Reaching for Retail

Now that you’ve mastered the catalog and Internet channels, you may be contemplating a move into the retail arena. And why not — the argument for retail is compelling enough: Stores can help you reach customers who don’t buy via mail order and aren’t on lists, as well as shoppers who use the Internet to research products but still prefer to make the actual purchase from a store. Not to mention that it seems everybody else is doing it.

But before you get caught up in the multichannel madness, remember that retail is not for the faint of heart or the shallow of pocket. Running stores requires a long-term commitment from management, marketing, and accounting. It also demands unique skills and disciplines, such as merchandising in a three-dimensional environment, not found in the direct marketing discipline.

As Stan Fridstein, president of Westlake Village, CA-based catalog consultancy Synapse Infusion Group and cofounder of children’s cataloger/retailer The Right Start, says, “Selling unique merchandise is not enough to be successful in retail.”

So should you or shouldn’t you? Like any other major business move, the decision to go into retail should not be taken lightly and requires significant research to justify the investment. But you can start by asking yourself the following six questions:

  1. Is my product line right for retail?

    Certain products may not lend themselves to retail conversion. You’re unlikely to see Grass Valley, CA-based Bud Plant develop a nationwide chain of stores, for instance: The cataloger sells comic-book art and collectibles, and much of its product line is highly specialized. Ditto Lexington, MA-based Dharma Crafts, which sells meditation supplies — perhaps it could support one or two stores in certain enclaves in the country, but not in the Peoria downtown mall….

    Merchandising in catalogs is item driven, while stores tend to be focused on assortment, says Curt Barry, president of Richmond, VA-based consultancy F. Curtis Barry & Co. “Because space is precious on a page, catalogers are looking to pick the one item that stands out. But in retail, the customers want to see a breadth of merchandise and possibilities.” So if you sell primarily suits in a catalog you may be able to offer just a few shirts. In a store, however, customers expect to have a lot more choices.

    They also expect to see a lot of product. When customers walk into your store, “they should immediately see an overwhelming fullness on the shelves,” Fridstein says. An 80-page apparel catalog might feature three to five items on a page, which translates to 240-400 SKUs. By comparison, a 3,000-sq.-ft. retail store needs about 700-800 products. And if you sell large items such as furniture that take up a lot of space, you have to factor that into your store selling space.

  2. Does my niche lend itself to expansion opportunities to round out a retail assortment?

    Remember the old Saturday Night Live skit about the store that sold only Scotch tape? If the store had also sold, say, duct tape and other adhesives, along with wrapping paper and packaging, it wouldn’t have been a joke anymore, but rather a viable business. The lesson: To succeed in retail, you may need to augment your niche with related product.

    Fridstein puts it another way: “You need to make commitments to categories to show that you’re actually in that category.” A home decor and gifts cataloger can get away with featuring a single page of five books in the catalog. But if you open a store selling just five books, the books would look sparse on the shelf. What’s more, it would appear that you don’t really know about books, so even if the books were about gifts and home decor, a customer would probably opt to buy a book from a retailer with more of a selection.

    The good news about rounding out your retail assortment is that you may uncover some surprise winners, notes Jim Klaus, president of Richmond, VA-based kids’ apparel marketer Children’s Wear Digest, which has four stores in Virginia, including one outlet. “We’ve never been particularly strong with infant clothing in our catalog,” Klaus says. “But when we opened our Virginia Beach store in 1998, our retail customers were constantly requesting infant merchandise.” The company added infant items to the store, and “it continues to be one of our best retail categories.” Whereas the parents generally buy the clothes for older children, gift-givers account for a significant portion of infant apparel sales, Klaus notes. That may explain why it sells much better at stores, where it is more easily accessible for “a customer who needs infant clothing for a baby shower the next day.”

  3. Where would I open my first store or stores?

    Unless your catalog brand rivals that of Cabela’s or L.L. Bean — and is so strong that consumers drive hundreds of miles just to visit the store — location is crucial. You might want to start slowly with one location not far from your catalog headquarters so that you can keep an eye on it. But you have to be able to count on traffic coming from the surrounding area. According to Barry, more than 95% of a store’s traffic comes within a 10-mile radius.

    You’d probably want to conduct a zip code analysis to determine where your best customers are; this in turn could suggest which markets would be best for your business, says Michael Grant, a Scarsdale, NY-based database consultant who aided apparel cataloger J. Crew with its retail push in the 1990s.

    Stores in conjunction with catalog mailings and the Internet provide a synergistic combination of contact, distribution, and order channels. Catalogs mailed to catalog buyers who lived within 50 miles of a new store generated terrific results for J. Crew when it was starting its retail expansion, Grant says. Initially, J. Crew opened stores in New York, Boston, Philadelphia, and San Francisco. In each of these cities, J. Crew had more than 25,000 buyers. At the time, J. Crew’s recent-buyers file exceeded 2 million.

    To identify potential store sites, J. Crew created a zip code penetration index, Grant says: The number of catalog buyers in an area was divided by the number of households in that area to determine the percentage of existing J. Crew customers. This ranking was then adjusted to incorporate other factors such as average order sizes and retail store cost per square foot. One location that was selected had a very low penetration index but a high sales-per-customer figure; what’s more, retail space there was very inexpensive. The location proved to be extremely profitable for J. Crew, Grant says.

    But be careful. Unlike in Field of Dreams, if you build the stores, they won’t necessarily come. “The unknown with retail comes from going into a region that you may be unfamiliar with,” says Renee Behnke, president of Sur La Table, a Seattle-based high-end marketer of culinary tools. Started as a store in 1972 in Seattle’s Pike Place Market, Sur La Table launched a catalog in 1988 and began expanding its retail operations after the Behnke family bought the company in 1995. It now has 29 stores and plans to open about 10 more this year.

    Like J. Crew, Sur La Table used its catalog to pinpoint retail location possibilities, Behnke says, but a large part of its store plan depends on the opportunities in desired regions. For example, the marketer has identifed numerous catalog buyers in the San Diego area and has been trying for two years to open a store there but has yet to find its ideal physical location. “We know we’d do well in San Diego but we just haven’t found the right space yet,” she says.

  4. How much money will I need to open a store?

    Retail requires cash — lots of it. Depending on your location, retail displays, signage, lighting, flooring, cash registers, and security equipment can cost $50-$200 per sq. ft. And that doesn’t include the actual cost of the lease, let alone merchandise and staffing expenses. If your store is in a high-end mall, your construction plan, or build out, must be approved by the mall, and thus subject to their specifications, which is likely to create additional expenses.

    Fridstein offers a hypothetical example: For a 2,000-sq.-ft. store, count on spending $100,000-$200,000 for the construction plan. Add another $125,000 for inventory, plus you can easily expect to spend $25,000 on travel and training expenses. So far, you’ve invested about $250,000-$350,000, “and you haven’t made a dime yet,” he says.

    And don’t count on your catalog business to float your retail ambitions. Even the healthiest catalogers, Fridstein says, drop just 5%-10% to the bottom line pretax, which is not enough to open more than a few stores. If you’re serious about building a retail force, you should probably adjust your strategic plan to include added financing.

  5. Who do I hire to run my retail division?

    Of course, you’ll need personnel to manage the stores and sell the merchandise. Attracting and retaining hourly labor to work on the “front line” can be challenging to catalogers used to hiring only catalog managers and back-end employees. Children’s Wear Digest hires hourly employees to work in its stores, which is quite different from the salaried workers who make up the catalog’s creative and merchandise teams, says Klaus. The students and younger people who work at the stores on the weekend “are much less reliable and take considerable management time to oversee,” he says. Children’s Wear Digest’s stores average 2,500 sq. ft. and require five to seven full- and part-time workers to run — at an hourly wage ranging from $7 to $13 per hour.

    Also, all quality retailers employ a virtual merchandiser, who is responsible for making the stores visually appealing — a sort of creative director for the retail side, says Fridstein. “Most catalog creative directors are brilliant, but being a quality visual merchandiser requires an entirely different skill,” he notes. And as your retail division grows, you’ll want an executive with retail experience to oversee the new business unit, such as a vice president of marketing.

  6. What back-end systems will I need for retail?

    While a catalog management system (CMS) is designed to report demand by a specific catalog drop, retail reporting focuses on store and region, says Curt Barry. You’ll need a retail-oriented system to capture point-of-sale data for inventory management purposes. Based on store sales history, assortment planning systems forecast product/SKU needs by store classification and location so that you can arrange for steady replenishment.

Prices vary depending on the buyer’s sales volume, but specialized retail systems are comparably priced to CMSs. A system package for a company with 1 million orders a year will cost $100,000-$200,000, while a warehouse management system (WMS) will run about $300,000.

CommercialWare’s CWDirect fully integrates retail and direct channel systems. Service providers Retek and Manhattan Associates have back-end warehouse management software that can process your retail and direct businesses in the same system.

As for the distribution facilities themselves, you can start out fulfilling store needs from your catalog warehouse. But as your retail division grows, you’ll likely find it more efficient to set up a separate retail warehouse. The typical retail warehouse is designed to replenish stores with full cases and pallets, Barry says, and is a “flow through” facility, meaning product isn’t held as back stock. This makes it easier for retail warehouses to stage shipments to the stores, which could have deliveries once or twice a week, Barry says. You can also arrange for shipments from vendors to be predistributed by product/SKU and by store.

Channel Rivalry

When a cataloger expands into retail, says consultant Stan Fridstein, catalog revenue and efficiencies generally decline as mailings drive business into the stores. Catalog profitability — the difference between sales per book and in-the-mail costs per book — falls, and circulation managers often want to stop mailing into those retail areas.

Of course, the retail division head, whose management is compensated largely on increases in same-store sales, does not want catalog circulation cut. “Top management knows the catalogs are driving retail, and also that customers should be able to shop from all channels,” Fridstein says. The challenge is determining which division should pay for the catalog costs.

There is an equitable way of allocating the charges, Fridstein says: “The key is to define the catalog’s role in the emerging catalog/retail entity and to isolate its effect on retail volume.” To do so, you need to measure the effect and costs of mailing catalogs into areas also served by stores, and charge the retail division the difference between catalog gross margin contribution and variable cost breakeven. “If the costs are justified, retail should fund catalog mailings into retail zones,” he says. Otherwise you are pitting your catalog circulation management against retail executives.

Mailers first getting into retail must also realize that catalog sales may rebound after the novelty of a store opening in a region wears off. When apparel cataloger J. Crew first expanded into retail, traffic surged at the new stores while catalog productivity declined significantly in areas around the stores. “This was confirmed by key catalog statistics, such as average order and recency, which were measured regularly before and after store openings,” says Michael Grant, a database consultant who worked with J. Crew on its retail strategy.

These measurements consistently showed distinct reductions in demand per catalog of 25%-40% depending on the distance from the store, Grant says. But within two years after a store opening, J. Crew’s catalog productivity in the area returned to previous levels.

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