a line in the sand with their department store partners, limiting the stores’ latitude with respect to markdowns and merchandising (to which I thought “good luck”- again questioning his experience). Last but not least, there was the stunning announcement that the company was putting 16 of its wholesale (“partner brands”) under review for divestiture, discontinuation, or licensing. Overnight, publicly, and at high volume, Mr. McComb was attempting to turn the wholesale business model on its head and create a lifestyle specialty retail conglomerate. He told WWD: “This is a company that has revolutionized the industry before and we look forward to doing it again.”

One part of the strategy that was not very clear involved the flagship brand. Interestingly, the originally announced list of direct brands included Liz Claiborne, according to a March 2007 article in WWD. Shortly thereafter, however, Liz appeared on the list of partnered brands. Many in the industry presumed at the time that the move occurred to pave the way for JC Penney, who already had the exclusive rights to distribute the “Liz and Co,” to get the flagship Liz Claiborne brand as well. However, it now seems that the switch was a result of McComb’s original lack of understanding of the nature of the wholesale business, and the realization that Liz was not capable of being a direct brand at the time, having been a long and deeply established wholesale brand. Therefore, that being the case, what is the best thing to do with it as a wholesale brand? Do you attempt to reposition it to align with the department stores’ move towards a younger and more updated consumer, or do you find a retailer whose

The reorganized plan was aggressive considering the looming recession, which was admittedly not totally visible at the time. The company was projecting the four direct brands to grow from $2.2 billion in revenues at the time, or 40% of LCI’s total business of $5 billion, to $3.2 billion by 2010 - 60% of the total. McComb also declared many costcutting initiatives, which included the dismissal of an entire layer of seasoned management, not to be replaced, and a new retail “partnership” model which

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core consumer is a perfect match for the brand’s original position? Do you change the brand to fit the distribution, or do you identify the best distribution for your brand to best reach its core consumer? The answer to that question is the very reason Liz & Co. sought a home at JC Penney. It would be millions of wasted dollars and years later that the flagship would finally find the same answer, following its “sister” to the same home, whose core consumer loves the DNA of Liz Claiborne just the way it is.

The Unraveling Strategy is one thing, but implementation is quite another. Although it’s impossible to implement such an ambitious strategy overnight, the unraveling of a strategic initiative can happen almost overnight. McComb’s announcement to put 16 of the wholesale brands (representing $800 in annual revenue) under review is widely recognized as one of his first major blunders. Essentially, this was a declaration to all potential acquisition or licensing suitors that these brands were “losers.” And, for the four of them under exclusive contract with Sears (First Issue), Dillards (Intuitions), JC Penney (Tint) and Kohl’s (Stamp 10), it certainly must have caused those retailers to rethink how to move forward with them. The announcement must have also caused the retailers of the other 12 brands under review, which included Ellen Tracy, Sigrid Olsen, Dana Buchman, and others, to proceed with caution. One pundit at the time said: “Just by opening his mouth, he probably devalued those brands by half.” Was McComb’s lack of experience at work here as well? Putting all those wholesale brands under review posed another major problem to the unwitting Mr. McComb, one he never could have been aware of without years in the business. A portfolio of wholesale brands gives a company more negotiating leverage over things like floor space, open-to-buy, and marketing programs, and as one brand may have a bad season, others can counterbalance the effect. By throwing so many brands “under the bus,” Mc Comb was essentially

Issue Six 2011

telling the department stores “You’re not important to us.” Essentially, he was turning his back on those whose support and partnership he would so desperately need to get the flagship brand back on track. Inexperience indeed. And, did anybody on the Board understand the gravity of these decisions? Meanwhile, the Liz brand, which had generated upwards of $2 billion annually in the early 1990s, was estimated to have dropped to about $500 million by late 2007. McComb had to deal with the brand’s positioning soon, and in the face of a disgruntled Macy’s, its biggest customer, over the Liz & Co. move exclusively to JC Penney, not to mention weakened relations with other big retailers for the reasons mentioned. Another move among many of McComb’s inexperienced missteps at the time, and a particularly critical one in the face of the looming economic collapse, was his hiring an executive from GE to become LCI’s CFO. So, while most of the industry, including LCI’s peers are battening down the hatches, expecting the worst, they were sailing into 2008 with more complexity, not less, with people turmoil, brand turmoil, with seriously weakened financials, diminishing cash flow and rising debt, and with an unfriendly department store sector that would impede his flagship repositioning efforts. By the middle of the following year, 2008, all of its experienced executives would be gone. In that same year, the LCI Board approved and implemented a $100 million share buy-back program. One top analyst observed that McComb and the Board must have had a bout of wishful thinking after watching the share price continue to fall even after the aggressive stock repurchase, and suggested they would have been better off using that money to pay down debt. Later, McComb commented at another analyst conference that if he could have done one thing differently, it would be to not do the stock buyback. A pretty amazing statement, all things considered. Need I ask again what the Board was thinking?

Now! Enter Mizrahi The severely wounded flagship brand had become a turnaround priority, even while the direct brands were beginning to wobble under both recessionary pressures and strategic challenges. It was like the fourth quarter of a football game, with the Liz brand on its own 40 yard line, down by three points with a minute left on the clock. What’s the call? You got it: Quarterback Bill McComb throws the “Hail Mary” pass to the team’s new wide receiver, Isaac Mizrahi. In the middle of all of this turmoil, a teetering financial situation, and the looming economic catastrophe, Mr. McComb cut a reported five-year, $6 million per year deal to lure Mizrahi away from Target, in addition to hiring all 25 people in his design staff. And, of course, high profile designers come with grandiose runway shows as part of their package, which cost another cool million a season, according to an unnamed source. Was anybody in the organization or on the Board advising against this move? Apparently not. One source commented that Mr. Mizrahi was completely autonomous and that no one questioned his decisions regarding the repositioning of the brand. Long-time Liz “staffers” were not allowed on the showroom floor when the line debuted. Even top management, including McComb, deferred to Mizrahi’s rather anointed authority.

him for a black tie event for the CFDA. McComb responded with an email that he was “sad, disappointed, and deeply disturbed.” Eighteen months later Rodriguez bought back LCI’s stake. Again, what was the Board thinking? With the enormity of the re-structuring and re-positioning in the face of recession, didn’t anyone think about the incredible distraction, to say nothing of where it fit strategically, and what about the crosspurpose to the need for a laser-like focus to lead and manage the entire enterprise, its many issues and challenges, as it headed into the storm?

However, McComb certainly had to know of the enormous odds against completing that high-stakes pass, particularly with warnings from Macy’s CEO Terry Lundgren and then-head merchant Janet Grove. Ms. Grove reportedly told Mr. Mizrahi that “the new line needed to make a big splash to reverse its plummeting sales,” which were down to about $200 million from $1 billion a decade earlier. For his part, Lundgren, still probably unhappy about the Liz & Co. to JC Penney deal, warned him that the line better be different from Liz & Co. or Macy’s might drop it. Well, the big “splash” that Ms. Grove demanded did occur on one level. Since Mizrahi was something of a media darling, the press and fashion critics raved and reviewed with energy. Vogue even featured a profile of him with Michelle Obama photographed in one of his designs. But, another kind of “splash” occurred in the real world of sales results – the sound of a heavy rock landing in water and sinking. In contemporizing the line, Mizrahi gave “…a shot of youthfulness” to the Liz “boomer” look that he described as “a little granny, ” and the new line was summarily rejected by its longtime brand loyalists. So, the real world of sales results, largely housed in a skeptical and miffed Macy’s, resulted in enormous markdowns, driving the partnered brands business to an operating loss of $40 million in the first quarter of 2009. Scrambling to recover the ball, or the dropped “Hail Mary pass,” McComb

reportedly offered brand exclusivity to Macy’s while also shopping the brand around to Kohl’s, JC Penney, and reportedly others. In September of 2009, Macy’s cut the line from 300 doors to 28, signaling the brand’s demise and the end of a 30 year relationship. Isaac Mizrahi currently designs a Liz Claiborne New York line exclusively for QVC, and presumably still continues to collect his salary. And the Board?

Stardust Memories Some stardust must have seeped into the LCI environs leading up to the Mizrahi chapter. Just months after McComb’s arrival in late 2006, following fourteen years at Johnson & Johnson, he must have had a post-Tylenol “fashionista” attack. In early 2007, LCI made a $12 million investment for a 50% ownership of the entity that owned the rights to the name and trademarks of designer Narcisco Rodriguez. Rodriguez, a two-time winner of the Council of Fashion Designers of America (CFDA) Womenswear Designer of the Year, was catapulted to fame when he designed the wedding dress of John Kennedy Jr.’s bride Carolyn Bessette. Regardless of Narcisco’s design capabilities and achievements, this was an “oil and water” mixture. Some experts wondered aloud if more than stardust got into McComb’s head. From the start, the relationship was impossible. As reported, one month after the acquisition, Mr. Rodriguez turned down Mr. McComb’s invitation to join

The JC Penney Lifeline Finally, and “a day late and a dollar short,” McComb does the exclusive deal with JC Penney, announced in October 2009. Although the deal was a good one, had he approached JC Penney before the Mizrahi chapter, the brand would have been worth a lot more, and would have carried greater strength from a negotiating perspective. As it turned out, JC Penney would only do the deal with an option to acquire the brand after five years, about which JC Penney CEO, Mike Ullman was quoted: “I think if they had their choice, they would probably not have agreed to sell it.” The deal also had LCI ceding total control of production and marketing. JC Penney has said that since its Fall 2010 launch in all 1100 stores, the Liz Claiborne and Claiborne brands have consistently been very strong performers. When the current five year contract is up, you can bet your bottom dollar that JC Penney will be exercising their option to buy the brand. Why? Because under their roof and for their core customer, the brand is correctly positioned, and the strategy, as they are currently executing it, is correct. And who knows? Maybe JC Penney can return the brand to its once iconic status and $2 billion annual volume. Why not? It is widely believed that some of their other private brands, like Arizona, do over a billion a year.

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As far as what’s left in its brand arsenal, I don’t see any with the capability of bringing the company back to anywhere near its $5 billion high mark. Of the $2.5 billion in sales for 2010, it’s estimated that the partnered brands, including royalties on Liz Claiborne at JC Penney, account for roughly 20%, or $500 million, while the four direct brands account for the remainder: Mexx, at about $700 million; Juicy Couture, $600 million; Lucky Brand, $500 million; and, Kate Spade, $200 million.

biggest piece of business, which it also was at an estimated $1.2 billion in sales when McComb arrived. This is a brand that sells not one penny’s worth of product in the U.S. It is managed and operated in Europe (and partially in Canada) where most of its revenue is generated, far from McComb and his experience base. As the biggest piece of business, it is potentially LCI’s biggest problem as well. The quality of its management, operations, distribution and brand positioning was questioned early on. Management and strategy have been re-shuffled several times since McComb took over. In May 2009, Thomas Grote, who headed Esprit’s international business for 15 years, was hired as CEO of Mexx. Although he has relevant and fairly successful experience in branded specialty retailing, if Mexx can’t be sold, or turned around, it could potentially sink the ship.

Is Kate the Next Liz?

Juicy Couture

While Kate Spade has experienced meteoric growth under designer Deborah Lloyd, doubling sales since she took over about three years ago, to about $185 million, it was from a relatively small base. Yet, one analyst cited the brand as the most valuable part of LCI’s total business, worth a potential acquisition price of $1 billion, assuming it hits predicted 2011 sales of $250 million. This is astounding, when one considers that some analysts estimate the entire LCI business to be worth only $1.23 billion.

Early on, Juicy Couture was a “hot” track suit brand in LA, catapulted by its appearance on the backsides of Madonna, Jennifer Lopez and others, then into the hands of LCI who capitalized its growth in overdrive by expanding the brand into a cornucopia of different products and rapidly increasing store count. Managing such explosive growth is difficult and requires experienced leadership. So, despite the challenges, McComb fired Juicy’s two founders, Pamela Skaist-Levy and Gela Nash-Taylor, the DNA of the brand’s “hotness,” and installed a new CEO in 2008. The new CEO was previously an executive at L’Oreal, the giant international beauty company. So, once again, a new chief takes over with absolutely no experience in the apparel business. And, this McComb “lack of experience” hiring pattern continues. One would think that while moving up the learning curve himself, he would want to have experienced direct reports. The CEO was replaced in 2010 by a former American Eagle Outfitters executive. At least this hire has apparel and retail experience, albeit not necessarily in the genre of the Juicy brand. The merchandising and design staff has also been moved to New York from its LA birthplace. The L’Oreal hire has subsequently been named EVP of Business

So, Mr. McComb was probably correct when he once commented that he’s considering changing the company’s name, saying: Liz Claiborne is “a misnomer strategically.” Which would certainly be the case if JC Penney were to own the brand.

What’s Left?

Regardless of Kate Spade’s success so far, however, I wouldn’t bet the ranch on its ever achieving the growth engine status of the once-revered Liz Claiborne mega-brand. In the meantime, McComb’s got his hands full trying to turn the other three direct brands around, having thrown new management into the mix and hoping new strategies will work. However, given everything that’s happened over the past three years, it’s no wonder there are more skeptics than believers.

Mexx It’s pretty scary that if the estimates are correct, Mexx, at $700 million, is LCI’s

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Development for LCI - responsible for opening 46 Juicy stores around the world.

Lucky Brand Not totally unlike Juicy, Lucky Brand had a strong positioning at its core with its classic American denim heritage. As it headed into the storm of 2008, the brand was moved away from its traditional roots into an edgier and more value-driven positioning, but business continued to decline. In the first half of 2009, the former head of the failing Mexx brand was appointed co-president of the Lucky Brand along with the then president. Both were to work with the founders of the brand to turn things around. By December of 2009, with the brand still unwinding, yet another CEO was appointed. And while his previous job had been Group President at WilliamsSonoma, prior to that role, he did have over 10 years of experience in specialty retailing at Coach, J. Crew, Banana Republic and the Gap.

What’s Next? The next and perhaps final chapter of this iconic company’s story is still playing out. However, when such an enormous and rapid decline in business occurs, one that cannot be pinned solely on the Great Recession, people want to know who was responsible and why. Unfortunately for Bill McComb, as for all CEOs, particularly those of public companies, the “buck” ultimately stops right at his desk. He will ultimately own the responsibility, whatever the outcome. Why the Liz Claiborne Board has been so passive and patient is anyone’s guess. Whether that patience continues will become evident before long. Although the stock price has risen a bit in recent months, shareholders will demand to know what is being done to stem the red ink, and the Board will need to address this in a swift and effective way, or find its days numbered. After all, the ‘buck’ that stops at their conference room table is the duty to shareholders. Hello? Anyone home?

Luxe Redux The High-End Customer Returns From Exile By Greg Ellis

As the economy begins to recover, high-end consumers are coming out of their self-imposed shopping hibernation, creating a bright outlook for the luxury segment. The luxury market is expected to remain strong, according to Kurt Salmon’s Luxury Spending Trajectory. The index, based on multiple measurements of consumer sentiment, is released monthly and provides insight into the following month’s revenue growth in the luxury sector. Of the luxury consumers surveyed — those in households with annual incomes of $150,000 or greater — 42% say they are confident or very confident in the economy, compared to 28% for lower-income consumers. Luxury consumers have a reason to be confident. High-income consumers appear to be recovering faster from the recession than lower-income consumers and are also less likely to be worried about losing their jobs. Recovery of the stock market, up 60% in the past two years, also boosts the luxury consumer’s confidence and spending power, as higher-income consumers are more likely to own stocks than those earning less. Luxury retailers and manufacturers are benefitting from this regained confidence. Since the bottom of the recession, public luxury company valuations have more than doubled compared to the valuations of their mainstream peers. These gains in valuation have been fueled by revenue growth, operational improvements, increased margins and reduced costs. More importantly, the street has rewarded luxury companies with a 20% increase in average EBITDA multiple vs. the lowest point of the recession. But even though the luxury forecast looks bright, luxury retailers are still battling for share. With more designers opening up boutiques, and with the increasing availability of luxury goods online, luxury retailers are increasingly trying to provide the highest quality and value to best serve their core customers and differentiate themselves from competitors. Increasingly, industry leaders say they must differentiate themselves by creating an emotional connection with consumers, building preemptive distribution that allows the retailer to serve and engage

Best Practices from Kurt Salmon

customers across different transaction channels and marketing interactions, and establishing control of their supply chain. To create an emotional connection with customers, leading retailers are developing a clear customer experience strategy that brings the value proposition to life for the target consumer. This strategy considers all possible interactions with consumers—both existing and potential—to create preemptive distribution. For example, Louis Vuitton stresses the importance of offering a refined experience and luxurious atmosphere to increase store productivity. The retailer’s stores are also designed to keep customers from feeling cramped. Several luxury retailers are enhancing their in-store customer experience with the help of new technology. Nordstrom, for example, is testing iPads at its bridal shops and special-occasion dress departments as a form of personal shopper that allows customers to see dress colors and styles that aren’t available in-store. Burberry has iPads on hand in some stores to let customers view its runway shows and place orders instantly. Developing these emotional connections will be even more important as increasing raw materials, overseas labor and energy costs continue to put pressure on margins in the coming months. Luxury retailers who have developed broad and deep connections with their consumers will be the most successful at passing on some of these cost increases to their customers. At the same time, focusing on efficiency and flexibility across all aspects of the retail supply chain will help control costs. Although the entire retail industry will likely experience some pressure from these cost increases, higher-end customers who frequent luxury retailers may be less dissuaded by price increases compared to lower- and middle-income consumers, who may be less able to make discretionary purchases or to pay more. Centered on the luxury experience, luxury brands are wellpositioned to weather the retail industry’s current challenges and chart a path for continued growth. Greg Ellis (greg.ellis@kurtsalmon.com) helps lead Kurt Salmon’s Customer Experience Practice. He has over 10 years of experience advising industry leaders. To learn more, visit www.kurtsalmon.com.

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BE CAREFUL WHAT YOU WISH FOR Amazon On a Level Playing Field By Robin Lewis

So, you big guys (and by that I mean you, Walmart, Target, Best Buy, Sears, Gap, Macy’s, Barnes & Noble, and a whole bunch of others) are all wishing, and trying to force your state legislators, to put Amazon on a “level playing field,” by rescinding a 1992 Supreme Court ruling stating that retailers have to collect sales taxes in a state only if they have a substantial physical presence in the state in the way of stores, offices, warehouses, etc. Thus, Amazon, by simply using small business “affiliates” to drive traffic to their site for a commission, has had an enormous pricing advantage in not having to collect and remit state sales taxes. However, the major brick and mortar competitors now argue that these affiliates, many of whom are third party retailers, do, in fact, qualify as providing Amazon a physical presence.

– and quietly settle into a level playing field? I don’t think so. While the retailers may think they’re getting the level field they wished for, what they are more likely to get is a playing field reconfigured by Amazon. As Amazon drops its 9,000 affiliates in Illinois to avoid having to collect and remit the sales tax, which it will likely do in other states when similar rules are enacted, it is difficult to imagine Mr. Bezos brushing it all off as he heads for a round of golf. Rather, I suspect that he and his “brainiac” inner circle are hatching a new paradigm that will intensify Amazon’s competitive advantage (a necessary move if it’s in danger of losing these sales tax battles in

When Mr. Fleming was asked what Walmart would think if Amazon started opening brick and mortar stores, he said: “I would think it would be one of Walmart’s biggest fears.” So, the pressure from the giant, taxpaying brick and mortar retailers, combined with dismal deficits in most states, has caused many states, hunting for tax dollars wherever they can find them, to view the Internet as the bullseye of the moment. Illinois, for one, has signed a law which would require Amazon to collect and remit tax on all sales made in the state. And, many others are looking at the same target and are about to follow suit, thereby wiping out a key element of Amazon’s pricing advantage. Well, it sure looks like the brick and mortar guys are going to get what they wish for: a level playing field. Or, are they? As the old saying goes, be careful what you wish for, you might get it. Do you think Amazon is going to lie down and cry “uncle”

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the future) and fundamentally change the playing field. In essence, they will simply up the distribution ante against their competitors. Having always held the winning hand in fast and free shipping, why not make it even faster by opening local distribution points across the country, essentially trying to beat Walmart at its own game? Without the sales tax issue preventing them from opening up physical locations, there’s no reason not to. Ironically, according to John Fleming, a former EVP at Walmart, “…it was Walmart who, beginning in the Seventies, pioneered and established the quintessential retail distribution machine.” Better yet, since Amazon’s consumer data base probably rivals Walmart’s by now, (which is bigger than the

Pentagon’s, according to Mr. Fleming), and therefore would know what a working mom in the northeast corner of Keokuk Iowa eats for breakfast and what brand of blue jeans she wears, why not open little Amazon shops with localized assortments of consumers’ preferences in those areas? When Mr. Fleming was asked what Walmart would think if Amazon started opening brick and mortar stores, he said: “I would think it would be one of Walmart’s biggest fears.” Furthermore, as he points out: “the future for all retailers is that their distribution must be on all platforms, and therefore be seamless for consumers.” So, just as the brick and mortar guys are making progress with their e-commerce initiatives, so too, must e-players consider connecting with consumers “on the ground,” so to speak. Fleming adds the perspective that e-tailers such as Amazon, with its huge data base, will be able to precisely identify consumers geographically, and therefore, will know where best to locate their stores. This comes at a time when the big-boxers, like Walmart, are now scrambling for small store strategies and some flexibility to move closer to the consumer. Think about a little Amazon in every neighborhood with everything you want, or at least a screen to tap into if it’s not physically in stock, and a distribution point around the corner to deliver it tomorrow, if not later today. No wonder Walmart is accelerating its small store strategy. And, if it is one of Walmart’s biggest fears, I dare say, all you other brick and mortar guys are well advised to think long and hard about what you are wishing for.

Now You See It, Now You Donâ&#x20AC;&#x2122;t The Increasing Allure of the Pop-Up Store By Andrew Mantis

Consumer Insights from MasterCard Advisors

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Last November, Hermes did it in West London. This spring, Apple did it in Austin. And in October, Brides did it in downtown Manhattan. That’s right, they opened pop-up stores, the temporary retail settings that once were almost synonymous with cheap Halloween costumes. In fact, pop-up stores are a growing phenomenon across the spectrum, from eBay to Liberty of London, and from mass-market retailers like Target to fashion labels such as Kate Spade. Last holiday season Toys ‘R’ Us had over six times as many pop-up stores as in 2009; their holiday pop-up stores alone required 10,000 hires. And their popularity isn’t limited to the big name chains. They can be as important to small independent businesses without the capital for a site of their own as to major retailers, looking to explore a new market or meet the demands of a seasonal rush. Indeed, 2010 turned out to be a very active year for pop-ups. The range was broad, from the big brands and mainstream retailers to more specialized settings. They’re particularly compelling

significantly cutting the lead time needed to build buzz. Taking advantage of the relatively low-risk environment to try the unusual, pop-up stores can be used at once to build loyalty with new customers, and to transform the whole customer experience. For example, a shopper who had one of the free facials at a Shiseido pop-up store last November, where nothing was for sale, walked away with the kind of associations that no amount of advertising can buy. And with Liberty of London teaming up with Target in a pop-up in New York’s Bryant Park, it took a mere two days for customers to buy out all the goods, before they actually got to their planned destination, the Target stores themselves. But if pop-up stores offer unique opportunities, the extraordinarily rapid time frame in which they operate places unique demands on the merchant. It’s not enough just to find an affordable and high-traffic location; it has to be where the target market is and available during the peak time for its sector. The offerings also need to be precisely tailored to that

But if pop-up stores offer unique opportunities, the extraordinarily rapid time frame in which they operate places unique demands on the merchant. today because of the way they respond to two major developments in the current retail landscape. First, of course, is the real estate market. This past holiday season had the highest retail vacancy rates in a decade – in malls, in empty stores, and even in a corner of an existing store or business if the synergy is right. Already there are websites that function as “matchmakers” between landlords with excess space and retailers looking for a short-term rental. Beyond that is the transformation of the human landscape, that is, the customer base. For one, today’s shoppers no longer have the kind of brand loyalty that large stores have always counted on. Further, they can be mobilized quickly through electronic messaging and social media, Issue Six 2011

audience. Finally, those shoppers have to be identified and reached with a compelling message. And all of this has to be done at a speed that few retailers are accustomed to. In working with a number of merchants, we’ve found that timely, granular information in three key areas can make the crucial difference in a pop-up store’s success:

Location, location, location. A detailed understanding of both the population and current sales in an existing area is as important to the prospective operator as a terrain map is to an army. To arrive at a complete picture involves marrying sales results about area stores with transaction data identifying the kind

of customers doing the shopping. Who are they? What else do they buy? With this in hand, it is possible to determine how much room there is for your particular offering.

Timing is (almost) everything. Even without a crystal ball, the merchant will need to have a sense of when the demand will be about to grow, so that he can be out in front of the shopper before the established competition. It doesn’t take much business savvy to know when the holiday shopping season is, or that the best time to sell candy is the second week in February. But a merchant who wants to get beyond the clichés and maximize the value of a short-term presentation needs as precise a forecast as possible of the sales cycle in the specific sector.

Hitting the target. The merchant has no time to wait to build a customer base – you need to get shoppers to your store instantaneously. That means being able to identify the most likely prospects and get an offer to them – by email, by instant message, by Twitter, by Facebook – right away. Finally, once the “circus has left town,” a retailer needs to evaluate the store’s performance. Perhaps to see if a permanent store would be sustainable, or to assess the success of a new product line, or marketing technique. Or perhaps to plan for the following year or shopping season. But a store’s results on their own aren’t sufficient to judge success. They need to be benchmarked against other retailers in that sector and geographical area. The liberation of pop-up stores from the Halloween reservation is a very exciting development in retail, and merchants are only beginning to discover the ways they can be used. But however they fit into an overall strategy, data – for location, for customers, for benchmarking – will be the key to their success. Andrew Mantis (Andrew_ Mantis@mastercard.com) is Group Head Information Services, Merchants at MasterCard Advisors.

Q&A With Hal Reiter

Reflections from The Corner Office from Herbert Mines Associates

Herbert Mines Associates recently conducted a leadership survey of 135 retail Presidents and CEOs about critical issues facing the industry. Hal Reiter, Chairman and CEO of Herbert Mines Associates, tells us that there were a number of intriguing findings including the challenge of retailers needing to tap young talent to bring in the most innovative minds for the future growth of the industry.

Q One of the findings was that 74% of

the presidents and CEOs surveyed said they will search for talent from outside the industry to fill leadership positions in the next five years. Did this answer surprise you?

A Retail leaders are some of the most creative, innovative, and colorful leaders in business today. But the industry hasnâ&#x20AC;&#x2122;t had a lot of success in bringing in outsiders to lead companies primarily because of the complexity of the retail business and the importance of understanding how critical the understanding of product merchandising and marketing is to success.

For top leaders, there is a greater likelihood of success if their roots are in retail, but there are some areas like finance and human resources where professionals can more easily transition from outside industry. We need to figure out what characteristics make the best retail leaders and determine where we can find people with these characteristics. As an industry, we must groom, nurture and retain these professionals effectively so that when the top positions become available, they are ready to step up to the plate.

Q Whatâ&#x20AC;&#x2122;s keeping presidents and CEOs up at night?

A Without a doubt, itâ&#x20AC;&#x2122;s the care and feeding, if you

will, of young talent. Retailers need to be constantly recruiting talented young people who are plugged in and able to keep up with the ever-changing digital world that is moving at warp speed. An overwhelming number of the survey respondents (90%) said that they believe the industry is not attracting the best and brightest from college campuses. The senior retail leaders need to identify, recruit, hire and retain this younger talent. It will take skill to find them and keep them. They need to change the perception that a retail career is folding sweaters at the Gap and capitalize on the exciting convergence of social media and retailing and the emergence of mobile commerce that is just beginning.

Q Understanding new ways to connect with

and market to consumers was seen as one of the biggest challenges facing the retail industry in developing leaders. What are the ways that retail leaders are addressing this challenge?

A The major focus for retailers right now is figuring out how to give consumers exactly what they want through customization. And if you look at examples of great retailers, they have the know-how to attract and entertain

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the elusive customer. Williams-Sonoma was one of the first retailers to make big changes. Enthralled by the store layout, display, and cooking demonstrations, consumers responded and sales went through the roof.

Q What is the biggest conundrum that retailers face in retaining talent in the coming years?

A The gold standard for career development continues

to be the executive training programs. However, these programs have a high attrition rate, so retail companies need to create a more effective work environment in which employees can achieve, be promoted and feel worthwhile. It is very expensive to lose recruits, and hire talent. The survey found that the number one retention tool for top talent was career development and advancement programs. In other words, it isn’t about the money or stock options. The key to grooming and growing internal talent is the exact same thing as retaining top talent—nurturing employees all the way through careers and not just at the very beginning.

Q The survey revealed that 73% of the

respondents don’t have a formal CEO succession plan in place. Why is that?

A Retailers aren’t enormous companies like GE or Pepsi with three or four candidates in different geographic regions running a line of business with an independent P&L. Retail leaders work down the hall from one another, and it isn’t great for the company culture to have colleagues vying against each other for the corner office. Also, a CEO is typically resistant because he or she doesn’t want a potential successor hovering, waiting in the wings. It is a Catch-22, where the board wants a succession plan, but the CEO usually doesn’t. It is an industry-wide problem that hasn’t been addressed yet, but one that really needs focus and attention. Harold D. Reiter is the Chairman and CEO of Herbert Mines Associates, the leading executive search firm specializing in C-Suite, senior level and corporate board placement for fashion, retail, e-commerce, food, chain restaurant and consumer product companies. Hal and his colleagues at the firm have secured top-tier executives for an impressive roster of blue chip clients including Barneys New York, Wal-Mart, Avon, Macy’s, Starbucks, Rue-La-La, Chico’s and Pier 1.

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Environmentally Unconscious By Warren Shoulberg

Kermit was wrong: It is, in fact, easy being green. The hard part is getting anybody to pay for it. The home furnishings business, like a lot of consumer product industries, has struggled with how to make its products more environmentally friendly. Without any widely accepted accredited monitoring organization to set standards or validate certification, the consumer has nowhere to turn for information. But even if she did, it wouldn’t matter: The home furnishings customer, no matter how noble her intentions or how politically correct her ideals, will not pay one penny more for a green product.

I think that’s what it does (Chemistry was never my strongest subject.) When it was first introduced more than a decade ago, the prices of products with Microban (and other competing treatments) were a few points higher than similar items without it. The Microban people may remember it otherwise, but plain and simple, the consumer wasn’t buying it…literally. She appreciated the product benefit – even if she didn’t quite get what it was all about either – but she wasn’t going to pay anything extra to get it. But the germ was out of the bag – so to speak – and there was no going back. Anti-microbial treatments became the de facto standard and all things being equal – and they were – the consumer chose an item with the treatment over one without. And the vendors and retailers pretty much absorbed the added cost.

The home business is not one that takes kindly to innovation or technology. The people who make home textiles, like bed and bath products, will tell you that the greatest technological advancement in the history of the industry was the invention of the fitted sheet. And the furniture industry is no better. In a manufacturing process cursed by a huge labor factor, the use of the staple gun to attach upholstery fabrics to a sofa frame was heralded as a huge breakthrough. So innovation is not at home in the home business. That’s why the industry’s efforts to embrace eco-friendly technology and techniques have been surprisingly aggressive…and unsurprisingly unsuccessful. Take the case of Microban. This is a proprietary anti-microbial process that is used on fabric-based products like kitchen towels and mattress pads to make them more resistant to germs and other nasty little things…well,

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More recent efforts to go green have been no more successful. In soft home products, we have seen sheets and towels made without chemical treatments and washes. Somewhat illogically, they have cost more than regular products, even though they required less in the way of raw materials and fewer manufacturing steps. Needless to say, they have not sold well. Alternative fabrics, made with such renewable fibers as bamboo, Modal™ and even rayon, have made small inroads but again because they had a higher price, they have not been widely accepted. In fact, the fastest growing fiber in the soft home business these days is the very tech-sounding microfiber, which turns out to be homespeak for good old polyester, about as ungreen as you can get. The furniture industry has tried to use sustainability as its green card…with tried being the operative world. Most furniture shoppers don’t realize that sometimes the frame of their couch is not even made of wood, but plastic. Nor do they know that the wood grain on lower priced dressers and tables is often printed on paper which is then applied to non-descript boards made of compressed wood scraps. In other words, this is a pretty clueless shopper. So trying to convince her to spend more on a piece for her bedroom or living room made from renewable or sustainable wood is pretty much an exercise in furniture futility. It just ain’t gonna happen. On the housewares side of the house, retailers and vendors have pretty much given up. If there’s a way to make a toaster oven earth friendly, it sure hasn’t reached the guys at Toastmaster, et al. Whatever it would take to make a small kitchen appliance more energy efficient would so increase the cost – and would be so negligible in impact – that nobody’s even bothered to give it a shot. The big appliance boys are a different story, but they are pretty much victims of that same old Microban syndrome. Whirlpool, Electrolux and General Electric – the Big Three of big appliances like washing machines and refrigerators –

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have done a pretty good job of making their products more economical users of power. (Albeit, it was at the mandatory behest of the federal government, but hey, we can’t quibble about such details.)

The home furnishings customer, no matter how noble her intentions or how politically correct her ideals, will not pay one penny more for a green product. When the gas-guzzler rebates went into effect a year or two ago, a similar program was put into place for major appliances and consumers did what they were supposed to do, buying lots of replacements. And then the minute the program ended, so too did the shopping spree. Gee, what a shock. So, don’t look to the home business to be in the forefront of the green movement. Ever since avocado kitchens went way, the color has never really agreed with home shoppers, who remain nothing if not consistent: They just won’t part with the green to go green. Warren Shoulberg is editorial director for several Sandow Media home furnishings business publications and is working on his next book, Stupid Business.

All I Ever Wanted Was Green Skin By Dana Wood

To semi-paraphrase Gordon Gekko, when it comes to an ever broader swath of the skincare market, green is good. At least that’s the assumption an industry-watcher could make when scanning the 2011 list of finalists for the much-coveted Cosmetic Executive Women (CEW) Beauty

proponent of sustainability in scent creation, that approached CEW with the idea. As sponsor of the new award, Givaudan in turn outsourced the vetting to The Natural Step, a non-profit “founded with the vision of creating a sustainable society.” Making the shortlist: Teensy tiny

Sure, we all want to be more green especially when it comes to what we’re slathering on our scalp, lids and lips. But... natural products that perform as well as our favorite standby are hard to come by. Insider’s Choice Awards. In category after category, products featuring a preponderance of natural ingredients were in it to win it when the august governing body would reveal all during its annual power lunch at New York’s Waldorf Astoria in late May. Ranging from up and comers like Yes To and Korres to behemoths like Origins and Burt’s Bees, the green-leaners would have a prime seat at the table. And as further indication that the natural faction is here to stay, CEW even added a new prize this year, the Eco Beauty Award. “It’s a response to the growing importance to consumers of products’ environmental impact on the planet,” says CEW president Carlotta Jacobson, noting that it was Givaudan, the world’s leading fragrance house and a major

players with rock-solid eco cred, including Amala and Vapour Organic Beauty, as well as big guns Aveda and Body Shop. Having been on the front lines of the business for decades, first on the editorial side, at Harper’s Bazaar, and now in her high-profile role at CEW, Jacobson can spot an industry shift at 50 paces. “We’re seeing more and more beauty brands focus on sustainability to offset environmental impact,” she says. “And our hope is that recognizing those companies and products will encourage the industry to take steps towards sustainability.” Yet while certainly laudable, sustainability in and of itself isn’t enough to make the cash register ring. Nor, necessarily, is the “green and natural is better for your skin than harsh

chemicals” argument. Especially not in this still-beleaguered economy. According to an Earth Day 2011 piece in The New York Times, spending even an extra 50 cents on, say, the environmentally friendly version of Fantastik, holds far less appeal among American consumers when money is tight. Green skincare is doubly challenged. Not only does it sometimes cost a bit more than its chemical-laden cousins, it’s also saddled with a whopper of a perception problem: That ingredients derived from plants simply aren’t as effective as the synthetic numbers cooked up in a lab. Witness a multi-page eco beauty story in this April’s issue of InStyle magazine. Headlined “Does It Really Work?: Green Edition,” the splashy exposé covered the waterfront, from aluminum-free deodorant to anti-aging serums, in a decidedly skeptical fashion. “Sure, we all want to be more green – especially when it comes to what we’re slathering on our scalp, lids and lips,” writes the reporter. “But despite the enormous boost in what’s available (the eco beauty category is up by 11 percent since 2007), natural products that perform as well as our favorite standbys are hard to come by.” No doubt media chatter like that is one reason why Mary Beth Peterson, the new U.S. president of Jurlique - a finalist for the CEW Eco Beauty Award – is attempting to shift the brand’s marketing message from hyper-natural to ultra-effective. “The U.S. consumer

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is more interested in how the product works,” Peterson said recently. “The opportunity is to break through in that regard and draw from the technology.” Still, at least one big natural player – Burt’s Bees – is having its cake and eating it, too. Once a niche brand with a small cult following, it was acquired by the Clorox Company in 2008 for a staggering $913 million, and now commands major space at mass retail, as well as a hefty share of mind among beauty junkies – eco-conscious and otherwise. And according to Celeste Lutrario, vice president of R&D for the company, that mainstream success has everything to do with improved product efficacy. “Natural technology has improved by leaps and bounds in the last five years,” says Lutrario. “Natural products can now fairly compete with synthetics in both aesthetics and performance, and that’s because they actually have one benefit that synthetic products do not: They’re filled with nutritive ingredients. Every plant oil, nut extract and fruit contains nutrients - vitamins, minerals, essential fatty acids, amino acids, anti-oxidants - that are required to keep the skin functioning and healthy. Instead of a chemicalbased primary formula that exists only to effect a certain reaction on the skin, or a specific look, feel and scent, natural formulas have a base of nutrient-rich botanicals.” Clearly green brands that have the R&D muscle (and budget) to overcome formula challenges are at a distinct advantage. “We’ve been able to deliver aesthetics that consumers expect,” notes Lutrario, “such as foaming in cleansers and rapid absorption in creams and lotions, that are similar to synthetics but gentler in most cases.” Not that every eco-minded beauty

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brand needs Clorox-level corporate backing to find success. Take Tarte Cosmetics, for example, a muchbeloved indie line that has stayed true to its earth-friendly, no-harshchemicals mandate from the get-go. Under the banner of “High-Performance Naturals,” it offers an array of popular beautifiers, from its famous Cheek Stain to a cache of products made with clay sourced from the Amazon rain forest. “Since I started the company out of my one-room, rent-controlled apartment over 10 years ago, I’ve always cared about the ingredients in my formulas,” says Tarte founder and CEO Maureen Kelly. “It was more of a personal preference than a business decision at the time. I really wanted to wear natural makeup that was good for my skin, but also efficacious.” Since that late-1990s launch, Kelly has become much more determined to spin her own eco-mindedness into solid profits, and to telegraph her core message – that beauty products can be both green and really, really good – in a more concise, direct manner. “In 2007, we underwent

a re-branding and updated the information on our packaging, displays and website to really reflect our natural position,” she says. “It was our responsibility to educate the consumer about our mission.” And at the end of the day, education is - and will continue to be the eco-friendly fuel that powers the green-beauty engine. Knowing that a plant-based miracle cream is at least nearly as potent as the option laced with retinol or beta hydroxy acid, and is whipped-up with fewer of the more irksome synthetic ingredients, will help women structure their budgets with more confidence. Ultimately, it’s about choice. Green is good, especially when it’s part of the bigger beauty picture. Dana Wood has served as Beauty Director for both W and Cookie magazines and has written for numerous national publications including Glamour, InStyle, Harper’s Bazaar and Self. She also spent several years in the Luxury Products division of L’Oreal as Assistant Vice President, Strategic Development. Her first book, Momover: The New Mom’s Guide to Getting It Back Together, was published in 2010 by Adams Media.

The Sky’s the Limit By Paco Underhill

In the spring of 1976, as a young researcher working for a small nonprofit organization, I was invited to a lunch discussion at the Wenner Gren Foundation for Anthropological Research, which occupied an elegant town house on New York’s Upper East Side, around the corner from the Frick Museum. The elegant Swedish institution, with roots in the Electrolux fortune, had been a sponsor of research, conferences and retreats for decades. The centerpiece of the discussion was an on-stage conversation between Jack Fruin, the head engineer for the Port Authority of New York and New Jersey, who was in the middle of designing and building Newark Airport, and Irving Goffman, a distinguished social scientist, author, and University of Pennsylvania professor. The conversation was about the design of public spaces. Jack was asking Irving for guidance; his design teams were making decisions on the layout of waiting areas. He had questions about the impact of wait times and what criteria he should be using to buy furniture for public seating. He asked for thoughts on how the impact of future technology might be anticipated in the design of checkin stations. Irving spent the entire lunch backing up. He didn’t know; yes, it was a researchable topic, interesting question, but no clear answers. I remember thinking

how much more fun and satisfying it would be to work for Jack than to study with Irving. That day was a punctuation point in my career. Early airports were conceived as variations on the passenger ocean liner terminal. They were meant to be glamorous and exciting. The first commercial airports had soaring ceilings and massive expanses of glass. As the cost of air travel declined in the 1970s, and a broad cross-section of our population was introduced to airports, the terminal, once a dramatic, not unpleasant place, was reduced to bus station levels of madness. In 2011, there is no question that commercial air travel is in a bad state of disrepair. Thanks to 9/11, flying is a very unpleasant affair. Most airports resemble cold war Berlin, complete with Checkpoint Charlies and unsmiling TSA workers. Add to these security checkpoints, capricious weather and mechanical problems, we never know how long a trip is going to take. Earlier this year I arrived at Orlando Airport at 11 a.m. for a noon flight to Newark and, five cancelled flights later, climbed on a plane after midnight and arrived home at three in the morning. We “road warriors” all have hair-raising stories of being trapped inside airports with hours to kill. Is it any surprise that someone thought retail was the answer?

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The link between transportation and shopping has deep roots in human history. Markets have historically been located at physical crossroads. Walk the Grand Bazaar in Istanbul where Europe meets Asia, and you see the genetic stamp of the world in the faces of shoppers. Why should airports as the crossroad ports of the world be any different? Airport operators have been caught in a dilemma, however. Is airport retail for the entertainment, convenience, and pleasure of the traveler, or is it another source of income for the quasi-public entities that run those facilities? Travelers are a captive audience, as anyone who has had to pay $3.50 for that cold small bottle of purified water that costs $1.00 in a convenience store on the Interstate would admit. At Heathrow and Gatwick, there are signs that promote airport retailing with “High Street” (“Main Street” to us) pricing, thus trying to combat the clear perception that in shopping at the airport you are paying a premium. However, a bottle of my favorite single malt scotch was cheaper at my liquor store on the Jersey side of the Holland Tunnel than it was at the Duty Free Store at Heathrow. Airport retail has some built-in challenges. First, shoppers are almost invariably encumbered with rolling luggage and backpacks, making the interaction with merchandise

like Charles De Gaulle in Paris and Terminal C in Newark, are planning retail into their renovation efforts. At the airport, you can only sell what people can carry, which is why watches, jewelry and fragrance work so well. The Duty Free operation in Brazil has overcome this cliché; there, you have online order access, and can pick up at the airport’s Duty Free either entering or leaving the country. I’ve wondered when someone is going to figure out that the airport might be a perfect place to reinvent that old twentieth-century entity: the catalog showroom. Look, see, and touch, and get it delivered at home.

Is airport retail for the entertainment, convenience, and pleasure of the traveler, or is it another source of income for the quasi-publicentities that run those facilities? clumsier and the transaction process slower. You can only fit two-thirds of the number of people comfortably in the same sized stores as in your local shopping mall. In general, most airports suffer when retrofitted with retail because the basic design of terminals constructed throughout the twentieth century was about managing airplanes relative to square footage and construction costs, rather than the functionality of retail. You see the difference in the twenty-first century airports like Terminal Five at Heathrow, or better yet in Dubai, where retail was a central function it its planning. However, many more,

Issue Six 2011

Three years ago I was part of the team working on the privatization of the retail shopping malls that are built into the Tokyo metro system. You can buy flowers, fashion, fancy cakes and confections, and dine in restaurants. Better yet, you can use your Metro Card to swipe and pay for small purchases on the run. As was carefully explained to me, the retail rents are a subsidy for transit costs. It made me think about my New York City subway system, where riders are screaming about fare increases but underground retail purchases are limited to candy, magazines and soft-core porn.

Paco Underhill is the CEO of Envirosell (www.envirosell.com), a behavioral research and consultancy firm focused on commercial environments.

Quotes to remember ON “THE DONALD’S” INTENT TO RUN FOR PRESIDENT “ Donald is as serious as a heart attack.” –Tony Fabrizio, Republican pollster GOLDMAN SACHS’S CEO LLOYD BLANKFEIN EXPLAINS “MARKET-MAKING” As a witness to the Raj Rajaratnam trial in Manhattan’s federal courtroom, Mr. Blankfein responded to a question about the bank’s market-making business: “We’re like a middleman…it’s a service we do for the world.” He quickly changed “the world” to “our clients.” AND FURTHER, MR. BLANKFEIN, NOT ONE TO PUT A “SPIN” ON THINGS When asked at the same trial how the bank’s performance was in October 2008, he answered: “We were losing money. We generally made money.” I BELIEVE THAT IS WHAT ONE WOULD CALL AN UNDERSTATEMENT DO PEOPLE TRUST WASHINGTON WILL REDUCE THE DEFICIT TWO YEARS FROM NOW? According to Fortune columnist Geoff Colvin, “Putting off the pain until tomorrow never works, because in Washington, tomorrow never comes.” A FEW SIMPLE STEPS FOR WALL STREET TO WIN BACK THE SMALL INVESTOR Stanley Bing, another Fortune columnist: • Show them the money. Wall Street should institute a program in which investors can drop by and see their hard-earned cash being turned into incremental assets that feed and water thousands of investment bankers, brokers, and support staff. • Hold pancake breakfasts once a quarter. This works well for volunteer fire departments. People love pancakes, particularly with bacon. Put folks in that kind of expansive mood, and then hit them with all the opportunities that lie in store for those with a little bit of green and a good strategy. • Advertise. It works for every other product nobody needs. • Give away a “toaster.” I use quote marks because nobody really wants a toaster, but the small investor does need little items that might lure him to the trading desk: iphones, cheese logs, microwaves? GOLFERS, IT’S THAT TIME AGAIN Golfer: “Think I’m going to drown myself in the lake.” Caddy: “Think you can keep your head down that long?”

CEO, Editorial Director Robin Lewis COO, Editor Judith A. Russell Art Directors Jodi Kostelnik Steffi Sauer

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