The Robin Report - Issue 5 - April 2011 by The Robin Report

Issue Five 2011

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Q&A with Jane Elfers We had the opportunity to talk with Jane Elfers, CEO of The Children’s Place, the number one pure-play children’s specialty apparel retailer. Here’s what she had to say about her first year at the company, the differences between the specialty and department store businesses, and the challenges of selling to some of the most value-conscious customers on the planet: parents of small children.

Dear Reader

SIZE MATTERS

Pardon me, but I just can’t

By Robin Lewis

help myself. I seem to have an In this case I’m stuck on small format retailing, including “moms and pops,” as a winning model in the over-stored and -stuffed 21st Century. Again, this is due to the format’s “smallness,” which affords it easier physical access to the consumer, across the street in their neighborhoods. It’s my preemptive distribution “thing” again: the necessity to get to the consumer first,

After two years of declining domestic same store sales, Walmart is finally getting it. However, it might be too late. What they finally ‘got’ is a small store strategy, that they now understand they must accelerate. The stores will be called Walmart Express, in a 15,000 square foot format, 15% of its average store size. But, it isn’t just the ‘smallness’ idea. The really big idea is what I rail about constantly: it’s really about preemptive distribution. To put it in laymen’s terms, if a retailer wants to win a consumer away from a competitor, it’s imperative that they provide the consumer with convenient and instantaneous access (including the physical store). They must get to the consumer first, faster and more often than the hundreds of equally compelling competitors.

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Edgar Allan Poe-like fixation.

Small is In

Q. Jane, you’ve been at the helm of Children’s Place for a year which has been a transitional one for the economy. Can you give us some idea of how the company has been doing through all of this? Do you think the recession is over, and if so, what will the recovery be like? What do you think about 2011 and beyond? A. The Children’s Place made significant progress in 2010. We grew top-line sales, and expanded market share through the opening of 67 new stores, primarily in value centers. We strengthened the management team and made great progress on our five key growth initiatives; improving the merchandise, accelerating new store growth, optimizing inventory management, sharpening the marketing message, and driving e-commerce growth. As we approach 2011, we know that our customers have been affected by the difficult economy and we anticipate they will continue to be cautious in their spending. However, we believe we are well positioned to continue to grow market share. > Continued on Page 2

The

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

• Dear Reader ……....................1 • SIZE MATTERS .............………… 1 Robin Lewis

• Q&A with JANE ELFERS ...…… 1 • LET THE DEALS BEGIN ........…... 6 Robin Lewis

• M&A MUSINGS ….........……… 7 Judith Russell

• Easing the Margin Squeeze ..................……….. 10 John B. R. Long III, Kurt Salmon

•B est and Brightest Need Apply ...........................12 Kristin Dennehy, Herbert Mines Associates

• Q&A with Jan Hatzius .......14 • T aking Care of (Small) Business......…................…...17 Paco Underhill

• Beauty Be-Tween The Lines ..............................18 Dana Wood

• School Dazed and Confused ….............……….20 Warren Shoulberg

• Little Bobcars ..........……….22 Robin Lewis

• quotes to remember…….. 24

Dear ReadeR > Continued from page 1 faster and more often than the hordes of equally compelling competitors, or you lose. And, while everybody says, “…oh yeah, I get it,” most are thinking about e-commerce. Well, while I most certainly understand that e-commerce is enormous, and the fastest growing retail preemptor, I’m finding it very difficult to get my senior retail executive readers to understand that the bricks and mortar/physical aspect of the total preemptive distribution strategy is just as important. In this issue, the article Size Matters: Small is In does give credit to some of the larger players, like Walmart, Home Depot, Best Buy, Office Depot, Staples, Target, CVS and Walgreen’s, as beginning to get it. And, I do believe Walmart opened their eyes a bit wider upon realizing they were losing enormous share to the dollar stores who are blowing out their small, neighborhood stores across the country. In the department store sector, as I’ve said many times, Kohl’s led the small, convenient, neighborhood strategy way before I think they even realized it, back in the early 90’s. JCPenney picked up on the wisdom of that preemptive strategy and now has its own small store strategy. Bloomingdale’s does as well, and I wonder when their parent Macy’s will opt in. Their localization strategy certainly begs for it. And, by the way, while this small store strategy is a necessity to continue winning share of a no-growth pie, the big traditional players also must understand that the other preemptive formats such as branded specialty chains, e- and m-commerce, TV, kiosks, pop-ups, food carts, in-flight shopping, door-to-door, living room selling parties, tractor-trailer tour trucks, and probably a dozen others I’ve missed,

are not sitting still. They will continue to evolve and create. Evermore. Also, if this scenario isn’t enough to give you an Edgar Allan Poe moment, what about new preemptive retail formats spewing forth, such as Little BobCars: Big New Preemptor? Finally, to break through my obsession, I did get weigh in on what seems to be the return to private equity and M&A deal making, however, not without the rather cynical cautionary note that I do hope everybody else is right and I’m wrong as the last “double-dipper” standing, who still believes another economic correction looms. Regardless, read Let The Deals Begin Or: Don’t Touch That Dial. An accompanying article by our own Judy Russell zeroes in on some specific potential targets and some color around why. And, please continue to go to our website and browse through all the additional wonders we have going on: you will enjoy video interviews with Steve Sadove, CEO Saks Inc., and Neil Cole, CEO Iconix. If you’re new to The Robin Report, please indulge yourself in past articles, which are as relevant today as when they were written. 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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small is in > Continued from Page 1 A big part of Walmart’s share loss was to the rapidly expanding dollar stores, such as those operated by Dollar General, Family Dollar and others, now numbering about 15,000 across the U.S. (vs. about 4,300 Walmart and Sam’s Clubs). Another 1,000 (10 -20,000 square foot) dollar stores are projected to open this year, vs. 30-40 small Walmart stores. Primarily competing in paper products, detergents, household cleaners, health and beauty aids, packaged foods and beverages, the dollar stores stole many of Walmart’s core consumers who,

Anyway, Walmart better put the pedal to the metal on its small store and preemptive distribution initiatives. If not, they risk preemption (no pun intended) by more of their competitors who are also ‘getting it.’

Just the Beginning Other “big box” retailers who have been in the pursuit of ‘small’: Home Depot launched its ‘lite’ urban store in the ‘90’s; Best Buy is opening 150 small Best Buy Mobile stores, focusing on smartphones; Staples is planning on accelerating the rollout of a 4,000 square foot model; Target has a small suburban and urban neighborhood model; Office Depot is repositioning itself with a 5,000 square foot store and touting itself as a convenience retailer; and, of course CVS and Walgreen’s are now fighting for every corner of every block in America. And, there are many others.

...the ‘share war’ battles among the Goliaths are now going to spread like guerilla warfare into the small towns and suburbs across the country. particularly during the recession, did not want to spend gas dollars or time to drive to Walmart. Furthermore, living from paycheck to paycheck, consumers opted to buy small quantities more frequently, also enabled by the proximity of a neighborhood dollar store. A big question for Walmart is: are they too late? Is bigness so ingrained in their strategic ‘mindset’ that they cannot execute a ‘small’ strategy? More importantly, do they really understand the necessity of a preemptive distribution strategy, which, along with small neighborhood stores, also includes a superior integration of all online and offline distribution platforms as well as the use of information and logistics technologies to ‘localize’ product mix (which is a must for small store success)? Adding to Walmart’s declining sales were the share of Target customers who, after trading down to Walmart during the recession, are now returning ‘home,’ so to speak, and the revenue loss attributed to a now highly criticized merchandising overhaul (including elimination of brands, narrowing of lines and a “rollback” pricing strategy). The resulting wider aisles and trimmer looking stores were not enough to offset consumers leaving due to lack of selection.

Issue Five 2011

Also, as predicted in my co-authored book with Michael Dart, The New Rules of Retail, the major department stores will also launch small, off-mall, neighborhood stores, such as JCPenney did a few years ago and will likely accelerate as the recovery continues. Further, we predict the department stores will eventually roll out branded specialty chains carrying their private label nameplates such as INC, Arizona, Stafford, and so forth. Finally, and another Walmart nightmare, we believe Amazon will develop and launch small neighborhood shops as showrooms, featuring localized merchandise based on consumer preferences in finitely defined neighborhoods, as mined from their Pentagon-sized consumer data base. In fact, one former Walmart executive admitted this scenario was one of Walmart’s greatest fears.

But Goliaths Beware: The Specialists Own Their Turf

So, the ‘share war’ battles among the Goliaths are now going to spread like guerilla warfare into the small towns and suburbs across the country. Well, not so fast, big guys! You think with your smaller units, you can march into these neighborhoods and summarily dismiss all of the independent or small chain specialists who have, over the years, won the hearts and minds of their local customers? Remember David slaying Goliath? So, think long and hard about it. Here are their advantages, why they own their turf, and why they will not easily be dislodged (again, right out of our book): • They are solid brands in their own right, although local ones - intimate boutiques or small shops with their own personas that, over time, have developed an emotional connection with their neighbors. •T hey carry all of the things their ‘friends’ love, which they learned over time through friendly chats in the store or cheering for local sports teams with them vs. mined from a database. •T he word ‘service’ means nothing in a happy family. Do you treat a member of your family with ‘good service’? No. You treat them with love. •T he shopping experience, including the ‘family’ feeling, will have been created just as product selection evolved (through living with their customer), all of it neurologically connecting with their neighbors. •A nd, finally, they have total control over their business and its ‘value chain,’ without which they could not have achieved all of the above. So, the final most important lesson for all you ‘big boxers’ is that simply developing preemptive distribution strategies, making your big box small, and moving it into a neighborhood, will not win. If you don’t strategize how to do all of the above, or at least a modicum of it, the ‘Davids’ out there will kill you.

Q&A with Jane Elfers > Continued from Page 1 Q. Children’s Place, with almost 1000 stores, is the largest children’s apparel specialty retailer, so you’ve no doubt been a barometer of sorts. How has the overall children’s apparel market fared relative to other apparel categories in the recession? Has the competitive environment changed? How big a role has being a value retailer played? A. Although children’s apparel has underperformed the adult apparel market over the past two years because of declining prices, unit growth has held up for a couple of reasons. First, there was an increase in the US birth rate in the early to mid 2000s, so the population has increased. Second, children’s apparel is a less discretionary purchase than adult apparel. Children outgrow last year’s clothes so parents need to replace most of their children’s clothing each season. However, consumers are trading down to value retailers and buying more merchandise on sale. As I said earlier, we have expanded our market share due to our value positioning. However, the increased promotional activity has resulted in a decline in our gross margin over the last couple of years. A number of the initiatives we have underway are focused on expanding gross margin going forward. Q. Do you see increasing raw material and other costs impacting your retail pricing going forward? A. This is the biggest issue in the industry right now. When we purchased our spring and summer lines, prices were above last year due to higher cotton, labor and shipping prices. We made the decision to take some modest price increases on select items in our spring/summer lines to partially offset the higher cost of goods. In addition, we value engineered our product and altered the mix to help mitigate the increased costs. Approximately 40% of our product is made in China, and we have been moving some of that to countries with lower labor rates. Cotton prices have continued to escalate substantially so we will also see price increases on the back-to-school and holiday 2011 lines. Fortunately, we are priced 30% below most mall-based children’s apparel retailers so even with these planned price increases, our merchandise still represents a tremendous value to our moms. Q. Also, if Children’s Place as a value retailer is one of your success factors, what are some of the other drivers? How important is fashion, and would “fast fashion” be an advantage in the category? A. Our customer is looking for great fashion and color. Children’s fashion tends to lag the teen and adult market so we have a little more time to monitor and pick up on the successful trends in the teen market and translate them for our children’s line. We have modernized the merchandise starting with the spring 2011 line. We are

providing greater differentiation between big and little kids, and we are introducing more fashionable basics. Our cycle from design to in-store is over six months. Going forward, we are looking to decrease the lead time for some categories, such as denim and graphic tees. We are also implementing localization strategies, so that stores receive product that is most appropriate to their region, from both a demographic and seasonality standpoint, when they need it. Q. What does the Children’s Place brand represent to consumers? Who is your target customer? A. The Children’s Place is known for head-to-toe outfitting, great value and an easy-to-shop environment. Our stores have a very “boutique” atmosphere, which customers have responded very well to. The customer can find coordinating tops, bottoms, socks, shoes, and accessories all in one place. Our typical customer has two children and an annual household income of around $70,000. We have broad appeal among Caucasians, Latinos and African Americans. We naturally have a young customer – and our young moms are heavy users of e-commerce and social media – so most of our marketing and promotional programs are internet-based now. Continuous improvement of the customer experience is a key initiative for us. Q. And, who do you view as your major competitors? How do you differentiate? A. Our customers shop at a lot of children’s apparel stores, including Old Navy and Target, whose price points are very similar to ours, as well as JCPenney and Kohl’s. There is less cross-shopping between our customer and those of Gap, Gymboree and department stores because their prices are so much higher. Q. There’s been some talk about Children’s Place being a good merger candidate with Carter’s and/or Gymboree. In fact, Goldman Sachs estimated such a move could increase the value of the company up to 50%. And Galt Investment Partners felt there was great cost reduction synergies (up to $50 million), through such a combination. Is this something you would consider? A. Our management team and board remain focused on improving the performance of the business and maximizing long-term shareholder value. We believe our current strategic initiatives will drive increased sales and profitability for The Children’s Place in 2011 and beyond. We are very well positioned to grow market share given our strong brand and value proposition. After my first year at the helm of The Children’s Place, I am even more optimistic than I was when I started. Q. What have been some of the major differences for you coming from the department store

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business model, where you were President and CEO of Lord & Taylor for 9 years, to running a branded specialty chain? What has been more challenging and what has been easier? A. This has been a very interesting transition for me, going from leading a broad-based department store to the narrower focus of a branded specialty chain. We have more control over our destiny at The Children’s Place; we control the process from design to point of sale. On the other hand, the biggest challenge so far has been to get the right people, processes and systems in place to fully maximize the business. That was my first priority and we have made tremendous progress over the past year in strengthening our team, our processes and our systems. There is greater volatility in the children’s apparel business than in broader based department and specialty retailers. Customers are increasingly buying children’s apparel closer to need, so changes in weather and holiday timing can dramatically alter results. Q. As someone who “grew up” in the retail business, (with your father working for a big retailer,) what are your thoughts on the evolution of the industry? What are the biggest changes you’ve noticed? A. Since prices are the same now as when I started twenty five years ago, I would have to say that technology is the biggest differentiator. Real time information at point of sale, planning and allocation systems, e-commerce, mcommerce (mobile commerce) and social media have all changed the pace at which we operate and the decisions we are able to make.

merchandise in our stores. Moms want to shop at The Children’s Place as long as possible because we offer age appropriate styling and great values. Upgrading our offerings for big girls and boys is aimed at keeping these children wearing PLACE clothes longer, which we know parents will appreciate. Q. With such an over-stored, over-stuffed and now, over-web-sited marketplace, with every price being challenged downward, (or lose the sale), how does one ever raise prices? And, if not, does this not lower all ships, potentially forcing cuts in quality, fashion and innovation? What are your thoughts on that rather philosophical question? A. Retail apparel has been in a deflationary environment for over twenty years. That is going to change. We don’t believe the answer is to put less into the quality of the product. We will continue to offer high quality, fashionable merchandise at a great value, albeit a slightly higher price than in the past. We’ll see how the customer responds but we have an advantage because we are going in 30% below most other mall-based children’s retailers.

Q. The retail industry is still in a very transformational phase, with the technological changes you just mentioned, as well as cost pressures, oversaturation, etc., changing the game for everyone. What do you see as some of the biggest challenges facing the industry in the next several years? A. At this point in time, I believe the state of the economic recovery and rising costs are the biggest challenges facing retail. US consumers are unlikely to have higher disposable incomes in 2011, yet they will face rising food, energy and apparel prices. This may negatively impact unit apparel purchases for awhile.

Q. Another big picture question: Could you ever see a scenario in which a department store invites you to lease space in their children’s apparel area in which you would essentially create and actually operate a Children’s Place shop, such as JC Penney is doing with Sephora and Mango, or Macy’s does with Sunglass Hut and others? And, would you do that? A. We think the biggest opportunity for The Children’s Place is to expand into value centers in smaller markets that don’t have a big mall nearby. These value centers are frequently strip malls serving populations of 100-250 thousand, sometimes less. Stores close by may be Target or Kohl’s or Walmart, and there are frequently several other value retailers in the mall. These are destination shopping centers so conversion is higher than in regional malls. Lease and build-out costs are lower so our yearone return on investment is significantly higher. We have more than 90 of these value center stores now and are very pleased with the results we are seeing. We plan to open another 85 stores in 2011, and half of these new stores will be in value centers.

Q. This is really an opinion question, but maybe one that you don’t mind answering: many child development experts are saying that because of the unchecked access to media, TV, Internet, etc., kids are growing up too fast, taking on pressures at a young age, not really being allowed to “be a kid.” Do you agree? If so, how have marketing and merchandise trends adapted to this new reality? A. I do agree that kids are growing up faster. We see girls as young as 6 and 7 wanting to dress like their teenage sisters, rather than their younger sisters. That is why we are providing more differentiation between big and little

Q. Any globalization plans for The Children’s Place? A. There is a lot of demand for The Children’s Place in other markets. We get calls every day asking to open stores in Latin America, Europe and the Middle East. At this point, we have stores only in the US and Canada, but our e-commerce site began international shipping in November 2010. We have had preliminary discussions with some potential partners about opening stores internationally, and we just hired a Senior VP of International Business Development who will develop for us a roadmap for international expansion. We expect that will be a big piece of our longer-term growth strategy.

Issue Five 2011

LET THE DEALS BEGIN OR: DON’T TOUCH THAT DIAL By Robin Lewis

I do hope everybody else is right and I’m wrong as the last “double-dipper” standing, who still believes another economic decline looms. I hope I’m wrong in still believing there’s no more “road to kick the can down” for our states and cities and for toxic debt that banks have not written off and for commercial real estate that’s under water, sucking air through an oxygen tube. And, I hope I’m wrong about believing the housing mess will continue to worsen. And, finally, I hope I’m wrong about consumer demand barely budging back, and worse,

actually dropping for everything other than absolute essentials such as food, gas, health care, etc. For all the obvious reasons, I hope I am wrong. If I am not, Meredith Whitney’s predictions of 50-100 municipalities defaulting could come true, and public sector layoffs would be enormous. Banks would offset their pressures (including those beset by the government) by seizing up on lending. Commercial real estate would tank, and foreclosures might continue ‘down the road’ indefinitely. Unemployment

would spike back up, putting downward pressure on consumer demand and dropping the economy into deflation territory. No amount of further quantitative easing by the Fed would help, and the $2 trillion that corporate America is sitting on would certainly not be used to rehire workers or invest in growth. So, if I’m right and everybody else is wrong, the private equity and M&A guys may not want to be “dialing for dollars” in pursuit of deals.

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M&A Musings

Who’s Next on the Block? By Judith Russell

Why speculate on M&A

If I’m Wrong On the other hand, if the tooth fairy really does exist, then we’re in for a period of renewed deal-making. A lot of ‘dry powder,’ or roughly $400 billion of investment capital, is anxiously being readied for deal making in the world of private equity, according to Preqin, a market research firm. About half of that will be targeting U.S. opportunities. Many of the funds raised in 2006 and 2007 are now burning holes in their managers’ pockets, having remained relatively inactive during the recession. There’s a pent up sense of urgency among investors to put that capital to work. And, as for that $2 trillion war chest across corporate America, even if consumer demand and growth continue their slog back, and part of that capital is invested in hiring and expansion, there will still be considerable funds for M&A deals. And, in a share shrinking economy, consolidation is a priority growth strategy for healthy companies, and a positive exit strategy for the weak.

The Good News Again, if I’m wrong, the playing field for deals is kind of perfect from a timing and opportunity perspective. We’re still early enough in the recovery stage that the valuations of many public companies, even those with minimal debt and healthy cash flows, are below the last decade’s average. Also, retail real estate values can be attractive either from a sale (revenue generation) or closing (cost reduction) perspective. Furthermore, for those interested in strategic

Issue Five 2011

candidates? Other than the fact that it’s fun, and human nature – like guessing who’ll toss his or her hat into the presidential race, or which celebrities will enter rehab next or become A-Rod’s next romantic interest - it illustrates, in bold fashion, just how much air is still in the retail market system, needing to be let out.

What makes a company a target? Depressed valuations, healthy balance sheets, good cash flow, and low debt are the most talkedabout attributes. Being small anything under $5 billion in market cap – also helps with the digestion and financing process. Underperforming brand equity, the ability to connect with the consumer, and global growth potential are all additional intangible traits that should not be ignored. A corollary to the old “too big to fail” is the concept of “too small to succeed.” Many of the small companies in the retail industry won’t remain stand-alone businesses because it will be increasingly inefficient to do so. Operational excellence increasingly requires critical mass and low overhead. There are roaming packs of wild financial watchdogs – in the form of bigger companies, activist investors and other private equity folks – who are standing by, ready to pounce, to wring the inefficiency out of the things, all in the name of “maximizing shareholder value through a value optimizing business combination” – in other

words, to make a big, fast buck. As the old adage goes, nature abhors a vacuum. Let’s take a look at some of the key retail and consumer companies that might be in play, and why. Home Stores – Bed, Bath and Beyond is reportedly on the prowl, looking to expand beyond the beyond. It experimented with gourmet foods last year, so might look to acquire its food supplier, specialty foods company Cost Plus, though we wouldn’t rule anyone out. Also in this space is WilliamsSonoma which, if you ask me, hasn’t even begun to realize its potential, and has been mentioned as a possible acquisition candidate. Children’s Apparel – Tongues are wagging about Carter’s, Children’s Place, and recentlytaken-private Gymboree. Should all three merge, according to one investment bank, they would save tens of millions in overhead and add a mid-double-digit premium to average share value. Bookstores – Unless you’re like the cynics who believe that bookstores will go the way of record stores, and there are lots of us, scuttlebutt has it that Borders and Barnes & Noble might still tie the knot. As if anyone cares. Might Amazon just buy the two of them, own the college, airport, and pop-up bookstore space, and use some of the bricks-and-mortar to open localized distribution centers? Perhaps. Teen Apparel – We know that the 4 or 5 players in this sector,

Essentially, the public and private pools of capital are no longer going to throw “free” money to a bunch of “deal cowboys” who used to acquire and take private uncompetitive companies that should have been shot dead.

acquisitions or for longer term growth objectives, international expansion opportunities abound. Also, since banks have been building back capital during the recession, the cost of financing is attractive, particularly for deals promising higher levels of return. Finally, if inflation kicks up over the next few years, those deals made today at the assets’ deflated value can reemerge with a much higher multiple in a more inflationary period down the road. According to Dealogic, the “dealers” are already off and running with 53 buyouts so far this year, totaling about $9 billion, up from just over a billion this time last year.

The Bad News for ‘Cowboys’ The not-so-good news, in one respect, is that the “wild west” of deal making and mind-blowing leveraging that occurred pre-bubble bursting, is over (at least until it isn’t). While the cost of capital may be attractive, it will be managed very judiciously and with more caution. Essentially, the public and private pools of capital are no longer going to throw “free” money to a bunch of “deal cowboys” who used to

acquire and take private uncompetitive companies that should have been shot dead. Many would leverage enormous new debt (with little of their own skin in the game) onto the balance sheet, recapping the original investment, taking a big dividend, and eventually taking it public again into a rising market at higher multiples. But, since the business was a dud when acquired and likely no better in its public reemergence, the funds who lent so freely would often be left with the mess. So, good-bye cowboys, hello buttoned-up thinkers. The biggest private equity firms are raising far less than they were during the bubble days. Fortune magazine’s columnist Dan Primack estimated in his Term Sheet blog that the ‘Big Seven,’ which include KKR and Blackstone, among others, could come up with about $41 billion, or half the pre-crash level, indicating cautionary and more limited activity for megadeals, at least through 2011.

It’s all About ‘Ops’ So, the days of ‘financial engineering to buy low, move deck chairs and sell high’ are, for the time being, over. The smart money is with those who are seriously intent on, and capable of, either fixing or strategically reposition-

ing, or creating new value for growth, for companies they seek to acquire. One of the biggest ‘operators’ as they are called, is TPG Capital, who acquired J.Crew in 1997, installed Millard “Mickey” Drexler as its CEO, repositioned the business for growth, successfully took it public in 2006, and just recently acquired it again. Once more, with Drexler at the helm and his vision regarding where new growth can be found, along with the assistance of TPG’s considerable pool of highly experienced ‘operators,’ the speculation is that this combination can much more successfully be accomplished as a privately held business.

The Competition: Corporate America As revenues tanked for corporate America during the recession, they cost-cut their way to increased productivity and profitability, and are now sitting on about $2 trillion in cash. So, while some of it may be used to buy into the slow recovery by rehiring and expanding organically, most of it will pursue growth through acquisitions. And, those now ‘leaner and meaner’ companies, having made it through the recession, are in several ways better positioned to win in the ‘deal’

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which includes Abercrombie, American Eagle, Aeropostale, Buckle, and others, are locked in a day-in, day-out share war, so wouldn’t it make sense for them to join forces and find their natural equilibrium? It depends on the cost, of course. American Eagle is apparently a prime target of private equity, and particularly vulnerable because of weak sales. Most consumers can’t tell these retailers apart anyway, so maybe there’s an AeroEagle & Fitch in our future after all.

market. First of all, their cash is free, while private equity debt will come at a price, thus giving the corporate players greater bidding power. Also, the ‘strategics’ as they’re called, are just that. They are better positioned to both identify and assess the best ‘deal’ fits for their strategic growth objectives, and in most cases, will have already defined where costsaving and growth synergies exist. Thus, they can rationalize a higher premium for the acquisition. Lastly, therefore, the biggest of the corporate players will have access to greater funding for the larger deals, if necessary, than even the biggest of private equity firms. So, while the private equity business will certainly accelerate, their share of the total deals may be less than realized during the pre-recession period. My final comment: if you do believe in the tooth fairy and a lasting economic rebound, then by all means, let the deals begin.

Issue Five 2011

Another possible candidate here is American Apparel. The company has already breached its loan covenants, and founder Dov Charney just got slapped with another harassment lawsuit by a former employee. Yet it’s one of the hottest brands around, and not just in NY and LA. I just returned from Europe, where it seemed every other teen I saw walking on the major shopping avenues was carrying an American Apparel shopping bag. Footwear – Deckers Outdoor, maker of UGG and Teva, is a publicly-traded company with a $3 Billion market cap. 96% of its revenue comes from one product line – that of the ubiquitous sheepskin UGG boots. What happens if the brand’s star starts to tarnish? You guessed it. The stock will plunge faster than you can say “baaaa.” Apparel – Columbia Sportswear has lost some of its shine since founder and product development genius Mother Gertrude Boyle stepped aside to let Tim run the show. This is a very tough competitive environment now, and The North Face seems to be winning the innovation war. UnderArmour, despite its meteoric success with stretchy, breathable activewear, has stumbled in its attempt to build an athletic foot-

wear business, so may end up acquiring a sneaker company with an existing brand and product expertise. And let us not fail to mention Jones and Liz. Beauty – Avon’s calling, and it’s an SOS call! Possible suitors include L’Oreal, P&G, and Unilever, all of whom would no doubt love to get their hands on Avon’s direct-to-consumer expertise, particularly the international part. Electronics – Best Buy is in a perpetual game of Whack A Mole, it seems…just when it cuts a competitor down to size, another pops up somewhere close by. We might see some activity in trying to acquire some niche businesses, like Game Stop, which just changed its agreement with some of its top leaders, paving the way for it to be taken over. Other – The cat’s finally out of the bag. The toy business is seasonal. Toys R Us has basically shined a neon sign on that revelation with its big pop-up store success. What’s next? Will it do another IPO? Will it be acquired by another big retailer, like Target or Walmart, or be snapped up by a foreign company? Will it acquire some new businesses, like perhaps, Build-A-Bear Workshop? And finally, there are just too many bricks-and-clicks office supply companies out there. Will the big 3 become 2? Who among the Staples, Office Depot and Office Max world will be left after this game of Musical Ergonomic Chairs? Judith Russell is Editor and Chief Operating Officer of THE ROBIN REPORT and Executive Editor of The Apparel Strategist, a monthly newsletter that reports, analyzes and predicts key business and statistical trends in the apparel industry.

Easing the Margin Squeeze Supply Chain Optimization Can Offset Rising Costs By John B. R. Long III

or most of the last two decades, the U.S. retail industry has benefitted from a thriving American consumer economy and a commitment from China to provide low costs. But in the past year, in nearly unprecedented fashion, costs have risen across all components of the retail supply chain. In the past, retailers have protected profits by passing along cost increases to suppliers or, in some cases, even consumers. In the current economy, however, suppliers are less and less willing to take up the slack; and consumers, clearly, are already skittish about spending—even at rock-bottom prices. But as costs continue to increase, the pressure to raise prices mounts. “The world has radically changed,” Richard A. Noll, chief executive of Hanesbrands, said in an interview. “There is a clear understanding that prices need to go up in this kind of environment.” Everyone is familiar with the huge hikes in cotton prices, which climbed 122% in 2010. But other key commodity prices are increasing as well. Oil prices are up 30%,

Best Practices from Kurt Salmon

raising the cost of synthetic fibers as well as transportation rates. Plus, labor rates continue to rise in China and other popular production regions. Oscar Feldenkreis, president and chief operating officer of Perry Ellis International, points to the challenges shared by all brands. “We are keeping an eye on inflation, and there are issues with rising material costs, sourcing and freight.” Even companies with strong supplier relations are facing pressure. In an optimal supplier matrix, approximately 20% to 30% of suppliers can help share the burden of cost increases, but that still leaves 70% to 80% of the supplier base that may not be as willing—or may simply be unable—to shoulder some of these increases. In addition to increasing supply chain costs, U.S. retailers continue to face a challenging consumer landscape at home. Saddled with an unemployment rate near 9%, consumers are still reluctant to spend. By contrast, demand is stronger in other global markets. In China, for instance, there is a growing culture of consumerism. The combination of decreased demand in the United States and increased demand in emerging economies means less available production capacity for retailers here at home.

SOLD OUT

Inventories are leaner already

Fabric prices are increasing

Labor costs in China are increasing

Factory capacity has dropped

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“ T he world has radically changed,” Richard A. Noll, chief executive of Hanesbrands, said in an interview. “There is a clear understanding that prices need to go up in this kind of environment.”

The confluence of changes in the consumer and production landscape is forcing all retailers to develop strategies for displacing inflationary pressures, including: Sourcing and Product Engineering. Developing an appropriate sourcing strategy to manage product, vendor, supply chain and financial risk is a solid start. This strategy should be coupled with an efficient sourcing process that: aligns with company, brand and sourcing strategy; proactively manages vendor performance; and designates appropriate cycle times for all sourcing activities. Additionally, product engineering may be able to mitigate some cost increases, but only to a small extent. Distribution and Logistics. Despite rising oil prices, many retailers can still cut distribution and logistics costs. Strategies such as route and mode optimization, coupled with aggressive labor management, can produce significant short-term savings. Merchandise Mix and Inventory Management. Properly managing inventories by holistically aligning them with customer demand can lower markdowns and use warehouse and distribution space more efficiently.

In addition to right sizing inventories, proactively managing the merchandise mix can also protect margins. Pricing and Customer Experience. Consumer confidence is still fluctuating enough to suggest that passing on the entire cost increase to consumers is risky. Even small percentage increases might send a consumer to the competition. Retailers need to assess customer motivations, price elasticities, pricing roles by category and competition to develop new pricing strategies that are not based on what worked last year. Although cost increases will continue to exert pressure on retailers in the coming year, we believe these strategies will help prevent a severe impact on margins. Focusing on efficiency will help control costs, while continuing to build a strong brand offering and customer experience will minimize the risk of price increases and ensure the retailer is well-positioned for future growth. John Long has more than 20 years of deep experience in all facets of the retail and consumer products industry. He can be reached at john.long@kurtsalmon.com

$ Oil prices are increasing

Issue Five 2011

Consumers are still focused on value

Who will foot the Bill?

Best and Brightest Need Apply Newly Minted College Grads Passing Retail By By Kristin S. Dennehy

Herbert Mines Associates recently conducted a “Retail Leadership” survey of 135 Presidents and CEOs with Women’s Wear Daily and found that 90% of respondents believe that the industry is not attracting the best and brightest on college campuses. Kristin S. Dennehy, a Managing Director of Herbert Mines Associates, who recruits senior executives in fashion and retail, said this is a growing issue gnawing at the industry and discusses an action plan for attracting and retaining younger talent.

Q What is your perspective on

why the fashion and retail industries are facing such a big talent void at the incoming and junior levels?

A The industry faces several issues when it comes to attracting and training young talent. Perhaps the biggest is the diminished number of formal department store training programs as a result of the massive consolidations that have taken place. Most of today’s senior retail leaders started their careers in management training programs, where they were exposed to functional rotations to teach them different disciplines, and saw examples of a career path laid out by more senior executives who advanced from the bottom up. Today’s new hires are missing that. With the growth of specialty retail, and wholesalers becoming retailers, a new model has to be created to replace this career foundational training. One retail

CEO told me about his daughter, who interviewed out of college last year at ten different retailers for an entry-level management position – only one had a training program.

Q Do any companies still have these “gold standard” retail training programs?

A Yes, but in much smaller numbers. The department stores, such as Macy’s Inc., which also owns Bloomingdale’s, still have their formal management training programs, as do specialty retailers such as Chico’s and Coldwater Creek, off-pricer TJX, and luxury retailer DFS. Other companies have created a paid or unpaid internship program that gives the company a chance to attract and view new recruits and this seems to be a growing trend of attracting talent. Gap, for example, has a six-month internship that rotates the internee through different disciplines, a great way to get younger talent engaged in understanding the career possibilities at the company. More companies need to formalize the process, however. Q Are retailers actively recruiting on college campuses?

A Most college campuses, except those with specialized fashion and retail programs, are not being widely approached by the industry to communicate the excitement and career opportunities the industry holds for their students. For the most part, retailers are ignoring schools with top programs in business and liberal arts, which is a mistake. Companies need to create a master plan which begins at the top of the organization and focuses on how to recruit the best and brightest and do outreach to career services at the campuses to speak about opportunities in the industry. They also need to

Reflections from The Corner Office from Herbert Mines Associates

encourage senior leaders to take part in campus outreach at their Alma Maters.

Q How different is this generation of college grads from the one before it?

A The generation that has grown up in the digital age wants instantaneous feedback and reward. They are impatient and want to move up the career ladder fast. The lack of a foreseeable career track makes it more difficult to keep this juniorlevel talent engaged. The transparency now available through LinkedIn and other social network sites exposes people at this level to their competitors and peers. They see what’s happening in other companies and industries and want to keep up, and therefore there is a lot more poaching between companies at the junior levels. Companies need to plan for talent acquisition and pipeline development to fill their junior level roles, and sell the “why” of their industry, rather than just react and reach out to advertise about open positions. They also need to communicate the wide variety of functions a retail management career includes. Many people still think of it as just buying, merchandising and store management, but the fact is there is challenging work to be done in the areas of design, marketing, systems, brand management, sourcing, production, operations – the list goes on and on. Q Even though your work is to

recruit C-suite executives, what are you hearing from your clients about their struggle to attract and retain young talent?

A It is a recurring struggle and they are consistently looking to fill positions for people with only a few years experience. Senior leaders are aware that this is an

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also need to create a specific area in the career section of the website to outline this career opportunity that sells the passion and excitement of their brand. For example, advertising a “career” path at a company is much more attractive than posting a “job,” and yet many fashion and retail websites don’t market “career” opportunities.

Q As we discussed, the up-and

coming generation is looking for quick movement up the career ladder. Once you recruit them, what is the best way to train, groom and motivate them to stay?

industry-wide issue, and they want to figure out how to attack the problem. It has to become a priority for them.

Q What should the action plan

be for Human Resources executives in retail and fashion to capture new leadership?

A There is a three-pronged approach that the industry should consider: • Self-assessment: Companies need to ask themselves if they are doing a good job at attracting and retaining junior talent. If they are, then they should promote their strategy to the industry as a best practice. If they decide they fall short, then the company needs to take action. Talk about the talent acquisition topic at this level, not just your senior leadership level. • Create a strategy: Companies need to be proactive. Two retailers we have spoken with recently shared that they realized the need to do more than just fill immediate positions. When they recognized their

Issue Five 2011

growth plans required a pipeline of talent, they hired someone within the Human Resources department to focus exclusively on college recruitment, program development for a training program, and to market this career opportunity on college campuses. They also created a campus tool kit to educate, and got the company exposure at career fairs to educate the students and career services leaders. The aim was also to get connected with less “obvious” fashion and retail schools to market at more of a cross-section of colleges. They brought in functional leaders from the company to meet students and talk about retail careers. One of these retailers started at local colleges, now has national reach, and has 5 years of trackable stick rate at their junior levels to attribute to the program. • Market and educate: Once a strategy is in place, Human Resources can map a plan to reach schools where retail and fashion is not woven into their DNA – a huge population of students does not consider fashion and retail as a career. They

A Companies need to formalize their mentorship and sponsorship programs. The junior talent also needs to be given real projects where they are held accountable. Communication is key. Younger professionals should be asked where they would like to get exposure in the company. They also need to see people getting promoted – that shows them a career path and gives them an incentive to stay. The convergence of interactive and traditional retailing has opened up a huge opportunity to capture their interest. Exposing more junior talent to the digital commerce and social media sides of the business will also keep them interested rather than potentially being attracted away to pure play e-tailers. Grooming and keeping talent, formally exposing them to different functional areas to keep the work interesting and stimulating, showing them how they can progress upwards, and helping that happen quickly is more important today than ever. Kristin S. Dennehy is a Managing Director at Herbert Mines Associates, the leading executive search firm specializing in C-suite, senior level and corporate board placements for retail, fashion, e-commerce, beauty, consumer products and restaurant/foodservice companies. The firm also conducts assignments for numerous private equity and venture-backed companies. Kristin and her colleagues have secured top tier talent for an impressive roster of clients including Barneys New York, Chico’s, Pier 1, eBay, Coldwater Creek and Macy’s Inc.

with Jan Hatzius, Chief U.S. Economist, Goldman Sachs

We talked with the Goldman Sachs Chief U.S. Economist, who is responsible for setting the firm’s U.S. economic and interest rate outlook, about his forecast for economic growth and employment, the likelihood of another economic decline, and the future role of the U.S. in the world economy. Q. What are your expectations for the economy in the next two years? A. We expect real GDP growth to be 3.25% in 2011 and 3.8% for 2012, roughly a percentage point above the economy’s underlying trend. It means that some of the excess capacity that built up from 2007 to 2009, especially in the labor market, is starting to be filled in. We estimate consumer spending will grow 3.5% in 2011 and 2012, caused by growth in personal income and employment, which underpins spending. The unemployment rate should come down gradually. It’s at around 9% now, and we have it declining to about 8% by the end of 2012. Q. So unemployment will drop by only a percentage point in the next year and a half ? A. Yes, we have it falling slowly, because economic growth will be slow compared to the period after the previous two

recessions. In 1975-76 and 1983-84, the years after the last two really deep recessions, the economy grew 6%, not 3.5-4%. However, the recovery is more visible in the labor market than it had been, which should underpin personal consumption. The last few months of labor increases have not been representative because of a number of special factors. One factor is a steep decline in labor force participation, which will come back when news of the improving job market gets more people looking for jobs. We think full employment, which we define as 5.5%, will take until 2015 to achieve, however.

Q. Isn’t a lot of the increase in personal income going toward paying off consumer debt? A. Demand is coming back gradually, as the household sector particularly has made progress deleveraging. If you look at the ratio of household debt service (interest and principle) to disposable income, it’s back to pre-debt-boom levels. Some of that has been achieved through subdued issuance of new debt, some through defaults, and some through interest rate reduction and mortgage refinancing. All are part of the adjustment process, which has progressed to the point where the growth in spending is going to be firmer than where it was the last couple of years. Q. In the face of inflation in non-discretionary areas like gas and food, isn’t it true that consumers are likely to steal share of wallet from discretionary areas to help pay for necessities? A. The increase in energy prices in particular, and food prices to some extent, are likely to be a drag on consumer spending growth. If you had less inflation in those areas,

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you’d have more consumer spending growth, but for now, we think the hit is manageable. We think rising oil prices may take a half percentage point or so off consumer spending growth in the next year. Oil is a moderate downside risk, but has already been figured into our forecasts – we’ve been working with $110 per barrel oil for 2012 on average for the last few months. If we were to see further increases from here, it would be a reason to take the forecast down a little. . With respect to the apparel and general Q merchandise categories that many of our retailers are involved in, many are estimating 10-20% increases in labor and raw material costs like cotton. Retailers and wholesalers claim they’re going to raise prices, which many people contend, as I do, will not stick. Your thoughts on this?

A. So far, we’re not really seeing much apparel price inflation. As far as particular apparel pricing strategies, I’ll have to defer to your expertise on that. Input prices are higher, but the likelihood of passing that through, given the amount of excess capacity, is low. Most of the increase in in-

the latter below the Fed’s target, it would take an even weaker economic growth picture than we’re expecting. Ben Bernanke said that he feels the risk of deflation is negligible. I think it’s declined, and give it a 10% probability, but wouldn’t say it’s negligible.

Q. How, in the aggregate, does one measure supply/demand equilibrium in the retail market?

A. Economic statisticians don’t have a great idea about that. It’s not measured by the government. The Fed measures capacity utilization in the industrial sector, but it’s tough to get a number for total retail square footage, and even if you had one, the number would be pretty meaningless, given the growth in online retailing. Q. Let’s go back to the employment topic. You say the situation has improved. How many jobs are being created, and where is job growth happening?

A. You have different measures of employment, such

put prices will be absorbed. Labor costs in the economy are very well-behaved; we’re not seeing any wage inflation at all.

as the Household Survey of Employment and the Payroll Survey, that at times have been inconsistent, but now are starting to converge and show a pretty convincing story of improvements in the employment market. Other measures, like surveys of hiring intention and online help-wanted ads, indicate that new job growth will continue. We estimate an average increase of 200K jobs added each month for the next several months.

Q. Is there any scenario in which we’ll see

Q. Where are the jobs coming from?

“ We estimate consumer spending will grow 3.5% in 2011 and 2012, caused by growth in personal income and employment, which underpins spending.”

widespread deflation?

A. If we were to see another downturn in the economy, which I don’t expect but I can’t rule out with certainty of course, given where unemployment and inflation are,

Issue Five 2011

A. A disproportionate number — 20-30K per month — are in manufacturing. We see an increase across the board in manufacturing, particularly in machinery, technology, oil and gas, and industrial supplies. (continued on next page)

with Jan Hatzius, Chief U.S. Economist, Goldman Sachs (continued)

Q. What about productivity – we hear all the time that labor productivity is increasing. Is that true, or are we just cutting costs, and working harder for the same wage? Is it impeding job growth?

A. Cost-cutting is always part of an increase in productivity – doing more with less. Productivity growth is 2-2.5%, and remains one of the bright spots of the recovery. It might be impeding job growth in the short term, but it also means that you are able to increase output with a given level of employment growth, which should result in increased employment eventually. Q. There’s a rather vocal debate now over whether small or big business is the main contributor to job growth. How does the increase in employment break down between small and large companies?

Q. What scenario will find the United States a dominant economic growth engine in the world for the next 25 years? A. I think it is unlikely that the US will be the dominant economic growth engine of the world. I do think it will be the largest economy for the foreseeable future, but given that the US is at the frontier of technological developments, poorer economies – developing economies like China and others — are having a much easier time moving toward that frontier, and are likely to grow faster. There shouldn’t be anything surprising about that, and it’s not a bad thing – in fact it’s a good thing for other countries to have a chance to catch up. It shouldn’t make Americans feel badly about themselves, it’s just the natural order of things.

“ Large companies are responsible for much of the employment growth so far. Small businesses are beginning to climb out of the deep trough they were in during the recession, but they’re still not in anything approaching robust growth.”

A. Large companies are responsible for much of the employment growth so far. Small businesses are beginning to climb out of the deep trough they were in during the recession, but they’re still not in anything approaching robust growth. It may be that we’ll see some improvement, but they’re still facing pretty tight credit standards. Not only are they credit constrained, but also pretty concentrated in industries, like construction, retail and others that have not yet begun to recover to the extent that others have. Q. What about the recession surprised you most? A. The depth of it, the rapid pace of decline in output, and the extent of the negative feedback effects between the real economy and the financial sector. We did expect a sizable impact on house prices and consumption, but did

not expect the large hit on the willingness and ability of financial markets to extend credit. How close the dominoes were standing together in the financial markets was a big surprise.

Jan Hatzius earned a Ph.D. in Economics from Oxford in 1995, and worked as a research fellow at the London School of Economics prior to joining Goldman Sachs in 1997 as an associate economist in the Frankfurt office. He moved to New York in 1999, and became a managing director in 2004. He has published widely on monetary and fiscal policy, the Goldman Sachs Financial Conditions Index, the housing market, inflation, corporate profits, consumption, and capital spending. Jan is frequently quoted in the financial press, such as the Economist, the Financial Times, and the Wall Street Journal, and writes a regular column on the US economy for the German daily Frankfurter Allgemeine Zeitung.

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Taking Care of By Paco Underhill

President Obama announced recently that he was forming a panel of Small Business experts to help him get America back to work. As the owner of a business with fewer than 500 employees, I am delighted that our President recognizes that Small Business has historically been the engine of job creation and business innovation. Entrepreneurs have played a starring role in creating our national identity. If we are going to get Americans back to work, however, we need some help. I have four quick suggestions. 1. Health Care Costs. Our system is busted, and it punishes Small Business. Why should it cost me one-third more to insure my employees than it does Citibank? Only when the burden of health care costs is shared evenly by all employers will we have the consensus to reform the process. Small- and medium-sized businesses have to buy all of their insurance at “retail prices.” We have no ability to form buying groups, much less bargain. Thus, we as a business segment are subsidizing the health care costs of Fortune 100 companies. What the insurance companies can’t make on them, they make on us. The system is also inefficient: A friend recently gave birth at a prominent New York City Hospital. It was a normal birth with no complications. She got seventeen invoices from separate departments and doctors within the same hospital. Imagine the bureaucracy it takes to generate 17 different invoices.

Issue Five 2011

(Small)

Business

2. Timely Payments. In 2007, over 95% of our invoices were paid in 30 days or less. In 2010, more than 75% were paid in 60 days or more. Given that our client base is Corporate America, we in effect were providing financing. If the banks and finance companies can collect interest on their loans to us, shouldn’t we be able to collect interest on our loans to them? We are facing a painful reality: that satisfaction with our work bears no relation to the timeliness of payment for that work. Small Business lending might be nice, but just getting paid on time would be better. 3. More Equitable Travel Costs. On any given day, my firm maintains a minimum of 50 people on the road. We spend almost a million dollars per year on airfares. From O’Hare to Newark, from Miami to LAX, air travel is getting more miserable and costly with each passing year. In addition to the extra time one must now spend on airport security lines, we must also pay more to fly. Why is it that, unlike those of trains or the bus, ticket prices on airlines can vary so greatly? Small Business carries the load. We pay the highest ticket prices, effectively subsidizing both the leisure traveler who can plan far in advance and the corporate traveler who, again, based on volume, negotiates a lower ticket price. Given that airports, air traffic control and FAA are all run on State and Federal dollars, shouldn’t we all pay at least close to the same price for the privilege of using the system? On a recent business trip from New York to San Francisco, I sat next to a tourist who had paid two hundred dollars for the same seat I was charged nine hundred dollars for. One more thing. All members of Congress need to do their commuting on commercial flights. No free rides for any politician on government aircraft. If they are responsible for regulating aerial infrastructure, shouldn’t they be obliged to use it?

4. Form 8802 United States Residency Certification. Last year we worked in 19 different countries. With the declining value of the US dollar, we can compete very effectively for work around the world. Critical, however, is the need to avoid double taxation on work done outside the country. Every year we struggle to get this paperwork out of the IRS. You have to apply online. You are promised action within 30 days; it has often taken three months. Approval seems to be arbitrary, in that for over a decade, one in three of our applications has been delayed or rejected for reasons they do not communicate. Want Small Business to do its part in correcting the balance of payments? Make it easier for us to do the work. On paper, 2010 was a great year for us. Merchants and marketers were climbing out from underneath their desks where they had spent 2009, and realized that they needed to face the new world order — or get left behind. But cash flow was a major headache. We got through 2010 doing more work with fewer bodies. My staff is getting crispy. I’m ready to hire, and take on some more space, but the costs may be prohibitive. More than Lehman Brothers or Bear Stearns, this country can’t afford to see Small Business fail. 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. His latest book published in July of 2010 is entitled What Women Want. It is not a sex manual.

Beauty Be-Tween The Lines Make-up for the Playdate Set By Dana Wood

hen she isn’t marching around the house ordering her parents to stop using plastic grocery bags “because sea turtles swallow them and die,” five-year-old Parker is rocking out in her hot pink bedroom to Taylor Swift and digging into her growing stash of makeup. As she dabs her cheeks with Hannah Montana blush and swipes her lips with Hello Kitty gloss, she’s getting a jumpstart on decades of future beauty consumption.

global industry analyst, it’s a mix of Marketing and Mama. “To some degree, it’s due to the popularity of Hannah Montana and so on,” she says. “But what I found interesting is that tweens were most apt to say that they’re influenced by their mother. They’re looking at what their mom is using to help them decide what to buy. So the more adult product choices have to do with who’s influencing them. And mascara is the product that is most likely to be used by women across all ages and ethnicities.”

And within just three short years, the now-pre-K kid will be routinely cracking open her piggy bank not for the Zhu Zhu Pet du jour, but for cosmetics mad money. In fact, according to NPD’s most recent look-see into the category, a 2009 report entitled “Insight into the Youth Beauty Market,” tweens (8 to 12) were the only group that ratchetedup their cosmetics spending over 2007, outpacing both teens and young women, whom NPD defines as 18 to 24.

Grant also notes that the awareness level of CoverGirl among tweens has shot through the roof recently, and cites the brand’s use of super-bright, kid-friendly packaging as a possible reason. “It’s not that CoverGirl is targeting young women,” she says, “but those mascaras in bright oranges and blues were very captivating.” Thus, it’s no wonder that the buzziest tween beauty launch in years – GeoGirl – includes both FYEO (For Your Eyes Only) Feather Lash Mascara and GR8 (Great) Lipshine lipsticks. The 69-SKU line, which rolls out in April and is exclusive to Walmart for at least one year, also weaves eco-mindedness and technology into the brand DNA.

Even more compelling for industry-watchers is the products gaining traction in tween-ville: mascara, eyeliner and real, bonafide lipstick rather than gooey gloss. That’s big-girl stuff. Heck, that’s woman stuff. So what’s driving the shift into more mature fare? According to NPD’s Karen Grant, Vice President and

On the natural front, GeoGirl is laced with chamomile, lavender and white willow bark and devoid of such chemical red flags as parabens, phthalates and sulfates.

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“ Marketing lipstick, exfoliator and eyeshadow to 2nd, 3rd and 4th grade girls is part of a larger and growing problem in our society which teaches girls that their value is dependent upon their sexuality and their perceived outer beauty...” - MomsRising blogger Amie Newman

And in a nod to tweens’ extreme tech-savviness, product names are all derived from text-speak. Don’t know that T2G means ‘time to go” or TiSC is short-hand for “this is so cool”? Then you’re not the target audience for T2G facial cleanser or TiSC body mist. Clearly, in its attempt to capture a slice of the smallbut-rapidly-growing $24 million tween beauty market, the company behind the brand - Lake Forest, California-based Pacific World Corporation - has done its homework. Still, its pre-launch outreach to mommy bloggers may not be having quite the effect the company had hoped. A recent rant on MomsRising.org, for example, not only calls into question the very notion of such a large push by Walmart to sell cosmetics to tweens, but also GeoGirl’s eco-positioning and philanthropic stance. (In tandem with the roll-out, Pacific World is unveiling gg-Gives, a program that directs a portion of net proceeds to charities recommended by its young customers.) “Marketing lipstick, exfoliator and eyeshadow to 2nd, 3rd and 4th grade girls is part of a larger and growing problem in our society which teaches girls that their value is dependent upon their sexuality and their perceived outer beauty,” writes MomsRising blogger Amie Newman. “Our girls, and our boys, need to be valued for who they are, first, as smart, compassionate, creative, loving human beings.” And then Newman thrusts the knife a little deeper. “In the meantime, I teach my 8-year-old girl how to be a committed steward of the earth by recycling, composting, digging in the dirt and reading National Geographic. If she wants to play with my organic makeup, she’s more than welcome to. But I’m going to pass, thank you very much, on Walmart’s green curriculum.” Despite her harsh words, Newman concedes that the horse has long been out of the proverbial barn; tweens love and covet makeup and beauty products at ever-younger ages. Just ask Bobbi Brown, who recently unveiled the splashy, coffee-table-esque tome Beauty Rules: Fabulous Looks, Beauty Essentials and Life Lessons, a follow-up to her 2000 smash Bobbi Brown Teenage Beauty. “I was about 11 or 12 when I first started wearing makeup ‘out,’ ” Brown recently told HollyBaby, the pint-sized edition of HollywoodLife.com. (Accompanying the online interview: an image of four-year-old Suri Cruise clutch ing a jam-packed makeup bag.) “When girls start going

Issue Five 2011

out to parties, school dances, Bar and Bat Mitzvahs, etc., that’s about the right time for them to start learning about makeup. It’s my belief that at that age, a bit of lip gloss and maybe a swipe of mascara is all you need.” A marketing genius if ever there was one, Brown has created a limited-edition Beauty Rules Face Palette. The $45 kit contains glosses and balms, pot rouges, shadows, liner and an eye pencil, all in ostensibly kidfriendly shades. Cleverly, the outer cover is an adorable riff on a spiral notebook. In a video for Amazon.com, Brown talks about the core impetus behind Beauty Rules. In a world in which teens are bombarded with media images of perfection, it’s getting harder and harder for them to feel as if their looks past muster. “I wrote the book to help empower girls to be able to realize that they rock, and they’re beautiful, and anyone could be great,” she says, before providing precise tips for finessing a smoky eye. In addition to learning how to wield an eyeliner brush, these insecure teenagers might want to channel their own tween selves; according to NPD’s Grant, young makeuplovers have a considerably higher level of confidence about their appearance than teens. That’s why a line like GeoGirl, which is designed to subtly enhance beauty rather than pile on the glitter and gloss, is probably on the right track. “Tweens haven’t yet hit that middle school crisis when everything changes,” Grant says. “They aren’t as self-critical and are pretty confident about their looks. They have a good amount of self-esteem.” 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.

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It’s time for many home furnishings retailers to go back-to-school – when it comes to back-to-school. While the late summer/early fall back-toschool selling season is primarily focused on apparel, some stores in the home business have gotten a nice seasonal boost selling dorm items to college kids. It’s developed into a nice business for stores at a time of year when there aren’t any natural holiday-oriented events on their home promotional calendar. But it’s not as easy as A-B-C. While stores like Bed Bath & Beyond and Kohl’s have seized the college back-to-school season and made it their own, a lot of retailers have simply been left behind. The home furnishings business, other than some obvious exceptions like beach towels and patio furniture, is largely a seasonless business. Stores are used to at most

extra-long sheets for the odd-shaped mattresses found in many dormitories became a core product. (Personally, I never understood this item as it made no sense that kids were any taller when they went to college than they were back home, but what do I know?) Home retailers then moved into items like desk lamps, toaster ovens, and pretty soon had a decent-sized business. That’s when they began developing specific products and programs specifically for the dorm market. One of the more famous ones was the shower caddy, a plastic basket with assorted bathing accessories, all in easy-to-getmoldy and even-easier-to-dump-atthe-end-of-the-semester plastic. General merchandise stores like Kohl’s and Target pretty quickly picked up on all of this and soon they too had a brand

But it’s not as easy as A-B-C. While stores like Bed Bath & Beyond and Kohl’s have seized the college back-to-school season and made it their own, a lot of retailers have simply been left behind. a twice-a-year merchandise reset, with the occasional drop-in program. It’s not like apparel where you wake up every other Tuesday needing to remerchandise half the department. So, this whole back-to-school seasonal thing doesn’t come naturally to most home buying and merchandising staffs. But maybe it’s about time they learned. The late, largely unlamented Linens’n Things is generally credited with being one of the first retailers in the home space to discover the back-to-school business. But it didn’t take long for its archrival – and eventual destroyer – Bed Bath & Beyond to move in and, as usual, do it better. At first these stores just identified off-the-shelf products and pitched them to the dorm-bound college student. Some of these were obvious. Twin

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new business. And they had the extra-added advantage of having the back-to-school customer already in the store shopping for clothing. The business grew even more. Annual sales of dorm furnishings have been over $6 billion for several years, according to the National Retail Federation. But as retailers are wont to do, they pushed success to excess. One of my favorite inside stories involves just such a case. One retailer had great success with a certain back-to-school item from a certain supplier and when it came time to develop next year’s programs, they came up with the illogical holy grail of retailing: We will sell more if we cut the price. They went back to the supplier and told him he needed to cut the price of this item 40 percent and if it did, they would order more. Of course, they wanted similar

quality although they promised to look the other way if certain compromises had to be made. This vendor did what any vendor does: It went back to its Chinese factory and said, “You need to use thinner plastics, slice a few inches off the size of this thing and oh, by the way, you have to cut your margins.” Sure enough, it all happened according to plan…that is, until the goods hit the retail floor. (You could see this one coming from the other side of the mall, couldn’t you?) The price was 40 percent less but the store sold maybe 10 percent more units. The vendor got slammed with markdown chargebacks, the goods got closed-out or put in the backroom for the following year and the customer – remember her? – got a crummy product when she was perfectly willing to pay for a better one. This tale of woe is certainly not unique to the home back-to-school market, but what is unexpected is that more stores have not jumped on the back-to-school bus. I’ve mentioned the stores that are doing a good job with the business, so you can pretty much guess who isn’t. Some of these guys are trying but they are certainly not in the same class as the best students of the season. All the more unexplainable is that most of the retailers know how to handle seasonal businesses. Most stores have already locked in their back-to-school programs for 2011, so we’ll have to see who gets a passing grade this year…and who gets a Big F for… messing things up. School’s out, but should be in, for home stores. Warren Shoulberg is editorial director of several home furnishings magazines for Sandow Media and has been reporting on the home business for a long time.

Little Bobcars BIG NEW PREEMPTOR By Robin Lewis

Don’t stop. Don’t pass “Go.” Go directly to the consumer

And, now I give you BobCar, launched in 2007, and one of the coolest and funkiest new distribution models I’ve ever seen.

a combination mobile sales boutique, showroom, and travelling billboard. You can also tell that it promises a highly engaging experience. And, most importantly, of course, is that it can travel to, even chase after, one’s consumers. It can chase after them anywhere - on the beach, in the mall, on golf courses, at sporting events and parades, in resorts; right in front of a store to urge them into the store, in parking lots, in their home (if it’s big enough), at commuter train stations, and, any other place you might think of (please email me with your ideas). And, by the way, it’s eco-friendly zero-emission electric, which, along with its flexibility, is a key advantage over “tractor-trailer tour” trucks.

What in the world is a BobCar? Well, it is a first. You can see in the accompanying photos that it’s

The BobCar was developed by Benjamin Cohen, a New York retailer who, after watching thousands

Kiosks, pop-ups, food carts, in-flight shopping, m-commerce, door-to-door, living room selling parties, tractor-trailer tour trucks and neighborhood small store formats are all fast-growing distribution models designed to literally get to consumers first, faster and more often than competitors, and are all forms of preemptive distribution.

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of people pass his store window, became obsessed with finding a way to get them to stop in.

The Brand Experience and Control Ambassadors In addition to customizing the BobCar design for each client brand, the BobCar folks also tailor the experience, using what are called Brand Ambassadors. For example, the newest concept, the BobCar Mobile Beauty Boutique, will have trained Brand Ambassadors with knowledge of everything “beauty” to provide personal demonstrations and samplings. If Sephora were a client, a BobCar Sephora Beauty Boutique might be stationed in front of a Sephora store with Ambassadors, suitably outfitted in Sephora-logoed apparel, beckoning consumers passing by to sample product and/or gain beauty tips. During this fun and educational experience, the Ambassador might provide a coupon offering to be redeemed in the Sephora store itself. The Ambassadors, according to a T-Mobile client are the “…key to the experience. They are professional, knowledgeable and aggressive (yet consumer friendly). Controlling the last 3 feet (as in retail parlance) is an understatement; they control the block.” T-Mobile visited over 100 retail and other locations in metropolitan New York, with each BobCar containing sixteen demo handsets, product information, LCD TV, T-Mobile rate plans, and Internet enabled laptops. Two trained Ambassadors per BobCar educated consumers about T-Mobile handsets and rate plans. Participants were given a $50 redemption card and referred to the T-Mobile retail shop, and redemption card could be redeemed online via the BobCar.

And, depending on the client’s preference, the products and/or services can be purchased on the spot. Of course, the traffic building benefit for the retailer is typically the primary goal. Other clients include Olympus, Samsung, Pentax, Wendy’s, Snickers, Target; Dunkin’ Donuts, Sara Lee, and others.

Preemptive Distribution, Great Experience and Turf Control Well, here I am again, with a unique new business example modeled on the three strategic operating principles for success as defined in my co-authored book: The New Rules of Retail: a mind-connecting experience, preemptive distribution, and total control, without which the first two would not be possible. Oh, go ahead and buy the book!

Over 6,700 phones were sold at T-Mobile Retail. Overall, they reported an average of a 200% sales increase per day when theT-Mobile BobCars were parked in front of their stores or chains like Best Buy.

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Quotes to remember JOHN FAIRCHILD, GLOBAL FASHION GURU AND FOUNDER OF W MAGAZINE, NAILS THE INTERLOPERS: “ If I see another movie star in a fashion magazine – it’s ridiculous! It’s a nightmare. That’s what they call the cutting edge,” he continued. “I hate that word. And buzz. It’s a crock. They love buzz! When I hear the word buzz, it reminds me of a chainsaw.” TWAIN HAD IT UPSIDE-DOWN. OUR “MASTERS OF THE UNIVERSE” FIND NO TIME AS ‘PECULIARLY DANGEROUS’ “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain FOLLOWED BY THIS RATHER STARK OPINION… “ In order to have a double-dip recession, you first have to have exited the recession – which we haven’t. What the government and its shills have been calling a recovery is nothing more than the predictable, but short-lived, effect of pumping the proceeds from issuing a lot of government debt into the chosen sectors of the economy.” – Casey’s Daily Dispatch ABOUT LOOMING INFLATION AND PRICING POWER, LISTEN TO THE ORACLE FROM OMAHA: “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. If you have to have a prayer session before raising the price by 10 percent, you’ve got a terrible business.” – Warren Buffet OF MICROSOFT’S AND NOKIA’S STRATEGIC PARTNERSHIP ALLOWING NOKIA’S USE OF THE WINDOWS SMARTPHONE PLATFORM, A GOOGLE EXECUTIVE TWEETED: “Two turkeys do not make an Eagle.” AND HERE’S SOME BRAIN PAIN. FROM THE SINGULARITY IS NEAR – WHEN HUMANS TRANSCEND BIOLOGY, BY RAY KURZWELL: “The Singularity will represent the culmination of the merger of our biological thinking and existence with our technology, resulting in a world that is still human but that transcends our biological roots. There will be no distinction, post-Singularity, between human and machine or between physical and virtual reality.

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

IllustratoRS Jodi Kostelnik, Joey Parlett and Steffi Sauer Contributing Columnists Warren Shoulberg Paco Underhill Dana Wood Advertising sales and rate information advertising@TheRobinReport.com

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Copyright © 2011 Robin Lewis, Inc. All rights reserved. Copying or reproducing, by any means whatsoever, of The Robin Report, or any distribution hereof, in whole or in part, without the express written consent of Robin Lewis, Inc. is strictly prohibited. The Robin Report is published monthly for senior executives in the retail, fashion, beauty, consumer products and related industries. The mission of The Robin Report is to provide new strategic insight into major industry and business events. It is intended to be concise for quick reading, provocative to stimulate thought, and humorous for fun and enjoyment. The opinions expressed herein are not, and should not be construed as investment or other advice. 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.