Biting to the Core: The Future of Mom-and-Pops, the Majors, and Brand Labels in the Evolving Retail Landscape
In a rapid and rather remarkable convergence of four key trends, a lot is changing for core retailers and for retail in general. The accelerating push of large brands into retail, their reduced dependence on core shops, the decline in the number of true core shops, and the financial/management model required in our new economic environment pose many challenges but also many opportunities for those still standing. I’ve written about some of these issues before, but it’s time to pull them all together. There’s a lot to cover, so let’s get started.
Evolution of the Core Shop
Once upon a time, 20, 30 years ago (pick the timing for the sport that interests you most), a true core shop was the place you dropped in on to get your fix of whatever subculture sport you were in to. You were an active participant part of a tight community, the products were niche and exclusive, and the few other places to turn to for the goods you were looking for took some effort. The folks in the shop had thorough knowledge and the best product service not to mention they were participants themselves who really lived the lifestyle and were driving forces in the progression of the time. They were the first to see new trends and introduce innovative products.
There was a certain interdependency between brands and shops. A bigger percentage of a brand’s sales went through the core shops, there were fewer other distribution channels, and there was more of a risk to consumer brand perception if they went outside the core shops. Further, the cost structure of the time made it easier for the small retailer to succeed. There was one land phone line. No computer and internet expenses. Insurance was a lot less. Stores weren’t open as many hours. Consumers had fewer options in terms of getting their hands on product and product information. Bottom line: It was considerably easier to be a destination shop.
Then some time after 1980 began the great economic melt-up. At some point even further down the road, “shops” started to pop up like mushrooms on damp, warm, manure. If they carried a collection of hardgoods and stood alone as single brick-and-mortar storefronts or even small independent chains, we labelled them as “core.” Eventually, large numbers of doors emerged. But the cost of operating a shop grew. Competition exploded and put pressure on margins, distribution expanded, consumers had more choices and easier access to products and information, internet sales took off creating a space of zero travel distance between product and consumers, brands moved into the retail space, and lifestyle customers became increasingly more important than participants. Brands, as they grew, inevitably became less dependent on core shops.
None of these emerging trends mattered so much as long as sales and cash flow grew and the economy was throwing a wild party. But like always happens, the bash ended and there were some terminal hangovers involved. All of the issues that growth and cash flow had let us work around came home to roost. Many core shops have had to scramble for cover or, worse, literally close up shop.
Thing is, though some may have been independent of any significant financial source, many of them were never really the core shops outlined above in the first place. We called them that because we didn’t have a better term and it didn’t really seem to matter. What were they then? I don’t know. Aberrations of a hot economy? Symptoms of unsustainable consumer spending?
Now, the overall number of shops has declined. The real core shops—the kind that were around a couple of decades back—will get a little breathing room if only because there are no longer five shops in a 10 block area. But not, in all cases, enough breathing room because the trending issues touched on above that economic prosperity allowed us to push to the side are still very much alive. And, as we’ll see below, big brands are getting very serious about retail.
The New Economic Model
Sales growth, though improving over last year, doesn’t seem likely to return to 2006 or 2007 levels. Credit is tougher to obtain and that issue is likely to stick around for a whiile. Being aware of risk and actually managing it is back in vogue.
Inventory is being vigilantly managed and expenses carefully controlled. The focus should now be on generating more gross margin dollars. You can’t get anywhere without a strong balance sheet. Systems, which are pretty bad in a lot of smaller retailers and brands, are a strategic advantage and a place you need to spend money. Issues of the cost of doing business, distribution, and the internet are not going away even when the recession completely ends. And consumers, though they seem to be spending more than they were a year or so ago, haven’t reopened their wallets with the same giddy abandon we enjoyed for so long.
What’s been really interesting are the conversations with shops and brands that have had to cut spending pretty dramatically and manage their businesses more closely. Almost universally, they tend to say, Damn! If only I’d done this 10 years ago, I’d be in great shape and have a whole lot more money in the bank. Turns out that, in many cases, these necessary actions the economic downturn required of retail to stay afloat were just smart business moves. Just because there was a long period where it wasn’t absolutely crucial to run your business well doesn’t mean there wasn’t a lot to gain by doing it. Oh, by the way, now you have to or you won’t be around.
The Eight Hundred Pound Gorillas
The conventional wisdom on why core stores are important to our industry says that they’re an early warning system for trends coming and going, they are builders of community, they provide better margins for both the shop and the brands sold in them because of who the customers are, they are incubators of brands, and they help keep the sport and culture a bit edgy and, well, special.
Obviously, some of that isn’t as true as it used to be, but I still think core shops are important. I’m not certain some larger companies feel as strongly about that as they once did. Or, at least, they have other priorities that make them less sensitive to the role of the core shop than they once were. Among these priorities is growth. It’s a public company thing and the growth, mathematically, just can’t come from small shops.
I’ve been pretty surprised over the last couple of months to hear what some of these major companies are saying in their Security and Exchange Commission filings and in the company conference calls where they discuss their results publically, meaning anyone can listen. All the quotes compiled below are from one of those two sources. Overall, they seem unclear about growth opportunities in core stores and, moreover, about the survival of some of those stores.
Billabong CEO Derek O’Neill says, “I can’t sit here at all and say that all the accounts that we’re currently dealing with will still be there in three months time.” He also says his company may have to tighten credit by the end of the next six months.
Genesco CEO Robert Dennis (Genesco owns U.S. shoe chain Journeys) notes that when, for example, a five-store chain has a lease coming up for renewal, it will find Genesco on their landlord’s doorstep taking over that space. The other thing that’s happening, as Dennis describes in discussing Genesco’s hat, uniform and sport apparel business, is that they “…are consolidating the industry,” he says. “The mom and pops are going out of business or they are credit constrained and can’t stay fresh.” I’m not so sure that’s any different than in action sports.
It’s interesting to note how U.S. retail giant Zumiez characterizes its stores in a recent 10-Q report. Except for being in malls, it’s typical of the description a traditional core store might use: “Our stores bring the look and feel of an independent specialty shop to the mall by emphasizing the action sports lifestyle through a distinctive store environment and high-energy sales personnel. We seek to staff our stores with associates who are knowledgeable users of our products, which we believe provides our customers with enhanced customer service and supplements our ability to identify and react quickly to emerging trends and fashions. We design our stores to appeal to teenagers and young adults and to serve as a destination for our customers. Most of our stores, which average approximately 2,900 square feet, feature couches and action sports oriented video game stations that are intended to encourage our customers to shop for longer periods of time and to interact with each other and our store associates.”
The big companies are also coming around to the idea that they can potentially merchandise their own brands in their own stores better than through core stores.
Nike: “We will continue to invest in bringing world-class solutions to consumers who are hungry for new retail experiences. Nowhere is this more important than online. The digital lifestyle is driving dramatic change in our industry and significant potential to our company. We are attacking that in every dimension; online shopping, customization, immersing our brands in consumer cultures and telling inspiring and entertaining stories.”
Billabong: “If you look at the wholesale level, most of the business going on, the buyers are focused on your price point category and up to your mid price print category. …In our own retail, which has definitely outperformed our wholesale side in this period, in our own retail we can showcase and merchandise a product across all the price points and we’re doing really well right across the board.”
Billabong continues: “…we are beginning to drop product into our own retail even faster than wholesale channel. We are beginning to, on certain key styles… build product that may go into our own retail before even the wholesale consumer sees it in an indent process.”
They see systems and operations as key. Operating well is a key advantage that can put a lot of money to their bottom lines.
Zumiez: “We have developed a disciplined approach to buying and a dynamic inventory planning and allocation process to support our merchandise strategy. We utilize a broad vendor base that allows us to shift our merchandise purchases as required to react quickly to changing market conditions. We manage the purchasing and allocation process by reviewing branded merchandise lines from new and existing vendors, identifying emerging fashion trends and selecting branded merchandise styles in quantities, colors and sizes to meet inventory levels established by management… Our management information systems provide us with current inventory levels at each store and for our company as a whole, as well as current selling history within each store by merchandise classification and by style.”
Nike: “To do that we committed to building our retail capabilities, smoother product flow, surgical assortment planning that focuses on key items, more compelling merchandising, stronger brand stories and more efficient back-of-house systems.”
Billabong: “If you look at the big retail brands out there, they don’t have a buyer to get past, they just decide what they’re going to make and they put it in their own stores and therefore they could have a very short cycle.…we are looking more and more at some of our own retail stores where we can looking at touching on a more vertical model. And not having that delay with going out and having an eight week ordering pattern and then go away and ordering product, we’ll just go straight to retail.”
PacSun talked about doing the same thing in their conference call last week. Genesco’s CEO characterized small retailers systems as being “from the dark ages.” The current overall consensus from these big brands and major retailers is that they’re looking at the vertical integration and fast fashion models of retailers like H&M and American Apparel. Essentially offering on-trend, in-season apparel at lower prices. What’s more, these retailers stock stores more frequently, but with limited quantities of merchandise, giving shoppers a reason to visit stores more often. As you can see, there’s a lot going on in the retailing world. So what’s a smaller retailer to do?
The Road Ahead
The first thing to recognize is that only you as a shop operator can change your own behavior. These big companies are going to do what they’re going to do. As the saying goes, it’s just business, and developing outward is the natural progression of economic growth. The good news is that there’s a role for specialty shops based on the original model, that is to say, a store that properly services the core participants of the sport and lifestyle. But you’re going to have to run your shop like a business. Location and community will be your key attributes, and a credible online presence is now a requirement. Running it like a business is just the price of admission.
Another piece of good news is that there are some natural limits on just how big big chains can get while still being credible. In his first conference call as Pac Sun CEO, Gary Schoenfeld said, “Nobody needs 900 Pac Sun stores.” The company is trimming back and reducing its number. Journeys store numbers will be almost static over this year. Genesco expects to open only 50 stores over five years across the whole company. Meanwhile, Footlocker, The Gap and Starbucks are other big retailers who we’ve seen that have learned this lesson and had to close storefronts.
Next, some of your suppliers—skate comes to mind—are able to supply you with new product regularly and quickly. Take advantage of that to the fullest extent possible. Another important element, and something that has been lost in recent years, but goes back to the historical specialty shop model, is finding and featureing new brands—even when it looks risky. It’s a point of differentiation you can’t afford to give up, and what’s even riskier is not taking chances on smaller, emerging brands. It’s always been the case that new brands grow up in the core shops and then move on into broader distribution. It’s true that it may be happening faster than in the past but that comes under the heading of something you can’t fix. That doesn’t mean you’re helpless. Favour brands that offer product exclusively for specialty shops. Do some private label (but not too much, you don’t want to completely bite off the hand that feeds you) that gives you a better margin.
Recognize the bigger brands’ concerns with the price points you’re buying and your ability to merchandise across their line well in the space you have available (see the quotes above). You’re never going to be in a position to carry everything by Quiksilver or Burton, but sit down and work with your brands to achieve a mix you’re both happy with. I mean, what’s wrong with saying to Brand XYZ, “Look, I’ve only got x-number of square feet in the whole store and can’t do what you’d like without turning myself into a Brand XYZ store. But I’d love to sell more expensive, faster-turn product that puts more gross margin dollars towards the bottom line. How can you help me do that?” Recognize their legitimate concern and interests in this area. If they don’t have a good answer, you’ve learned something and at least your conscience is clear. And if they do have a good answer, you might make a few more bucks. Finally, remember that the best shops give credibility to the brands they carry—not the other way around. I can’t believe how much mileage I’ve gotten out of saying that.
Okay, let’s talk systems. A lot of retailers, perhaps more than half in action sports, have point of sale systems that they don’t use as anything but glorified cash registers. That’s got to end. If you agree that your focus has to be on capturing gross margin dollars and that you can no longer rely on big sales increases, then what choice do you have? You probably already own most of the hardware and software you need. If not, it’s cheap enough to get. Yes, the training will be a pain in the ass and this management accounting stuff kind of sucks, but if you don’t know which inventory is moving (and which isn’t), how quickly, and at what margins, then you are simply screwed. At best, you’re leaving a pile of money on the table. Good for you if you can afford that. At worst, poor systems will guarantee you go out of business.
Conceptually, the whole analysis above isn’t that hard to get your head around. Do you agree with the evolution and role of core shops I’ve described? Does the financial model make sense given the current economic conditions? You can’t argue with what big brands are doing in retail. They are doing it and they are transparently telling you they’re doing it. But don’t despair. You’ve got tools and you can compete, even prosper, if you just remember the values of what the core shop really consists of and apply these to your own retail environment.
Spot ON!!!!
Thanks Juli. It’s all pretty clear if you just read what the bigger brands are actually saying.
J.
Wish I could write so well.
Thanks Mom!
J.
Great article. I’m finishing up a plan for a skate shop and indoor park, recognizing that in this environment I will need them both as a differentiator. That said, I’m looking for a recommendation on a POS system that tracks both shop sales and park usage. Thoughts?
JM,
I think putting a shop together with a park is a great idea. The difficulty, of course, is that you need a lot of room and paying for that somewhere that’s convenient to a lot of skaters might be a challenge. I assume you’ve worked that out. I don’t have a specific system to recommend. I guess all I’d say is that there are a lot of them that will work fine. The key isn’t so much what system you buy, but that you set it up and use it right. I can’t think of anything unique about a park that would make it require software different from the shop, can you?
Thanks,
j.