The Impact of Market Consolidation

We’re all watching the continuing rationalization of our retail space.  I suppose “rationalization” is a way too benign sounding word for a process that includes bankruptcies, store closings, job losses, margin hits, too much inventory, and struggles to increase sales and even to stay in business.

As ugly as this continues to be, there are going to be opportunities for the brands and retailers who get through it.  I’m going to take some comments from Dick’s Sporting Goods most recent conference call to help us think about the upside and downside of the process.  Dick’s, I suspect, will do just fine over the medium to long term because with the demise of The Sports Authority, there just aren’t that many larger, national big box competitors left (Academy has like 200 stores in 15 mostly southern states.  Who else?).  Dick’s ended their most recent quarter with 647 Dick’s stores.  They also own Golf Galaxy and have some Field and Stream stores I guess.

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Dick’s Sporting Goods; Insights into the Development of the Action Sports Retail Environment

Never thought I’d be looking to Dick’s for that. Dick’s, which has been around since 1948, had revenue of $4.9 billion in 2010 from 525 stores. The 444 Dick’s stores are around 50,000 square feet each though there are some two level ones that go up to 75,000 square feet. The 81 Golf Galaxy stores are between 13,000 and 18,000 square feet. The word action sports isn’t mentioned anywhere in their most recent 10K.

What’s intriguing is their business strategy. It’s intriguing because there’s a lot that would fit right into Zumiez’s annual report. A good independent specialty retailer will tell you that he tries to do a lot of the same things.

Let’s take a look at what Dick’s business strategies are and how they compare to the generally agreed on best practices in our industry. This may tell us something about how our industry is evolving.
Dick’s refers to itself as an Authentic Sporting Goods Retailer.
“Our history and core foundation is as a retailer of high quality authentic athletic equipment, apparel and footwear, intended to enhance our customers’ performance and enjoyment of athletic pursuits, rather than focusing our merchandise selection on the latest fashion trend or style. We believe our customers seek genuine, deep product offerings, and ultimately this merchandising approach positions us with advantages in the market, which we believe will continue to benefit from new product offerings with enhanced technological features.”
The focus on performance and enjoyment rather than fashion is what I’ve argued action sports is really all about, though we got away from it in the good old economy days and thought everybody who carried some hard goods was a “core” retailer. I might be putting words in their mouth, but it sounds like Dick’s thinks you can be “core” for a whole bunch of sports at the same time in 50,000 square feet. Our specialty retailers try to do it with two to maybe five sports. In their most recently completed fiscal year, 54% of Dick’s revenues came from hard goods. 
Dick’s second strategy is Competitive Pricing. They specifically do not try to be the price leader but will match competitors’ prices.
“We seek to offer value to our customers and develop and maintain a reputation as a provider of value at each price point.”
Their sheer size gives them some pricing (and costing) leverage that action sports retailers typically don’t have. No independent specialty shop can compete on price. Dick’s also has the advantage of selling product in nearly two dozen sports and activities, with the result that they can better manage their inventory to respond to seasonality and even out cash flow.
Dick’s carries a Broad Assortment of Brand Name Merchandise.  “The breadth of our product selections in each category of sporting goods offers our customers a wide range of price points and enables us to address the needs of sporting goods consumers, from the beginner to the sport enthusiast.”
What I particularly like about this is the obvious customer definition. Dick’s thinks it’s the place to go if you’re a participant in any of the sports or activities they support. You can be a beginner or an expert and they’ve got what you need. That sounds like something an independent specialty retailer in action sports might say.    Trouble is, you can imagine Sports Authority saying it too. But Dick’s differentiates itself from Sports Authority in ways that action sports retailers would recognize. Let’s look at some more of Dick’s business strategies.
They offer Expertise and Service.  “We enhance our customers’ shopping experience by providing knowledgeable and trained customer service professionals and value added services.”  “We actively recruit sports enthusiasts to serve as sales associates because we believe that they are more knowledgeable about the products they sell.”
This means having professional golfers in the golf part of the store, certified fitness trainers helping you buy workout equipment, and trained bike mechanics to sell and service bicycles. It may be a 50,000 square foot store but in your little part of the store, where you’re buying stuff for the sport you’re committed to, you’ll be working with experts who are just as committed as you are.  That will sound familiar to any action sports retailer, chain or single store.
Dick’s creates Interactive “Store-Within-A-Store.” 

"Our Dick’s Sporting Goods stores typically contain five stand-alone specialty stores. We seek to create a distinct look and feel for each specialty department to heighten the customer’s interest in the products offered.”
Once again, that’s not exactly an unfamiliar concept. A typical store will include a pro golf shop, footwear center, fitness center, hunting and fishing area, and a team sports store with appropriate seasonal equipment and apparel.
Their last business strategy is Exclusive Brand Offerings that “…offer exceptional value and quality to our customers at each price point and obtain higher gross margins than we obtain on sales of comparable products.”
Those would be shop brands. We all recognize and understand that. But Dick’s seems to go further. They work with existing, well known brands to develop products that are available exclusively at Dick’s under that brand’s name. That’s possible only because of their size and market power.
Though Dick’s isn’t active in action sports, you can’t help but look at their business strategies and get some understanding for why specialty retailers are having such a hard time. Dick’s has all the advantages that come with size; purchasing power, efficient distribution, access to capital, good systems. But they’ve gone further and are applying many of the competitive techniques we use to think of as being available only to the specialty retailer to the large format business. And they can do it without having the highest prices.
Dick’s isn’t a direct competitor for action sports retailers, though inevitably there is some crossover of brands. But if Dick’s can do it, so can other retailers. The good news is that if you really an independent action sports retailer (that is, your customers are participants and the first level of non-participants that are serious about the lifestyle) you’re got your location and your community connections as a point of differentiation. The bad news is I think that’s all you’ve got, so you better do that right.