June 4, 2018 Consensus

The Weekly Consensus – June 4, 2018 (Volume 10, Number 22)

The Big Story
RetailWire Discussion: Best Buy Finds More Inventory on Hand Drives Sales
George Anderson, RetailWire

Best Buy has been on a roll with a same-store sales gain of 7.1 percent in the first quarter following a nine-point comp gain during the fourth quarter. Among the keys to the consumer electronics chain’s success has been its inventory management.

Speaking on Best Buy’s earnings call with analysts in late May, CFO Corie Barry applauded the company’s inventory and demand planning group for “the quality of our inventory,” which she said was reflected in the chain’s net promoter score. “Customers are consistently telling us one of the big drivers of that improved customer experience year-over-year is inventory availability both online and in stores,” said Ms. Barry. “And so, I feel very good about the targeted quality of the inventory and then also the levels in support of the business we’ve been seeing.”

Best Buy’s inventory is up about nine percent on a square foot basis year-over-year. The chain is in the midst of a multiyear effort to transform is supply chain, according to a Wall Street Journal report. While the chain’s management believes the investments being made are critical to Best Buy’s sales success, analysts are watching to see if it delivers the returns investors expect.

 

Discussion Questions: Do you see demand planning and inventory management as a competitive advantage for Best Buy? Where do you see the biggest opportunities for retailers to improve supply chain and inventory management practices today?

 

Comments from the RetailWire BrainTrust:

 

One of the great things about Best Buy is its joined-up inventory system. From a customer’s perspective, this allows stock to be checked across various stores and from the online warehouse. Generally, these checks are completely accurate.

While this system is more flexible, it requires a higher level of inventory in stores — which are now acting as fulfillment centers as well as places of direct purchase. As much as this is an investment, Best Buy seems to have committed to this in a way that other retailers (looking at you Target!) haven’t.

Despite more consumers shopping online, immediacy and the need to “have something now” are still strong drivers of satisfaction. Retailers unable to deliver on these promises find that customers simply defect elsewhere — and in an occasionally-purchased category like electronics, this can be punishing.

Neil Saunders, Managing Director, GlobalData

 

Demand planning and inventory management are huge competitive advantages for Best Buy. Striking a balance between being lean and carrying an ample amount of inventory is every retailer’s struggle. Best Buy’s approach to inventory has allowed a seamless store vs. online experience that lets customers get what they want when they want it (immediately or conveniently). It’s important for retailers to understand the “why” of product that’s turning over well. Is it demographic driven? Market driven? Promotion driven? Understanding the why allows retailers to make more fact-based, and less gut-based, decisions that can parallel the results Best Buy is currently experiencing.
Byron Kerr, Head of Amazon, Tuft & Needle

Accurate demand planning and inventory management systems have been available to retailers for over 20 years at this point. The problem, as with every system, is execution. Most users don’t believe the data so they override the system and the system does not yield the desired result and it gets scrapped.

It sounds to me like Best Buy is finally paying attention to the data and it is yielding a positive result. Having the correct inventory in the stores is essential for growing sales. There are a lot of retailers who have a ton of inventory on display, but no one is buying it because it is the wrong inventory for their consumers.

Can this be a strength? Clearly, it can. It will also help in determining the right sized store.
Phil Masiello, Founder and CEO, Hound Dog Digital Agency

Like with labor, I think the pendulum on inventory in stores got pushed way too far to “cut, cut, cut” and needs to come back a little. It’s not just about having the right products in the right stores at the right time. The idea of “fixture inventory” or that you need a base level of inventory, no matter what it is, to make the store look “stocked” is not baseless. If people see an empty store, they think “There’s nothing here for me” and won’t shop. So even if you had a perfect match between what you had in store and what you expected to sell before the next replenishment truck, it really would not be enough inventory to get consumers confident enough to shop.

So, I suppose we should give kudos to Best Buy for recognizing this, though I would say it’s more like “rediscovering a long-established retail store principle.”
Nikki Baird, VP of Retail Innovation, Aptos

Demand planning and inventory management are mission critical for EVERY retailer. It is not just raising inventory levels, but fine-tuning inventory by market, by store and even at the shelf level in some cases. To be successful in inventory optimization today requires extensive data, analytics and rapid replenishment.

Chris Petersen, PhD., President, Integrated Marketing Solutions

 

It’s good to see that Best Buy understands how product and having product on hand is key to retail sales. This is a refreshing view given pundits with theories as extreme as the idea that stores should be mini-amusement parks.

I’m reminded of much of W. Edwards Deming’s writing about how metric-based management can lead to the perfectly managed company that failed.

It seems we are in a phase where intense computerization of, well, everything allows management to obsess over a tiny detail while losing track of the big picture. More retailers need to follow Best Buy’s example of ditching the micro-management in order to look at the big picture.

Doug Garnett, President, Protonik

 

Best Buy has done many things right since the dawn of online competition, this being basic and smart. Demand planning goes beyond simply minimizing out-of-stocks, but falls short of the need to carry everything between online and in-store. BB’s products experts are a real advantage. To offer inventory they can sell, (up-sell, etc.) after advising should work. After all, the only thing that beats next day delivery is buying in the store today.
Dan Raftery, President, Raftery Resource Network Inc.

The inventory management system is great but part of that advantage is that the people on the floor can check inventory status on the floor. A real-time system that all employees can access provides a clear advantage for consumers to help their decision making.

Camille P. Schuster, PhD., President, Global Collaborations, Inc.

 

Read the entire RetailWire discussion here:

 

Headlines of the Week

Deal-hungry JAB to buy Pret A Manger for £1.5bn

The private equity owner of Pret A Manger has agreed to sell the UK-based sandwich shop chain for £1.5bn to JAB Holdings, the German family-owned investment group challenging Nestlé with its rapid acquisition of companies linked to the coffee market. The £1.5bn purchase price is inclusive of debt, three people with direct knowledge of the transaction said. The sandwich chain confirmed the sale early on Tuesday. The sale would be a lucrative exit for Pret’s owners, Bridgepoint, the UK private equity group, which initially paid £364m including debt to buy the business a decade ago.

 

Adobe Buys Magento for $1.68 Billion to Target E-Commerce

Adobe Systems Inc. agreed to buy e-commerce company Magento for $1.68 billion, in a bid to capture a bigger slice of the digital-commerce industry from Salesforce.com Inc. and Oracle Corp. The Photoshop software provider is making its third-biggest acquisition to create an end-to-end system for designing digital ads, building e-commerce websites and other online customer experiences and completing transactions. Campbell, California-based Magento offers software to build and run web stores, handle online purchases, shipping and returns. It also helps merchants sell products through social media ads and competes with Shopify Inc. Magento technology supports more than $155 billion in gross merchandise volume. EBay Inc. sold Magento in 2015 and it has been backed by private equity firm Permira Holdings LLP since then.

 

 

Apparel & Footwear

DSW CEO: “This is the disruption we need”

DSW Inc. wants to grow sales with rewards and services, not by getting into price wars.

“That’s the revolution, that’s the disruption we need to compete,” CEO Roger Rawlins said on a Wednesday morning conference call. The Columbus-based retailer has been pushing that message for a while now, but this month has put more action behind it with the rollout of its new DSW VIP rewards program. It is the biggest overhaul of the program in 10 years.  Rewards club members account for 90 percent of DSW’s shoppers, Rawlins noted. DSW still is on track to go nationwide with its kids business as well.

Madewell Brand Buoys J. Crew

Crew Group Inc. has one persistent bright spot as it tries to revive its business: Madewell. The younger, more casual brand that made its mark in denim said same-store sales, a closely watched measure, skyrocketed 31 percent in the first quarter — nearly triple the 11 percent rise the previous year. Chief Executive Officer Jim Brett is trying to capitalize on Madewell’s success by introducing more categories without making the over-expansion and fashion mistakes that have plagued J. Crew. Madewell’s strength helped offset a 6 percent drop in the J. Crew brand’s comparable sales, helping the closely held company’s overall same-store sales eke out a small increase — the first gain since 2014.

 

Destination Maternity taps former Lands’ End exec as CEO

As had been expected, the maternity apparel retailer announced it has appointed Marla. A. Ryan CEO, effective immediately. Ryan replaces Melissa Payner-Gregor, who served as an interim CEO since January 2018 and director of the company since August 2009. Ms. Payner-Gregor is exiting the company to pursue other opportunities. Ryan’s appointment comes a week after investors voted to replace all four directors of the company with four dissidents, including three women, one of whom was Ryan. Ryan is the founder and CEO of Lola Advisors LLC, a business consultancy working in the apparel, beauty and wellness sectors. Prior to founding Lola Advisors, Ryan was employed by Lands’ End from 2009 through 2017, most recently serving as senior VP of retail.

 

Athletic & Sporting Goods

Dick’s Sporting shares surge as retailer raises earnings forecast

Dick’s Sporting Goods Inc’s shares jumped 24 percent, after the retailer of outdoor products and guns reported better-than-expected first-quarter results and raised its yearly profit target.  Dick’s reported earnings of 59 cents per share in the three months ended May 5, easily topping analysts’ average estimate of 45 cents, according to Thomson Reuters I/B/E/S.  The Pittsburgh-based chain said it focused on selling off older inventory during the quarter and ran fewer promotions, which helped boost earnings.

Adidas takes 12-10 lead over Nike in World Cup shirt deals

Adidas can declare itself the winner over arch rival Nike in the upcoming soccer World Cup even before the first match kicks off as it is kitting out the most teams.  However, the German sportswear brand, which is also the official sponsor of the tournament, expects only a limited financial impact, partly because this year’s World Cup takes place in Russia, where the economy is in the doldrums.  Since the last tournament in 2014, Adidas has grown sales rapidly in areas other than soccer, capitalising on booming demand for its retro basketball sneakers and springy Boost running shoes to outpace Nike, particularly in the U.S. market.

Cosmetics & Pharmacy

L’Oréal Delves Deeper Into Digital With Pulp Riot Buy

L’Oréal keeps growing its share of the digital beauty space, with its acquisition of Pulp Riot, the professional hair color brand with bright, bold hues that was born online. Financial terms of the deal were not disclosed. The buy of the label, which was started in 2016 by David and Alexis Thurston in Los Angeles, follows fast on the heels of L’Oréal’s purchase of Stylenanda, the South Korean lifestyle makeup and fashion company with a major online presence, earlier in May.  In the course of its brief life, Pulp Riot has already garnered more than 675,000 Instagram followers and generated net sales of $11 million in 2017.

Albertsons Collaborates with Personalized Medicine Platform Provider

Personalized medicine platform provider Genomind has entered into a partnership with Albertsons to allow pharmacy patients at select Albertsons, Jewel-Osco and Acme supermarkets who are dealing with mental health issues to voluntarily receive free education about how genetic testing may be able to help them get better faster.

Genomind’s Genecept Assay is a genetic test designed to help clinicians optimize treatment decisions for their patients dealing with mental health issues.

 

Discounters & Department Stores

Walmart Offers Employees New Perk: Cheap Access to College

Walmart is offering its employees a new perk: affordable access to a college degree.

America’s largest private employer, which in the past has helped its workers get their high school or equivalency degree, hopes the new benefit will help it recruit and retain higher quality entry-level employees in a tight U.S. labor market. The company is teaming up with Denver-based startup Guild Education to offer employees the chance to obtain a bachelor’s degree in business or supply-chain management.

It’s Just About Time For Full-On Panic At J.C. Penney

It’s been a long sad slog for J.C. Penney. In 2011, after more than a decade of (at best) mediocre performance, the company brought in Ron Johnson from Apple as its new CEO. In what some saw as a bold attempt at transformation — and others saw as a misguided Hail Mary pass — retail’s latest savior changed just about everything all at once, and to put it mildly, the results were disastrous. Sales plummeted by about a third, the stock tanked, and Johnson was eventually shown the door.

 

Grocery & Restaurants

The great meal-kit shakeout continues as Kroger plans to buy Home Chef for +$200mn

A year ago, no meal-kit startups of consequence had gone public or sold to a competitor. As of today, at least five of the startups in the space have, or intend to. The latest: On Wednesday, Kroger announced its intent to purchase Chicago-based Home Chef for $200 million up front. The value of the deal could balloon to $700 million over five years if Home Chef hits certain “significant growth” milestones.

Kroger pushes against Amazon’s grocery moves with Ocado

Kroger Co. is fighting back against Amazon.com Inc.’s incursion into the supermarket aisle and Walmart Inc.’s beefed-up e-commerce offering through a deal with U.K. online grocer Ocado Group Plc. Kroger agreed to buy a stake in Ocado and license technology that helps other grocers run automated warehouses and deliver food to customers’ doors.

Home & Road

One Kings Lane to Open NYC Flagship

One Kings Lane plans to open a New York City flagship in a 200-year-old house in SoHo this fall.  The flagship, which follows the e-commerce company’s successful brick-and-mortar experiment in Southampton, N.Y., last year, will be located at the landmarked 143 Spring Street. “Our first shop, which opened in Southampton last summer, set the tone for this next opening and future stores to come. It was extremely important to us to find the right space — one that has deep roots in the local community and could provide the perfect backdrop for the storytelling we do around our product,” said President Debbie Propst. “As a brand that’s all about the mix, finding a space that includes some of the oldest and newest construction in SoHo is a perfect fit for us.”

 

U.K. home improvement chain sold—for $1.34 (No Typo)

The struggling Homebase chain is getting a new owner.  Wesfarmers, the Australian retail group, agreed to sell Homebase for 1 pound ($1.34) to Hilco Capital, a London-based restructuring company. Wesfarmers acquired Homebase, which operates 255 stores, in 2016 for 340 million pounds, (about $530 million). “A divestment under the agreed terms is in the best interests of Wesfarmers’ shareholders and will support the ongoing reset and repositioning of the Homebase business,” stated Wesfarmers managing director Rob Scott.  Homebase was Wesfarmers’ first overseas acquisition—the company intended to eventually rebrand the acquired chain to its own do-it-yourself banner Bunnings. British retail experts agree the takeover has been a disaster, starting with Wesfarmers’ decision to get rid of Homebase management immediately after the deal closed.

Jewelry & Luxury

With New Lab-Grown Line, Is De Beers Embracing Self-Cannibalization?

When Swarovski announced it was entering the lab-grown diamond business in 2016, some in the natural industry seemed surprisingly happy about it. Swarovksi was just the kind of established fashion-oriented company that the trade wanted in that space.

For one, Swarovski knows how to sell “things that sparkle,” as Swarovski board member Daniel Cohen told me. “Consumers,” he noted, “make choices based on product design and price point.” The stones in those products could be crystals, lab-grown, flux-grown, or moissanite. It doesn’t matter. If the look and price is right, you don’t have to engage in endless arguments about whether the diamonds are “real” or “eco-friendly” or all the rest. The pieces just sell. That’s pretty much Mass-Market Jewelry 101.

Nirav Modi Crisis Hits Gemfields

Proceeds slumped at Gemfields’ May auction of higher-quality rough emeralds as the Nirav Modi fraud case hurt Indian demand, the miner reported last week. Most of the company’s emerald clients are based in India, where the gemstone and jewelry sector is suffering from the repercussions of the Modi scandal, Gemfields CEO Sean Gilbertson explained in a statement last week. “Given the ensuing losses sustained by Indian banks, access to finance has become challenging for many companies in the Indian gem and jewelry industry,” he said.

What Is the Future of Jewelry Trade Shows?

It’s a pivotal moment for jewelry trade shows, with big changes afoot in Vegas.

The JCK Las Vegas Show, owned by Reed Exhibitions, is poised to return to the Sands next year, where it launched 26 years ago, just as Emerald Expositions opens a new jewelry trade show nearby. Around the world, big jewelry trade shows are downsizing, smaller ones are opening, and vendors and retailers are dropping out and showing on their own.

 

Office & Leisure

Samsonite Gets Support From Biggest Holder After Stock Plunge

One of the world’s largest investment firms gave Samsonite International SA a significant vote of confidence after the luggage maker came under a blistering attack from a short seller. Capital Group Cos., already the company’s biggest shareholder, paid about HK$359 million ($46 million) for 13.3 million Samsonite shares on Friday after the stock had its biggest two-day drop on record. The plunge followed a report by short-seller Blue Orca Capital LLC alleging accounting lapses and poor corporate governance. The investment firm is making a strategic bet on Samsonite’s prospects, buying low after recently selling high. The Mansfield, Massachusetts-based company said last week that Blue Orca’s allegations are “one-sided and misleading,” and said it would provide additional information “in due course.” Samsonite has yet to release a more detailed response, and trading in the company’s shares has been halted all week.

Charleston retailer to be U.S.’s first specialty toy shop to host Mattel store within a store

A Charleston-based toy retailer will become the nation’s first specialty store to host a Mattel store within a store. Wonder Works at 975 Savannah Highway in St. Andrews Shopping Center in West Ashley will debut the Mattel shop after having recently completed eight months of planning and design. The national toy company is looking to test market its products in independently owned retailers after the wheels fell off of Toys R Us earlier this year when it filed for bankruptcy and announced it is closing its stores. “We are honored and excited that Mattel has chosen Wonder Works to pilot its specialty-focused programs,” said Wonder Works owner Christine Osborne. With the demise of Toys R Us, Osborne expects toy revenue at her four Charleston-area locations to grow 20 percent this year.

Polaris buys the biggest maker of pontoon boats for $805 million

Polaris Industries Inc., builder of vehicles for speed on the dirt, will go a bit slower on the water.  The Medina-based company on Wednesday announced it was buying Boat Holdings LLC, the nation’s biggest maker of pontoon boats, for $805 million, the largest acquisition by value in Polaris’ 64-year history.  The deal puts Polaris back in the marine business for the first time in more than a decade after it ended a small water scooter business and a licensing agreement with another manufacturer that put the Polaris brand on some boats.  The pontoon segment has grown faster than the overall boat industry for several years in the United States.

Technology & Internet

Amazon’s new Marketplace Appstore connects sellers to software

Amazon is creating another app store, but it’s not for consumers. Instead, the online retail giant will for the first time put its seal of approval on a bunch of third-party apps intended for professional sellers with its new Marketplace Appstore. It launches to sellers starting Monday, the company said. The new app store, which will be available in North America through Amazon’s main hub for sellers called Seller Central, will include tools to handle pricing, inventory, advertising and other needs for pro sellers.

 

Finance & Economy

Confidence in the jobs market soars to highest level since 2001

Consumers are more confident about the labor market than any time in the past 17 years, according to the latest report from the Conference Board.  The research firm revealed 42.4 percent of consumers surveyed in May said jobs are “plentiful,” which is the highest level since March 2001.  The rising sentiment on jobs without similar wage gains is perplexing economists and executives.  Earlier this month the unemployment rate in April hit an 18-year low, while wage growth went roughly sideways at a 2.6 percent annualized gain.

 

OECD predicts two more years of economic expansion, but oil and trade are major risks

The current outlook for growth is bright, but specific risks could endanger long-awaited progress, according to a report released by the Organization for Economic Cooperation and Development (OECD).  But a brewing combination of rising oil prices, trade tensions and financial market vulnerabilities could coalesce amid an environment of monetary tightening, spelling potential disaster.