The Big Story
When Less Is More
Paul Alexander, CFA
We here at Consensus published a short presentation last week called “15 Hot Takes on the Modern Consumer Economy.” The deck contained 15 slides, each with a different aphorism relating to the retail landscape or consumer behavior and a few supporting statements. One slide proclaimed, “We Are on the Road to Recovery from Our Inventory Addiction,” and the accompanying discussion spoke about new methods of improving inventory efficiency, including showroom stores and better systems for buying and planning. This was a theme in our colleague Doug Stebbins’s Big Story entry last week, where he wrote about Nordstrom’s new concept store, which will carry very little inventory, and will instead offer customers the personalized attention of stylists. Both the inventory Hot Take and the Nordstrom story frame the reduction of inventory as either a byproduct of new technology, or an experimental new method of retailing. However, a front-page article in the Wall Street Journal last week exposed that we’ve neglected to write about an infinitely simpler, low-tech method of controlling inventory that may be making a comeback: buying less inventory to begin with.
Simply buying less inventory may seem crude, or even risky, but as the Journal reported last week, it works for Aldi, the German grocer that announced its intention this summer to spend $3.4 billion over the next five years on expanding its presence in the U.S. Aldi has built its success on a much smaller, more curated assortment of products than typical grocery stores. This approach to merchandising and inventory management yields a number of benefits. First, a smaller assortment means smaller stores and less staff, which reduces expenses. Second, a limited assortment of brand-name products gives management more negotiating power with suppliers, resulting in lower costs; Aldi’s prices are on average almost 17% lower than Wal-Mart’s on like items, according to Customer Growth Partners. It also enables management to focus more closely on ensuring that each product in the store is of the highest quality and value. Lastly, more edited assortments are easier to shop for customers.
Limited assortments may seem counterintuitive in world where Amazon’s success is frequently attributed to its “endless aisle” of virtually unlimited selection. However, it is precisely because of Amazon that stocking a large selection of products, especially those that can be easily purchased online, no longer makes sense for most retailers. As Amazon has become today’s category killer in nearly every category, traditional retailers trying to offer large assortments are fighting an unwinnable fight – just ask electronics stores, book stores, and, most recently, toy stores.
As many observers have argued in recent years, the better strategy is to compete against Amazon in one of the behemoth’s blind spots. For instance, Nordstrom’s showroom concept is about personalized attention and providing an experience; things Amazon can’t and doesn’t offer. Other retailers use their authority in a category and limited assortments to stress that the products they do offer are perfect. If this tack is executed well, consumers don’t miss the broad selection. Sometimes, consumers are relieved and happy to be spared the effort of sifting through numerous options. Consider Apple, and the success of its limited assortment. Yes, the company offers certain variations within each franchise, but Apple is based on the proposition that it offers the perfect phone, the perfect computer, and the perfect tablet.
Unfortunately for retailers, simply reducing inventory doesn’t have many benefits unless they are offering truly great product. And consistently building an edited assortment of compelling product is difficult to do with consistency. However, there is an entire profession devoted to this endeavor (talented merchants may be rarer these days, but they are not extinct), and the industry does appear to have realized that it needs to do something differently. Perhaps the retail world hasn’t fully recovered yet from its inventory addiction, but at least it has admitted that it has a problem.
Headlines of the Week
Toy store chain Toys R Us filed for bankruptcy on Monday, 9/18 after struggling for years to pay down billions of dollars in debt and remain relevant in an era of online shopping. Toys R Us been spiraling toward bankruptcy for years as it failed to keep up with competitors. Analysts cited many reasons for the company’s demise: Lousy in-store customer service, a second-rate website and prices that are often higher than at many of its big-box competitors. Add to that piles of mounting debt — much of it dating to a 2005 leveraged buyout — and it was clear, many said, that the 60-year-old brand was in trouble. The company said its 1,600 Toys R Us and Babies R Us locations would operate “as usual,” and that it would work with its investors to address its debt of about $5 billion. The filing cites $7.9 billion in debt against $6.6 billion in assets and the company has more than 100,000 creditors.
Amazon is growing its partnership with department store chain Kohl’s. Earlier this summer, the two companies announced that Kohl’s would begin selling Amazon devices, such as the Echo and Fire tablets, at 10 of its stores. On Tuesday, Kohl’s said it will begin accepting Amazon.com returns at certain U.S. locations. The retailer will pack and ship eligible items — back to an Amazon fulfillment center — for free. “This is a great example of how Kohl’s and Amazon are leveraging each other’s strengths – the power of Kohl’s store portfolio and omnichannel capabilities combined with the power of Amazon’s reach and loyal customer base,” said Richard Schepp, Kohl’s chief administrative officer. As an added bonus, customers visiting Kohl’s for Amazon returns can use “designated parking spots” near store entrances. In this partnership, “convenience” for consumers is key, Kohl’s has said. Starting next month, the Amazon return service will be available at 82 Kohl’s stores across Los Angeles and Chicago.
Apparel & Footwear
Ask any woman. Shopping for bras is a pain, sometimes literally. And if you’re what they call curvy? Good luck with that. But there’s fresh hope on the plus-size horizon, with brands including Calvin Klein and specialty retailers such as Brayola introducing more brassieres in 40DD and beyond. It’s part of a new push by clothiers to appeal to full-figured women in the U.S., where the average dress size is between 16 and 18, according to trend-forecasting company WGSN. The only surprise is that it has taken so long. Plus-size women’s clothing is a $21 billion sector growing at a rate that researcher NPD Group Inc. pegged at some 6 percent last year — about three times the average for clothing in all sizes. And one of the fastest-expanding segments is lingerie, per IBISWorld.
The fledgling but growing online tuxedo rental market has a new power player. Generation Tux, the online suit and tuxedo rental company founded in 2014 by retail veteran George Zimmer, who founded Men’s Wearhouse, has completed the acquisition of Menguin for $25 million. The announcement comes at a time when Menguin, founded in 2013, has experienced three years of 800% compound annual growth rate, according to a company statement. “We built Generation Tux to be the ultimate high-tech, high-touch clothing rental experience. Menguin’s digital marketing and entrepreneurial leadership sparked my interest; upon meeting, it became clear that we could do more together than apart,” said Zimmer. The two companies will operate as separate brands under the new holding company, Gen Tux, while leveraging their combined operational, technological, fashion and fulfillment expertise.
Crocs, perhaps the most polarizing shoe of our time, is making a comeback. The company’s signature foam clog fell out of favor a decade ago, but now it is a star reborn on Twitter and beyond: On the runway, in the pages of Vogue and on feet of people who feel a little funny about it but can no longer resist. The turnaround is no accident, analysts say, but rather the result of four years of strategic changes, following a $200 million investment by private-equity giant Blackstone Group in 2013. Since then, Crocs has closed hundreds of under-performing stores, done away with unpopular styles and shifted its focus back to its classic foam clog, which sells for about $35 and accounts for nearly half of the company’s sales. “The classic clog has re-emerged as our hero,” said Terence Reilly, chief marketing officer of Crocs. “Certainly in 2017, there’s been a resurgence.” Annual sales have exceeded $1 billion for six consecutive years, and profits rose 54 percent in the most recent quarter.
Athletic & Sporting Goods
Adidas has passed the Jordan brand as the second-most popular sneaker in the United States, market tracking company NPD Group announced. “I’ve never seen a brand in the sneaker industry grow this fast,” NPD sports industry analyst Matt Powell said. From January through August of this year, Adidas had 11.3 percent of the U.S. market share by dollars. That was up from the 6.6 percent the brand had over the same period last year. Meanwhile, the Jordan brand essentially stayed steady, growing only from 9.4 percent to 9.5 percent year-to-date. The leader in the marketplace, Jordan brand owner Nike, dropped from 39 percent of the market share for the first eight months of last year to 37 percent for the first eight months of 2017.
Sports equipment maker Bauer has unveiled a collar-like device it says can protect against microscopic brain damage in athletes playing contact sports like hockey, soccer and football. Researchers who developed the NeuroShield say it’s not known yet whether the product can also prevent concussions in players who suffer head trauma. The NeuroShield collar is worn around the neck and applies a slight pressure that increases blood volume in the veins around the brain, helping to reduce movement of the brain inside the skull. Damage occurs when the brain sloshes around inside the skull due to a blow to the head.
Cosmetics & Pharmacy
Walgreens Boots Alliance announced that it has secured regulatory clearance for an amended and restated asset purchase agreement to purchase 1,932 stores, three distribution centers and related inventory from Rite Aid for $4.38 billion in cash and other consideration. After all stores are acquired, stores are planned to be converted to the Walgreens brand in phases over time. The stores to be purchased are located primarily in the Northeast and Southern U.S., and the three distribution centers to be purchased are located in Dayville, Conn., Philadelphia, Pa., and Spartanburg, S.C. The transition of these distribution centers to Walgreens will not begin for at least 12 months.
Dealmakers Anna Sweeting and Montse Suarez have launched Vaultier7 (V7), the UK’s first female-led specialist investment fund focused on beauty, personal care, health and wellness and lifestyle businesses. The new venture has received backing from the Puig Family, the owners of the Puig fashion and fragrance empire, among other investors, and has been formed to take advantage of rapid change in the consumer landscape as a result of digital transformation, demographic changes and shifts in purchasing patterns.
V7 will invest in companies with revenues of £3m to £15m, providing growth capital between £2m and £10m, with a focus on UK and Europe.
Discounters & Department Stores
As sales and foot traffic decline, department stores are looking to new designers and brands to drive people back in. Last week, Neiman Marcus announced the arrival of Luxe Lab, a boutique-like collection of merchandise picked from a group of “forward-thinking” designers, including Simone Rocha, Nour Hammour and Francesco Scognamiglio. According to a Neiman Marcus spokeswoman, the goal of the Luxe Lab is to offer a selection of pieces from designers outside of the typical lineup, establishing the retailer as an authority for up-and-coming fashion. In the first assortment, which is online and available in 14 Neiman Marcus stores, a handful of the items are exclusive to the retailer.
Wal-Mart Stores Inc. won’t be hunting for seasonal workers this holiday season, even as it gears up for a surge of shoppers. Instead, the company is expecting its current staff to add hours and earn more money during the Christmas season — an approach Wal-Mart says was popular with employees last year. The move contrasts with Target Corp.’s plan for the holidays. The retailer expects to add 100,000 temporary workers — a record for the chain — and is holding a nationwide hiring event next month. The number is more than 40 percent higher than last year’s 70,000.
Grocery & Restaurants
In a move the company said would “reinvent the way consumers discover, purchase, and experience food,” Albertsons Cos. said Wednesday it would acquire New York-based meal-kit company Plated. Terms were not disclosed of the deal that is expected to close later this month. Albertsons said Plated would operate as a wholly owned subsidiary of Albertsons under its own leadership team led by its co-founder and CEO Josh Hix.
Luna Grill, the San Diego-based Mediterranean concept, on Monday said it has received an investment from the private equity firm PWP Growth Equity. Terms of the deal were not disclosed. The investment should give Luna and its co-founders, Sean and Maria Pourteymour, the resources to expand the chain they started in 2004 and since expanded to 38 locations across Southern California and Dallas-Fort Worth, Texas. The company said the deal is “specifically targeted to spur growth in existing and new geographies.”
Global Franchise Group on Friday said it has acquired Round Table Pizza, giving the Atlanta-based owner of Great American Cookies and Pretzelmaker a growing, 450-unit pizza chain. Terms of the deal were not disclosed. But the acquisition gives GFG its fifth brand, and one that has seen steadily improving sales in recent years. Round Table was an employee-owned company. Global Franchise Group, owned by private-equity firm Levine Leichtman since 2010, operates Hot Dog on a Stick and Marble Slab Creamery/Maggie Mooe’s Ice Cream, in addition to GAC and Pretzelmaker. The Round Table acquisition gives GFG a portfolio of brands that operate more than 1,500 locations and have nearly $1 billion in combined system sales.
Home & Road
A combination of restructuring costs, Hurricane Harvey and a new accounting standard took its toll of Bed Bath & Beyond’s second quarter results. For the quarter ended Aug. 26, the home goods retailer reported net sales of about $2.9 billion, a decrease of about 1.7% from the same time last year. Comparable sales also decreased by approximately 2.6%, worse than analysts’ expectations of a 0.7% decrease.
Love’s Travel Stops & Country Stores is set to buy Bridgestone Americas’ national network of stations that provide services for the trucking industry, Speedco. Speedco has operated as a subsidiary of Bridgestone for the last decade, and has been around for more than 25 years. It has 52 locations across the country that provide maintenance and lube services. The acquisition of Speedco, when finalized, will bring the number of tire and lube service facilities to 323. Love’s is a privately owned company based in Oklahoma City, Okla., and owns the Truck Tire Care line. The deal needs regulatory approval.
Jewelry & Luxury
New York–Much of what’s contained in De Beers’s 2017 Diamond Insight Report was foreshadowed by company executives at the annual Forevermark breakfast held during the Las Vegas jewelry shows back in June. There, Forevermark U.S. President Charles Stanley and Stephen Lussier, Forevermark’s London-based global CEO, shared some details about Forevermark’s plans for the fourth quarter, announcing that this year, the diamond brand’s major marketing push for the year will be women-centric. Why? Because women today are buying more diamond jewelry for themselves as they gain power, position and money in the workforce, and they also are exerting greater influence over those pieces bought as gifts for them.
Given the huge volatility experienced by bitcoin in recent weeks and months, it was something of a surprise to see a jeweler in London offering customers a digital currency payment option. Samer Halimeh, a luxury diamond retailer headquartered in Knightsbridge, Samer Halimeh has decided to start accepting bitcoin for the jewelers’ retail services and business-to-business (B2B) gemstone trades. “We are the first diamond dealer and Bond Street level luxury jeweler to start accepting and trading using bitcoins,” Halimeh was reported as saying. “This is because we have seen rising inquiries for this digital currency from clients, suppliers and trading partners.” He said that the company has up to now dealt with US dollar purchases from clients in the Gulf and Asia. However, over the past 18 months, customers have been acquiring large amounts of bitcoins. Halimeh says an “increasing number of clients” have been asking to purchase goods with bitcoin. This is particularly the case with VIP customers who buy jewelry costing in the millions.
Office & Leisure
Rest easy, kids. Toys “R” Us isn’t going anywhere, at least not if the makers of Barbie and Transformers have their way. The company, which operates about 1,600 stores globally, will likely survive because manufacturers such as Mattel, Hasbro and closely held MGA Entertainment Inc. need the last remaining toy chain. These vendors are eager for whatever remaining leverage they have against the might of Amazon and Wal-Mart, the bane of all companies focused on a single category of shopping. “Oh my God, they are very important, and people don’t understand,” Isaac Larian, founder and chief executive officer of MGA, said of the toy chain. “That’s the only place where kids can go and just buy toys. There is no toy business without Toys ‘R’ Us.” For its part, the company said it doesn’t plan to close stores and will continue normal operations at its namesake outlets, as well as Babies “R” Us, and their websites.
On Tuesday, while Toys “R” Us Canada was in Ontario Superior Court seeking protection from creditors, Mastermind Toys announced the launch of its 56th store, part of a national expansion that will see the Toronto-based chain overtake its giant competitor in two years. Four more Mastermind locations are scheduled to open in Canada before the end of this year, for a total of 12 openings in 2017. Twelve more are scheduled for 2018 and another dozen in 2019, bringing the total number of stores to 84, with an eye to as many as 90 in three years. Meanwhile, Toys “R” Us, crushed by debt and restructuring while court orders hold creditors at bay, currently has 82 stores in Canada. The stores are vastly different in size — Masterminds are in the 5,000 square foot range while Toys “R” Us stores are around 35,000 square feet — but it’s an impressive feat nonetheless.
Technology & Internet
Since launching the beta mode of its new luxury platform in July, resale company ThredUp’s Luxe program is already on track to rake in $10 million dollars in sales by the end of the year. As it prepares to open to the public on Thursday, the challenge now is finding a way to scale. While fellow luxury retailers The RealReal and Vestiaire Collection were founded with the infrastructure to handle high-end resale from the onset — namely with trained authenticators and distribution services already in place for these types of products — ThredUp is adjusting to adding luxury to its roster. After 2,000 beta participants contributed more than 600 brands, the company is continuing to iron out kinks after already overhauling its existing system of procuring items. (In advance of the beta mode, it hired an authentication team and redesigned the branded duffel bag with bulletproof material and RFID technology for sellers to more safely ship their items to ThredUp warehouses.)
This week may be looked back upon as a breakthrough moment for AR apps in retail. Retailers and brands have been working with the technology for a while, but they have been doing so with the knowledge that these apps would not be able to run on very many mobile devices or be seen and used by very many people. The launch of iOS 11 changes the AR game, as the software is eligible for download by millions of iPhones and iPads already in use, and many more new devices to come, including the iPhone 8 and iPhone X, announced last week, which the company said are optimized for better AR app experiences.
Finance & Economy
U.S. household wealth increased in the second quarter to yet another record, driven by solid gains in financial assets and rising property values, figures from the Federal Reserve in Washington showed. The increase in household wealth reflects steady growth in house prices, which were up 5.7 percent in June from a year ago, based on S&P CoreLogic Case-Shiller data, as well as a 2.6 percent rise last quarter in the S&P 500 Index, which is hovering near a record high. A strong job market and low inflation also are allowing Americans to improve their purchasing power, helping to sustain household spending, the biggest part of the economy. The report also showed companies had almost $2.3 trillion in liquid assets, giving them the means to boost investment.
For most Americans, things are looking up. For the wealthiest, it’s a far prettier picture. Overall, the median household notched solid economic gains last year, building on improvement from 2015. Incomes for a typical U.S. household, adjusted for inflation, rose 3.2 percent in 2016 to $59,039, according to the latest Census data. Even though wages and salaries are on the rise, those gains have not been shared across the board. Average incomes among the wealthiest 5 percent climbed 5.5 percent in 2016 to $375,088. Among the poorest one-fifth of households, incomes rose by just 2.5 percent to $12,943.