The Post Recession Role of Company Stores

 

When a brand said, “We’re just going to open a few flag ship stores to build the brand image and collect some good consumer information,” I was okay with that. Made sense.
When it said, “We’re just going to open a few outlet stores to keep stuff that didn’t sell well out of the wrong channels,” I was okay with that too. In both these instances, I even bought into the idea that it wouldn’t hurt, and might even support, their specialty retail customers.
But when opening stores started to evolve into a vertical integration growth strategy, I got worried. It suggested saturation of the market and a lack of other growth opportunities. It was like the canary in the coal mine for the distribution issue. It might turn out to be good for consumers (if price, rather than any kind of “specialness” was the main purchase driver for them) but it certainly wasn’t good for the industry. Not for a moment did I think that somehow it was good for specialty retailers. I don’t think anybody actually did.
That’s not to say I think opening retail stores was a bad decisions for some brands. No more than I think it’s a bad decision for a retailer to decide to stop carrying a popular brand when they realize they can’t make any money on it because of how it’s distributed. One of my business mantras is that every company does what it perceives to be in its own best interest. That’s the way it should be. The interests of “the industry” come in second.
Well, wherever you go, there you’ll be. And here we are.
The market has changed. Some brands have closed stores, and certainly they are all thinking long and hard about how quickly and how many to open. Sales increases are going to be harder to come by. Gross margin dollars and expense control are going to be where businesses look to increase their profits. What does this suggest for the role of company stores?
By the way, I consider a brand’s internet sales another type of company store, and I think what I’m discussing here applies to the internet as well.     
Why Brands Open Stores
As a brand, the traditional ways to grow are by taking market share, by getting your piece of a growing market, by acquisition, by adding products, and by extending your brand franchise, under which I guess opening retail stores might fit.
When times were good and the cash was flowing, brands could look at all of those. Though of course, only larger brands generally had the capability to make acquisitions and open stores. From a strict financial perspective, having your own retail stores looks like a no brainer. If Gertrude’s Skate Shop can make money selling $1 million of product, they have to buy it from us (and other brands), and they carry lower margin hard goods, can’t we make even more? We can probably control certain expenses better, we can merchandise our stuff the way we want and, with luck, we won’t have any trouble collecting receivables from ourselves.
Now, I trust the actual analysis was a bit more sophisticated than that, but you can see that the initial financial analysis would be compelling—especially if you needed some more growth and didn’t know where else to get it. And if you figured times were so good and sales growth and cash flow so robust that the “fat and happy” syndrome, from which we all suffered and would no doubt like to suffer from again, meant that any business blowback, including dissatisfaction from your specialty retail customers, would be minimal.
Like managers at winter resorts who believe themselves to be great managers when the snowfall is good, we were all a bit deluded by many years of good times.
It’s Not Quite That Easy Any More
In the same way that no battle plan long survives contact with the enemy, no business plan gets far into implementation unscathed.
In the first place, you have to find people to manage and work in your new stores. I don’t care how well you know the product and the industry—running a retail store takes a different skill set than running a brand. How hard is it to get and keep good people? Look at the effort Zumiez puts into finding, training, and keeping good people for their stores. It’s one of their top priorities and never something they take for granted.
The best retail managers, of course, are already working at retail stores; stores that probably buy product from your brand. Call me mean spirited, but I’m just not seeing specialty retailers being happy about a brand they have worked to build hiring their people to work in the brand’s new store. Though perhaps there are now some good people available from retailers that have closed.
Next, you’ve got to stock your new store. VF Corporation has enough brands to comfortably diversify its store offerings, if you believe that enough of their brands belong in the same retail environment. Other companies may not, depending on what you believe about consumers’ retail preferences. Do they want to shop regularly in a store with only one or a few brands even if the assortment is very broad? Should you carry brands you don’t own in your stores?
What’s the impact on your overall sales? Will you increase sales, or will you just cannibalize sales from other places now that sales increases are harder to come by? Perhaps you’ll be happy if you just hold your sales levels, as this would improve your profitability based on the much higher margins you earn at your stores.
Assuming we’re not talking about an outlet store, how do you handle pricing? As an image store, you want to hold full retail. In fact, you’ve probably assured your other retail customers that you will. That’s all fine until those specialty retailers start discounting your product. Now what? Do you truly not care if nobody buys the stuff in your company owned stores because it’s cheaper in other specialty retailers? Tempting, in this environment, to cut those prices but still make a great margin, isn’t it? Maybe those stores you own become part of your strategy for reducing the excess inventory you got caught with last fall.
Before our economic circumstances changed, company stores posed some issues, but they somehow seemed manageable. Now, they require some harder decisions.
Like, for example, what is a brand’s relationship with specialty retailers? There are, of course, fewer specialty retailers, and fewer retailers in general. Though this was starting to be true long before the economy went south, big brands with wide distribution are and will find themselves getting a smaller percentage of sales and profits from specialty retailers.
The surviving specialty retailers aren’t going to be that excited about selling brands they really can’t compete and differentiate themselves with due to that brand’s broad distribution. I had an email from a specialty retailer a couple of weeks ago telling me about a certain brand he could buy at a big multi store retailer at their discounted retail price cheaper than he could order it directly from the brand. If that’s true, it’s hard to imagine him carrying that brand for long.
Specialty retailers will have no choice but to focus on smaller brands, or limited distribution offerings from large brands that give them enough margin and differentiation to survive. You just don’t stay in business by selling stuff you lose money on, no matter how cool it may be.
Specialty retailers and company stores are going to have less competition because of the decline in retailer numbers. Whether this makes up for the decline, or at least slower growth, in overall sales we’ll have to wait and see. If you’re a large brand looking to maximize your gross margins dollars in a period of slower sales growth, company stores can make a lot of sense-—if you can manage the (admittedly incomplete) list of issues I outlined above.
A large brand may tend to look at specialty retailers as a place where you want to be well represented, but not as the source of a lot of growth and profitability. Years ago, I suggested that brands should have a list of the 50 or 100 specialty stores they thought they just had to be in for brand integrity and credibility and make sure they were in them. I still think they should be doing that.
The corollary is that larger brands may have a preference for their own stores over smaller retailers that the brands perceive can be hard to work with and offer limited opportunities for growth. After this recession ends (whenever that is), and the associated retrenchment, I expect to see more company stores selling the more widely distributed brands.
The numbers almost demand it.