What’s Happening to Core Retailers? Things We Won’t Argue About- and What They Mean

Now, not all that long after I accomplished that feat, I’m not sure it really matters. I’ve begun to be concerned that the traditional concept of core stores is of diminishing importance (or at least they are being treated like they are of diminishing importance), and changing that is what this article is about.

 

I’d been thinking about this for a while.   But there were three pieces of information that finally made me decide to tackle it even though I knew it might not be too popular a point of view. In my endearing naiveté, I think that what’s important is that you consider the business issue being raised regardless of whether you believe I’m right or wrong. 

 

 

Anyway, the first piece of information was the announcement that VF Corporation, the owner of the Nautica, Lee, Jans Sport, Vans, Wrangler, Reef brands, and a whole lot of others for that matter, was planning to go from 600 to 1,200 retail stores over five years. I didn’t even know they had 600 retail stores.

 

The second was a Business Week online article that talked about brands opening their own stores as a “survival strategy” response to big department store chains having fewer store fronts due to consolidation and chains getting better and better at designing and selling their own higher margin private label brands.

 

These two pieces of information made me realize how wrong I’d been two years ago when I asked a panel of specialty retailers at the Surf Industry Conference what they were going to do when there were 5,000 company stores in the U.S. I should have said 10,000.

 

The third was reading through the prospectus for Zumiez’s very successful initial public stock offering and noting that the company’s gross margin for its last complete fiscal year was 32.8 percent. Pac Sun’s, by way of comparison, was 36.4 percent. Both are doing a fabulous job and they do it with a gross margin that would put a traditional specialty retailer out of business in about 20 minutes. Don’t like Zumiez or Pac Sun for whatever archaic, incestuous action sports reason? Get over it. Their many customers like them and that’s what matters.

 

 

So small core shops can not sell the same product as specialty chains at anywhere near the same gross margin and expect to survive. That’s the first thing in this article that I don’t think anybody can argue with.

 

Just for clarification, when I say “small core shop,” I don’t mean the guy with five store fronts or with one store doing $6 million annually. It’s not like it’s a walk in the park, but they can do well or even prosper. The second thing we can agree on is that there are fewer of these small core shops than there use to be. A lot fewer I think. I wish I had numbers on that. And no, I don’t know how many store fronts you have to have before you become a chain.

 

The third thing I don’t think anybody will argue with is that fewer brands are accounting for a larger percentage of total sales. Next is that these brands all want to grow. How’s that for a blinding glimpse of the obvious? And I don’t think I’ll get much disagreement if I suggest they are very interested in the broader lifestyle market as the major source of that growth- because after a certain size, that’s the place much of it has to come from.

 

 

Given these “things we won’t argue about,” what might the motivations of larger brands be. How might the specialty stores fit into their plans?

 

The law of large numbers tells us that it gets tougher and tougher to get big percentage growth as your base starting number gets bigger and bigger. What that means is that even if a larger brand gets good increases from core retailers, it just won’t move the revenue or profit numbers as much as it use to. If you just talk about the small core retailers, it moves those number even less- perhaps not enough to really matter? I suppose, though you may be getting tired of my saying this, that that’s another thing we won’t argue about.

 

From a strict financial point of view, then, I can imagine that the larger a brand gets, the less it is focused on the core shops- especially the smaller ones. Most brands believe, I think, that core shops still have an important role to play in developing new brands, identifying industry trends, creating excitement, building the foundations of the sport, and defining the lifestyle. They want them to succeed. 

 

But there’s all this qualitative stuff and then there’s the sales manager sitting there with a budgeted sales increase she really needs to make. And the larger the company, the bigger the number in dollars. Where’s it easier to find those additional sales dollars? From a bunch of small shops or from one chain of 50, or 500, stores?

 

The sales and marketing people recognize the importance of the qualitative factors in establishing their competitive position and keeping on top of the market. Maybe the brands with their own stores think they can get some of the same kind of input through those stores that they can get through core shops. I don’t happen to think that’s true.

 

If I were a larger brand, I’d select, let’s say, 50 shops in Europe that are established, well run, influential, and on top of their market and its trends. We’d all probably pretty much pick the same shops for that select list.  Maybe it’s shorter than fifty. The greater your presence in those shops the better. I’d make sure my brand was well represented in those shops even to the extent of making some deals I would not necessarily make with a shop that’s not on my list. I’d utilize my relationships with those shops to gather much of my core market and retail trends information.

 

If your brand’s sales increases are less likely to come from smaller core shops, your customer base is increasingly broader than those that they appeal to, you believe you can get the marketing and trend information you need from a smaller, select group of shops and the dangers of broader distribution have declined dramatically, where would you focus your time and effort? I know where I’d focus mine.

 

Maybe I should have started with this section so small shop owners weren’t rushing to their doctors for lithium prescriptions for depression by the time they got here. 

There’s no advice leading to a miracle fix here. Hard goods are tough, shop owners need to run their shops like businesses, margin and competitive pressure is real, and your revenue level needs to be higher than it use to be for you to have a viable financial model.

 

But I want you, on the other hand, to consider the size of the potential market out there and all the people who want cool shoes and clothing but aren’t ever going to buy a skate board. My god, it’s huge. If it wasn’t, frankly, you wouldn’t have these problems- or these opportunities.

 

Do what I do from time to time- wander into a shop in a chain you think is doing a good job. Not for a five minute walk through. Talk to the sales people. Engage the manager in a discussion about how they do things and why. Look at their layouts and their use of wall space. Watch who their customers are. Make some notes about their pricing. Rigorously compare what you carry with what they carry. I do this to gain information (not often enough) without saying I’m writing an article or making an appointment or anything. I just engage whoever’s around in a conversation about the store and the industry.

 

Who on your list of the absolutely best shops is in your area? Go visit them and do the same as with the stores above. How come the biggest brands are so focused on those stores? It goes beyond sales volume I think you will find. Ask the owners, who will probably be willing to talk to you if you call them in advance and if you aren’t too direct a competitor, how come they are so successful.

 

Look, you do have a certain level of legitimacy that the chains don’t have and there’s a huge potential market out there. You can go after your piece of it without losing your vibe, or coolness, or whatever the word is to explain your distinctiveness. In fact, you have too. It may look risky, but consider the alternative. Do what you have to do to be one of the stores that major brands feel they just have to be in.