retail services - Lincoln International

Transcription

Private Markets Research
Fall 2008
RETAIL SERVICES:
CHARTING A COURSE FOR
PRIVATE EQUITY
CHICAGO
MADRID
FRANKFURT
NEW YORK
LONDON
PARIS
LOS ANGELES
TOKYO
VIENNA
retail services:
charting a course for private equity
** CONFIDENTIAL – NOT FOR DISTRIBUTION WITHOUT APPROVAL OF LINCOLN INTERNATIONAL **
Table of Contents
Introduction
Introduction
Defining Retail Services
Which Way Retail?
Why are Retail Services Important?
2
3
7
10
Sales, Marketing & Merchandising Services
The Basics
Market Structure – “Top Heavy”
Drivers of Competition
Growth Opportunities
Threats & Concerns
The Evolving Role of the Wholesalers
Competitive Landscape
Selected Sales, Marketing & Merchandising Agencies
The Private Equity Play
19
22
24
26
35
38
41
42
42
In-Store Marketing Services
The Basics
Market Structure
ISM Sector Overview: Sampling & Demonstration Services
Benefits
Threats & Concerns
Selected Sampling & Demonstration Companies
ISM Sector Overview: Retail Media Networks
Benefits
Threats & Concerns
Selected Retail Media Networks
44
48
49
50
52
55
58
60
61
61
63
66
69
71
74
77
78
78
Mystery Shopping Services
The Basics
Market Structure
Threats & Concerns
Selected Mystery Shopping Companies
80
81
84
87
88
89
89
Table of Contents (Cont’d)
Loyalty Program Services
The Basics
Market Structure
Threats & Concerns
91
95
97
98
103
104
Warranty Program Services
The Basics
Market Structure
Threats & Concerns
106
108
110
112
115
Retail Security Services
The Basics
Market Structure
Threats & Concerns
116
119
121
122
125
Design, Build & Installation Services
Overview
127
What’s the Story with Retail Construction?
128
Retail Design Services
The Basics
133
Market Structure
135
137
Retail Building Services
The Basics
139
Market Structure
142
143
Installation Services
The Basics
145
Market Structure
146
148
Threats & Concerns
150
158
160
161
Appendices
Company Summaries
Statistical Snapshot
Comp Store Sales Tracker
Retail Capex Monitor
Glossary
164
242
243
244
246
Retail Services:
Charting a Course for Private Equity
Introduction
The Retail Infrastructure & Services team at Lincoln set out last year on
an ambitious journey (more ambitious than we knew). Our goal was
not to scout out exotic beaches in the South Pacific or hip new cafes in
European capitals. Rather, it was to define and map a massive universe
of companies in an industry known as retail services. Not knowing where
exactly to start, we decided to set the proverbial research ball in motion to
see where it rolled. We have spent months speaking with retail buyers and
merchandising professionals, consumer packaged goods (or “CPG” – for
more definitions please see the glossary) executives and marketing gurus.
We have become regular participants on earnings calls, formed lasting
friendships with various staff members of trade associations, and consumed
the time of our clients in the private equity community with portfolio
holdings that touch upon this universe. The result, we hope, is a thoughtful
guide that will provide useful insight to all those who have an interest in the
sector – from the management teams who live in the industry day-to-day to
the investment professionals who are seeking to create value in a dynamic
and evolving marketplace.
This report will
provide a broad
framework of the
retail services
industry...
...and explain why we
believe it represents
an outstanding
investment
opportunity for
private equity.
This report is intended to provide a broad framework of the industry and to
touch upon the key attributes that drive value in each of the main verticals.
We recognize that this report will not be all things to all people and that
some may find the report to be either too superficial or too expansive. Our
primary objective, however, is to provide a high-level definition of retail
services to private equity investors – many of whom will have little familiarity
with the industry. To do so, we will provide a map of the industry; discuss
the current retail environment; and explain why retail services are becoming
an increasingly important driver of efficiency and profitability at retail. We
will then turn our attention to the specific verticals – sales, marketing and
merchandising agencies (or “SMMAs”), including value-added wholesalers
and importers; in-store marketing companies (or “ISMCs”), which include
sampling and demonstration service providers and retail media networks
(or “RMNs”); mystery shopping services; loyalty program services; warranty
program services; retail security services; and design, build and installation
(or “DBI”) services. We will analyze the key characteristics of each
segment, with a focus on market structure; drivers of competition; growth
opportunities; and threats and concerns. We will also summarize the key
players and provide our perspective on why each segment would represent
an attractive investment opportunity for private equity investors.
Lincoln International RETAIL SERVICES: CHARTING A COURSE FOR PRIVATE EQUITY
Fall 2008
We hope that this report leads you to the same point that we arrived at
some time ago. The retail services industry represents a large, dynamic and
rapidly evolving marketplace with significant investment appeal. Whether
you currently own a business in the sector or are on the look out for new
opportunities (or both), this report will be informative and provide an
interesting perspective on an exceptional industry.
Defining Retail Services
“Retail Service: rē΄tāl΄ sûr΄vĭs. Any service that facilitates a
retailer’s ability to sell its products to consumers...”
Our conversations with professionals throughout the retail and consumer
products industries made one point very clear – the term ‘retail services’
can mean different things to different people. We define retail services
as any service that facilitates the ability of a retailer to open its doors and
move products onto, and off of, store shelves in the most efficient manner
possible. This is a broad definition that captures firms ranging from the
architects and general contractors who design, build and fixture the stores
to the firms that ensure that the merchandise hits the shelves in the right
place at the right time.
We put forward a
broad definition of
retail services.
It is important to note
This definition does create the potential for confusion in one important
that retailers and CPG
respect. The term retail services implies that these services are always
brand managers make
being provided directly to retailers. While that is often the case, it is
use of retail services.
important to understand that the end customer
ESTIMATED ANNUAL REVENUE
can also be the consumer packaged goods
U.S. Retail Infrastructure Industry
companies that are moving products into the
retail stores. CPG brand managers and marketing
executives often rely on retail services companies
to develop and build relationships with retailers
on their behalf; to position their brands most
Retail Services
$40 billion
effectively in the retail channel; to manage the
Retail Technology
$54 billion
distribution and placement of their products; and
to market and promote their products on the
retail sales floor. Regardless of who the specific
Retail Fixturing,
customer is, every retail services company shares
POP Displays, Storage,
Lighting, Etc.
a deep knowledge of the retail channel and is
$47 billion
subject to the same end market dynamics as the
overall retail industry.
Source: Lincoln International, NASFM, NARMS, POPAI, VM+SD, BBTCM, IHL
Fall 2008
Lincoln International
RETAIL SERVICES: CHARTING A COURSE FOR PRIVATE EQUITY
While difficult to quantify, we believe that the retail services market
represents a sizable percentage of the overall retail infrastructure industry.
The ‘nuts and bolts’ of the store, primarily fixturing and displays, account
for an estimated $47 billion of annual sales. Retail technology, including
everything from business intelligence software and data warehousing to
point-of-sale systems, accounts for an estimated $54 billion of annual sales.
We believe that the retail services industry is slightly smaller than these two
segments, accounting for roughly $40 billion of annual spending.
Given the scale of the retail services market, we have spent a good deal of
time attempting to determine the appropriate mapping of the competitive
universe. Our analysis has led us to conclude that there are four primary
categories of businesses within the industry:
THE RETAIL SERVICES UNIVERSE
Sales, Marketing & Merchandising
Services (SMMAs)
Sales Agencies
Merchandising Service
Organizations (”MSOs”)
We have divided the
universe into four
primary categories.
Retail Media Networks
Other In-Store Media
Other Retail
Services
Design, Build & Installation
Services
Warranty Services
Security Services
Retail Architects & Design Firms
General Contractors
Installation Services
Sales, marketing and merchandising agencies are companies that provide a
range of retail sales and marketing support to CPG companies and retailers.
While SMMAs were once referred to as merchandising service organizations
(or “MSOs”), we have broadened the name to reflect the full suite of
services that most now provide. Specific activities include headquarter
Sampling & Demonstrations
Value-Added Wholesalers &
Importers
Mystery Shopping
Sales, marketing &
merchandising is one
of the most dynamic
segments of the retail
services industry.
In-Store Marketing (”ISM”)
Services
Terminology can vary. Sales Agencies provide outsourced sales and marketing services
(akin to headquarter services). MSOs do the heavy lifting in the aisles of the store (retail
services). We use the SMMA label to describe firms that provide both kinds of services.
Fall 2008
services (high-level services including brand representation, marketing plan
development and execution, new program planning efforts, etc.) and retail
services (implementation of product promotions, display set-up, product
cut-ins and resets, out-of-stock replenishment, and other ‘retail execution’
services). There is often overlap between SMMAs and the value-added
services that are provided by many of the large food wholesalers who are
looking to expand beyond their traditional distribution role. We will discuss
the similarities that exist later in this report.
The second category of the retail services industry relates to what we refer
to as in-store marketing companies (“ISMCs”). ISMCs are highly specialized
service providers that develop, plan and implement creative in-store
promotional campaigns. Specific activities include sampling, promotions,
product demonstrations and events. While many SMMAs offer services that
compete with ISMCs, ISMCs often deliver a focus and unique skill-set that
more diversified companies are unable to offer. We have also identified
retail media network providers as a sub-segment of the ISMC sector. RMNs
create, deploy and manage highly-targeted media campaigns that are
conducted within retail stores. This category includes in-store television
networks, music services and, to a lesser extent, specialty advertising
services.
ISMCs forego the
more labor-intensive
retail execution tasks
and focus on dynamic
retail marketing
programs.
The “Other” category of the retail services industry consists of a number
of interesting segments. Mystery shopping, which is nearly a billion
dollar business, refers to companies that conduct store-level experience
evaluations. Loyalty program services relate to businesses that help retailers
design, implement and administer their loyalty plans. Warranty program
service providers work to administer extended warranty plans. Retail security
refers to mall and retail-store based security personnel and monitoring.
Design, build and installation companies refer to businesses that are
directly involved in the development of new stores and roll-outs in, or
refurbishments of, existing locations. This category includes architecture
firms, general contractors, specialty contractors with a focus on a particular
discipline (i.e. IT and telecom systems), and companies that manage the
procurement and installation of visual merchandising, fixturing, point-ofpurchase (or “POP”) displays and storage solutions.
Of the estimated $40 billion spent on retail services each year, it is
extraordinarily challenging to estimate how much is spent within each
segment of the market. However, we have gathered information from a
broad range of sources and have compiled the following estimates:
Fall 2008
We have taken a
crack at estimating
the size of each
market segment.
U.S. RETAIL SERVICES INDUSTRY
$40 BILLION
Mystery Shopping
$1 billion
Security Services
$2 billion
Other Retail
Services
$9 billion
Loyalty
$2 billion
The design, build &
installation segment
is the largest in
the retail services
industry.
Warranty
$4 billion
In-Store Marketing
Services
$4 billion
Retail-Related
General Contracting &
Building Services
Retail Media
$2 billion
$15 billion
Sampling
Design, Build &
Installation
$19 billion
$2 billion
Wholesaler
Merchandising Svcs
Sales, Marketing &
Merchandising
Services
$8 billion
$4 billion
SMMAs
$4 billion
Design
$2 billion
Installation
$2 billion
Source: Lincoln International, NARMS, Retail Construction, DDI, Promo, Press, MSPA
Convergence is taking
place between many
of the key retail
services segments.
Apart from the scarcity of publicly-available data, there is another problem
that we confronted when compiling these estimates. There can often be
significant overlap between the various segments. For instance, SMMAs
provide some of the same services that ISMCs offer. Some design firms also
have general contracting or installation sales. As we will discuss later in this
report, we believe that convergence will be a key trend in the retail services
industry in coming years. Since this convergence is already underway, there
are often blurred lines between each segment that make accurate revenue
estimates difficult.
With the overall market defined, we will now turn our focus to the trends
that are driving the industry as a whole. To do so effectively, our starting
point must be the health of the overall retail industry and the outlook for
consumer spending.
Fall 2008
Which Way Retail?
“You continue to have this dichotomy showing up...a recession
looming, and then, flying in the face of that, you have
consumers who continue to consume...” David Doll, CEO,
Kanaly Trust Co. in the Wall Street Journal, November 2007
Wall Street pundits, television news anchors and the local mechanic all have
strong and indisputable opinions on the direction of the economy these
days. The housing market is melting down; groceries keep getting more
expensive; gas prices are near all-time highs; health care costs are soaring.
The average consumer is working more to make less and, at the same time,
is spending too much. One would expect that these factors would push
consumer spending into hibernation.
Despite certain weakening, the consumer has
continued to spend more than we would have
expected. As the graph on the right illustrates, while
the pace of growth has moderated, the overall level
of monthly retail sales has grown significantly (and
consistently) since 1992. Despite a flattening that took
place during the short recession of the early 2000s,
the long-term trend has been positive throughout the
period. This growth was driven by a number of factors:
strong employment levels; growing wages; modest
inflation; low interest rates; broad credit availability;
rising home prices and declining levels of personal
savings.
The consensus seems
to be that the sky is
falling on retail...
...but we’re still
seeing some growth
out there.
U.S. MONTHLY RETAIL SALES
(Excluding Auto & Auto Parts)
($ in Billions)
$300
Fifteen Year CAGR = 5.6%
250
200
150
100
50
0
'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Source: Census Bureau
Clearly many of these indicators have shifted in the
past twelve months and the economy has weakened
significantly. Consumer confidence has been in
decline; the Federal Reserve has cut interest rates to
stimulate growth; the decline in housing prices and
rising inflation levels are pinching consumer spending.
These factors are having a real impact on retail sales.
However, as the graph on the right illustrates, the
yearly rate of growth in monthly retail sales has actually
reamined quite close to the 15 year average. The
most recent data available, September 2008, saw
growth of 3.8 percent over 2007, less than the average
growth rate of 5.5 percent over the 15 year period.
U.S. MONTHLY RETAIL SALES GROWTH
(Year-Over-Year, Excluding Auto & Auto Parts)
12%
9%
6%
3%
Average = 5.5%
0%
'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Fall 2008
The average monthly retail sales increase year-to-date in 2008 has been
5.1 percent, exceeding the 3.9 percent seen in 2007. Now, we do believe
that these statistics are somewhat misleading. Given that these figures are
nominal, as opposed to real, they do not reflect an annual inflation rate that
has now reached 5.6%. Adjusted for inflation, retail sales are not as robust
as these figures indicate.
MONTHLY COMP STORE SALES GROWTH
10%
Average = 3.1%
6%
2%
-2%
-6%
-10%
2004
2005
2006
2007
2008
Comp store sales, which reflect the sales performance
of stores that have been open for at least one year,
have trended downwards more dramatically. After a
lengthy period of strong performance, the graph on
the left reflects that the overall bias for retail comps
have been downward since 2004. April of 2007 was
a particularly bad month, with our measure of overall
comps declining from an increase of 8.7 percent in
March to a decline of nearly 5.1 percent. Comps have
been relatively soft since that time with a continued
downward bias. Comp store sales declined by 4.3
percent in September, well below the 57 month
average increase of 3.1 percent.
The Christmas season is a key driver of retail results in
While Christmas any given year. Growth during the 2007 Christmas season was not as robust
2007 wasn’t a as it had been in previous years, but it also was not as catastrophically weak
blockbuster, it wasn’t as many analysts had expected. Upscale department stores continued to
a catastrophe either. show strength as the credit crunch deferred its impact on higher-income
households. Consumer electronics also performed well as a retail category
as consumers hit the stores for flat panel televisions,
RETAIL STOCK PRICE PERFORMANCE
iPods and other popular products. Apparel and other
Retailers vs. S&P 500
specialty retailers reported more mixed results. The
LTM Ended October 16, 2008
125
outlook for the 2008 season is much more mixed.
100
75
50
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
S&P 500
The stock market has recognized the mixed results that
retailers have been posting over the past year. Wall
Street is concerned about the strength of the consumer
and the near-term prospects for retailers. Accordingly,
investors have driven retail stocks downward alongside
the broader index. As the graph on the left illustrates,
the S&P Retailing Index has fallen in line with the
S&P 500. It is important to note, however, that retail
stocks had actually been underperforming the broader
market indices prior to this recent downturn. Notable
S&P Retailing Index
Fall 2008
retail stocks that have performed well over the past year include Finish
Line (up 72%), Longs Drug Stores (up 36%), Children’s Place (up 15%) and
Aeropostale (up 15%). The weakest performers have included Circuit City
(down 96%), Bon-Ton Stores (down 89%) and Office Depot (down 85%).
Given the recent correction in the markets, only five of the 100 retailers
that Lincoln tracks have seen their stock prices increase over the past
twelve months. While retail valuations held up surprisingly well through the
summer, they weakened meaningfully over the past two months. As seen
in the table below, as of October 16th, 2008, the retailers in our composite
were trading at a median enterprise value / LTM EBITDA multiple of 5.3x.
The group had been trading at 7.3x at the beginning of September.
We feel that retail
valuations are
surprisingly robust
given the state of the
economy.
Selected Retail Trading Metrics and Valuation Data
Company
LTM %
Price
Change
Price as
% of 52Wk High
Enterprise Value /
Rev
EBITDA
EBIT
High
Low
71.7%
(95.6%)
92.6%
4.2%
2.41x
0.02x
23.8x
NM
171.7x
NM
Mean
Median
(43.4%)
(47.9%)
46.2%
45.3%
0.47x
0.36x
5.5x
5.3x
8.4x
7.1x
With Wall Street analysts and other retail market observers increasingly
skeptical about the near-term retail outlook, many retailers are concerned
Capital spending
about mounting evidence of a consumer pull-back. Retailers such as Wallevels have started
Mart, Walgreens, Starbucks, Chico’s and Wet Seal have announced plans to
trend downwards.
curtail the pace of store openings in light of weaker operating results and a
soft economy. Retail capital expenditure trends seem
CAPITAL EXPENDITURES FOR
to be supporting this increased caution. For instance,
50 TOP U.S. RETAILERS
(Trailing Twelve Month Data, $ in Billions)
the Lincoln team tracks the capital investment patterns
50
of fifty of the nation’s largest retailers on a quarterly
basis. The pace of capital investment over the past
40
several month seems to indicate that we are entering
another downturn. The graph on the right shows the
30
general trend in capital expenditures dating back to
1997. The data reflects the fact that there was a major
20
surge in investment in the late 1990s leading into the
new decade. Following the downturn during the last
10
recession, investment resumed its climb. The most
recent quarterly data, which includes trailing twelve
0
month capital spending through July 2008, reflects
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
the first sequential declines since early 2003 (including
Source: SEC Documents
Wal-Mart). Since retail construction projects tend to
Excluding Wal-Mart
Wal-Mart
Fall 2008
to
'08
be relatively long-term in nature, we would expect to see a lag effect and
weakness to persist into 2009.
PROJECTED U.S. RETAIL SALES
($ in Billions)
$3,500
3,100
2,700
$2,672
$2,752
$2,829
$2,898
2,300
1,900
1,500
2008
2009
Source: Euromonitor International
2010
2011
No one can dispute that there is a great deal of
uncertainty in the overall retail industry at this point.
However, most analysts and observers would agree
that the medium and long-term outlook remains
positive. The U.S. is a nation of consumers. Declining
home prices and tighter credit availability may pinch
demand in the short-term, but the consumerism that
characterizes our society will not fade away. Despite
being an increasingly mature industry, it is reasonable
to expect that the industry should grow at a slight
premium to GDP in the coming years. The graph
on the left reflects historical and projected U.S.
retail industry sales estimates that were compiled by
Euromonitor International.
Why are Retail Services Important?
“One of the greatest values that a retail service provider can
bring to a client’s program is the ability to offer a single pointof-contact and a dedicated, nationwide team that understands
the challenges and unique dynamics associated with executing
change at the store level. Equally important is the ability to
bring expertise and best practices to the client’s program,
resulting in greater efficiencies and speed-to-market...”
Rick Davis, Founder & CEO, DAVACO, 2008
The retail
environment is in
flux...
The current retail environment is, in many respects, in transition. The
economy is shifting from a period of strong and sustained growth to a
period of uncertainty. New retail concepts are rising while others are
falling into decline. Real estate strategies that have driven growth over
the past decade are becoming more mature, creating new opportunities
for creative developers. The drive towards standardization in retail that
characterized the ‘big box’ era is being displaced by a move towards
differentiation and a more customized shopping experience.
...but change means In our view, regardless of whether it is positive or negative for the retailers
opportunity for retail themselves, change always creates opportunities for retail services
services companies. companies. When times are good for retail, services companies benefit
10
Fall 2008
from that growth. When times are not as good, services companies are
called upon by their clients to help streamline cost structures, to enhance
efficiency and to redesign the stores to attract more shoppers. Unlike the
retail industry overall, we would argue that the retail services industry is
much less vulnerable to the vagaries of the economic cycle.
Being more specific, we believe that retail services companies are
important to their retail and CPG clients for several reasons:
Efficiency: As discussed, the consumer and retail market in the U.S. is
increasingly mature. Given the sheer scale of the industry, we should
not be surprised that the expected rates of growth in the future will
approximate overall GDP growth. Now, that is not meant to imply that
there are not pockets of much higher growth throughout the industry.
The beauty of the U.S. retail market is that exciting new store concepts
can grow from one location to several hundred in a short period of time.
The service providers who count them as clients will benefit accordingly.
Overall, however, many of the nation’s largest retailers have started to
forecast lower rates of growth.
In a dynamic
marketplace, a new
store concept can
grow from zero to
several hundred
stores in short order.
How do these retailers address shareholder demands for earnings growth
when the expansion of their store base is starting to slow? The answer is
greater efficiency. Retailers recognize that increased efficiency throughout
their organizations will be the key to their long-term profitability in
a slower-growth environment. Wal-Mart became the largest retailer
in the world through an aggressive growth strategy, but it became
the best retailer in the world (arguably) because of their unparalleled
focus on operating efficiency. From store design and construction to
merchandising and inventory management, Wal-Mart has proven that
significant value can be generated through supply chain optimization and
an institutional focus on direct and indirect costs. We believe that retailers
(large and small) have been learning the lessons of Wal-Mart and have
made significant progress in improving the efficiency of their operations.
The graphs below, which illustrate the improvement in inventory turnover
and gross margins over the past fifteen years, support this assertion.
Increasing inventory
turns and gross
margins reflect
greater operating
efficiency.
Fall 2008
11
AVERAGE INVENTORY TURNS
AVERAGE GROSS MARGINS
(Fifty Leading U.S. Retailers)
8.0x
(Fifty Leading U.S. Retailers)
40%
35
6.0
30
4.0
25
2.0
'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
Retail services
companies have an
important role to
play as retailers grow
more efficient.
20
'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
Retail services companies have had an important role to play in this drive
towards more efficient retail operations. They design and build stores
that allow for optimal merchandise placement, storage and transaction
processing. They refurbish stores to enhance consumer appeal and
execute roll-outs of interesting new concepts (i.e. Vera Wang departments
at Kohl’s). They design and install the IT and telecom systems that
enhance communication capabilities throughout a retail chain. They help
retailers (and the CPG companies) stock shelves, replenish out-of-stock
items and manage inventory more efficiently. They utilize their market
knowledge to ensure that the product mix at a given store is optimized
for the unique demands of the local community. They design and
implement creative promotional programs that boost product lift. All of
these services, and countless others, have allowed retailers to market their
products with a greater deal of efficiency than ever before.
“Every retailer wants to be unique...”
Brand Manager at a Leading Consumer Products Company
Differentiation: The U.S. retail industry has experienced unparalleled
growth and change over the past twenty years. In our view, the dynamism
in the industry during this period has been driven by two primary
developments.
Wal-Mart was gamechanging in many
ways.
12
The first has been the emergence of Wal-Mart as the world’s largest
retailer. In 1993, Wal-Mart had 1,983 stores and 183 million square feet
under roof. By January 2007, the store count had expanded to nearly
Fall 2008
6,800 stores and 807 million square feet. Wal-Mart has driven change
throughout the retail industry. Retailers, large and small, have felt
enormous pressure from Bentonville and have made every effort to cope.
In an effort to match Wal-Mart’s low prices, retailers have pressured
vendors and taken steps to make their supply chain more efficient. They
have also attempted to standardize their store operations, from inventory
management to the ‘look and feel’ of their real estate, to improve margins.
A second trend that has changed the look of the U.S. retail industry has
been the proliferation of ‘big-box’ retail concepts. Best Buy, Staples,
Home Depot, Costco and other retailers grew from a handful of locations
in the early 1990s to thousands of stores today. These retailers adopted
many of Wal-Mart’s most successful strategies and sought to dominate
their specific categories. The result, once again, was the development of a
highly efficient and standardized store base.
We believe that retail has entered a new era. The big-box stores are
facing three serious crises simultaneously. First, the economy is hitting a
soft patch and consumer spending is waning. Second, their store base has
grown to such an extent that new locations are beginning to cannibalize
existing stores – most of the good real estate is now gone. Third, and
perhaps most importantly, the consumer is simply getting bored. While
the standardized look and feel of the stores may be efficient from an
operational perspective, it is no longer appealing to a consumer who
has a myriad of other shopping choices and fewer dollars to spend. The
only way for retailers, big-box or otherwise, to address these crises is to
develop and execute a plan to differentiate the nature of the shopping
experience and to excite the consumer once again.
Differentiation is also an increasingly important strategic priority for the
CPG companies who rely on retailers to distribute their products. The
proliferation of new brands and brand extensions has led to crowded
retail shelves. While the data is not recent, the table on the right is an
interesting reflection of the problem that consumer brands are currently
facing. Where there was once ten brands of potato chips on the store
shelves, there are now 78. Where there was once 160 brands of breakfast
cereal, there are now 340. The emergence of private label brands has
only exacerbated the increased competition facing the CPG companies.
Additionally, the fragmentation of traditional media has made it difficult
to implement advertising strategies and to build brand awareness.
The big box retailers
sought to emulate
Wal-Mart’s focus
on efficiency and
standardization.
The problem is that
the consumer has
gotten bored.
U.S. Consumer Choices
Product
Category
Vehicle Styles
Potato Chips
Cereals
Radio Stations
Amusement Parks
1970
2000
654
10
1,212
78
160
340
7,038
12,358
362
1,174
Source: POPAI
Fall 2008
13
Consider that in 1995, it took three television stations to reach 80 percent
of women in the U.S. In 2000, it took 97 spots to reach the same group.
Accordingly, like the retailers themselves, CPG brand managers and
marketing executives are struggling to differentiate their products from a
seemingly limitless number of competitive offerings.
Retailers and brand
managers are turning
to retail services
companies to help
them stand out from
the pack.
‘Boots on the ground’
allow many retail
services companies
to have a better
understanding of the
local markets than
their clients.
Retail services companies play a vital role in allowing retailers and CPG
brand managers to stand out from the competition. Design firms such as
Callison and Gensler work closely with retailers to create visually appealing
stores that capture the attention and loyalty of fickle shoppers. SMMAs
such as Acosta and Advantage work closely with CPG brand managers
to ensure that their products are positioned on the best retail shelf
space, making it significantly more likely that a consumer will purchase
their product. ISMCs such as PromoWorks and Mass Connections work
with CPGs and retailers to develop and execute creative promotional
campaigns and marketing events that engage the consumer in dialog
and facilitate increased product lift. All of these services are important
components of the differentiation strategy that is essential to the longterm success of today’s retailers and consumer brands.
Local Market Knowledge: An interesting paradox is emerging in
the retail industry. In the pursuit of growth, local retailers are going
regional; regional retailers are going national; and national retailers are
looking overseas as they develop a global presence. As they do so,
however, many retailers have recognized that they are straying from
the fundamental factor that made them successful in the first place – an
understanding of their core customer. As discussed, consumers are
facing more choices than ever before and are increasingly difficult to
reach. While there are clear operating benefits to standardizing the store
base and merchandising mix on a regional, national or global basis, the
fact is that customers in Chicago have different interests and priorities
than customers in New Orleans or Los Angeles. This issue is becoming
even more important as the ethnic make-up of the U.S. consumer market
continues to evolve.
“We have to shift our focus from products to customers and
redefine our value proposition...”
Brad Anderson, CEO, Best Buy
14
Source: Fortune Magazine
Fall 2008
Despite some controversy, the Best Buy ‘customer centricity’ initiative that
was launched in 2004 reflected the importance of this issue. Best Buy had
determined that the ‘one-size-fits-all’ approach that it had pursued for
many years was no longer appropriate given evolving consumer needs.
Accordingly, they developed a complex model to determine who (and
where) their most profitable customers were. Having identified those
‘angels’ and where they were, the goal was to personalize the shopping
experience in specific stores through changes in merchandising, service
and infrastructure. While this effort suffered from a number of executionrelated issues, we believe that the Best Buy example reflects a broader
trend that is taking place throughout the retail industry.
Best Buy has been
very progressive in
terms of ‘customizing’
the shopping
experience.
Retailers and CPG companies recognize that many retail services
firms have a better understanding of local market dynamics and niche
customers than they do. Given that they have thousands of employees
merchandising products in stores throughout the nation, SMMAs are
keenly aware of how specific products are received by consumers in
one geographic market versus another. ISMCs have the knowledge
and people in place to cater specific promotional programs to be most
effective in any given neighborhood. As retailers have grown, many have
lost the ability to provide that personalized experience. CPGs may have
had the knowledge, but generally lacked the ability to execute given their
reliance on the retailers. The understanding of which products are best
received in specific communities is one of the most powerful assets that
retail services companies possess.
Retail services
companies are wellpositioned to help
brand managers
and retailers drive
demand in local
markets.
“The new economy requires CPG companies to think outside
the box...Industry dynamics are ensuring that CPG companies
are becoming more open to new ways of leveraging targeted
collaboration to create value in this environment. They are
redefining relationships with their suppliers, customers as well
as consumers. Improving margins is also not easy at a time
when commodity prices are soaring and powerful retailers are
driving hard bargains...”
PricewaterhouseCoopers, Consumer Products Barometer,
January 2007
Knoop, Lal and Tarsis. “Best Buy Co., Inc.: Customer Centricity.” Harvard Business
School. October 16, 2006.
Many analysts would argue that the captive retail stores of leading brands (i.e. Apple,
Sony Style) are an attempt on the part of the branded consumer products companies to
regain control of the shopping experience and to enhance their knowledge of the
customer base.
Fall 2008
15
Intermediary Role: The balance of power between retailers and the
CPG companies is constantly shifting. Whereas brand was once king, the
consolidation that has taken place in the retail industry (and the growth of
behemoths such as Wal-Mart) has shifted this balance firmly in the favor of
the retailers. This development has been a key growth driver for many of
the nation’s largest retail services companies.
Brand managers are
under enormous
pressure from the
retailers to ensure
that their products fly
off the shelves.
A proliferation of brands, when combined with an increasingly
concentrated retail industry, has placed CPG companies in a difficult
position. First, getting access to the shelves can be challenging.
Emerging or niche brands, in particular, typically lack the resources,
awareness and relationships needed to gain access to the large national
retailers. Second, retailers are more vigilant than ever before in terms of
SKU performance metrics. If a new or existing product is not performing,
it will be replaced on the shelves by a competing brand in short order.
Accordingly, more pressure is being placed on brand managers to ensure
that product lift is maximized.
Retail services companies play an important role as the intermediary
that bridges the gap between the retailers and the CPG companies to
address these issues. Retailers support the use of SMMAs and other
merchandising service companies for several reasons. First, retailers
want an intermediary because they would rather have a relationship
with one firm than have to manage relationships with thousands of
brands. SMMAs serve as a valuable buffer and retailers rely on them
to identify and represent the brands that are ‘most likely to succeed’ in
their stores. Second, retailers want an intermediary because they have
the skills and people necessary to maximize lift more effectively than the
brands themselves. Finally, SMMAs and other intermediaries can provide
consistent and reliable merchandising services on a national or regional
basis, and most brands are unable to do so themselves.
Retail has always
been a seasonal and
cyclical business.
Mitigate the Impact of Cyclicality and Seasonality: Retail has always
been a cyclical and seasonal industry. Overall levels of retail sales typically
rise and fall in direct correlation with the broader economy and the
Christmas Season can account for as much as 40 percent of total annual
sales (depending on the retail category).
While the economic cycle will never disappear and the Holidays will always
be key to the success of any given year, it is our view that retail services
companies help retailers offset some of the negative impact. For instance,
16
Fall 2008
SMMAs and ISMCs work closely with brands and the retailers to ensure
that the right inventory is in the store at the right time of the year and
that products are promoted in an appropriate manner. Given the cost
of excess inventory in terms of carrying cost and discounting, optimizing
this mix is essential depending on the economic environment and the
season. Retailers never want to be caught with too much inventory in a
weakening economy or the wrong inventory during the Holiday season.
Additionally, retail services companies provide services to the CPGs and
retailers that they would otherwise need to perform themselves. Shelf
stocking, out-of-stock replenishment and other merchandising services
are time and people-intensive and outsourcing these services provide
CPGs and retailers with more variable cost structures. Even design firms
provide greater flexibility for retailers. The alternative to hiring a design
firm would be to increase the investment in the in-house store design and
construction team, a costly undertaking in a weakening retail environment.
Similar to other outsourcing initiatives, retail services companies allow
retailers and CPGs to maintain more flexible cost structures, to better
manage seasonal and cyclical swings in their business, and to focus on
their core competency – selling appealing merchandise to their customers.
“We’re becoming more focused on matching up quantitative
data with our marketing and merchandising activities...”
Marketing Executive, Large CPG Company
Technology and Performance Measurement: Retailers have historically
been criticized by analysts and industry observers for being far too slow
to adopt new technologies. While this argument was convincing several
years ago, we would argue that retailers have become much more savvy
in this regard and that their performance has benefitted accordingly.
Regardless of the functional area – from supply chain management to
planograms to store security – technology has become an essential
component of a retailer’s success. Perhaps the most important aspect
of technology has been the increasing ability of retailers, CPGs and retail
services companies to gather, analyze and interpret massive amounts of
sales data. Experienced veterans of the retail industry were once widely
respected for their seemingly innate ability to judge consumer preferences
and purchasing habits. This judgment has been replaced by cold, hard
data sets and technology has enabled that shift to take place. The result
is significantly greater visibility into every aspect of a retailer’s operations,
leading to much better decision-making capabilities. CPGs have also
Fall 2008
Retail services
companies provide
their clients with
the ‘flex’ needed to
mitigate cyclical and
seasonal concerns.
Retailers have
become much more
proactive in terms
of adopting new
technologies.
17
benefited from this information revolution and make use of this data as
they develop and execute their marketing plans.
Technology has
become a much more
important component
of the SMMA business
strategy.
Retail services companies have been essential to this evolution. SMMAs,
having armies of employees deployed in retail stores throughout the
nation on a daily basis, have always been well-positioned to gather
and make use of this data. Dedicated market research firms, such as
ACNielsen and IRI, have become leaders in this field and make use of
extraordinarily sophisticated technology to identify trends in consumer
demand. Retail services companies have also played a role on a more
basic level. For instance, companies such as CrossCom National design,
install and maintain the IT and telecom systems that allow retail stores to
communicate with headquarters. Design firms such as Callison make use
of sophisticated architectural applications that allow them to work in a
highly integrated manner with their clients. Retail media networks design
and deploy visually-appealing media messages that catch the eye of the
consumer in the store and compel follow-on purchases. As technology
continues to redefine the way that retailers conduct business, retail
services firms will be on the front lines.
Retail services will
become even more
important as the retail
industry matures.
We recognize that the points detailed above are only the beginning.
Behind the scenes, retail services companies enhance the quality of the
shopping experience and positively impact store-level performance in
many more ways. However, we are hopeful that this discussion highlights
one important fact: As the retail industry matures, retailers and CPGs
will increasingly turn to outsourcing to enhance their profitability and
capital efficiency. We believe that this trend will lead to significant growth
opportunities for retail services companies in the years ahead.
18
Fall 2008
Sales, Marketing & Merchandising
Services
The Basics
“No other marketing activity generates greater sales return
than timely merchandising support...”
Brand Marketing, 2007
Most shoppers never consider how their favorite frozen food or hair care
product is made or how those goods get to retail shelves.
Sales, marketing and merchandising agencies constitute one of the largest
segments of the retail services industry. These organizations play a vital,
yet often overlooked, role in the retail supply chain by bridging the gap
between retailers and the CPG companies. SMMAs not only ensure that
products reach store shelves, but also provide a range of outsourced
solutions for the retailers and CPGs. Moreover, they provide a means for
retailers to align their merchandising strategies and plans with those of
the brand managers. As you can imagine, the SMMAs have thousands of
employees serving a broad range of functions. Some of them maintain
offices at the headquarters of the nation’s largest retailers to facilitate
seamless communications on behalf of their CPG clients. Others spend
their days setting up POP displays and stocking shelves at the local grocery
store to ensure that their clients’ most popular products are always readily
available and are well-positioned on the shelves.
SMMAs provide a
range of outsourced
services to CPG
companies and
retailers.
SMMA services fall within two categories, commonly referred to as
“headquarter” and “retail” services. Headquarter services include all efforts
required to represent brands to retailers, including business development
and sales planning efforts; assisting with the development, review and
execution of marketing plans; and the development of relationships with
key contacts within retail organizations. These services tend to be much
more high-level and strategic in nature. Retail services, on the other
hand, are more tactical in nature. These services directly support sales
efforts at the retail location and include the implementation of product
promotions; installation and maintenance of POP displays; product cut-ins
and resets; category management activities such as planogram design and
implementation; and ensuring that products are available and positioned
appropriately on store shelves. Retail services are the ‘nuts and bolts’
execution activities that CPG brand managers and retailers rely on to be
successful on a daily basis.
SMMA services
fall into two
primary categories:
headquarter and
retail.
Fall 2008
19
“MSOs can do a much better job selling and managing the
product at the shelf than we could... and at a much lower
cost...”
Consumer Packaged Goods Executive, 2007
Evidence suggests that SMMAs are very effective at retail selling and
support services. They can develop regional and local sales plans,
implement new product introductions and promotional campaigns and
provide a regional point of contact for local retail management and buyers.
These organizations provide for the quick replenishment of out-of- stock
merchandise (a major concern for the industry), the implementation and
execution of blitz campaigns on a regional level, and other retail sellthrough activities.
SMMAs allow
retailers and CPGs to
focus on their core
competencies.
EXPECTED CPG SALES REPRESENTED BY SMMAs
($ in Billions)
$250
$213
$194
200
$176
$153
150
$133
$116
100
50
0
2005
2006
2007
Source: ASMC Foundation
Wall Street’s intense
focus on retail
metrics is driving
demand for retail
services.
2008
2010
What has been driving the increasing demand for SMMA services? Wall
Street continues to pressure retailers and CPG companies to increase
earnings despite a growing list of challenges. Consumer spending
is softening and there is intense competition among brands for the
consumer’s attention and ‘wallet-share’. These factors, combined with
significantly higher raw material prices and employee costs, have increased
pressure on retailers and CPG companies to streamline operations and
deploy capital and resources in the most efficient manner possible.
20
2009
Currently, a majority of retailers and CPG companies
outsource some or all of their merchandising services
to third-party service providers. According to data
from the ASMC Foundation, these SMMAs currently
represent 67 percent of all CPG brands and cover
63 percent of retail customers. A recent study,
conducted by the Institute for Customer Management
and the Center for Business and Industrial Marketing
of Georgia State University, found that 60 percent
of CPG companies outsource 80 percent of their
brands to SMMAs. As the graph on the left reflects,
the outsourcing of sales and marketing duties by
CPG companies is projected to grow by 15 percent
per annum through the end of 2008 and 10 percent
thereafter. This growth reinforces our perspective that
the prospects for the SMMA industry continue to be
positive.
Donthu, Gruen, Kasi, Kesel, Parvatiyar. “Value of Outsourcing Sales & Marketing.”
ASMC Foundation. 2006.
Fall 2008
“Utilizing a third party allows the supplier to focus on managing
the brand, which is the main focus...”
Retail Executive, 2007
To do so, retailers and CPG companies have been working to reevaluate
their business strategies and identify their core competencies. In the case
of the CPGs, brand managers and marketing executives have recognized
that their time and resources are best spent by focusing on product
development and innovation. As a consequence, many have decided that
sales and merchandising functions can often be executed more efficiently
by third parties on an outsourced basis. Not only can this decision result in
substantial cost savings, but it can also increase the overall success of the
merchandising and marketing strategy.
Retailers and brand
managers have been
very thoughtful about
identifying their ‘core
competencies’.
“It depends on the retailer as to which MSO is selected...”
Retailers across the country also face the daunting task of differentiating
themselves in an intensely competitive environment. The execution of
an effective merchandising strategy is an essential driver of their success.
Accordingly, retailers have a ‘hands-on’ role to play when a CPG is deciding
to work with an SMMA. As the preceding quote reflects, the retailer often
has the ability to influence (or dictate) the decision-making process based
on their preference and past experience with specific SMMAs. Even though
the CPG may be paying the bill, it is the retailer who stands to gain (or lose)
most directly from the performance (or underperformance) of an SMMA.
Retailers must ensure that products that are in high demand are placed on
shelves quickly and that an appropriate stock is maintained at all times. Too
much inventory is just as bad as too little given that real estate on the shelf is
a retailer’s most valuable asset. The importance of speed-to-shelf solutions
and out-of-stock prevention has elevated the impact that SMMAs have
on store-level performance. Additionally, in many cases the SMMAs are
assuming responsibilities that store staff would have to perform themselves.
Retailers rely on the SMMAs to outsource these functions and to leverage
their merchandising management expertise to drive sell-through initiatives
and leave store employees to do what they do best – tend to the customer.
While it can be difficult to quantify based on publicly available information,
the argument has been made that SMMAs can perform sales and marketing
tasks at a cost that is as much as 30 percent lower than in-house sales teams.
According to the survey sponsored by the ASMC Foundation, the cost
savings to CPG companies of outsourcing sales and marketing functions
Fall 2008
SMMAs can perform
some tasks at a cost
that is 30% lower than
in-house teams.
21
versus direct sales exceeds $4 billion annually. Additionally, a cost savings
of $3 billion could be achieved with the outsourcing of the remaining 46
percent of sales activity.
Even brands that
maintain in-house
teams often turn to
SMMAs for selected
services.
Given the data, it is not surprising that most retailers and CPG companies
use an SMMA to handle part or all of their merchandising and category
management services. While top tier brands, such as P&G, typically
maintain headquarter sales operations in-house, most smaller to mid-sized
CPG companies take advantage of SMMAs’ portfolio of services. Unlike
their smaller competitors, the top tier brands typically have the awareness,
relationships, expertise and resources necessary to support direct store
sales efforts. Brand managers at the larger companies believe that direct
contact with the retailers is beneficial to the long-term success of their
business. Many argue that the headquarter sales function is better dealt
with in-house utilizing resources and knowledge of other groups within
the organization. Maintaining this function in-house can also lead to more
accurate forecasting and strategic planning at the brand level. However,
even in situations where major account management duties are handled
in-house, it is not uncommon for top brands to utilize SMMAs for regional
roll-outs or specific niche targeted initiatives.
Market Structure – “Top Heavy”
As discussed, the retail industry has undergone dramatic changes over the
last decade. As competition has increased and consumer preferences have
shifted, many retailers found themselves in a desperate battle to remain
profitable. The result has been a wave of consolidation and increased
concentration among the nation’s top retailers. Consequently, CPGs and
service providers who relied on the retail channel also needed to consolidate
in order to remain competitive.
Retail consolidation
has driven M&A at
the brand level as
well.
22
In the mid-1990s, consolidation efforts within the supermarket industry and
the rise of powerful mass merchandisers such as Wal-Mart spawned a wave
of mergers among CPG companies in order to maintain their leverage and
compete on a national basis. Whereas the top five supermarket chains
controlled only 20 percent of total industry sales in the early 1990s, by
the end of the decade the top five controlled more than 40 percent of
all grocery sales. As larger retailers swallowed up smaller regional ones,
CPG manufacturers needed to adapt to the changing balance of power by
adopting an acquisition growth strategy of their own. With consolidation
taking place on both sides of them, SMMAs had no choice but to follow
Fall 2008
SMMAs have
expanded to retain
their competitive
position.
suit and gain scale. Accordingly, ten years ago the SMMA landscape
consisted of more than 2,500 competitors. Today, there are fewer than 500
independent firms still in existence.
As reflected in the graph on the right, the SMMA
industry is led by a small number of large national
players, followed by a highly fragmented group of
regional firms with more specialized merchandising
expertise. The three largest competitors in the
industry are Acosta Inc., Advantage Sales and
Marketing and CROSSMARK. In step with retailers
and CPG companies, these three organizations
have grown substantially since the late 1990s. While
organic growth has been an important driver, these
competitors also acquired many smaller service
providers along the way. Today, these three
companies maintain an estimated 60 percent market
share of domestic merchandising services. We do
believe, however, that opportunities will continue to be
available to mid- and small-sized SMMAs that continue
to innovate.
ESTIMATED SMMA MARKET SHARE
(Assumes $4.0 Billion Market Size, Does Not reflect Wholesalers)
Acosta
23%
Other
39%
Advantage Sales &
Marketing
23%
CROSSMARK
15%
Source: Lincoln International estimates
“Sometimes it’s better to be a big fish in a small pond when it
comes to selecting an MSO...”
Despite the obvious benefits to the retailers and CPG companies that deal
with large national SMMA organizations, the current industry structure has
some unfortunate consequences. The current model favors those CPG
companies with category-leading brands. Conflict of interest concerns are
of paramount importance to manufacturers and, as a result, prevent national
SMMAs from acquiring accounts with direct competitors. From this, there
stems an under-representation of non-top three brands in each category.
Unfortunately, this does not bode well for smaller regional consumer brands
because they are unable to garner the attention that they would like to
receive from national SMMAs. Moreover, it becomes quite difficult for CPG
companies to switch SMMAs because only a few have enough scale and
capabilities to serve their needs and, in all likelihood, the other SMMAs are
already dealing with a competitor.
Smaller brands have
a difficult time getting
representation from
the larger SMMAs.
Advantage Sales & Marketing website
Fall 2008
23
Given this background and overview of market structure, it is important to
understand the competitive advantages that determine market positioning
and profitability in the SMMA industry.
Retailers are getting
bigger; brands
are getting bigger;
SMMAs need to do
the same to succeed.
Scale: This issue has been touched upon already, but has driven a great
deal of M&A activity in this industry in recent years. Retailers have gotten
larger, compelling CPGs to grow in response. Given that SMMAs sit
between the two parties, consolidation in this market was inevitable. While
this is a people-intensive business that does not benefit from economies of
scale in a classic sense, scale has certainly benefited the largest players. The
large CPGs and retailers are more comfortable dealing with a small number
of large service providers than they are dealing with a large number of small
providers. This has been a key success driver for the ‘big three’ SMMAs.
“Regional MSOs have built strong [retail] relationships in their
market, and we recognize that...”
Brand managers
and retailers are
looking for SMMAs
with a large national
and international
footprint.
Geographic Footprint: Local retailers are becoming regional; regional
retailers are becoming national; and national retailers are going global.
Accordingly, CPGs tend to prefer SMMAs that have the ability to provide
service across a broad geographic area while maintaining exceptional
knowledge of local markets. While each of the key players in the industry
now have national coverage, we believe that they will increasingly look to
expand overseas alongside the retailers. Smaller players that lack a broad
geographic footprint can find themselves at a competitive disadvantage.
Strength and Depth of Retailer Relationships: The strength and depth
of relationships with retailers is one of the most important determinants
of success in this industry. In many respects, CPG companies are relying
upon their SMMA to manage critical aspects of their retail relationships.
To successfully represent the CPG brands, the SMMA needs to be fully
integrated into the retailers on a sales and an operational level. Many of the
larger SMMAs actually maintain staff on-site at the headquarters of the larger
retailers to maintain these relationships. Successful SMMAs also develop
and maintain strong working relationships between their retail sales and
support teams and store-level management. Given the amount of time that
the SMMAs’ employees spend working within the retail stores, having a solid
working relationship with the retail staff at the store level is critical to their
competitive position and success.
24
Fall 2008
Breadth of Services: While there is a difference of opinion on this point
within the industry, we believe that a broad portfolio of service capabilities
is an important driver of success. Some of the largest CPGs make use of
the retail services capabilities but do not look to their SMMAs to provide
headquarter functions. Conversely, many of the smaller CPGs need their
SMMA to offer both. While clients may not select every service from the
‘menu’ that their SMMA provides, we believe that being able to provide the
full-range of services is very important. Now, that being said, it is important
to note that a number of smaller players in the industry have been successful
in pursuing a ‘best-of-breed’ as opposed to a turnkey approach. These
competitors would argue that you cannot be all things to all people.
Retailers and brand
managers are looking
to work with SMMAs
that offer a full suite
of services.
“[Poor] in-store implementation...is like an elephant in your
stores. Nobody likes to admit it’s there, but it is absolutely
stomping on your category and promotional plans...”
Warren Dawson, Retail Tactics
Reliability of Execution: As discussed, SMMAs divide their service
offerings into two components – headquarter and retail services. One of
the primary drivers of competition in the industry is the ability of an SMMA
to manage and execute retail services on time and under-budget. The
logistics involved in doing so can be extraordinarily complex, and retailers
and CPG companies have zero tolerance for mistakes. Cut-ins that are not
implemented on time or late or incomplete out-of-stock replenishments
result in lost sales and sub-optimal shelf space utilization, both of which will
not be tolerated by demanding retailers and brand managers. According to
the Grocery Manufacturers Association, out-of-stock in certain categories can
climb as high as 17 percent during promotions, costing retailers an average
of $75,000 annually per store. The cost of poor display execution is also
overwhelming. According to a recent NARMS / IRI study, display execution
is the largest driver of incremental sales volume related to sale promotions.
Displays can drive sales increases of 36 percent, versus price reductions (35%)
and feature advertisements (28%). Despite these statistics, retailers are often
unable to implement their display solutions strategies. In fact, more than 40
percent of POP display material is never used due to poor retail execution.10
Proven SMMA retail execution capabilities are a necessity to retain existing
customers and to win new ones. If an SMMA is viewed as sub-par in this
10
Poor Execution =
Lost Sales.
Tenser, James. “CPGMatters: Implementation Group Aims at Elephant in the Store.”
Retail Wire. November 19, 2007.
Parks, Liz. “Retailers are Examining Key Customers’ Buying Habits...” Supermarket
News. January 30, 2006.
Rice, Jeff. Chief Communications Officer. CROSSMARK.
Fall 2008
25
regard, their competitive position will be seriously compromised.
“MSOs hold a wealth of information about how your product is
doing compared to the competition...”
SMMAs are ideally
positioned to
gather and interpret
invaluable consumer
data.
Data Collection and Information Management: SMMAs have
thousands of employees walking the aisles, stocking the shelves and
executing merchandising strategies in retail stores each and every day. Their
employees are on the front lines of retail selling and are well-positioned
to gain invaluable insight into brand competition and consumer behavior.
Retailers and CPG brand managers rely on their SMMAs to gather this
information and to make it available to key marketing decision-makers. As
one would expect, the successful deployment of information technology in
the field has become a vital competitive differentiator for the nation’s leading
SMMAs. The SMMAs who can best capture and disseminate the most
extensive and relevant information to their retail and CPG clients will find
themselves at a meaningful advantage versus their competition.
Despite a tough retail
environment, we
believe that there
are tremendous
opportunities for
growth.
In an increasingly competitive retail environment, service providers must
constantly be on the lookout for new opportunities in non-traditional
channels and adjust their business models to take advantage of developing
trends. We believe that the largest players in the industry are well-equipped
to move forward in this changing retail landscape and that smaller and midsized SMMAs will target niche markets and specialized services as an avenue
for growth. We have identified several interesting growth opportunities for
SMMAs to consider.
“Consumers increasingly trust retailers’ own offerings, and are
more willing to switch from buying famous [national] brands to
buying private label goods...”
Matthew Adams, Datamonitor, 200711
Increased Focus on Private Label Brands: Perceptions of store branded
merchandise continues to change. No longer thought of as inferior ‘knockoffs’ of major brands, private label goods have increased in both quality
and popularity. A recent study by IBM’s strategic consulting unit found that
three quarters of all consumers surveyed did not see any benefit to buying
branded food products and that a majority of consumers felt that the quality
11
26
http://findarticles.com/p/articles/mi_hb3042/is_200604/ai_n20405643
Fall 2008
of private label products was the same as comparable brands.12 According
to another study conducted by Datamonitor, U.S. consumers spent an
estimated $108 billion on private label goods in 2005. Within three years,
the domestic market is expected to grow to more than $130 billion.13 While
private label goods have established a substantial foothold domestically,
the level of market penetration is no where near the levels that are found in
Europe. Last year in the U.S., private label sales accounted for 23 percent
of food sales and seven percent of drink sales.14 In Europe, private label
penetration is much higher than in the U.S. This is particularly the case in the
U.K. where, in 2006, 37 percent of all CPGs sold were private label.15
These factors suggest that there is still enormous
market potential for private label brands on U.S. retail
shelves. Retailers that do not currently have store
branded products in place are missing an opportunity
to drive sales growth and profitability. On average,
profit margins for private label goods are estimated to
be 10 percent higher than those of branded products.16
The graph on the right, created by McKinsey & Co.,
reflects two scenarios for future private label growth:
one in which private label share stabilizes; the other in
which private label share continues to accelerate.
The private label
movement represents
an enormous
opportunity for
SMMAs.
PROJECTED PRIVATE LABEL DOLLAR SHARE
(Value Potential)
30%
25%
20%
15%
24%
$55B
16%
We believe that the continued growth in private label
10%
brands will provide a sizable opportunity for SMMAs
2004
2006
2008
2010
2012
2014
2016
Source: McKinsey & Co., 2007
in coming years. Retailers, many of whom are less
Base Growth Scenario: Assumes we are at equilibrium
familiar with the brand management process, have
point in terms of private label share, and current retailer
and category trends continue. No external shocks occur
come to rely on SMMAs to provide the support and
that could drive the industry further to value.
expertise necessary to successfully develop and
Aggressive Growth Scenario: Target, Costco and others
implement a private label program. The largest
continue to grow private label aggressively, and WalMart increased private label focus. Additional leading
SMMAs, including Advantage and CROSSMARK,
grocery retailers expand private label offerings, driving
remaining grocers to pursue as well. Consumers
currently offer a range of private label services to
embrace private label brands, in step with retailer
offerings.
retailers who are introducing house brands. Other
companies, such as Daymon Worldwide, are more
focused and have developed a private label specialization. Specific services
include identifying potential manufacturers, providing branding expertise
and sales support.
12
13
14
15
16
Cordeiro, Anjali. “Private Labels Changing Dynamics of Food Industry.” Associated
Press Financial Wire. July 17, 2007.
“Datamonitor Predicts Private Label Progress.” Private Label Buyer. April 1, 2007.
“Tomorrow’s Private Label Consumers.” Research & Markets. January 2007.
Ibid.
Source: Daymon Worldwide website
Fall 2008
27
“If we can come up with private label items that can bring
something different, unique or new to a category, that allows us
to be a better agent for our consumers...”
Wal-Mart Executive, 200717
The largest SMMAs
are building
impressive private
label credentials.
As private label programs proliferate and penetration increases, we believe
that smaller regional (and even local) retailers that are looking to differentiate
themselves in a competitive environment will also launch programs. If this
occurs, we believe that these retailers will turn to smaller and mid-sized
SMMAs to provide the same level of private label support that the larger
players do to the national retailers.
Demand is increasing
for more specialized
SMMA services.
Specialized Merchandising Services: In a drive towards differentiation,
retailers are seeking to target attractive new market opportunities that, in
turn, require more complex merchandising strategies. SMMAs must adapt
if they are to strengthen their role within the value chain. For instance, the
continuing move towards organic foods represents a sizable (and growing)
opportunity for SMMAs. Additionally, the evolving demographic landscape
in the U.S. will also change the nature of the retail industry and SMMAs need
to position themselves accordingly.
“Demand for organic food is growing immensely in the United
States and is motivating the giants in the food industry to enter
this lucrative market...Several multinationals are vying for
strong positioning in this market by either offering new organic
food products or by strategically acquiring or partnering with
flourishing major organic brands...”
Sneha Pasricha, Frost & Sullivan Analyst, 200718
The market for non-traditional food offerings such as organics continues to
grow. The global organic food market is experiencing strong double-digit
growth due to increased consumer awareness and a focus on health and
wellness. By 2009, the global organic food market is projected to exceed
$86 billion in annual sales. Domestically, we continue to see strong growth
within the sector. A decade ago, the U.S. organic food market generated
annual sales of only $3.6 billion. In 2004, 2005, and 2006, organic food sales
were $11.9 billion, $13.8 billion and $16.9 billion, respectively. According
to a study published by the Global Industry Analyst Inc., domestic sales of
17
18
28
Nimalya, Kumar and Jan-Benedict, E.M. Steenkemp. “Are Brands Dead?” Private
Label Strategy. July 2007 – August 2007.
“Roadmap of U.S. Organic Food Markets – An Industry Outlook.” Frost & Sullivan.
September 2007.
Fall 2008
organic food and beverages are expected to reach $43
billion by 2010.19,20,21 We believe that this presents an
enormous opportunity for SMMAs to target organic food
producers as well as specialized retailers.
U.S. NATURAL & ORGANIC FOOD SALES
($ in Billions)
$50
40
The organic food category presents a unique
merchandising challenge. First, with some clear
30
exceptions, the majority of organic foods are still
produced by small, emerging companies as opposed
20
to the large, traditional brand managers. Most of
these small companies lack retailer relationships,
10
merchandising and marketing resources. Conversely,
retailers that are looking to expand their organic product
0
offerings often lack familiarity with these brands and
1998
2000
2002
2004
2006
2008
2010
are not experienced in the specialized merchandising
Source: Nutrition Business Journal and CIBC World Markets
requirements of the category. Accordingly, SMMAs with
Natural Foods
Organic Foods
expertise and relationships in the organic sector can add significant value to
both the brands and the retailers that they serve. As the category continues
to grow, SMMAs with a focus on the sector stand to benefit.
“Overlaying these changing demographic patterns will be an
even greater shift to multiculturalism throughout the country.
Retailers will need to respond to the tastes, customs, interests,
and spending habits of an increasingly diverse population with
money to spend...”
PWC / TNS Retail Forward, 200722
The changing face of the U.S. population also represents an outstanding
opportunity for SMMAs. When dealing with specific ethnic communities,
CPG companies recognize that generic merchandising efforts are not as
effective as more targeted strategies. As a result, these companies are
turning to SMMAs who have the knowledge and capabilities needed to
develop and execute these targeted programs. Companies that hope to
garner additional sales from specific ethnic groups need to align themselves
with knowledgeable SMMA partners to avoid pitfalls and maximize their
merchandising return on investment.
19
20
21
22
SMMAs with a
focus on ethnic
merchandising can
add substantial value.
Gray, Steven. “Organic Food Goes Mass Market.” Wall Street Journal. May 4, 2006.
“U.S. Organic Sales Show Substantial Growth.” Organic Trade Association. May 6,
2007.
“Tough Road Ahead for Organics?” The Food Institute Report. July 30, 2007.
“Retailing 2015: New Frontiers.” PricewaterhouseCoopers / TNS Retail Forward. 2007.
Fall 2008
29
GROWING HISPANIC POPULATION IN THE U.S.
(% of Total Population)
100%
80%
“The Asian consumer presents distinct and,
in many cases, lucrative opportunities for
marketers and advertisers in diverse product
categories...”
Cynthia Park, Managing Director, Kang &
Lee23
For instance, we believe that SMMAs with a proven track
record of success marketing to the Hispanic and Asian
40%
communities will be in high demand in coming years.
U.S. Census Bureau projections indicate a 50 percent
20%
growth rate in the Hispanic population over the next 30
years. By 2010, it is expected that the U.S. population
will include more than 47 million Hispanic Americans
0%
2000
2010
2020
2030
2040
2050
with over $1 trillion of purchasing power. Moreover,
Source: Federation of American Scientists
there are currently 15 million Asian Americans in the
Hispanic
Non-Hispanic
U.S. with estimated purchasing power of $427 billion
per annum.24 Asian buying power has the secondfastest projected rate of growth, slightly behind the Hispanic community.
By 2011, Asian buying power is expected to grow by 46 percent over the
Asian-American current level to reach $626 billion.25 SMMAs that understand the unique
buying power is issues and concerns that influence the purchasing behavior of this growing
expected to grow by demographic will benefit greatly. While many of the national players address
46 percent by 2011. this market already (including providing bilingual services to retailers), there
is still considerable room for those firms that specialize in merchandising to
these consumers.
60%
“Regional MSOs have built strong relationships in their market,
and we recognize that...”
CPG Executive, 2007
SMMAs with a focus
on fast-growing
regions are also wellpositioned.
Specialized SMMA knowledge extends beyond ethnic communities.
While the general trend in the industry has been towards consolidation
and nationwide capabilities, a number of the CPG executives surveyed
for this report emphasized that dealing with smaller regional firms can be
advantageous. These executives commented that even though they are
partnered with a national SMMA, they continue to rely on the services of
a smaller, regional-focused SMMA in certain markets where they possess
deeper relationships with local retailers and greater awareness of the local
23
24
25
30
Ibid.
Imada, Bill. “Four Myths about the Asian-American Market.” Advertising Age. October
31, 2007.
“Asian Buying Power has Grown by 59%.” Asian Reporter. September 26, 2007.
Fall 2008
environment. Retailers (and consumers) in
Selected Population Growth in U.S. Cities
Biloxi have different concerns than retailers
Population
(and consumers) in Chicago. Regional SMMAs
City
State
2005
2006
%∆
are best-positioned to understand the subtle
North Las Vegas
NV
176,527
197,567
11.9%
differences in product mix, shopper behavior,
Fort Worth
TX
623,119
653,320
4.8%
Miami
FL
386,619
404,048
4.5%
and seasonality that characterise their local
Bakersfield
CA
295,769
308,392
4.3%
markets. Accordingly, we believe that regional
Raleigh
NC
342,812
356,321
3.9%
SMMAs with a focus on fast-growing geographic
Chandler
AZ
231,728
240,595
3.8%
Toledo
OH
301,728
298,446
(1.1%)
markets will be well-positioned for growth
Pittsburgh
PA
316,299
312,819
(1.1%)
in coming years. As the table on the right
Buffalo
NY
279,138
276,059
(1.1%)
illustrates, the migration to the Sunbelt and the
Cleveland
OH
450,560
444,313
(1.4%)
Detroit
MI
883,465
871,121
(1.4%)
Southwestern states should benefit SMMAs with
St. Louis
MO
352,572
347,181
(1.5%)
26
a focus on those regions.
“We continue to evaluate our existing brands in the context
of our new framework, and we’ll divest those businesses that
don’t fit our long-term growth plan...”
Irene Rosenfeld, Chairman & CEO, Kraft
Mergers, Acquisitions and Divestitures: As mentioned in the opening
pages of this report, change creates opportunity for retail services
companies. The consolidation of the retail and CPG industries has certainly
created challenges for SMMAs. When two retailers or CPGs merge, the
combined company typically looks to centralize its operations and the loss of
a merchandising account can soon follow.27
Consolidation among
retailers and CPG
companies has had
a big impact on
SMMAs...
However, these transactions have also created opportunity. In an effort to
enhance the efficiency of the combined business, the acquiring company
may look to outsource non-core functions across the organization. If the
acquirer has made use of an SMMA while the target historically did not,
the deal may lead to a dramatic increase in business for the incumbent.
Additionally, the newly combined company will often look to rationalize
its portfolio and divest non-core brands, often through a sale to a private
equity buyer. For instance, Kraft recently announced that it would sell its
Veryfine and Fruit2O drink brands to Sunny Delight, a portfolio company
of J.W. Childs (a Boston-based private equity firm).28 In 2006, P&G sold its
Pert Plus Brand shampoo and Sure deodorant to private investment firm
Najafi Companies, and was forced to divest its SpinBrush business following
its acquisition of Gillette. While these businesses may have benefited from
...both positive and
negative.
26
27
28
Hamstra, Mark and Zwiebach, Elliot. “Sales Agencies Rethink Their Business Models
Amid Mergers, Divestitures.” Supermarket News. June 12, 2006.
Jargon, Julie. “A Bite at a Time.” The Wall Street Journal. November 7, 2007.
Fall 2008
31
in-house sales and marketing teams under the former parent, the new owner
may or may not have the resources to continue that effort. Brands purchased
by private equity groups may not have a dedicated sales and marketing
force within the organization. Accordingly, these transactions can present an
excellent opportunity for SMMAs to acquire additional business.
“As prime merchandising opportunities, such as front-ofstore displays, diminish, average lift will continue to erode,
prompting more experimentation among manufacturers with
new in-store marketing vehicles [and] a stepped-up investment
in merchandising innovation...”
Thom Blischok, President, IRI Retail Solutions and Strategic
Consulting29
In-store marketing
is growing in
popularity...
Creative Marketing Services: As this quote emphasizes, CPGs and
retailers are struggling to differentiate their products and have fewer tools
at their disposal to do so. The recent move towards ‘clutter free’ store
environments has reduced the amount of space available for POP displays,
one of the most effective means for promoting CPG products on the sales
floor. Accordingly, CPGs and retailers are becoming more proactive in
addressing alternatives to their traditional promotional efforts. The result has
been a significant increase in the popularity of sampling, demonstrations,
‘retailtainment’ events, in-store media and other eye-catching promotional
activities.
...and SMMAs are
continuing to migrate
into the space.
While many SMMAs are involved in the execution and monitoring of
basic promotional activities, the actual development of the projects is
typically done elsewhere. Our research found that, more often than not,
CPG companies and retailers are turning to specialized in-store marketing
companies to develop the innovative marketing campaigns that are
deployed at retail locations. The core competency of these organizations
is generating and implementing creative ISM solutions that engage the
shopper, increase product awareness and, ultimately, lift rates. While
SMMAs are viewed by CPGs and retailers as good strategic partners with
store-level merchandising capabilities, ISMCs provide highly creative services
and are expert in consumer psychology. ISMCs possess a unique skill set
that is more akin to an advertising agency and are therefore positioned very
differently than SMMAs.
29
32
“CPG Companies Face Merchandising Crisis, Turn to New Solutions.” Business Wire.
August 29, 2007.
Fall 2008
Given the differing mindset and capabilities, we question the feasibility
of SMMAs organically developing the expertise that ISMCs possess. We
do, however, believe that there is a significant opportunity for SMMAs to
become more involved in the promotional side of the business. While
efforts are being made to build in-house capability, SMMAs looking to
gain a foothold in the space may look to pursue strategic acquisitions or
joint ventures with ISMCs to quickly build capabilities (and credibility) in the
marketplace. We will discuss the ISMCs in detail in the next section of this
report.
We believe that
SMMAs will actively
consider acquisitions
in the broader ISM
sector.
“We also believe that there will be more global players in
the future – U.S. retailers are expanding abroad and more
European retailers are expanding in the U.S.”
Sandy Kennedy, Retail Industry Leaders Association
International Growth Opportunities:
INTERNATIONAL RETAIL SALES OUTLOOK
(Excluding Auto, 2006-2011)
Following in the footsteps of Acosta, Advantage
and CROSSMARK, we believe that SMMAs
Russia
15.4%
should look internationally as a means to grow
Indonesia
10.6%
India
10.4%
their business. With large enough scale, SMMAs
China
8.9%
can establish a presence outside of the U.S.,
Mexico
7.2%
enabling them to service domestic retailers and
Brazil
6.6%
CPG companies with locations abroad. We do,
U.S.
5.2%
South
Korea
5.1%
however, concede that for most SMMAs the
Canada
4.7%
more appropriate course of action would be to
U.K.
4.1%
partner with other domestic firms to establish an
France
2.9%
Germany
0.8%
international location, or alternatively, establish
Japan
0.8%
a joint venture with a service provider outside
0%
4%
8%
12%
16%
of the U.S. catering to multinational operations
Source: OECD National Statistics Office, TNS Retail Forward
or international brands. As we continue to see
an influx of international retailers entering the
domestic market, including Tesco and Japanese convenience store chain
SMMAs are looking to
Famima!!, the regional expertise that SMMAs bring to the table will become
expand abroad and to
ever more important. Additionally, SMMAs may be well advised to target
provide their services
foreign CPG companies looking to enter or expand their position in the
to global retailers
domestic U.S. market. Foreign brands can leverage the core competencies
arriving in the U.S.
of SMMAs to make inroads into domestic store shelves.
Focus on New Channels: At this point, the vast majority of SMMA work
focuses on the grocery, mass, drug and convenience store channels. To
a smaller extent, SMMAs also handle office supplies, home improvement
products, and toys and apparel. An SMMA’s core competency lies not only
Fall 2008
33
in selling but also in highlighting and marketing products across many retail
channels and stores. We believe that these services could translate beyond
the Krogers and Wal-Marts of the world and into less obvious channels,
including industrial equipment and supplies.
The industrial equipment and supply industry is
a $400 billion market in the United States and
serves professional contractors, home builders,
Company Names
maintenance professionals and municipalities.
Wolseley (Ferguson)
Despite the consolidation strategies of some of
W.W. Grainger
the larger competitors in the industry (including
HD Supply / Hughes Supply
Home Depot’s experience with Hughes Supply and
Wolseley’s acquisition of Ferguson Supply, among
Applied Industrial
others), the market remains highly fragmented.
Fastenal
It is also an industry in transition. In attempt to
MSC Industrial Direct
mitigate cyclicality and enhance operating margins,
Interline Brands
traditional industrial supply distributors are making
Red Man Pipe & Supply
a significant effort to differentiate themselves and
F.W. Webb
to transform their gritty ‘counter configuration’
Motion Industries
warehouse operations to a more retail-oriented
layout and merchandise mix. Surprisingly, many of their locations now look
more like suburban retail stores than they do traditional industrial supply
houses.
Selected Industrial Supply Distributors
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Industrial supply may
represent a growth
opportunity for
traditional SMMAs.
Advantage has
already made a move
that touches the
space.
34
We would argue that most industrial supply distributors currently have little
or no in-house merchandising or marketing capabilities relative to more
traditional retailers. As their business model evolves, we believe that SMMAs
can bring quantitative-driven merchandising strategies and capabilities to
this massive category. Working with an SMMA to collect and analyze data
on contractor spending habits and trends, distributors can enhance sales of
products that generate significantly higher pull-through and profit margins
than their existing product mix.
Given the nature of the products, we would assume that the commission
structure for an SMMA in the industrial equipment and supply category
may be meaningfully higher than it is in the grocery / mass / drug channels.
Advantage Sales & Marketing has made inroads into this space with its
acquisitions of Garden Grove, CA based Kalty Salios and Norcross, GA
based Sigma Retail Services, both of which provide merchandising services
to Home Depot. Additionally, CROSSMARK also has a small division that
focuses on the home improvement space. While Home Depot and Lowe’s
represent a large opportunity for SMMAs, we believe that the enormous
Fall 2008
base of industrial equipment and supply dealers will be an increasingly
attractive area of focus for SMMAs in the years to come.
Heavy industrial and construction equipment dealers are also attempting
to adapt their business model to increase their focus on higher-margin and
higher-turn consumable products. While the sale of heavy equipment will
always be the primary focus, today’s Deere and Caterpillar dealerships also
offer a broad range of products, including apparel, chemicals, replacement
parts and other items. While not a near-term opportunity like the industrial
supply channel, we do believe that these dealership represent a longer-term
revenue opportunity for SMMAs as they seek new markets.
Dealerships may
also represent a
longer-term growth
opportunity.
Threats and Concerns
Retailers and CPG companies alike face tough challenges as the retail
landscape changes and consumer expectations evolve. Consequently,
the SMMAs that service these companies will have to address a number of
concerns in the years ahead.
“If I started my own brand, my business model would follow
direct store delivery. I’d make it work somehow...”
CPG Executive, 2007
Direct Sales versus Outsourcing: We strongly believe that CPGs and
retailers will continue their move towards outsourced services. However,
there are still many in the industry who believe that keeping the effort inhouse is a better strategic decision. Companies must weigh the cost savings
associated with outsourcing against the perceived lack of control over efforts
made by the SMMA. For the majority of brand managers, having a direct
sales team in place is cost prohibitive. Only the largest CPG companies have
the capacity to manage the process internally, as they can spread the costs
over a large portfolio of products. According to some industry contacts,
these internal sales teams are held to strict budgets and have proven that
they can perform these tasks at a competitive price. Moreover, some believe
that it is easier to demand more from an internal group and keep closer
tabs on their activities, justifying any extra cost. In fact, even manufacturers
who utilize SMMAs often maintain direct sales teams to cover their most
important brands and retailers in order to guarantee high quality standards.
For these companies, costs savings are not as important as controlling the
sales and marketing process. Accordingly, customer diversity is imperative.
A management change at a CPG company may result in a corporate strategy
shift and a significant loss of business for an SMMA.
Fall 2008
There is a constant
risk that a brand
manager may decide
to bring the function
in-house.
35
Large CPGs and
retailers are seeking
to reduce the number
of vendors they deal
with...
...and this represents
both a threat and
an opportunity for
SMMAs.
Vendor Rationalization Initiatives: Another major concern facing
SMMAs relates to a trend that is taking place throughout the global
economy – large CPG players and retailers are seeking to reduce the
number of vendors and service providers they deal with. CPGs and retailers
are recognizing that it is easier to deal with one national provider that offers
a turnkey sales and merchandising solution than it is to manage relationships
with a multitude of smaller, regional competitors. Given the maturity of the
industry and an increasing need to focus on operating efficiency, the breadth
of the supply chain is being optimized to enhance simplicity and profitability.
While CPGs and retailers are making the strategic decision to limit their
vendor relationships, mergers and acquisitions are also putting pressure
on SMMAs. Many large national retailers have been formed through the
merger of regional players – particularly in the grocery and drug categories.
Many of these retailers have been centralizing the operations of their
subsidiaries in order to reduce redundancy and streamline operations.
Kroger, for example, which owns Fred Meyer and Ralph’s, has made the
strategic decision to consolidate buying for these brands into its corporate
headquarters in Cincinnati.30 Those SMMAs that once called on Fred Meyer
and Ralph’s directly to place their clients’ products now risk losing those
accounts because of this centralization. Another example is SUPERVALU and
Albertsons. While early signs indicated that the acquisition would not result
in major changes to the vendor relationships, in October 2007 the company
announced that it would centralize operations to reduce costs. As a result of
duplicative functions and relationships between Albertsons and SUPERVALU,
the company decided to consolidate its merchandising and marketing
staff into its Minneapolis headquarters. As was the case with Kroger, this
centralization initiative will result in the loss of key merchandising service
accounts. As was mentioned in the previous section, customer diversity is
one of the most important considerations for any SMMA. An appropriate
level of diversification will protect against the loss of a key account due to a
merger or consolidation.
“Unless CPG marketers find new ways to reestablish relevance
in stores where fresh, prepared foods reign supreme, they will
find their products shunted to the least desirable section of the
store, doomed to minimal exposure and lethargic turnover...”
In-Store Marketing Institute31
30
31
36
Op. Cit., Hamstra, Mark. Zwiebach, Elliot.
Handrinos, Nick. “Shopper Marketing: Capturing a Shopper’s Mind, Heart and Wallet.”
Deloitte Consulting LLP. 2007. Page 21.
Fall 2008
Declining Shelf Space: Consumer preferences have continued to evolve
and retailers have responded by reformatting their stores and introducing
new product offerings. A growing trend among retailers is the dedication
of an increasing amount of floor space to non-CPG goods such as prepared
foods and other “lifestyle” oriented offerings.
Non-CPG products
are getting a greater
share of shelf space.
RETAIL SALES OF PREPARED MEALS
Over the past several years, the sale of prepared foods
in retail stores has experienced strong growth. Whole
Foods has capitalized on this growing trend by offering
a large selection of prepared foods within every retail
location. As evidence, a recently opened Whole Foods
store in Green Hills, Tennessee has allocated 15 percent
of the 57,800 square feet of retail space to prepared
foods.32 Moreover, in September, Publix Super Market
chain, an operator of 900 supermarkets, launched an
effort to expand into the prepared food business by
introducing a 4,500 square foot prepared food section
in its new Publix GreenWise Market concept located in
Palm Beach Gardens, Florida.33
($ in Billions)
$30
25
Ten Year CAGR = 5.6%
2005 / 2006 Growth = 15.2%
$20.5
$19.8 $19.7 $20.0
20
$16.5 $16.9
15
$13.7
33
34
$18.1
$14.9
10
5
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Retailers are also looking to broaden their consumer
appeal by licensing coffee houses within store locations. Currently, there
are 829 Starbucks Coffee shops co-located in Safeway stores. In addition,
in August 2007 the Great Atlantic & Pacific Tea Co, announced that it
had signed a licensing agreement with Starbucks to operate stores within
selected A&P locations.34 Last year, Ralphs introduced Coffee Bean & Tea
Leaf branded cafes within its retail stores. And it is not just prepared meals
and coffee kiosks that are limiting the amount of retail space available for
traditional CPG goods. A walk through a grocery or drug store reveals a
broad range of products that would not have been found there ten years
ago: consumer electronics; lawn and garden supplies; floral departments;
even sporting goods. Retailers are doing their best to appeal to as many
consumers as possible. The end result, however, is that a declining amount
of retail real estate is available for the goods that SMMAs have historically
represented. This trend represents a meaningful concern for the SMMA
industry.
32
$23.6
Reduced space
for CPG goods
may translate into
less demand for
merchandising
services.
Lee, Wendy. “Whole Foods Poised to Blaze Trail on Prepared Meal Sales.” Tennessean.
com. October 31, 2007.
Glovis, Jaclyn. “Publix’s New Shade of Green: Chain’s First GreenWise Market to Open
in Palm Beach Gardens.” Sun-Sentinel. September 20, 2007
Demarris, Kevin. “A&P Adding Starbucks Shops in Some Stores.” The Record. August
31, 2007.
Fall 2008
37
A weak economic
environment is
clearly not a positive
for SMMAs...
...although tough
times may also lead
to more outsourcing.
Macroeconomic Concerns: The performance of the merchandising
services industry is correlated to the health of the retail industry as a whole. If
unemployment levels rise or consumer spending falls, the resulting weakness
in the retail industry may cause difficulties for SMMAs. The synergistic
relationship between the retail industry and the SMMAs can lead to a
tenuous situation when the strength of the economy is in question. Since
SMMAs are compensated based upon a commission structure, a decline
in retail spending may negatively impact revenue. Additionally, in a weak
economic environment retailers and CPG manufacturers may pressure
SMMA margins to shore up their own profitability. Furthermore, SMMAs
may also suffer as CPGs launch fewer new product roll-outs and reduce their
overall level of marketing activity.
Now, it is important to note that there is a contrarian view on this topic. In
a tight economic environment, retailers and CPG manufacturers may be
more inclined to outsource their sales and marketing functions to reduce
overhead costs. Additionally, since much of the compensation structure is
commission-based, relying on an SMMA during a difficult economy increases
the variable component of the CPG company’s selling and marketing cost
base. Finally, some would argue that marketing and merchandising efforts
become even more important during downturns as retailers and CPG
companies compete for fewer consumer dollars. While we strongly believe
that these arguments have merit, SMMAs should be concerned about
broader macroeconomic trends and remain vigilant.
The Evolving Role of the Wholesalers
“The traditional wholesaler customer base has been affected
by accelerated consolidation in the supermarket industry,
which is creating chains with the critical mass to self-distribute
and placing independent operators at risk. Moreover, nontraditional food retailers such as supercenters, warehouse
clubs, convenience stores, dollar stores, and drug stores are
increasing their food share gains. This trend is straining all
supermarket operators, including independents serviced by
wholesalers as well as supermarket chains operated by the
wholesalers themselves...”
Mary Lou Burde, Credit Analyst, Standard & Poors35
35
38
“Report Explores U.S. Food Wholesalers’ Business Strategies.” Market News
Publishing. February 6, 2006.
Fall 2008
Food wholesalers are another essential piece in the supply chain ensuring
fully stocked retail store shelves. The core focus of the wholesalers has
traditionally been the warehousing and distribution of perishable goods
and foods to stores throughout the country. However, the food wholesaling
industry has faced a number of formidable challenges in recent years,
straining profitability levels and forcing the key players to seek new
opportunities. The consolidation of the food retailing channel has been
more pronounced than other retail categories, putting immense pressure
on wholesalers. As seen in the table below, the market share of the top five
grocery retailers grew from 26 percent in 1995 to 50 percent in 2005.36 At
the same time, the market share of independent grocers (a large customer
base for wholesalers) has been in decline. In 2001, independent grocers
accounted for 18 percent of total grocery sales in the U.S. By 2006, their
market share had declined to only nine percent.37
Traditional
wholesalers
have been facing
an increasingly
challenging
environment.
Sales of Top 15 Wholesale Grocers
Company
McLane, Inc.
C&S Wholesaler Grocers, Inc.
SUPERVALU, Inc.
2001
2002
2003
2004
2005
2006
2007
%∆
$12.1
$11.3
$11.0
$18.7
$19.2
$20.5
$22.5
86%
8.5
9.8
11.1
13.6
15.2
18.5
19.4
128%
11.4
9.3
10.5
9.0
9.2
9.4
9.7
(15%)
Wakefern Food Corp.
5.9
4.9
5.2
7.1
7.2
7.5
7.8
32%
Topco Associates LLC
3.2
3.2
4.1
4.5
5.0
5.5
7.2
125%
Core-Mark Holdings Co.
3.4
3.5
3.6
4.2
4.9
5.3
5.4
59%
Associated Wholesale Grocers
3.1
3.1
3.7
4.6
4.9
5.1
5.2
68%
Eby-Brown Company
3.2
3.5
3.7
3.7
4.1
4.3
4.4
38%
Nash Finch Company
3.1
3.1
3.0
3.1
3.8
4.0
3.9
26%
The H.T. Hackney Co.
2.3
2.4
3.1
3.1
3.3
3.6
3.6
57%
Unified Western Grocers, Inc.
2.9
2.8
2.8
3.0
2.8
2.9
3.1
7%
Roundy’s, Inc.
3.0
2.7
3.3
2.6
2.5
2.7
2.8
(7%)
United Natural Foods, Inc.
0.8
0.9
1.1
1.5
1.8
2.2
2.5
213%
Associated Wholesalers, Inc.
0.9
0.9
1.0
1.0
1.0
2.1
2.4
167%
Tree of Life, Inc.
0.8
1.2
1.3
1.5
1.1
1.8
2.0
150%
Total Top 15
$64.6
$62.6
$68.5
$81.2
$86.0
$95.4 $101.9
58%
Total Industry
134.5
131.1
129.2
141.4
154.5
190.1
NA
48%
48%
53%
57%
56%
50%
NA
Total Top 15 Market Share %
36
37
Source: TDLinx, a division of ACNielsen.
George, Richard. “The Past and Present Landscape of Food Wholesaling.” Food
Marketing Institute. 2007.
Fall 2008
39
These trends, and others, have put the traditional food wholesalers in a
difficult position. The bankruptcy of Fleming in 2003 and the continued
migration of SUPERVALU into the retail business reflects the scale of these
challenges.
The lines separating
wholesalers and
SMMAs is continuing
to blur.
In order to deal with the difficulties in their core market, the wholesalers
continue to adapt to new competitive realities. As their role continues
to evolve, the line distinguishing wholesalers from SMMAs / MSOs is
becoming increasingly blurred. Wholesalers are increasing their emphasis
on merchandising services and are garnering more business as a result.
For instance, many wholesalers now offer sales and marketing support;
advertising services; retail cut-ins; category management services;
information technology support; and financing services to their retail and
CPG customers.
Providing these services is beneficial to the wholesalers for a number of
reasons. First, offering a full suite of services increases the depth and quality
of the customer relationship and increases the ‘stickiness’ of the account.
Second, these value added services can often be offered at more attractive
operating margins that the traditional warehousing and distribution services.
Third, the provision of these services can mitigate the significant working
capital intensity of the core wholesale business.
Wholesalers want to
be SMMAs, but not
the other way around.
It should be noted that while wholesalers are offering services that have
traditionally been performed by SMMAs, SMMAs are not migrating into the
distribution and logistics side of the business. The competitive environment
in that space, combined with the costs associated with establishing a
logistics and warehouse operation, make such a move unattractive.
It is also interesting to note that wholesalers may be in a unique position
within the value chain to garner potential business from European
companies that are entering the U.S. market. Unlike traditional food
brokers or SMMAs in the U.S., our understanding is that the comparable
organizations in Europe typically take title to the goods and provide for
their physical distribution, more typical of a domestic wholesaler. European
companies that are looking to establish a footprint in the U.S. market may
feel more comfortable dealing with a business model more similar to what
they are accustomed to in their home country, (i.e. wholesalers), rather than
employing the services of two different organizations (the SMMA and the
wholesaler) to ensure their goods make it to the shelf.
We believe that the larger food wholesalers will continue to move towards
a full-service model in which they provide a menu of services that overlap
40
Fall 2008
with those that are offered by SMMAs. As the lines continue to blur
between different retail categories (i.e. drug stores selling groceries, grocery
stores selling prepared meals) and between retailers and wholesalers (i.e.
SUPERVALU becoming a large grocery retailer), we believe that wholesalers
will continue to reposition themselves in a manner that competes directly
with the SMMAs.
The SMMA market has consolidated dramatically in recent years. However,
there are still an abundance of companies, large and small, that compete for
business in the industry. The list on the following page, while incomplete,
provides a high-level overview of some of the key players in the industry. It is
important to note that this table contains companies that provide traditional
merchandising services. However, it also includes a number of companies
that provide similar services, such as inventory counting and measurement.
For more detail on selected competitors, please refer to the profiles in the
Company Summaries section of this report.
Fall 2008
While the market
is consolidated,
there is still ample
opportunity for
smaller competitors
to prosper if they
concentrate on a
niche.
41
Selected Sales, Marketing & Merchandising Agencies (SMMA’s)
Company Name
Website
Company Name
Website
Acosta Sales & Marketing
acosta.com
Action Merchandising
actionmerchandising.com
Advanced Retail Mrchdsn
arm-retail.com
Advantage Sales & Mktg
asmnet.com
Aisle One Merchandising
aisleone.com
Alliance Mktg Group
amgatretail.com
American Merch. Specialists
merchandisers.net
At Your Service Marketing
aysm.com
ATA Retail Services, Inc.
ataretail.com
BDS Marketing
bdsmktg.com
Beckett Associates
beckettassociates.com
Berends Merchandising
berends-usa.com
Burpee Garden Products
burpee.com
Certified Mktg Services
certifiedmarketingservices.com
ChannelForce
channelforce.com
Chuck Latham Associates
clareps.com
Complete Merchandising
cms-inc.com
Continental CSS
homecenterservice.com
Convergence Marketing
convergencemktg.com
CREW Marketing
crewmarketing.com
CROSSMARK
crossmark.com
Crossroad Services, Inc.
mycsm.com
DAVACO, Inc.
davacoinc.com
Derema Group
derema.com
Diamond Retail Services
diamondretailservices.com
Done Right Merchandising
donerightmerchandising.com
Driveline Retail
drivelineretail.com
Distribution Services Inc.
distributionservices.com
Eagle Merchandising
eaglemercs.com
Finta LLC
fintaonline.com
Footprint Retail Services
fprs.com
Forte Marketing Group
fortegroupinc.com
Franklin Resource Group
franklinresource.com
Greet America
greetamerica.com
In-Store Marketing
in-storemktg.com
Karpata Instore Service
meijerservice.com
Lawrence Merchandising
lmsvc.com
Legends LLC
legendsmi.com
M3 Retail
m3retail.com
MarketSource
marketsource.net
Market Connect Group
mcgconnect.com
Merchandise Mgmt Co.
merchmanco.com
Merchandising Solutions
merchandisingsol.com
Mosaic
mosaic.com
National In-Store
nis-retail.com
Nat’l Marketing Svcs
natlmktg.com
National Product Services
npsinet.com
Premium Retail Services
premiumretail.com
Prism Retail Services
prismretailservices.com
Quest Service Group
questservicegroup.com
Retail Integrity
retailintegrity.com
RGIS
rgisinv.com
Sell-Thru Services
sell-thru.com
SPAR Group
sparinc.com
Stan Tashman & Assoc.
tashman.com
WIS International
wisintl.com
SMMAs & Value-Added Wholesalers – The Private Equity Play
Private equity has
been active in the
SMMA sector.
42
Of all of the segments of the retail services industry, private equity firms
have been most active in the SMMA space. J.W. Childs has invested
in Advantage Sales & Marketing (and it was formerly owned by Allied
Capital); AEA has a controlling interest in Acosta; Blackstone controls
RGIS; American Capital owns WIS; and that is a short list. A variety of
Fall 2008
other private equity firms have invested in companies that, in one way
or another, touch the SMMA industry. What has been the appeal of this
segment for private equity firms? First, private equity has driven a dramatic
consolidation in the sector that has allowed the SMMAs to gain enough
scale to profitably navigate between huge retailers and CPG companies.
Second, companies in the SMMA sector tend to be larger than in other
categories of retail services, allowing private equity firms to deploy
meaningful amounts of capital. Finally, the growth trends and financial
metrics of these companies can be outstanding, leading to attractive
returns for the private equity investors.
Now, with that being the case, has the story already been told in the
SMMA industry or is there still an opportunity for private equity investors
to make money? We believe that the latter is true. The largest players in
the space which, apart from CROSSMARK, are controlled by private equity
firms, still have solid growth opportunities ahead of them. Accordingly, we
would anticipate robust auctions for these assets when they hit the market.
However, there are also other opportunities to be pursued. Smaller and
more specialized SMMAs have an excellent opportunity to carve out
an attractive niche in areas that may be too small for the larger players
to greenfield. We also believe that there are opportunities to invest in
traditional wholesalers who have yet to transition their business model
into a more value-added, SMMA-style offering. Private equity firms can
generate attractive returns by partnering with the owners and managers
of these businesses. While the SMMA market may be more mature than
other categories, there are still profitable opportunities to be had.
Fall 2008
Despite the
consolidation that
has already taken
place, we believe that
private equity still has
an opportunity in the
SMMA market.
43
In-Store Marketing Services
The Basics
“We’re concentrating on [several] areas for a breakthrough...
[including] how to improve our understanding of what drives
purchase choices shoppers make at what we call the first
moment of truth when they stand before a store shelf and
decide to buy a Gillette or a P&G brand or a competitor...”
A.G. Lafley, CEO, P&G, at Consumer Analyst Group of NY
2006 Conference
P&G has been a key
driver of in-store
marketing in recent
years.
SMMAs and ISMCs
are increasingly
difficult to tell apart.
P&G is the largest spender of marketing dollars in the world. It would
therefore stand to reason that P&G is a trend setter, and not a follower, in
the CPG space when it comes to in-store marketing. P&G, more than any
other competitor in the CPG industry, has driven an intensifying focus on
in-store marketing activities in recent years. The primary beneficiaries of
this focus are the ISMCs that deliver creative marketing services in order to
enhance brand recognition and stimulate product lift.
Given the breadth of this report, it is important to reiterate the manner in
which ISM fits into the overall retail services universe. There are no bright
lines in retail services that divide SMMAs from ISMCs. In fact, SMMAs
provide many of the services that ISMCs offer. However, in an attempt to
draw a distinction, we would propose that the primary goal of an SMMA
is to ensure that products are available when buyers demand them. The
primary goal of an ISMC, on the other hand, is to stimulate buyer demand
for those products. ISMCs are focused on what the Marketing Leadership
Council has termed “Shopper Marketing:”
“Shopper Marketing is in-store advertising, promotion and
design initiatives that align with and extend [CPG] equitybuilding objectives while simultaneously creating a source
of differentiation for participating retailers through tailored
executions that address specific shopper need-states and
activate purchase at the point-of-sale...”
Marketing Leadership Council, 200538
A well-known (albeit disputed) statistic is that more than 70 percent of
all purchase decisions are made in-store.39 Additionally, 68 percent of
consumer purchases are made on impulse. When you combine these
striking percentages with the fact that nearly twice as many people (127
38
39
44
Marketing Leadership Council. “Assessing Shopper Marketing.” July 2005.
“Consumer Buying Habits Study.” POPAI & Meyers Research Center, 1995.
Fall 2008
million) visit a Wal-Mart store in a week than watch the evening network
news (68 million), it is no surprise that retailers and CPG brand managers
are recognizing that they have a substantial opportunity to influence
shopper purchasing behavior on the sales floor. By converting shoppers
into buyers, these companies hope to drive revenue, increase brand
awareness and long term customer loyalty.
More people visit WalMart each week than
watch the evening
news.
“...[under the old paradigm, in-store budgets tend to come
from] whatever money you have left...The store was an
afterthought. Now, it’s certainly making its way further
upstream because a store is a place to both brand and then sell.
The store may be the first interaction or touch point a shopper
or consumer has with brand. The store may now be that place
where they form opinions about the brand. It’s not just where
purchase decisions happen.”
Meg Kinney, EVP, The Integer Group, commenting in IMI’s
POP Trends Report, 2007
The following graphs, taken from a Deloitte survey of leading CPG
manufacturers and retailers, illustrates the increasing popularity of ISM:
Marketing Budget Allocation by Element
Manufacturers
100%
4%
4%
3%
80%
Retailers
100%
6%
5%
4%
20%
9%
9%
4%
19%
80%
5%
3%
7%
5%
7%
7%
9%
9%
17%
60%
3%
12%
11%
9%
60%
34%
30%
28%
40%
40%
20%
35%
36%
33%
2004
2007
2010
0%
76%
72%
65%
20%
0%
2004
2007
CAGR ‘04 - ’10
2010
CAGR ‘04 - ’10
In-Store Marketing
Internet
Co-Marketing
Consumer Promo (Inc. FSI)
21%
Other
2%
15%
In-Store Marketing
26%
6%
Internet
9%
-1%
Consumer Promo (Inc. FSI)
0%
Trade Promotions
Traditional (TV, Radio, Print)
-1%
Traditional (TV, Radio, Print)
-1%
-1%
Source: Deloitte / GMA Study
Fall 2008
45
Brand managers are expected to increase their ISM budgets to nearly 10
percent of their total spend, and retailers are expected to increase their
total in-store investment to 12 percent, by 2010.
Data from the In-Store Marketing Institute
(CPG Manufacturers, 2006)
and P-O-P Times also confirms that the
ISM category has significant growth
66%
1%
25%
8%
ahead. While we do not cover the POP
58%
2%
26%
15%
display business in this report, 92 percent
of the CPG manufacturers surveyed stated
58%
4%
34%
4%
that they intend to increase or maintain
42%
10%
37%
12%
their current spending on POP displays
31%
6%
40%
23%
and 71 percent of respondents stated
21%
6%
33%
40%
that they will increase or maintain their
11%
13%
25%
51%
spending on retail marketing events.
9% 6%
32%
54%
While only 54 percent and 41 percent said
7% 11%
29%
54%
that they would increase or maintain their
0%
20%
40%
60%
80%
100%
spending on in-store print media and
Less Emphasis
More Emphasis
digital media, a significant percentage
Don’t Know
No Change
of respondents were still evaluating their
Source: In-Store Marketing Institute, P-O-P Times
strategies in this regard. We believe that
this reflects the relatively nascent state of
these marketing techniques and that the high percentage of ‘undecideds’
actually represent an opportunity for ISMCs going forward.
P-O-P BUDGETS BY TACTIC
Packaging
Internet
P-O-P- Displays
Print Ads
Retail Events
Retail Media - Print
TV Ads
Retail Media - Digital
Radio Ads
Brand mangers are
convinced that instore holds value.
“We’re shifting a lot more dollars into the retail world. We’re
a lot more about effectively merchandising and talking to
customers at the point-of-purchase. It’s more of a balance of
things. It’s not as if the advertising world is going away...But
we’re treating in-store on more of an equal playing field.”
Michael Hand, Director of Marketing, Miller Brewing Co.40
Having established that there is an increasing amount of focus on ISM, let
us now address some of the reasons why.
It’s increasingly
difficult to
communicate with
consumers.
Fragmentation of Traditional Media: Brand managers and marketing
executives have recognized that it is increasingly difficult to communicate
with the American consumer. The widespread acceptance of satellite
television; the proliferation of cable channels; the increasing popularity
of pay-per-view, TIVO, satellite radio and the Internet have all led to a
massive fragmentation of the media landscape. CPG companies used to
40
46
“POP Trend Report 2007.” In-Store Marketing Institute. December 2006.
Fall 2008
be able to reach the great majority of the American public through one ad
placement on a national network. A recent study by IBM reflected the fact
that consumers now spend more time using laptops and less time watching
television. Seventy-one percent of respondents used the Internet for more
than two hours per day for personal use, versus forty-eight percent spending
the same amount of time watching television.41 According to a study
conducted by McKinsey & Co., traditional TV advertising will be one-third
less effective by 2010 than it was in 1990.42 According to another study, 69
percent of advertisers believe that the impact of TV advertising is declining,
and 60 percent are looking for alternative ways to reach the consumer.43
CPG advertisers who had come to rely on mass media to communicate
with their customers and promote their brands are now scrambling to
adapt. Clearly the Internet, mobile phones and other forms of advertising
are making headway in this environment. The data also reflects that these
brand marketers are realizing that ISM activities can allow them to interact
with customers at the most critical point of their spending process. A
recent Forrester study found that 72 percent of advertisers surveyed were
investigating the ISM industry as a potential alternative to their traditional
marketing strategies, and 54 percent said that they would increase their ISM
budget at the expense of television advertising.44
Differentiation of the Shopping Experience: The cookie-cutter
standardization that has become commonplace in the retail industry certainly
had some benefit for retailers. There is, however, a backlash underway as
bored consumers look for better alternatives. Accordingly, retailers and
CPG manufacturers are looking to ISM to improve the shopping experience
and to differentiate their stores and products from those of the competition.
ISM can provide this differentiation in several ways. First, a successful ISM
strategy allows for greater personalization of the shopping experience. For
instance, ISM initiatives can be customized on a local basis to ensure that
promotions are optimized for the demographic make-up of the surrounding
community. The end result is a shopping experience that caters specifically
to the store’s best customers, in contrast to the ‘all things to all people’
approach that had become so popular over the past decade. A second
point of differentiation is that ISM can create excitement around a store
or a particular brand, capturing the attention of a distracted consumer.
The growing popularity of ‘retailtainment’ concepts, in which ISMCs
41
42
43
44
T.V. advertising will
be one-third less
effective in 2010 than
it was in 1990.
In-store marketing
can be an invaluable
tool for improving
the quality of the
shopping experience.
“The End of Advertising As We Know It.” IBM Global Business Services, 2007.
“Creating the New In-Store Marketing Paradigm.” Extended Retail Solutions.
“If Not TV.” Forrester Networks. July 2006.
Ibid.
Fall 2008
47
Entertainment (and
free food) sells.
stage in-store events ranging from cooking classes to concerts, illustrates
that entertainment sells. Third, education is becoming an increasingly
important aspect of the ISM process. The popularity of organic foods,
dietary supplements and other fast-growing categories has increased the
need for ISM activities that educate the consumer about product benefits.
Finally, what better way is there for a retailer to differentiate himself from his
competitors than by giving away free products during a sampling event?
“In the new paradigm, the idea is in the center – a relevant,
compelling idea about the brand – and now TV is out there as a
spoke, just like digital, just like 1-to-1, just like PR. That shift in
thinking is potentially the biggest driver of money moving into
the retail space...Retailers are thinking about their store as a
media outlet...”
Meg Kinney, EVP, The Integer Group, commenting in IMI’s
POP Trends Report, 2007
Technology is
enabling highly
creative in-store
marketing initiatives.
Technology: The introduction of new technologies has driven the growing
popularity of the ISM industry in several ways. CPG brand managers are
recognizing that technology now enables highly customized and eyecatching visual displays with outstanding content management capabilities.
Be it POP displays with interactive capabilities, store-based video and audio
networks, or technologies that allow for more meaningful and timely data
collection, technology is a key enabler of successful ISM services.
Market Structure
IN-STORE MARKETING SERVICES
$4 BILLION
Retail Media
$2 billion
Sampling &
Demonstration
$2 billion
45
Source: Lincoln International, MSPA, Promo, Press
48
In an effort to analyze the ISM industry, we have segmented the
market into two categories: sampling and demonstration services and
retail media networks. As the graph on the left illustrates, we estimate
that companies in these segments generate approximately $4 billion
in annual sales. The overall market has been experiencing significant
growth in recent years, with each category growing by an estimated
5 percent to 10 percent in 2006. Product sampling experienced the
highest growth rate, increasing by 9.4 percent in 2006.45
Sampling and demonstration services are a cornerstone of any ISM
initiative. As one would expect, sampling companies develop and
implement specialized marketing programs that allow consumers to
sample products (often food) in the store. Retail media companies
develop, implement and maintain in-store media networks
Veronis Suhler Stevenson Communications Industry Forecast, 2007.
Fall 2008
– video, audio, digital signage, kiosks – that allow for ongoing customer
communication within the store.
The ISM industry is much more fragmented than the SMMA sector, which is
dominated by the three large independent players. While there are sizable
companies in each of the sectors to be discussed, we believe that the
emerging and evolving nature of the industry has yet to allow for any one
player to become dominant. In the sampling and demonstration segment,
many of the key players are smaller, independent ‘agencies’ that are viewed
by CPGs and retailers as experts in conceiving and implementing highly
creative ISM campaigns. In fact, a number of these agencies have been
acquired by SMMAs or traditional advertising agencies that are looking to
increase their presence in the industry. The retail media segment has been
characterized by a number of relatively small, independent companies. In
recent years, however, larger media conglomerates have been acquisitive in
the space.
The ISM segment
remains very
fragmented.
ISM Sector Overview: Sampling and Demonstration Services
The sampling and demonstration services segment is one of the key sectors
of the ISM industry, accounting for more than $2 billion of annual revenue.
While spending for more traditional marketing grew by five percent in 2006,
product sampling and demonstration events grew by an impressive 9.4
percent.46 Sampling and demonstration events represent a cornerstone of
most successful ISM strategy and are widely employed by retailers and CPG
brand managers on a national and global basis.
Demand for sampling
and demonstration
services is growing an
an attractive rate.
Sampling and demonstration events, which are also known as experiential
marketing, allow representatives of the retailers and brands to directly
engage with consumers at the point-of-sale, offering them the opportunity
to test a product and to learn more about its benefits and attributes.
Specific services provided by companies in the space include program
conception and development, display sourcing and assembly, media
production, sampling services, in-store demonstrations and seminars.
While it may not represent a sizable percentage of their businesses,
some sampling and demonstration companies also provide more typical
merchandising services, including cut-ins, category resets and planograms
(in direct competition with SMMAs). Recruiting and staffing is an
important aspect of the service offering for companies in the industry. As
representatives of the brand and / or the retailer who interact directly with
46
“Cutting the Promo Pie.” Promo Industry Trends Report, 2007.
Fall 2008
49
the consumer, the individuals who are tasked with managing an event must
be punctual, professional, engaging and, perhaps most importantly, highly
knowledgeable about the product being promoted. The sampling and
demonstration companies invest significant time and resources to develop
and maintain a network of qualified individuals in local communities who
have a proven ability to manage successful sampling and demonstration
events.
Sampling and demonstration events have become much more elaborate
since the concept was first introduced into the retail environment. While
basic displays staffed by workers handing out free cheese and crackers
are still common, marketers have made great strides in transforming these
initiatives into creative ‘retailtainment’ concepts that attract consumers and
actively involve them in a store-based event. Specific events may include
contests, games, musical events or giveaways. The images on the left
reflect programs that were implemented by the Sunflower Group and Mass
Connections, two competitors in the industry.
Benefits of Sampling and Demonstration Events
In-store sampling and
demonstration events
can have a dramatic
impact on sales.
Sampling and demonstration events deliver a number of benefits to retailers
and CPG brand managers. First and foremost, sampling and demonstration
events are used to increase product lift. According to research conducted
by Promo Magazine, shopper purchasing was “greatly influenced” or
“influenced” by sampling, leading to increased sales of sampled products.47
Moreover, a study by NFO Worldwide found that at least half of the
consumers who received a coupon with a sample purchased the product
that was sampled.48 Additionally, a University of Virginia study revealed that
in-store samples can increase sales of the sampled products by as much as
300 percent on the day of the promotion.49 One of the marketing executives
with whom we spoke believed that offering samples creates a psychological
reaction on the part of the consumer to reciprocate by purchasing the
product. Whether the purchase trigger is psychological or simply driven by
increased product awareness, the end result is typically increased sales.
47
48
49
50
Odell, Patricia. “Sampling Reigns as Key Method to Drive In-Store ROI.” Promo Xtra.
October 17, 2006.
http://www.csus.edu/indiv/j/jensena/mktg101/Chapter%2015.pps.
Heilman, Carrie; Lakishyk, Kyryl; Radas, Sonja. “The Effectiveness of In-Store Free
Samples on Sample Takers.” July 2006.
Fall 2008
“Sampling is not easy to get into. There’s a high price of
admission, but [it has] the best ROI...”
Art Averbrook, President of Co-Op Promotions, 200550
An equally important, although less tangible, benefit is the positive impact
that sampling and demonstration events can have on brand recognition,
loyalty and market share. Consumer loyalty is increasingly tenuous given
the proliferation of choices in this crowded retail environment. In fact, one
recent study estimated that only five percent of consumers feel that they are
truly loyal to one brand.51 Statistics reflect that sampling and demonstration
events can be used to motivate consumers to switch to a sampled brand
from a competing product or to strengthen consumer preferences for the
sampled brand. The University of Virginia study cited above concluded that
61 percent of consumers who participated in a sampling event switched
from their preferred brand to the promoted one.52 As CPG brand managers
fight for market share in an era of slowing consumer spending, sampling and
demonstration events have proven their effectiveness.
Many believe that
sampling and
demonstration
events can also have
a positive effect on
customer loyalty.
“We recruited staffers who were able to understand and clearly
communicate the clinically proven benefits of Activia and could
answer questions about probiotics...”
Andres Ostermayr, Chief Marketing Officer, Dannon53
Another benefit of sampling and demonstration events relates to increased
sales of complicated products. As mentioned previously, many of the
fastest-growing consumer products categories require a meaningful degree
of customer education. Taking the time to understand the attributes and
benefits of organic foods, dietary supplements, or teeth-whiteners can be
difficult for time-stretched shoppers. While an abundance of information
may be available online and through television advertising, consumers
are not typically inclined to do their research before heading to the
grocery store. Given the fact that many of these product categories boast
significantly higher margins for the retailers and CPG companies than their
more traditional offerings, they understand the importance of stimulating
demand at the retail level. In-store sampling and demonstration events
represent an outstanding opportunity for CPG companies and retailers
to engage the consumer and to educate them about the benefit of these
products. It is interesting to note that an estimated 70 percent of consumers
50
51
52
53
Complex products
are particularly wellsuited for sampling
and demonstration
events.
“Cutting the Promo Pie.” Promo Industry Trends Report, 2007.
Mahoney, Sarah. “Companies Shift More Funds, Brain Cells to Shopper Marketing.”
Marketing Daily. October 16, 2007.
Ibid.
Facenda, Vanessa. “A Regular Triumph.” Brandweek. June 20, 2008.
Fall 2008
51
that received a free sample actually read the product information that was
distributed along with the product.54 Sampling and demonstration events
allow for greater consumer education, which in turn generates higher sales
of very profitable product categories.
Demonstrations
are particularly
valuable with
more complicated
products.
The quote at the beginning of the previous paragraph relates to Dannon’s
introduction of Activia to the U.S. marketplace and reflects how important
the educational aspect of sampling can be. Given the complexity of the
product’s benefits (which included improved ‘gastrointestinal regularity’ and
other sensitive topics), sampling by knowledgeable staff was essential to
the success of the launch. The result of the program exceeded Dannon’s
expectations, with 70-80 percent awareness of the brand within six months
and 90 percent distribution into the mass grocery channel within three
months. The demand for Activia actually outstripped supply and forced the
company to temporarily curtail the sampling effort.55
“...a move to healthier eating is new terrain for many
consumers, who require clear guidance regarding the
nutritional content of foods and beverages, particularly when a
health condition [or benefit] is present...”
Information Resources, Inc., 200756
Sampling and Demonstrations – Drivers of Competition
Having established that retailers and CPG companies are increasing
their investment in sampling and demonstration events due to a number
of identifiable benefits, let us now turn our attention to the drivers of
competition in the industry. There are a number of attributes that retailers
and CPGs consider when selecting a sampling and demonstration company.
Creativity is key
in the sampling
business.
Creativity: We believe that one of the most important competitive
advantages that a leading sampling and demonstration company can have
is an outstanding creative team. As ‘plain vanilla’ sampling tables evolve
into near-theatrical retailtainment events, retailers and CPG companies
are relying on their service providers to create eye-catching, attentiongrabbing concepts that draw consumers to their products and compel
them to buy. There is no limit to the ideas that can be brought into a store
54
55
56
52
http://www.csus.edu/indiv/j/jensena/mktg101/Chapter%2015.pps.
“A Regular Triumph: In Successfully Introducing Activia to the U.S. Market, Dannon’s
CMO Gave Consumers a Whole New Reason to Buy Yoghurt.” Brandweek. October 8,
2007.
“Times & Trends: A Snapshot of Trends Shaping the CPG Industry.” Information
Resources, Inc. 2007.
Fall 2008
environment, from “an in-store Garth Brooks concert, [to an] Oreo cookiestacking contest...”57 Retailers and brand managers are seeking to partner
with service providers with a proven track record of creativity and innovation.
Given the focus on the creative aspects of event planning, many companies
in the sampling and demonstrations sector are aligned with traditional
advertising agencies (or are run by executives with advertising backgrounds).
A great event is more
than just handing out
free cookies.
Understanding of the Brand: One of the most powerful aspects of
sampling and demonstration events is the ability to communicate a
comprehensive perspective on the brand, its positioning and benefits.
Accordingly, service providers must have a thorough understanding
of the product and have the ability to convincingly address customers’
comments, questions and concerns. In order to be successful, the sampling
and demonstrations team must work in a collaborative fashion with the
CPG brand management staff to understand the key selling points and
differentiating factors for the product being promoted. This integrated
approach during the program development phase will allow the sampling
and demonstrations team to develop the knowledge and passion necessary
to represent the brand on the sales floor.
The best sampling
and demonstration
companies are
experts regarding
their clients’ brands.
“You have to know about floor graphics, coupon restrictions,
rules for distributing point-of-sale materials – every store has
different restrictions...”
Suzanne Gocke, Vice President, Mass Connections58
Retail Relationships: Successful competitors in the sampling and
demonstrations space require deep retail relationships. CPG brand
managers want to know that their service provider has a good working
relationship with the local store managers who oversee the locations in
which events will be held. However, beyond these connections, CPG
brand managers depend upon these companies to have a comprehensive
understanding of the ‘rules of the road’ within each retail location. Retailers
have grown more demanding with regard to the rules and regulations that
govern in-store events and displays. Not only do specific retail chains have
different rules and requirements than their competitors, but stores within
a chain on a regional or local basis may have differing restrictions as well.
Being able to navigate this confusing landscape represents a key competitive
advantage for successful sampling and demonstration companies.
57
58
“National In-Store’s Brand-Advocate Initiative Raises the Retailtainment Bar.”
PRNewswire. August 11, 2003.
“Who Should You Trust to Sample New Products.” CPG Matters. February 2006.
Fall 2008
53
“Stick to the retailer’s rules and regulations or be prepared to
cancel your event...”
Event Marketer Magazine, 200459
Staffing and Logistics Capabilities: The quality and qualifications of
the individuals who are leading a sampling and demonstration event is
a key determinant of the success of that initiative. These ‘ambassadors’
are representatives of the brand and are the most important asset that a
sampling and demonstration company has to offer. Retailers and brand
managers favor service providers that have large networks of qualified
personnel on a local, regional or national basis that they can draw upon for
specific events. Building and maintaining these networks is time-consuming,
expensive and, in our view, represents a real barrier to entry.
Sampling and
demonstration
companies are,
in many respects,
staffing businesses.
In addition to being able to mobilize the necessary people, successful
sampling and demonstration companies are able to facilitate the entire
event process – from the creative development on the front-end to the
procurement (or manufacturing), delivery and installation of the related POP
materials. The logistics involved on the back-end can be highly complex and
difficult to execute. A faulty or late POP display can disrupt the timing and
success of an event and result in lost sales for the retailer and the brand. A
proven ability to successfully execute the entire sampling and demonstration
process is an essential driver of success.
Similar to SMMAs,
local market
knowledge is key.
Local Market Knowledge and Ethnic Capabilities: While retailers are
continuing to expand their presence on a national and international basis,
they still depend upon their sampling and demonstration partners to cater
their events to the specific demographic attributes of the local community.
Sampling and demonstration events need to be customized to maximize
their appeal to consumers in the vicinity of the store. More so than in the
SMMA industry, our research leads us to believe that retailers and brand
managers often favor service providers with local market expertise and
capabilities. For instance, if an in-store sampling event is geared towards
Hispanic consumers, the CPG may look to a sampling and demonstration
company that has a large network of Spanish-speaking staff in the area.
More specifically, if the promotion is in New York they may favor firms
that can provide staff of Puerto Rican descent but if it is in Los Angeles, a
service provider with a large Mexican or Latin American team may be more
appropriate. As retailers and brand managers increase their focus on highly
targeted marketing initiatives, the specialized capabilities of a sampling and
demonstration company become a key competitive differentiator.
59
54
“Retailtainment Cheat Sheet.” EventMarketer.com. July 22, 2004.
Fall 2008
Sampling and Demonstrations – Growth Opportunities
Our research leads us to believe that spending on sampling and
demonstration events will continue to grow in the years ahead. While a
more difficult economy may impact consumer spending, the relatively
low cost and compelling ROI of sampling and demonstration events may
motivate brand managers to divert investment from other, more traditional
promotional activities. With that background, there are several specific
growth opportunities that lay ahead for the segment.
We believe that
significant growth
opportunities lay
ahead.
Expanding into New Product Categories and Channels: The majority
of sampling and demonstration events continue to be focused on food
products in the grocery and club store channels. While we would expect this
trend to continue, our conversations with people in the industry also reflect
the extent of opportunities that may exist in new product categories and
channels.
A variety of new
channels will present
opportunity.
In order to identify product categories or channels that are particularly wellsuited for sampling and demonstration events, we have attempted to define
several product attributes that can be addressed through a successful event.
The following table summarizes these attributes and the level of benefit that
sampling and demonstration events can provide.
Benefits Continuum - Sampling & Demonstrations Services
Benefit of Sampling & Demonstration
Product Attribute
Low
Neutral
High
High Product Complexity
Weak In-Store Sales Support
Significant New Product Features
New Target Customer
Strength of Brand
Sensitive Nature of Product
This chart attempts to characterize which product attributes are most
conducive to a sampling and demonstrations program. In general, the
higher the level of product complexity, the more receptive consumers will
be to sampling and demonstrations. Consumer electronics are an excellent
example of complex, feature-rich products that consumers prefer to ‘touch’
before making a purchase. The second attribute relates to the level of
in-store support. Those products that do not receive significant attention
from the retailer’s sales team may be well-suited for a dedicated sampling
Fall 2008
55
56
Some products and
categories are better
suited to sampling
than others.
and demonstrations effort on the part of the brand or its representatives.
Existing products that incorporate new features and require meaningful
consumer education are also well-suited to demonstrations. Additionally,
brand managers who are attempting to introduce existing products to
a new target customer group would likely benefit from a sampling or
demonstration event. It is interesting to note a product attribute that, in
our view, results in neutral benefit. Some brands have enough awareness
and clout in the marketplace that a sampling or demonstration event may
not yield much benefit. For instance, consumers are willing to purchase
an Apple iPod or iPhone without trying the product based largely on their
belief that the Apple brand is synonymous with quality and functionality.
Products that do not lend themselves well to sampling or demonstrations
are sensitive items that consumers typically do not feel comfortable
discussing. We had also considered including price in this table but
decided against it. Any new car dealer will tell you that consumers do not
like to buy a car without a test drive (leading us to assume that high priced
items typically require sampling and demonstration). However, unlike the
other categories, the inverse (that low priced items are not well-suited for
sampling) is not true given the popularity of food sampling.
Complex products,
and those that don’t
garner sufficient
attention from
the retailer’s staff,
are best suited to
sampling.
So what does this chart tell us about categories and channels that are
well-suited for sampling and demonstrations? To some extent, we would
argue that most product categories could benefit from sampling and
demonstration events. Consumer electronics brands could benefit from
events that educate the consumer about the merits and functionality of their
particular product offerings. A sporting goods manufacturer introducing
a new snowboard would benefit from a live product demonstration by a
professional snowboarder (many sporting goods stores have enough space
for a creative POP display that allows for a live demonstration and testing
by consumers). An auto parts manufacturer would benefit from a qualified
mechanic demonstrating the benefits of a particular spark plug at the end
of a Pep Boys aisle. Apparel companies could boost sales by hosting instore fashion shows hosted by a local celebrity. The intense competition
that exists throughout the retail industry, coupled with the blurring of lines
between traditional retail channels, leads us to conclude that sampling
and demonstration companies have significant opportunities to apply and
monetize their expertise in a number of interesting ways.
Fall 2008
“We are constantly stretching our creative [team] to get
consumers to come into our door in what is obviously a
crowded retail marketplace...”
Senior retail executive
Exclusive In-Store Events: Recent economic data reveals that upperincome households are continuing to spend while lower-income consumers
are becoming more cautious at the cash registers. We believe that sampling
and demonstration companies have an excellent opportunity to increase
their focus on the upscale consumer. Improved data collection and mining
capabilities now allow high-end brands and retailers to learn a great deal
about their most profitable customers – when they shop; where they shop;
what they buy; how much they spend; and what their general interests are.
Sampling and demonstration companies should work closely with these
brands and retailers to target these customers with upscale, creative and
entertaining ‘invitation only’ events. For instance, if an upscale grocer knows
that a specific customer visits the store once a week and purchases seafood
80 percent of the time, a sampling and demonstration company could invite
that person to an exclusive in-store cooking class in which grilled salmon
is prepared. A high-end department store could invite a group of its best
customers who have shown an interest in purchasing cosmetics to an afterhours ‘makeover’ at their local store. A luxury goods store could coordinate
a travel event in which its biggest spenders could travel to Europe to tour
private art collections. While we recognize that many brands and stores are
already offering these types of in-store events, we believe that sampling and
demonstration companies are well-positioned to benefit as events move
‘upmarket’ and appeal to more affluent consumers.
Focus on International Retailers: Creating and implementing
successful sampling and demonstration events requires outstanding local
market knowledge. Large global retailers continue to increase their focus
on the U.S. market. The U.K.’s Tesco is currently rolling-out their Fresh &
Easy concept in the Western U.S.; Japan’s Famima!! now has 13 locations
throughout Southern California; H&M and Zara continue to build out their
store counts nationwide. As these retailers gain scale, we believe that U.S.
sampling and demonstration companies will be well-positioned to offer
their services and to help these new arrivals enhance their brand recognition
among U.S. consumers.
True experiential
marketing is more
than just sampling.
International retailers
moving to the U.S.
also represent an
opportunity.
Retail Media Solutions: There is convergence taking place throughout
the retail services industry. Wholesalers are migrating into SMMA services;
SMMAs are migrating into ISM services; and we believe that ISMCs
Fall 2008
57
The best sampling
and demonstration
companies are
incorporating media
and technology into
their events.
will continue to migrate into retail media services. For instance, Mass
Connections, a leading ISMC, operates an independent production studio
to create digital content for its in-store demonstrations. As technology
becomes more pervasive in the in-store setting, we believe that more ISMCs
will incorporate video, audio and digital media into their sampling and
demonstration events. Doing so will increase the ‘eye catching’ nature of
their events, draw more consumers to the samples and increase lift for the
brands and retailers. By extension, we also believe that some ISMCs will
become more active in other segments of retail media management, further
enhancing their growth opportunities.
Sampling and Demonstrations – Threats and Concerns
The outlook for ISMCs with a focus on sampling and demonstration services
is bright. In addition to a potentially weakening economy, however,
companies and investors in the sector must address a number of concerns.
AVG NUMBER OF GROCERY STORE DISPLAYS
PER STORE PER WEEK
(% Change Versus Prior Year by Quad Week)
0
-2
0.0%
-1.4%
-2.9%
-4
-3.6%
-3.0%
-2.9%
-3.6%
-4.2%
-3.7%
-4.3%
-4.4%
-4.9%
-6
Quad Wk 1 Quad Wk 2 Quad Wk 3 Quad Wk 4 Quad Wk 5 Quad Wk 6
Source: Information Resources, Inc.
There is a silver
lining to clean floor
initiatives...
For ISMCs with a focus on sampling and demonstration events, there is
good news and bad news reflected in this trend. The good news is that
more ISM dollars are being diverted from traditional POP displays to
new promotional activities, including event marketing. The bad news is
that sampling and demonstration companies make extensive use of POP
60
61
58
“Clean Floor” Policies: For the past several
years, many U.S. retailers have been implementing
and enforcing what is referred to as a “Clean Floor”
policy. In an effort to enhance the quality of the overall
shopping experience and to reduce clutter in the aisles,
retailers have been placing significant restrictions on
the number and size of POP displays that are permitted
in their stores. According to a recent study, the total
number of displays within the grocery store channel
has decreased by a total of 9.1 percent over the past
two years.60 As the graph on the left illustrates, the
result has been a meaningful reduction in the number
of merchandising displays, particularly in the grocery
channel.61 Many would argue that this trend is nothing
new and that ISMCs have modified their activities to deal
with it, but we still see it as a concern.
Op. Cit., Handrinos, Nick.
“Times and Trends: A Snapshot of Trends Shaping the CPG Industry.” Information
Resources, Inc. 2007.
Fall 2008
materials and are therefore impacted by the restrictions put in place by the
retailers. To the extent that retailers continue to tighten their clean floor
policies, ISMCs with a focus on sampling and demonstration events may
find that their ability to operate is further constrained. The result may be
fewer or smaller (or both) sampling and demonstration events. While this is
a legitimate cause for concern, we actually view the clean floor regulations
as a net positive for sampling and demonstration companies. The successful
players in the industry are best positioned to understand and navigate
the complexities of the in-store rules and regulations on behalf of their
clients. This knowledge and expertise represents a meaningful competitive
advantage.
...but clean floor
policies can place
limits on a sampling
company’s use of POP
materials.
“When it comes to careers, less than a third of college
graduates think retailing has a good reputation...”
National Retail Federation, 200762
Recruiting and Retaining Qualified Staff: Having already discussed the
importance of staffing to the sampling and demonstration industry, there
is no need to dig much deeper on this point. However, it is important to
note that finding, recruiting and retaining qualified employees continues to
be difficult. Additionally, there are fewer people interested in retail-related
careers than there have been in the past. Accordingly, ISMCs with a focus on
sampling and demonstration events need to aggressively market themselves
to potential recruits if they are to remain competitive. On a positive note,
we believe that the aging baby boom generation will represent a large pool
of potential talent for sampling and demonstration companies. Many baby
boomers will want (or need) to work beyond the traditional retirement age to
stay active and earn additional income.
Increasing Popularity of Online Advertising: Although ISM has been
growing at a double digit rate for many years, online advertising is also
growing at a rapid pace. Between popular mobile devices and Internet
sites, millions of consumers are exposed to online ads every single day – and
not just while shopping. As manufacturers get a better understanding of
how well their message is reaching audiences via this medium, it may lead
to a decreased focus on ISM. While certainly a valid concern, we do not
believe that ISM (and sampling and demonstrations in particular) are overly
vulnerable. Retailers and brand managers have recognized the benefit of
personally interacting with the shopper at the point of sale. The required
investment is relatively small and the benefits, including ROI, are impressive.
62
Continued strength in
online advertising can
divert ad dollars away
from the in-store
environment.
O’Donnell, Jayne. “Wanted: Retail Managers.” USA Today. December 31, 2007.
Fall 2008
59
Sampling and Demonstrations – Competitive Landscape
As the following graphic illustrates, the competitive environment for ISMCs
with a focus on sampling and demonstration events is multi-dimensional.
THE COMPETITIVE LANDSCAPE FOR
SAMPLING & DEMONSTRATION SERVICES
In-House Retailer & CPG Event
Planners
Exclusive Sampling &
Demonstration
Companies
Sampling & Demonstration
Services
Passive Sampling
(no staffing)
The competitive
environment is multidimensional...
...and traditional
advertising agencies
are getting into the
in-store mix.
60
ISMCs with Focus on Sampling &
Demonstration Services
SMMAs That Provide Sampling &
Demonstration Services
On one level, other ISMCs with a focus on sampling and demonstration
services represent direct competitors (PromoWorks, Mass Connections, etc.).
On a second level, SMMAs that offer sampling and demonstration services
(Advantage, CROSSMARK) represent formidable competitive threats. On a
third level, retailers and CPG brand managers often organize and execute
their own events as opposed to using a third party. To complicate matters
further, some sampling and demonstration companies work exclusively with
one retailer (i.e. Warehouse Demo Services only works with Costco). Finally,
some retailers and CPG companies choose to have unmanned sampling
tables, referred to in the industry as “passive” sampling. Passive sampling
represents a viable alternative to more cost-conscious clients.
There is another competitive issue that is worth noting. While ISM efforts
were once primarily the domain of SMMAs, ISMCs and proprietary sampling
groups, the traditional advertising agencies have also become much
more active in the space. Recognizing the importance of ISM as a viable
marketing medium, advertising agencies have been active in growing their
in-house retail initiatives both organically and through strategic acquisitions.
In fact, more than half of the Top 25 companies listed in Promo Magazine’s
Top 100 Promotion Agencies (many of which are active in the ISM space) are
now owned by one of the larger advertising agencies.
Fall 2008
The following table reflects the key players in the in-store marketing industry
who are active in the sampling and demonstrations space:
Selected Sampling & Demonstration Companies
Company Name
Website
Company Name
Website
Acosta
acosta.com
Kit Moss Productions
kitmoss.com
Action Link
actionlink.com
Mass Connections
massconnections.com
asmnet.com
Mosaic Sales Solutions
mosaicsalessolutions.com
All-Ways In-Store
awinstore.com
Nichols & Associates
nicholsnassociates.com
aysm.com
Pat Henry Group
thepathenrygroup.com
bdsmktg
bdsmktg.com
premiumretail.com
CIM
consumerimpact.com
PromoWorks
promoworks.com
CROSSMARK Events
crossmark.com
Promotion Network
promotionnetworkinc.com
Daymon Worldwide
daymon.com
Quality Marketing Group
qmgrp.com
Driveline Holdings
drivelineretail.com
Quest Service Group
Euro RSCG Impact
eurorscq-impact.com
Sales Builders Marketing
sbmarketing.com
ForceOne Retail
force1one.com
Sell-Thru Services
sell-thru.com
Franklin Resource Group
franklinresource.com
SPAR Group
sparinc.com
Greet America
greetamerica.com
Stratmar Retail Services
stratmar.com
Sampling and Demonstrations – The Private Equity Play
Companies that offer sampling and demonstration services to retailers
and brand managers represent a sizable component of the retail services
industry. While the large SMMAs are now offering a range of sampling
and demonstration services, we continue to believe that there is ample
opportunity for some sizable independent players to be successful in the
marketplace.
Frankly, our initial perspective on the segment was not overly positive. We
felt that there were few barriers to entry, significant customer concentration
risk and relatively undifferentiated service offerings. Our research, however,
reflected a different view. First, barriers to entry have actually grown more
formidable in recent years. While it is true that any mom or pop can set up a
table to offer crackers to passing shoppers, retailers have grown much more
sensitive about whom they are willing to allow into their stores. Retailers
and brand managers prefer to work with service providers who understand
the unique rules and regulations of specific stores and who are able to
provide reliable service on a regional or national basis. They want to deal
Fall 2008
While large players
have moved in, there
are still plenty of
opportunities.
Our research has
turned us into fans
of the sampling and
demonstration sector.
61
Firms need to
gain scale to be
competitive over the
long run.
with a more limited number of suppliers who can provide a range of services
with excellent quality and professionalism. Accordingly, smaller firms need
scale and larger firms need to enhance their resources and capabilities to
strengthen their retail and brand relationships. Private equity can be helpful
in both respects.
Second, customer concentration does not appear to be as much of an issue
as we once thought. It is true that several sizable players in the industry
are exclusive to a specific retailer. Clearly a private equity firm will need
to be comfortable with the nature of those relationships before making an
investment. Additionally, smaller competitors in the space are more likely
to have concentration issues. As other firms have gained scale, however,
we believe that many have taken tangible steps to ensure that there is
more diversity in their customer list. While private equity firms need to be
sensitive to this issue, we do not believe that it is as much of a concern as we
did when we first started to learn more about the industry.
There is much more
differentiation in the
marketplace than we
originally thought.
Finally, the services that successful sampling and demonstration firms
provide are much more differentiated than we originally believed. While
there is certainly a ‘commodity’ aspect in terms of basic sampling services
(i.e. free cookies on a table at the end of the aisle), the better sampling
and demonstration companies have evolved into sophisticated event
marketing organizations. As retailers and brand managers continue to
look for differentiation in the crowded and competitive aisles of a grocery
or department store, they are turning to their sampling and demonstration
companies to call attention to their products in highly creative ways.
From sports-related promotions to sweepstakes programs, sampling
and demonstration companies have a terrific ability to add value to their
clients. The successful firms in the space differentiate themselves from the
competition by designing and implementing the most creative programs
and, perhaps more importantly, by building a network of talented, energetic,
professional and reliable people to execute the events at the store level.
In short, we are intrigued by the sampling and demonstrations segment.
Successful companies in the space represent an impressive blend of
creativity and execution capabilities. While it is certainly a competitive
segment, we believe that private equity firms have an opportunity to invest
in businesses that can become truly national brands with a depth of retail
and brand-level relationships.
62
Fall 2008
ISM Sector Overview: Retail Media Networks
“The ability of digital signage to enhance brand image and
display promotional messages using targeted full-motion video
at the point of purchase makes it an opportune medium for
advertisers...Dwindling attention spans and lack of sensitivity
towards mass advertisements has meant that advertisers now
need to deliver engaging content that is relevant to the specific
target audience through emerging marketing tools such as
digital signage...”
Aravindh Venkatesh, Analyst, Frost & Sullivan63
Eye catching or annoying? Terrific ROI or too expensive to justify the
investment? Easy way for advertisers to communicate their brand message
or too difficult to create appropriate content? Destined to become a
multi-billion dollar market or will it be Skytron / Screenzone revisited?64
Regardless of your perspective on these questions, everyone seems to agree
on one thing: retail media networks (“RMNs”) continue to be a controversial
topic these days. Brand managers, retailers, advertising executives and
retail media companies are all working hard to better understand how to
create, deploy and manage digital retail media assets to maximize consumer
awareness and, ultimately, drive product lift and revenue growth.
Perhaps surprisingly to many outside of the industry, retail media networks
have been around in one form or another since the 1970s. At that time,
several progressive grocery retailers began to run pre-recorded advertising
spots on in-store television screens.65 While technology and content
management capabilities have evolved dramatically since that time,
the basic premise remains the same. Advertisers have an outstanding
opportunity to use retail media networks to appeal to, and educate,
consumers as they are in the process of making a purchase decision.
Retail media
networks are the
most controversial
of all retail services
segments.
Rudimentary RMNs
have been around
since the 1970s.
While others view it differently, we define retail media networks as digital
video; in-store audio; digital signage; interactive kiosks and displays. As
is the case in most sectors of the retail services industry, there are a broad
range of market size estimates in the public domain. The most detailed
estimate that we have been able to find was published by Infotrends in 2007.
Their report estimated that the “narrowcasting” industry, which they define
as “the digital delivery of visual content through a network of displays in
63
64
65
“Frost & Sullivan estimates $1.1 billion business in five years.” Sixteen:nine. December
6, 2007.
Skytron and Screenzone were early pioneers in the retail media space that went bankrupt.
“The business and technology behind place-based broadcast networks in retail stores.”
Wirespring.com.
Fall 2008
63
an out-of-home setting that is centrally managed and
controlled,” accounted for approximately $1.1 billion of
revenue in 2006. This revenue figure was driven by an
$3.0
estimated installed base of 630,000 screens in 97,000
2.5
locations. They expect that the market will account for
roughly $2.5 billion of revenue by 2011.66 These revenue
2.0
figures exclude revenue attributable to the fast-growing
digital billboard sector. The Digital Signage Forum is
1.5
somewhat more aggressive in estimating market size,
1.0
expecting total industry revenue of approximately $3
billion by 2009.67 It is unclear to us if they are including
0.5
digital billboards (of which an estimated 800 have
been deployed nationwide at this point) are included
0.0
2006
2007
2008
2009
2010
2011
in their estimates. We would estimate that the current
Source: Infotrends
market size, including digital kiosks and other POP, is
approximately $2 billion. Given the current economic
uncertainty, we are somewhat guarded in our near-term growth outlook
We estimate that for the space. However, longer term we are bullish on the industry and
retail media is would anticipate that retail media networks should reach $5 billion of annual
currently a $2 billion revenue over the next decade. Frost & Sullivan seems to concur with the
business. long-run prospects for the industry, anticipating that approximately 90
percent of retailers will have in-store digital screens by the end of 2011.68
NARROWCASTING REVENUE, 2006 - 2011
($ in Billions)
“This media has the ability to reach target audiences more
effectively, especially in the era of ad-skipping...When you’re in
a store, you don’t have the option of turning off that screen...”
Leo Kivijarv, Vice President, PQ Media69
RMN business models
continue to evolve.
As this industry has evolved, so too have business models. Most RMNs
operate as private broadcast networks that offer content that is customized
for specific retail locations. Revenue is generated through the sale of
advertising and, in certain cases, the creation of content for advertisers and
retailers. The expenses consist of typical operating costs and often reflect a
revenue share agreement with the retail partners.
We expect that several factors will drive growing demand for retail media
networks in coming years:
66
67
68
69
64
“Narrowcasting: The Opportunity for Digital Signage and In-Store TV Networks.”
Infotrends, 2007.
Brown, Peter J. “Digital Signage Taking Next Step.” Satellite Today. June 1, 2007.
Hollis, Nigel. “Online, In-Store: Two Big Opportunities for Video.”
Mediapostpublications. September 17, 2007.
Newman, Eric. “What’s in Store? Lots of TV Ads.” Brandweek.com. November 2007.
Fall 2008
EFFECTIVENESS OF RETAIL
AUDIO ADVERTISING
Cost-Effective Technologies: Digital technology continues
to evolve and become more affordable. While we do not
believe that prices have fallen as dramatically as they have
in the consumer sector, digital displays of all kinds (plasma,
LCD, LED) have become much more cost-effective in recent
years. Additionally, the proliferation of wireless broadband
technologies has enabled the growth of retail media
networks.
Question: Do you think announcements about products
or sales played in music programming are very helpful, helpful,
somewhat helpful or not helpful?
.
Not Sure
2%
Not Helpful
28%
Media-Appropriate Content: The content continues
to become more appropriate for an in-store setting and
is increasingly effective in attracting consumer attention.
Advertisers and network operators have realized that
traditional ‘30 second spots’ will not suffice and that content
must be optimized for the medium to be successful. There
are two types of content on a typical RMN – product-driven
(promotes the benefits of a specific product to prompt
purchase) and entertainment-driven (similar to the screens
found at the cash register). RMN operators have become
significantly more effective at creating and sourcing
content of both kinds.
Helpful /
Somewhat Helpful
52%
Very Helpful
18%
Source: Arbitron.
EXPECTED USE OF DIGITAL MEDIA
100%
Advertiser Acceptance: In a highly fragmented
media environment in which advertisers struggle
to communicate their message, there is growing
recognition that retail media networks can allow
advertisers to reach consumers as they make a purchase
decision in the store.
Retailer Buy-In: We also believe that the growing
clout of retailers will continue to drive retail media
networks to new levels. Just as Wal-Mart can ‘convince’
a brand manager to invest in POP displays to drive
product sales, we believe that retailers will exert the
same influence to enhance their retail media presence.
80
60
40
20
0
Digital Interactive
Billboards
Kiosks
Continue Using
Probably Stop
In-Store
TV
(Network)
Digital
Displays
In-Store
TV
(DVD)
May Continue
Will Discontinue
Source: Infotrends, 2007
Fall 2008
65
Benefits of Retail Media Networks
PERCENTAGE WHO REPORT
MEDIUM CATCHES THEIR ATTENTION
“Done right, digital out of home, no matter
where it is encountered, will be one of the
most critical and powerful pieces of the media
mix. In-store, where purchases are actually
made, will be a simple must-have...”
Laura Davis Taylor, Retail Media
Consulting70
75%
60
45
30
There is an
abundance of data
that suggests retail
media can drive lift.
ge
na
oa
rd
e
Di
gi
ta
llb
in
az
ag
Bi
TV
Source: OTX, 2007
M
di
o
Ne
w
sp
ap
er
In
te
rn
et
Ra
M
ob
ile
Ph
o
ne
0
lS
ig
15
Despite what many consider to be a series of false
starts, retail media networks have become more prolific
in recent years. Companies such as Premier Retail
Networks (PRN Corporation), CBS Outernet (formerly
SignStorey), Adspace Networks, InStore Broadcasting
Network, PlayNetwork and others have dramatically
expanded their digital footprint nationwide. While we
are well aware of the controversy surrounding retail
media networks, our conversations and research lead us
to believe that they can provide brand managers, retailers, and advertising
executives with several tangible benefits.
Increase Product Lift and Sales: While measurement is difficult, retail
media networks seem to be growing more effective in enhancing product
lift and revenue growth. There have been a number of industry studies that
make this assertion. While some estimate that digital signage can increase
overall lift in specific product categories by as much as 20 percent, others
have estimated that in-store video with solid content management initiatives
can drive incremental lift rates by 30 to 35 percent.71,72
“There’s something intriguing about reaching a consumer at
the moment they are interested in buying products, and have
money in hand to do so...”
Steve Kalb, Senior Vice President, Director of Broadcast,
Mullen73
There are a variety of statistics that strengthen the argument that retail
media networks can increase product lift and sales. While the sources have
70
71
72
73
66
Davis Taylor, Laura. “Retail Relevance: The In-Store Digital Signage Opportunity.”
Seesawnetworks.com. November 12, 2007.
Baird, Nikki. “The Business Case for Retail Media Networks.” Retail Systems Research.
September 2007.
Gerba, Bill. “Proven Methods for Tracking Your At-Retail Media Network.” wirespring.
com. June 2006.
“NBC to Host its First Digital Out-of-Home Upfront.” Ad Age.
Fall 2008
a clear bias, the statistics are interesting
DIGITAL SIGNAGE
(Influence on Purchase Decisions)
nonetheless. As seen in the graph on
the right, an NOP World study asserted
Influences Me to
that 84 percent of shoppers agreed
84%
Buy Product in Future
that digital signage would “influence
their decision to buy the advertised
Makes me Think More
81%
product in the future;” 81 percent
Positively About Product
agreed that it would make them “think
Influences Me to Buy
more positively” about the advertised
66%
Product Today
product; 53 percent stated that digital
signage would “influence them to
Influences Me to Buy
Product Instead of Product
53%
buy the advertised product instead
Intended to Buy
74
of one they planned to buy.” PRN
0%
20%
40%
60%
80%
100%
has put forward data that states inPercentage of Respondents
store television generates 56 percent
Source: Guideline Research: NOP World 2004, Base: 688
average recall versus 21 percent for
regular television spots.75 These statistics are supported by the assertion
that an estimated 72 percent of advertisers are willing to consider in-store
media as an alternative to traditional advertising, and 54 percent would
be willing to increase their in-store budget at the expense of television.76
While steps continue to be taken to put more accurate measurement
Retail media can get
methodologies in place, intuitively it does make sense that a retail media
the attention of busy
network with well-vetted content can enhance sales. Retail media can get
shoppers.
the attention of distracted consumers in a crowded store; can educate
them as to the benefits of specific products; and can make them aware of
product options that they may not have been considering. In order to do
so, the digital displays must be placed correctly within the store and, just as
importantly, content must be highly customized to appeal to the consumer.
Sophisticated Content Management Capabilities: The technologies
that drive retail media networks provide retailers and brand executives with
outstanding content management capabilities. Given the digital nature
of the information being displayed, the content of the networks can be
optimized in a dynamic fashion to maximize sales potential. For instance,
the displays within a specific store can provide time sensitive information
(i.e. sale expires at 3:00 p.m.); environmentally sensitive information (i.e.
umbrellas for sale in aisle five on rainy days); or age sensitive information
74
75
76
Technology =
Targeting.
Gerba, Bill. “Retail TV is Effective, Says Nielsen In-Store Media Study.” wirespring.
com. August 2006.
Op. Cit., Newman.
Op. Cit., Baird.
Fall 2008
67
Digital content can be
managed to deliver
the right message to
the right people at the
right time.
(i.e. more hip content to appeal to the after-school crowd). Content can be
changed quickly, frequently and inexpensively. Additionally, the content
of the network can be adapted to provide the same information across an
entire retail chain or differing information within the departments of the
same store. Finally, one of the big issues that brand managers typically face
is ensuring that their promotional materials are compliant with the rules and
regulations put forward by specific retailers. The messages communicated
through digital displays can be customized to ensure that the format and
information provided is always fresh and in complete compliance with
specific regulations.
“...When you serve one million customers a day who don’t
have a remote control to change the channel, it’s a compelling
argument that advertisers’ investments could not only build
brand equity, but move tons of their products in our stores...”
Mike Dombrow, Director of Marketing, Wal-Mart Canada77
Effective retail media
can positively impact
the perception of a
retail brand.
Branding Mechanism: According to a 2007 survey conducted by Wegener,
a telecom company, the primary objective cited by retailers who were
installing a network of digital displays was to enhance the perception and
value of their brand and the brands that are sold within the store. Forty-six
percent of respondents cited branding as being their primary goal.78 Few
will dispute that digital screens, when placed correctly, have the ability
to capture a shopper’s attention for a brief period of time. Creative and
targeted content can be used to emphasize clear branding messages
that the retailer wants to communicate, and does so at a point when
the consumer is most likely to make a purchase. Brand marketers and
retailers recognize that the fragmentation of traditional media has made
it increasingly difficult to capture the attention of busy consumers. Many
believe that retail media networks provide an excellent opportunity to
communicate with shoppers in a highly targeted manner.
“It’s no major secret. Media has become very fragmented.
People are consuming it where they want to...”
Mark French, Senior Vice President and General Manager,
NBC Everywhere79
77
78
79
68
Murphy, Samantha. “Wal-Mart Canada Discusses In-Store Narrowcasting Strategy.”
Chain Store Age. 2008.
“Dollar General Launches In-Store TV Network.” Retailwire. April 4, 2008.
Breen, Peter. “NBC Adds In-Store to the Mix.” In-Store Marketing Institute. January
2008.
Fall 2008
Reduced Operating Costs: Retailers and brand managers can realize
significant cost benefits from utilizing a retail media network. Retailers
can benefit from better leveraging their in-store employee base through
the utilization of an RMN. For instance, the networks can be used as a
cost-effective medium for employee training, either at the store, regional
or national level. Second, retail media networks can be used to educate
shoppers about the benefits and pricing of specific products – information
that would otherwise need to be provided by employees. This can be
particularly useful in categories such as consumer electronics, in which a
curious shopper’s inability to get the attention of a busy salesperson will
often result in a lost sale. Brand managers can also benefit from retail media
networks. Brand managers spend billions of dollars annually on temporary
corrugated POP displays that need to be designed, manufactured,
assembled, shipped and installed on the retail floor. RMNs allow brand
managers to customize their content, change it in a dynamic fashion and
mitigate these costs. We would never suggest that digital media will replace
POP displays, but in a ‘clutter-free’ retail environment that is seeing a more
limited number of displays on the sales floor, RMNs can be a cost-effective
tool.
Increased Customer Satisfaction: This will certainly be one of our more
contentious assertions, but here goes... When ‘done right’ we believe
that RMNs can enhance overall customer satisfaction levels. In addition
to providing important information in a timely manner (i.e. consumers can
get information on a new camera from a digital POP display with dynamic
content instead of waiting for an elusive sales clerk), RMNs can also catch
the attention of weary shoppers as they wait at the register – providing them
with the local forecast, headlines or the latest Hollywood gossip. The new
holy grail of retail is differentiation, and we believe that the use of RMNs can
accomplish that objective by informing and entertaining shoppers at the
point-of-purchase.
Retail media can
reduce operating
expenses and
facilitate employee
training initiatives.
If done effectively,
we believe that a
retail media initiative
can actually improve
shopper satisfaction.
“...The most important media channel we have is in our store...”
John Fleming, EVP & CMO, Wal-Mart80
Retail Media Networks – Drivers of Competition
While the RMN industry is still relatively immature, the basis for competition
between the key market participants has emerged. Every brand manager,
80
Gerba, Bill. “Wal-Mart: In-Store Media is the Most Important Channel.” Wirespring
Blog. May 6, 2006.
Fall 2008
69
advertiser and retailer may have different objectives that they are looking to
accomplish through their in-store media strategies. However, each will look
towards an RMN provider with certain characteristics in mind.
Advertisers are
looking to partner
with retail media
networks that can
attract ‘eyeballs’
nationwide.
The ability to
create and manage
content effectively
is a key competitive
differentiator in the
industry.
Geographic Reach: While there may be a number of RMN providers that
are primarily regional in nature, all of the players in the industry are under an
increasing amount of pressure to expand their geographic presence. The
nation’s leading retailers now have national and international footprints.
When selecting an RMN provider, retailers are looking for an organization
that has a depth of resources and a proven ability to deploy, maintain and
service a complex digital network across the store base. Similarly, advertisers
are seeking the largest exposure possible for their messages and will
typically favor RMN providers that can deliver a large, yet targeted, audience.
Given the capital requirements of the business, providing broad geographic
coverage requires a substantial investment on the part of the RMN provider.
Accordingly, smaller competitors that lack a balance sheet or strong capital
partners are at a significant disadvantage.
Content Creation and Management Capabilities: A plasma screen
in-store is not the same as a plasma screen in a living room. Shoppers have
different expectations and content must be catered accordingly. Creating
relevant content is one of the biggest challenges facing the industry. What
content appeals most to a busy consumer? How do you create a content
loop that is short enough to maximize impressions but long enough
to be useful for an advertiser? These are difficult questions to answer.
Accordingly, brand managers, advertisers and retailers favor RMN providers
that can create content that can address these and other issues. While
most of the key industry participants have the ability to do so, those that can
distinguish themselves in this regard will find themselves at a competitive
advantage. Additionally, despite the fact that brand managers, advertisers
and retailers are looking for a large geographic footprint for their RMN,
they are also looking for a provider who can manage and serve customized
content. Technically, content management capabilities can be highly
complex and not every RMN provider will have the ability to manage the
process in a reliable manner.
Depth of Retailer and Advertiser Relationships: RMN providers
often face a ‘chicken and egg’ dilemma. Retailers will favor those providers
who can deliver a deep bench of advertisers who are willing to commit
meaningful marketing dollars. However, advertisers will only consider
those providers who have an extensive installed base of screens at retailers
that appeal to their target demographic. Breaking this pattern has been
70
Fall 2008
a primary strategic objective of the key players in the sector. The largest
players in the industry have successfully done so, but there is an ongoing
struggle taking place to deepen the bench of advertisers. Quite simply, the
more advertisers in the RMN provider’s rolodex, the more consideration they
will receive from the retailers.
Critical Mass within a Specialty Channel: Despite the benefits of
size and reach in this industry, there will always be a number of successful
niche RMN providers. For instance, advertisers who are targeting specific
demographic cohorts may turn towards specialty RMNs that have access
to the appropriate shoppers. For instance, Pharmacy TV is an RMN that
targets shoppers as they wait in line for prescriptions. GymScreen Media
provides content to fitness clubs. Even though these concepts may lack the
large scale of PRN or others, they are building critical mass in highly targeted
segments that will appeal to a broad range of potential advertisers.
Retailers may turn
to smaller RMN
players if they have a
strong presence in an
attractive niche.
Retail Media Networks – Growth Opportunities
“...Compelling in-store content really does produce results to
drive sales and reinforce the brand, as long as you have the
right content...”
Eric Hebel, Chief Operating Officer, Channel M81
While the ultimate scale of the market opportunity is up for debate, we
believe that RMN providers have substantial growth opportunities ahead
of them. Brand managers, advertisers and retailers are all recognizing the
benefits that the successful deployment of an RMN can deliver. Given that
positive dynamic, we believe that RMN providers should focus their efforts
on a number of strategic growth initiatives.
Expand the Store Base: First and foremost, RMN providers must continue
to concentrate on expanding their domestic reach with retailers. The market
opportunity is substantial. Infotrends estimates that there are 97,000 screens
installed throughout the U.S., a small number given that there were 1.1
million retail stores in the U.S. in 2002 (we estimate that this figure may be
closer to 1.5 million at this point).82 This data is even more striking given that
the majority of these stores have the potential to host multiple screens or
displays. While most observers agree that tough times in retail may slow the
growth rate of RMNs, we would counter that a challenging environment may
81
82
U.S. retail stores are
still meaningfully
underpenetrated
and represent a huge
growth opportunity.
Johannes, Amy. “GameStop TV Boosts Sales by More Than 19%.” Promo Magazine.
February 29, 2008.
Source: Census Bureau.
Fall 2008
71
be somewhat beneficial. First, retailers are looking to improve the quality of
the shopping experience and improve lift, and many believe that RMNs can
help to do so. Second, retailers may also look to RMNs as an attractive new
revenue source (albeit a relatively small one at this point).
CHINA RETAIL SALES
($ in Billions)
$750
625
500
375
250
2005
2006
2007
2008
2009
2010
Source: Euromonitor International
INDIA RETAIL SALES
($ in Billions)
$750
625
500
375
250
2007
2010
2015
Source: A.T. Kearney
83
84
72
International Growth Opportunities: In addition to
the massive market in the U.S. for RMNs, we believe that
the international opportunity is also attractive. Retail
becomes a more global business each day. According
to a study by KPMG, 70 percent of the world’s 50 top
retailers now have a presence in China.83 Similarly, India
is expected to experience GDP growth of more than
10 percent in 2008 and is one of the world’s fastestgrowing consumer economies. European retailers have
always been aggressive in targeting high growth market
opportunities around the globe, and large U.S. retailers
are now following suit. While we strongly believe that
RMNs should concentrate their efforts on expanding
their presence in the U.S., they should also remain
open to pursuing international growth opportunities
alongside their current retail clients.
There is already clear evidence that RMNs will be wellreceived overseas. Tesco and others have deployed
RMNs in the U.K.; PRN has taken steps in Brazil; and
Shoppers Stop, Pantaloon and others have rolled out
networks in India. Focus Media, a Shanghai-based
outdoor advertising firm with a sizable in-store presence,
trades on the Nasdaq and has a market capitalization
of $3.8 billion.84 While most forms of media are heavily
regulated in many international markets (including the
U.S.), in-store media is loosely regulated and more open
to foreign competition and ownership. Accordingly,
RMN providers will be able to build substantial
international footprints, ultimately allowing global
advertisers the opportunity to gain customized access to
consumers in far-flung markets.
Debnam, Nick and Smith, Gregory. “Retail Outlook in China.” KPMG.
Capital IQ, August 29, 2008.
Fall 2008
Joint Ventures to Cross-Sell: We believe that independent RMN
providers could strengthen their position with advertisers through the
establishment of joint ventures or strategic alliances with other providers
of outdoor / away-from-home advertising solutions. Doing so would allow
advertisers to place their content on multiple screens in a variety of different
environments (i.e. in-store and billboards) simultaneously and with one sales
point as opposed to several.
Partnering with other
out-of-home media
providers may drive
growth.
Mergers and Acquisitions: If joint ventures make sense, presumably
acquisitions make sense for the same reasons. For example, CBS acquired
SignStorey from Golden Gate Capital and rebranded it as CBS Outernet as
part of its CBS Outdoor strategy. CBS now offers advertising in a number
of outdoor venues – bus; billboard; rail / subway; street furniture; and
sporting events. By incorporating in-store into the portfolio (in addition to
SignStorey, CBS Outdoor also had a sizable in-store signage operation),
CBS can now offer advertisers what they view as the broadest range of
alternatives. Prior to being acquired by Thomson, PRN was also an active
acquirer of RMNs (they acquired AdVenture Media, a provider of in-store
media solutions to Sears; Stopwatch Entertainment, an RMN that serviced
Best Buy and Circuit City; and Impli, which operated an RMN for Ralphs).
In addition to offering advertisers a one-stop solution, consolidation can
be beneficial in several other respects: a larger organization can better
leverage its technical support and installation teams; purchasing synergies
(i.e. bandwidth and satellite access); deepen ties with landlords, etc. Over
the longer term, we believe that M&A can drive growth for the larger players
in the industry and would expect to see more consolidation take place.
Promotional Initiatives: In the previous section of this report we had
mentioned that it may make sense for other in-store marketing companies
to get involved with digital media. Similarly, we believe that RMN operators
can be creative in introducing marketing and promotional events into their
service portfolio. The primary goal of an RMN is to attract in-store viewers
and to keep the attention of busy shoppers. One way to do so may be to
engage the shopper directly in an event that makes use of the network. A
hypothetical example may be an in-store sweepstakes event: Shoppers are
given a sweepstakes ticket by representatives of the RMN upon entering the
store. The RMN then displays a new ‘winning number’ on the screens every
fifteen minutes and the winner is awarded cash or merchandise provided by
a sponsor or advertiser. The result would be an exciting (and ongoing) instore event that would result in increased viewership and greater advertiser
appeal.
Fall 2008
Marrying retail media
with in-store events
can lead to new
growth opportunities
for RMN operators.
73
Expand into New Specialty Channels: A final growth opportunity relates
to the specific end markets that RMNs focus on. For instance, RMNs with
a focus on mass merchants may decide that their advertiser base would be
well-suited for DIY chains and look to expand accordingly.
Retail Media Networks – Threats and Concerns
“...Digital signage has not developed as quickly as many
originally thought. Time frames have slipped...It is a
challenging market...”
Christopher Baugh, President, NSR85
Despite the benefits that RMNs can provide to retailers and brand
managers, critics are quick to point out that there are a variety of challenges
that must be overcome if the networks are to reach their potential.
All the key players
are working to
find an accurate
measurement
methodology.
A traditional 30
second ad spot will
never work in-store.
Lack of Reliable Measurement Capabilities: In-store marketing
initiatives are attracting billions of dollars each year. However, brand
managers, retailers and advertisers continue to struggle with the difficult
topic of measurement. It is extraordinarily difficult to determine if an
RMN (or a traditional POP display for that matter) has actually motivated a
consumer to lift a product off the shelf and put it into the cart. A variety of
players in the in-store marketing industry are working to develop standard
measurement protocols that will allow brand managers, retailers and
advertisers to quantify effectiveness and, ultimately, ROI. The highest
profile effort underway is the P.R.I.S.M. (“Pioneering Research for an InStore Metric”) initiative. P.R.I.S.M. is led by the In-Store Metrics Consortium
– a coalition that includes brands and retailers such as Albertsons, Kroger,
Walgreens, Wal-Mart, 3M, Disney, Coca Cola, Kellogg, Miller Brewing
and P&G. P.R.I.S.M. attempts to predict and estimate in-store traffic and,
combined with knowledge of the marketing communications that are instore, estimates the “opportunity to see.” The ultimate goal is to provide
an in-store measurement metric that is comparable to the gross ratings
system in the television industry. Other players, including Arbitron and
VNU, are also attempting to devise a measurement protocol to allow all
market participants to better understand the ROI on their in-store marketing
investment.
Ineffective Content: Participants in the industry have made significant
progress in optimizing their content to be most effective in an in-store
environment. At this point, however, there is still too much RMN content
85
74
Brown, Peter. “Digital Signage Taking the Next Step.” Satellite Today. June 1, 2007.
Fall 2008
that is better suited for a television commercial than it is for a store.
Consumers are simply not willing to stand and watch a traditional 30 second
commercial on an in-store screen. Additionally, advertisers should not take
the ‘lack of a remote control’ for granted. Shoppers still have the ability to
look the other way and tune out if the content is not helpful or appealing.
Advertisers must encourage their creative teams to think ‘outside of the box’
and calibrate a marketing message that will be well received in the aisle.
“...the last thing I want to see as a shopper in a supermarket is
six immobilized shoppers with their carts in a high traffic area
of the store all staring at [a screen on] the ceiling...”
Blog Entry, Retailwire.com86
Location within the Store: Given that RMNs are still relatively new
(at least this iteration of them), retailers are working to identify the most
effective positioning for the screens within their stores. Place the screens
in a high traffic zone and you risk creating a bottleneck and annoying
shoppers. Place the screens in a less crowded area of the store and they
may go unwatched. Place too many screens or interactive kiosks too close
together and the shopper may keel over with sensory overload. While some
experimentation will always be required, retailers should work closely with
their store design and merchandising teams to analyze planograms and
determine which areas of the store (and product categories on the shelves)
would be most conducive to digital media support.
System Reliability: As is the case with any developing technology, system
reliability is a key concern for retailers. Inoperative digital displays waste
space (and real estate is a retailer’s most valuable asset); frustrate shoppers
(each of us has spent valuable time poking the touch screen on a glitchy
display with no success); and communicate the wrong message about the
brand that they are intended to support. On a recent walk through the
cosmetics department of a high-end retailer in London, I was surprised and
disappointed by the number of expensive digital displays that were frozen
or completely blank. Technical reliability must improve if the RMNs are to
become a true success.
86
Poor placement
within a store can be
detrimental to the
RMN’s success.
A glitchy system is
a waste of valuable
retail real estate.
Davis Taylor, Laura. “Retail Relevance: The In-Store Digital Signage Opportunity.”
Seesawnetworks.com. November 12, 2007.
Fall 2008
75
“...half the point of digital signage is to control the content, so
that I’m not playing competitors’ ads in my store. Ultimately,
I’m competing for share of wallet against every retailer. The
last thing I would want to do is bring another brand’s message
in to play on my signs...”
Unnamed Retail Executive87
Who controls the
screens?
Turf Wars: One of the impediments to broader acceptance of RMNs
relates to questions of control and ownership. As retailers consider the
merits of deploying digital technologies (particularly in-store video and
audio networks), many are debating whether it is more efficient to rely on
a third party operator or to make the sizable investment and control the
network themselves. The success of PRN, Adspace and others reflects the
fact that many retailers are open to third party management. However,
Target, Dollar General and others have made a different choice and have
decided that maintaining control of the RMN (and its content) made more
strategic sense. To be successful over the longer term, independent
operators of RMNs must put forward a compelling value proposition that
makes clear to the retailers that deploying and maintaining an RMN is costly,
complex and beyond their core competency.
“...they [retailers] somehow think they can buy monitors,
mount them, plug them into the Internet and get what they
want. They don’t understand that these systems are really
private broadcast networks and there is a lot more to it than
they are expecting...”
Ron Gross, CEO, DynaTek Media88
A retail bankruptcy
can leave the RMN
with a bunch of
unused screens.
Retail Consolidation and Bankruptcies: RMNs typically make a
substantial capital investment in screens and other equipment to deploy
their network in retail stores. To the extent that a retail customer is acquired
by another retailer or files for bankruptcy protection, that investment is put
at risk. This concern has heightened given the current economic uncertainty
and the pace of retail mergers and acquisitions in recent years.
Shopper Acceptance: Many critics of RMNs assert that consumer
acceptance of in-store media is, and will remain, low. They argue that
consumers are already overwhelmed by marketing messages throughout the
store; that they find digital media to be distracting; and that shoppers have
become expert at ‘tuning out’ unwanted solicitations – digital or otherwise.
87
88
76
Baird, Nikki. “The Business Case for Retail Media Networks.” Retail Systems Research.
September, 2007.
Goldman, Michael. “The Retail Signage Solution.” Sound & Video Contractor.
December 2007.
Fall 2008
While there is a substantial amount of data and anecdotal evidence that
suggests otherwise, companies that operate RMNs must continue to create
content that appeals to the consumer and enhances, as opposed to detracts
from, the overall shopping experience.
Retail Media Networks – Competitive Landscape
The competitive landscape for RMNs has evolved dramatically in recent
years and now consists of three primary groupings. First, there are a
significant number of independent network operators active in the retail
media industry. Companies such as Adspace, Channel M and Ripple
compete aggressively in the marketplace but continue to be owned by
individuals and private equity investors. Their management teams would
argue that their independence allows them greater flexibility to target
opportunities and compete for business in a highly dynamic environment.
They would also assert that their relationships with private equity investors
provide them with substantial financial resources and invaluable strategic
guidance that can help them compete against larger and better capitalized
competitors.
There are three
primary categories
of competitors in the
RMN industry
The second category of competitors are now divisions or subsidiaries of
larger, diversified parent companies. Two notable examples are SignStorey,
which is now owned by CBS, and PRN, which was acquired by Thomson
SA in a $245 million transaction in 2005. These companies are formidable
competitors that can mobilize their resources, relationships and expertise
of large parent companies to identify and compete for business. There is
debate in the marketplace regarding the extent of the synergies that have
been realized through these transactions, but most would agree that there
are benefits to being owned by ‘deep pockets’ in an industry known for both
capital intensity and, in many cases, customer concentration.
Finally, a number of retailers have chosen to build out and manage their
own RMNs. Specific examples include Target Channel Red and Dollar
General’s recently announced in-store TV network. The primary benefit of
doing so is that the retailer retains complete control over the assets and the
content that will be displayed. Critics of this model, however, assert that
deploying the network and developing / acquiring the content extends well
beyond the core competencies of a retailers and that the RMN can be more
efficiently managed by others.
Some retailers have
decided to roll-out
and manage their own
networks.
The following table provides a list of many of the key competitors in the
RMN industry:
Fall 2008
77
Selected Participants in the Retail Media Network Industry
Company Name
Website
Company Name
Website
AdSpace Networks
adspacenetworks.com
CBS Outernet
cbsouternet.com
On-Spot Digital Network
onspotdigital.com
Reactrix
reatrix.com
Access 360 Media
access360media.com
Channel M
channelm.com
PRN
prn.com
Target Channel Red
na
InStore Broadcasting Ntwk.
www.ibnads.com
Pharmacy TV
pharmacytv.net
Pharmacy Channel
pharmacychannel.tv
Ripple
rippletv.com
PlayNetwork
playnetwork.com
Clear Channel Digital Mall
clearchannelmalls.com
Automotive Bcasting Ntwk.
automotivebroadcastingnetwork.com
Fuelcast Network
fuelcast.com
Capturion
capturion.com
Enhanced Media Concepts
enhancedmediaconcepts.com
Gas Station TV
gstv.com
LevelVIsion
levelvision.com
Petro TV
petrotv.com
Pumptop TV
pumptoptv.com
SeeSaw Networks
seesawnetworks.com
TransWorld Media
transworldmediainc.com
Retail Media Networks – The Private Equity Play
Retail media is certainly one of the more controversial segments of the
retail services industry. While we believe that there is a significant market
opportunity ahead, others feel that retail media will never reach its true
potential for a variety of reasons.
Consumers will
always migrate
to stores that are
functional, pleasant
and entertaining.
Venture investors
have been active with
earlier-stage RMNs.
78
Why are we believers and where do the opportunities lie for private equity
firms? Ultimately, consumers will always prefer to shop in stores that not
only provide them with the products and prices that they demand, but that
offer the most pleasant and entertaining shopping environment. While
there are valid complaints today that retail media can be overwhelming and
distracting, we are of the view that retailers and the retail media network
operators are still learning. They are learning how best to position the
screens and speakers; how to cater the content based on time of day and
viewership; and how to turn the networks into a valuable (and entertaining)
shopping tool as opposed to a time killer for shoppers waiting at the
register.
Private equity opportunities take two forms in the retail media industry.
First, there are a large number of small start-ups that are working to
develop a foothold in the industry. These firms, for obvious reasons, tend
to be technology focused and are looking to expand their capabilities and
presence with retailers and brand managers. Given their early stage, many
Fall 2008
of these companies represent interesting investment opportunities for
growth-oriented venture firms. Second, there are still a number of more
mature companies that may represent interesting investment opportunities
for more traditional private equity firms. While strategic buyers have grown
more active in the space (Thomson and CBS are two examples), we still hold
the view that private equity firms can be competitive. This is particularly
true for those firms that have a track record of investing in growth-oriented
media and technology companies. For those who can get comfortable with
the emerging technologies, competitive environment and the start-stopand-start again history of retail media, we feel that the sector continues to
represent an interesting opportunity for private equity.
Fall 2008
While strategics
have been active, we
believe that there is
still a role to play for
private equity firms.
79
Mystery Shopping Services
The Basics
Yes, THAT mystery
shopping.
“As the marketplace continues to experience new challenges
and competition, more companies are turning to mystery
shopping as a strategic business practice...”
David Rich, President, Mystery Shopping Providers
Association89
Mystery shopping is exactly what you would imagine. At a
simplistic level, mystery shopping companies send undercover
agents to shop at a store and provide feedback on the quality
of the experience. Mystery shopping can provide invaluable
information to retailers and companies from a wide variety
of sectors and industries. Because of its anonymity, mystery
Restaurants
21.5%
Other
shopping allows retailers to evaluate customer service,
26.6%
operations, merchandising, product quality and anything
else that is related to the consumer experience.90 A common
misconception about mystery shoppers is that they are only
Retail (General)
16.8%
Grocery Retail
found in department stores and other retail venues. The truth
9.1%
is that mystery shoppers can be found at restaurants, banks, gas
Banking
Gas / C-Store
stations, amusement parks, grocery stores or even health care
14.2%
11.8%
facilities. As seen in the graph on the left, although mystery
shopping covers a multitude of sectors, the five largest segments,
based on percentage of total market size, are restaurants, retail,
Source: MSPA
banking / financial, gas station / convenience stores and grocery
stores.91 Essentially, mystery shopping can be an important
tool for any company or organization that wants to gain further insight into
assessing their customer service.
ESTIMATED MYSTERY SHOPPING
SALES BY SECTOR
Mystery shopping
is an important
component of
the retail services
industry.
Why do companies hire mystery shopping companies? The point of
using mystery shoppers is to objectively provide a snapshot of the
consumer experience. Although mystery shopping can highlight areas of
improvement, the main purpose is actually to gauge how well a company
delivers customer service.92 Successful mystery shopping companies
evaluate service and the consumer experience using facts and observations,
89
90
91
92
80
Alexander, Deborah. “Who is the Secret Shopper? $600 Million.” Omaha World-Herald.
June 24, 2006.
Arcieri, Katie. “Mystery Shoppers Becoming Common.” The Maryland Gazette.
February 16, 2008.
www.mysteryshop.org
Op. Cit., Arcieri.
Fall 2008
free of personal bias. Generally speaking, companies use mystery shopping
to understand and improve the typical customer experience at each location
and throughout the organization.93 For retail, mystery shoppers might
evaluate product placement, store and rest room cleanliness, checkout
timing, and sales-floor service. Mystery shopping services are used to
strengthen customer loyalty, improve customer service, and enhance crossselling and up-selling.94 Together, these have helped companies boost
sales and increase market share in a very competitive retail environment.
Because mystery shopping can help management pinpoint the areas
that need improvement, mystery shopping is viewed as an important tool
used to create “better trained employees who provide better service to
customers.”95 Overall, the feedback and analysis compiled from mystery
shopping can lead to increased customer retention, improved sales
performance, and greater revenue potential.
Brand managers,
retailers and a variety
of other industries
turn to mystery
shopping companies
to evaluate their
performance.
“The biggest mistake retailers can make is to use mystery
shopping as negative reinforcement, such as firing an employee
for poor service based on individual evaluation. In fact, the
MSPA strongly suggests that, at the start of a mystery shopping
program, retailers explain to employees how the program will
work and what is expected of them...”
John Swinburn, Executive Director, Mystery Shopping
Providers Association.96
Market Structure
In 2005, The Mystery Shopping Providers Association (“MSPA”) estimated
that the U.S. mystery shopping industry generated $600 million of annual
revenue, with mystery shopping companies growing an estimated 11.1
percent between 2004 and 2005. Additionally, there were an estimated 10
million mystery shops conducted in 2006 alone.97 Today, we estimate the
value of the U.S. mystery shopping industry to be approaching $1 billion in
annual sales. Frankly, we were surprised by the scale of the industry and the
extent of its growth in recent years.
93
94
95
96
97
We were surprised
to learn that mystery
shopping is almost a
$1 billion business.
Ibid.
Ibid.
Ibid.
“Mystery Shopping Changes with the Time.” Retail Customer Experience Magazine.
www.mysteryshop.org
Fall 2008
81
“In a competitive retail world, companies want to make sure
the customer is being taken care of...”
David McAleese, CEO of A Closer Look.98
While the market is
highly fragmented,
a number of sizable
competitors are
emerging.
The mystery shopping industry, as a whole, is extremely fragmented and
ripe for consolidation. Although there are several larger companies active in
the space, including National Shopping Service / Global Compliance (which
has more than 150,000 registered shoppers performing over 30,000 client
visits a month), the majority of the companies that provide mystery shopping
services are relatively small, family-owned and operated businesses.99 Some
of the key players in the industry include: Corporate Research International,
BestMark, Shop’n Check (which is owned by Market Force Information),
Second to None, and Shoppers Critique. From 2004 to 2007, Second to
None, which has more than 200,000 “Customer Experience Auditors,” grew
by an impressive 300 percent.100 The following graphic, which can be found
on the Market Force Information website, depicts the key steps of a mystery
shopping process.
THE MYSTERY SHOPPING PROCESS
Exit Store
Checkout
Process
The typical mystery
shopping process
provides a full
evaluation of the
retail experience.
Enter Store
Exterior Appeal
of Location
Interior Appeal
of Location
Quality of
Staff Interaction
Product Appeal
and Availability
Process of Browsing
and Shopping
Source: Market Force Information.
98
Benner, Katie. “Consumer Confidential: Get Paid to Shop.” CNN Money. November 29,
2005.
99 “National Shopping Service Announces 150,000th Mystery Shopper.” Market Wire (Press
Release). October 26, 2004.
100 “INC. Magazine Includes Second to None on List of Fasted Growing Companies.”
August 20, 2007.
82
Fall 2008
“In today’s marketplace, small, medium and large companies
alike are challenged for ways to attract and retain customers
in an environment where there is increasing parity in product
selection and price, yet most businesses provide an on-line or
in-store experience that is mediocre at best...”
Jeff Hall, President of Second to None.101
Growing innovation and increased technological advancements are
continuing to transform the mystery shopping industry. Many mystery
shopping companies now offer their clients a full suite of services that can
be used to supplement traditional mystery shopping tasks. For example,
Market Force Information offers two types of services to their clients:
experience evaluations and identifying solutions. Experience evaluations
specifically refer to mystery shopping, direct customer feedback surveys,
on-site audits, and competitive evaluations. Identifying solutions, on the
other hand, takes the information from the experience evaluations and
assesses it using a variety of sophisticated statistical and analytical tools.102
By combining traditional mystery shopping services with advanced data
analytics capabilities, many of these companies have been able to establish
themselves as value-added market research firms.
Technology is driving
a new level of
sophistication in the
industry.
Some of the common mystery shopping services include:
On-Site Mystery Shops: On-site mystery shops are undercover evaluations
that are conducted to assess customer service, merchandising, brand
representation, and transaction process and efficiencies, as well as evaluating
compliance with safety and security procedures, corporate and franchise
standards, and industry regulations. These tasks are the ones that are most
commonly associated with traditional mystery shopping and are widely used
throughout the retail industry.
Web Shops: Web shop tasks, which have grown increasingly commonplace
given the rapid growth of Internet commerce, include active evaluations of
websites to assess the ease of use, transactional efficiencies, product and
service fulfilment capabilities, and response times to online inquiries. Web
shops have come to represent a substantial growth engine for mystery
shopping companies given the evolution of traditional retailers into multichannel business models.
Web evaluations
are becoming
an increasingly
important service
offering.
Telephone Shops: Telephone shops represent undercover evaluations that
are conducted by telephone to assess customer service and call handling
processes at individual retail locations, call-centres, customer support
101 MSNBC’s “Your Business” Highlights Value of Mystery Shopping. March 2, 2008.
102 www.shopnchek.com
Fall 2008
83
lines or corporate offices. As we will discuss in the Warranty Program
Services section of this report, an essential component of building and
maintaining customer relationships relates to after-purchase customer
service and support. Accordingly, mystery shopping companies have made
a substantial effort to increase their telephone evaluation activities.
Remedial Shops: Remedial shops are repeat shops that are completed at
sites that previously received ratings that did not meet corporate standards
during regularly scheduled shop visits. These shops are intended to ensure
that the appropriate steps are being taken to remedy any shortfalls or
inadequate procedures that are in place at the store level.
Competitor
evaluations can be
a key benchmarking
technique in the retail
industry.
Market Force
Information has
been one of the
consolidators in the
industry.
Competitor Comparisons: Competitor comparisons are undercover
evaluations of retail competitors that are intended to provide a scorecard
comparison of a client’s performance relative to its competition. These
projects can be customized to assess customer service, pricing, site
cleanliness, and operational strengths and weaknesses.103 In the highly
competitive retail industry, sophisticated comparison analyses can provide
invaluable corporate intelligence and benchmarking thresholds.
The highly fragmented mystery shopping industry has just started to
consolidate. Market Force Information has been an early consolidator in the
marketplace. For example, Market Force acquired Shop’n Check Worldwide
(in 2006); Speedmark Information Services (in 2007); and Certified Marketing
Services (in 2008).104 Together, these acquisitions enabled Market Force
to expand its services beyond mystery shopping to include “retail resets,
recalls and displays; phone and Web-based customer surveys; and movie
theater audits.”105 The decision to consolidate is an important one because
it allows mystery shopping companies to diversify their service offerings
and to become one of the few players with scale in an industry largely
characterized by ‘mom and pop’ operations. The success of MFI suggests
that private equity firms can see similar results if they acquire a platform
company and grow through additional acquisitions.
While mystery shopping has long been accepted as a successful evaluation
technique for retail performance, we believe that there are a number of
103 www.globalcompliance.com
104 Queen, Nicole “They’ve Got a Secret: Many Mystery Shoppers.” Denver Business
Journal. February 29, 2008.
105 Ibid.
84
Fall 2008
exciting growth opportunities ahead. Retailers are more concerned than
ever about differentiating the shopping experience and ensuring that
consumers leave their stores satisfied and with products in hand. Mystery
shopping companies provide them with the analysis that they need to do so.
More specifically, mystery shopping companies have identified a number of
specific growth initiatives:
Enhanced Demographic Analyses: A major opportunity for mystery
shopping service providers would be to offer services that cater to specific
demographic profiles. In other words, mystery shopping companies could, in
addition to their typical services, provide analyses of shoppers who are from
different regions and backgrounds. Second to None, for example, offers
Hispanic Consumer Insight Resources, which can be extremely beneficial
for companies that want to develop or better understand their Hispanic
customer base.106 Since certain retailers and brands cater to different
genders, ethnicities, or socioeconomic cohorts, it would be advantageous
for mystery shopping companies to offer services that analyze specific
types of consumers. Measure Consumer Perspectives LLC is one of the few
companies that appears to intertwine demographics with mystery shopping
services. Specifically, Measure gathers extensive demographic data on
all of their evaluators, including: zip codes, number of children, income,
level of education, banking habits, travel habits, and shopping habits. This
data helps Measure when it comes time to send a person who matches
the demographic profile of their client’s customers.107 By offering this
type of service, mystery shopping companies can be more precise in their
conclusions. This could, in turn, produce better relationships with clients and
lead to repeat business and referrals.
Insight into the
shopping habits of
Hispanic customers is
in high demand.
“The field teams need to have a strong local knowledge which
can be incorporated into the execution of the activity and
the analysis of the results to create a more accurate research
project...”
Joel Kaufman, Managing Director of Link Communication108
Sophisticated Technologies: Mystery shopping companies can also
provide a number of value-added services to reach new customers. For
instance, successful firms in the space are enhancing their ability to collect,
analyze and interpret data intensive market research. For example, Shop’n
Check combines descriptive statistics, hypothesis testing, factor analysis,
Technology is
redefining the
industry.
106 www.second-to-none.com
107 www.measurecp.com
108 Hemsley, Steve. “Field Marketing; Going Undercover.” Marketing Week. March 29,
2007.
Fall 2008
85
Make no mistake:
successful mystery
shopping companies
are sophisticated
market research
firms.
Many mystery
shopping companies
now provide a
variety of services to
shopping mall owners
and managers.
correlation, and regression analysis in order to create a truly comprehensive
report for their clients.109 In addition, Shop’n Check analyzes the data from
a number of outlets, including mystery shopping, interactive voice response
(i.e. evaluating how effective or annoying a voice prompt system is), and
web-based customer surveys, in order to show its clients where they are
performing well and where specific improvements are needed.110 While
we recognize that a number of mystery shopping companies are already
becoming more analytics-oriented, those that are not will need to offer this
type of service to remain competitive within the industry.
Expansion into New Channels: Mystery shopping companies are making
significant efforts to broaden their customer base and, in certain cases,
expand into entirely new end markets. For instance, in addition to providing
services to specific retailers, mystery shopping companies are also beginning
to provide a range of additional services to shopping mall operators. In an
effort to differentiate themselves from their competitors, mall owners are
using mystery shoppers to assess their services and evaluate the shopping
environment in general. Over the last few years, the MSPA reports that it
has seen a 20 percent increase in the number of inquiries from shopping
center owners and managers.111 Mall owners or managers often use mystery
shoppers to get feedback on mall signage, overall cleanliness of its center,
rest rooms and parking spaces.112
Mystery shopping companies have recently started to expand their business
into non-traditional segments such as health care. Mystery shopping
services can be well-suited to the health care industry since medical facilities
and hospitals are increasingly looking for ways to improve the patient
experience and differentiate themselves. Because many health care facilities
are criticized for their poor customer-service, mystery shoppers (or mystery
patients) could prove to be valuable in helping health care facilities create
better customer service. Some of the ways in which mystery shopping
companies can cater their services for a health care setting is by having
shoppers make inquiries over the phone; go to a doctor’s office for a
checkup; or, in extreme cases, fake symptoms.113 Some argue that mystery
shopping tactics in the health care field have already yielded meaningful
results, including: improved estimates of wait times; better explanations
of medical procedures; extended hours for hospital administration
109
110
111
112
113
86
www.shopnchek.com
Ibid.
Davis, Riccardo A. “Mystery Science.” Retail Traffic Magazine. November 1, 2006.
Ibid.
Wang, Shirley. “Health care Taps ‘Mystery Shoppers.’” The Wall Street Journal. August
8, 2006.
Fall 2008
workers; escort for patients who have gotten lost; and even less-stressful
programming on the television in the waiting room.114
“Health care companies are just starting to warm to the
idea of using mystery shopper services to gauge customer
satisfaction...”
Barbara Gerber, President of Devon Hill Associates115
It is important to realize, however, that mystery shopping is not meant to
replace customer and patient satisfaction initiatives. Rather, it is intended
to provide information most administrators do not have the time to gather
on their own. In 2005, Devon Hill Associates was hired by California
Healthcare Foundation to perform health care-related research. Devon Hill,
which focuses on the health care industry, sent mystery shoppers posing as
uninsured patients to 64 California hospitals.116 Devon Hill’s success should
signal to other mystery shopping companies that the health care industry is
a largely untapped market opportunity.
Healthcare and other
new end markets
are interesting
opportunities for
mystery shopping
firms.
While medical mystery shopping offers a number of opportunities, it also
raises the concern that mystery patients will take up time and resources
needed by sick patients. However, mystery shopping companies who work
in the health care sector recognize this concern and make every effort to
accomplish their goals without interfering with those who are truly in need.
Despite the numerous opportunities available in the mystery shopping
industry, there are a number of concerns that need to be evaluated by any
private equity investor who is considering an investment in the space.
Macroeconomic Environment: A weak or declining economy will be
a problem for mystery shopping companies. Since mystery shopping is
often considered a more discretionary expenditure, retailers and brands
may feel less inclined to spend money on their services during periods of
financial instability. While a convincing argument can certainly be made that
retailers should actually invest more to improve the customer experience
and satisfaction levels during a downturn, practically speaking many will be
shortsighted and cut back on this sort of spending. Another possibility is that
retailers may look to ‘in-source’ the service during tougher economic times.
Brand managers
and retailers may
be less inclined to
spend in a soft retail
environment.
114 Ibid.
115 Darce, Keith. “Good Medicine for Health care.” The San Diego Union Tribune. January
18, 2007.
116 Ibid.
Fall 2008
87
There have been
several high profile
mystery shopping
frauds that have
tarnished the industy.
Credibility Concerns: Another concern that mystery shopping
companies must address relates to credibility. This concern has two primary
components. First, there have been several high profile scams in which
criminals duped unsuspecting mystery shopping applicants into cashing fake
checks and wiring personal funds to a fictitious organization. In one such
incident, fraudsters stole at least $150,000 from individuals who were looking
to find employment in the mystery shopping industry.117 One of the most
challenging tasks that any mystery shopping company faces is recruiting and
retaining qualified individuals. Incidents like this deter potential applicants
and make the recruiting process even more difficult.
“It’s shocking how complex these schemes have become. I am
obviously concerned that our name is being falsely used in this
manner, but I am outraged that innocent consumers are being
scammed out of their hard earned dollars...”
Mike Mallett, CEO of Corporate Research International118
High quality people
are essential to the
success of a mystery
shopping firm.
The second credibility issue that mystery shopping companies face relates
specifically to the quality of their workforce. Because mystery shopping is
primarily observation-based, there is the possibility that poor training or
unqualified mystery shoppers will provide inaccurate or biased information
to the client. Incorrect information could have a negative impact on both
the company being analyzed and the mystery shopping company that is
providing the service. Part of the problem stems from the fact that some
mystery shoppers believe that they need to find a flaw in their experience.
This, however, could be detrimental if the information they are providing is
imprecise or misleading. The root of this problem relates to the difficulties
involved in recruiting and retaining qualified and reliable workers.
Mystery Shopping – Competitive Landscape
The mystery shopping industry is highly fragmented, with companies
ranging from small, one-person operations to sizable companies with
sophisticated private equity backing. The following table reflects some
of the U.S. companies that provide a range of mystery shopping and
experience evaluation services.
117 Reid, Crystal. “Tips on Mystery Shopping.” The Bismarck Tribune. March 2, 2008.
118 Corporate Research International Warns Consumers About Mystery Shopping Scam;
Firm Urges: Beware of Quick Cash Offers. Market Wire. April 6, 2007.
88
Fall 2008
Selected Participants in the Mystery Shopping Industry
Company Name
Website
Company Name
Website
AboutFace
aboutfacecorp.com
Maritz Research
maritz.com
aysm.com
Marketing Endeavors
meshoppers.com
Bare International
bareinternational.com
Michelson & Associates
michelson.com
Benchmark Collaborative
benchmarkco.com
Mystery Guest
mysteryguestinc.com
BMA Mystery Shopping
mystery-shopping.com
National In-Store
nis-online.com
checkup Marketing
checkupmarketing.com
Promotion Network
promotionnetworkinc.com
CKA Group
ckagroup.com
Quest Associates
questforbest.com
Client Smart
clientsmart.com
Reality Check
rcmysteryshopper.com
Confero
conferoinc.com
Ritter Associates
ritterandassociates.com
Coyle Hospitality Group
coylehospitality.com
Second to None
second-to-none.com
Customer Service Experts
customerserviceexperts.com
Secret Shopper
secretshopper.com
DSG Associates
dsgai.com
Service Excellence Group
serviceexcellencegroup.com
Dynamic Advantage
dynamic-advantage.com
Service Intelligence
serviceintelligence.com
Ellis
epmsonline.com
Service Sleuth
servicesleuth.com
Freeman Group
freemangroupsolutions.com
Servicesense
servicesense.com
GAPbuster
gapbuster.com
Signature Worldwide
signatureworldwide.com
Grass Roots Perf. Measmt.
grassrootspmusa.com
Sinclair Customer Metrics
ssanet.com
ICC Decision Services
iccds.com
Six Star Solutions
sixstarsolutions.com
J.D. Power
jdpower.com
Synovate
synovate.com
Kinesis
kinesis-cem.com
TrendSource
trendsource.com
Mystery Shopping – The Private Equity Play
We believe that mystery shopping represents one of the lesser known,
and most interesting, segments of the retail services industry. Frankly,
we were shocked to learn that the industry already accounts for nearly
$1 billion of annual revenue and even more surprised to learn that there
are few sizable players in the marketplace. Mystery shopping should
be interesting to private equity firms for two primary reasons. First, the
industry is highly fragmented and, in our view, ripe for consolidation. Of
the thousands of competitors in the marketplace, only a small number of
companies have any meaningful scale at this point. We believe that retailers
and brand managers will be much more inclined to work with larger, more
sophisticated players than small, poorly capitalized service providers. The
second reason we believe there is a private equity opportunity relates to the
potential for growth. Mystery shopping companies are, in effect, incipient
market research firms. With greater financial resources and backing from
Fall 2008
We believe that
mystery shopping
represents an
interesting industry
that has been largely
‘off the radar’ for
private equity.
89
Mystery shopping =
market research.
90
a sophisticated private equity investor, mystery shopping firms can make
the investment required to put much more advanced analytical capabilities
in place. With the ‘boots on the ground’ in retail stores already, successful
mystery shopping firms will be able to deliver a much more effective
analytical toolset to their retail and brand management customers than the
smaller competitors in the marketplace. In doing so, investors in these firms
will have a substantial opportunity to generate incremental value.
Fall 2008
The Basics
“...As a customer’s relationship with the company lengthens,
profits rise...and not just by a little. Companies can boost
profits by almost 100% by retaining just five percent more of
their customers...”
F.P. Reichheld, Author of “The Loyalty Effect”119
We have all heard the common marketing refrain that it costs a great deal
more to acquire a new customer than it does to retain an existing one. It
has been this core belief that has driven retailers and consumer brand
managers (among many others) to construct and offer ‘loyalty programs’ that
are intended to reward customers for their loyalty and shopping behavior.
While there is great debate about the differing philosophies that underlie
these programs and their overall level of effectiveness, few can dispute
that loyalty programs (and their administration) have become a multi-billion
dollar business. This section of our report is focused on those companies
that provide services and technologies that allow retailers and brand
managers to design, create, implement and administer successful loyalty
programs.
“Loyalty Marketing: Membership-based
program that enables a retailer to track
consumer purchase history and reward the
shopper with exclusive benefits, discounts
or accumulated points that can be redeemed
instantly or at a later date...”
While you are reading this report there is a good chance
you are either sitting on plane or have within the past
couple of weeks. There is an equally good chance that
the miles you have flown have accumulated into your
American or United frequent flyer account. Founded
in 1981, American’s AAdvantage program represented
the modern-day vanguard of customer loyalty programs.
While airlines and banks / credit card companies have
always been active in the loyalty space, the graph on
the right reflects that retailers now have more loyalty
program members than any other industry in the U.S.
Marketing Mantra #1:
It costs more to win
a new customer than
it does to keep an
existing one.
TOTAL U.S. LOYALTY MEMBERSHIPS
BY MARKET SECTOR
(in millions)
500
400
300
200
488
27
Retail loyalty programs account for
488 million members, or 37% of total
91
108
254
239
124
99
100
92
78
137
38
31
Fuel
Other
0
Retail
Airline
Fin'l
Svcs
Internet Hotel Gaming
Specialty
Department
Grocery
Discount / Drug
Restaurant
Source: Colloquy.
119 Source: www.crmtrends.com.
Fall 2008
91
2,000
TOTAL U.S. LOYALTY MEMBERSHIPS
(in Millions)
CAGR = 5.2%
1,500
1,000
1.319 billion
500
973 million
0
2000
Source: Colloquy.
Loyalty marketing has
a long history in the
United States.
2006
Overall membership in loyalty programs has exploded
over the past decade as competition for share of
consumer spending has grown more intense. In 2000,
there were an estimated 973 million loyalty program
memberships in the United States. That figure had
grown by nearly 36 percent by 2006, with a total of
1.319 billion program memberships (representing a
CAGR of approximately 5.2 percent). It is interesting
to note that the average U.S. household participates
in approximately twelve programs. The graph on the
left reflects the extent of the growth in loyalty program
memberships in the U.S.120 While we recognize that
the CAGR itself may seem more moderate than ‘high
growth,’ the aggregate numbers are quite impressive.
The loyalty concept actually predates the AAdvantage program by many,
many years. In fact, the first ‘loyalty services’ company was the Sperry &
Hutchinson Company (S&H), founded in 1896. S&H sold “Green Stamps” to
grocers, department stores, convenience store operators and other retailers,
who would then hand out the stamps to customers who made purchases
to reward them for their loyalty. The stamps could then be redeemed for
merchandise that was offered through a dedicated S&H catalog or “Green
Stamps” stores. While the programs have, in many respects, become much
more sophisticated since that time, retailers have continued to make use
of the same rewards concept to retain customers and attract new ones.
Retailers now account for 37 percent of all loyalty program participants –
collectively coming close to matching airlines and financial services. Despite
the impressive number of total members, we estimate that only 35 percent
to 40 percent of retailers have implemented loyalty programs to date and
that the remaining 60 percent to 65 percent represent an outstanding
opportunity for loyalty program services companies.
As detailed in the chart below, we believe that the retail industry is wellsuited for loyalty programs for several reasons.121
120 “Sizing up the U.S. Loyalty Marketing Industry.” Colloquy Talk. Rick Ferguson and
Kelly Hlavinka. April 2007.
121 “Gaining Competitive Advantage Through Effective Retail Loyalty Programs.” Oracle
Corporation. June 2006.
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Fall 2008
Retail Characteristics That Are Addressed Through Loyalty Programs
Retail Attribute
Comment
Commodity Product
Many retailers sell commodity products, particularly
grocery and hardline retailers.
Low Switching Costs
It is easy for a customer to drive down the street or
walk across the mall and into a competing store.
Limited Customer Information
Without a loyalty program, retailers have no real
way to gather information about their customers.
Customer Service a Differentiating Factor
The level of customer service often determines the
quality of the experience for a shopper.
Retailers and others have made the strategic decision to invest a massive
amount of time, resources and capital into the development of their loyalty
programs. They have done so for a variety of reasons related to the simple
consideration stated at the beginning of this section – it is more expensive
to get new customers than it is to keep them. The problem is, according
to the Center for Retail Management at Northwestern University, only 12
percent to 15 percent of customers are actually loyal to a single retailer.122
Since those customers may account for as much as 55 percent to 70 percent
of a retailer’s revenue base, it is of the utmost importance that those most
loyal customers be retained and that initiatives be used to expand their
number. So how do loyalty programs accomplish this goal?
Enhance a Retailer’s Understanding of the Customer and What They
Buy: A successful loyalty program provides a retailer with invaluable insight
into who her best customers are and what, when, how and why they buy
specific products. If this information is utilized effectively, the result should
be increased customer loyalty; a more efficient merchandising strategy;
more targeted promotions; and increased sales lift and profitability.
Despite the best
efforts of retailers,
only a small
percentage of
customers are truly
loyal.
Marketing Mantra #2:
Loyalty is driven by
knowledge.
Rewarding Positive Behavior: Successful loyalty programs also reward
and encourage ‘positive shopping behavior’ on the part of a retailer’s best
customers. A properly configured program should encourage profitable
purchases by offering specific incentives that appeal to targeted customers.
Increase Switching Costs: A retail loyalty program should also create
‘switching costs’ that compel a profitable customer to continue making
purchases at a specific store. Once a shopper has attained a specific status
or level of benefit with a retailer, all else being equal they are unlikely to
switch to a competitor who does not offer comparable benefits.
122 “Loyalty-Marketing Programs in the Retail Food Industry.” FMI Backgrounder. 2005.
Fall 2008
93
One little known benefit
of loyalty programs is that
they can actually reduce
marketing costs.
Decrease Marketing Costs: An effective loyalty program will require
members to provide their current contact information and will incentivize
them to keep the information up to date. The result is a lower rate of
returned direct mail and lower costs due to direct email solicitations.
Generate New Revenue Streams: Loyalty programs can lead to
incremental revenue in several ways. First, a good program will motivate
members to increase their volume of purchases. Second, some loyalty
programs require an annual membership fee to paid by the consumer.
Third, high-quality data can be sold to third parties (provided that no privacy
rules are being violated). Finally, a retailer can generate revenue through
the sale of points to program partners.
There are two kinds
of loyalty programs:
cumulative and
immediate.
There are two general categories of loyalty programs that retailers utilize
to enhance their customer relationships. The first category, known as a
“cumulative” program, is most similar to the successful ‘points’ programs
that were popularized by the airlines. The original S&H Green Stamp
program, which required that shoppers accumulate stamps in small books
before redemption, was the original genesis of the concept. Points
programs allow customers to accumulate points based on the value of
items purchased and provide for rewards at certain thresholds. Cumulative
programs have many advantages over other types of loyalty programs:
1.
They allow for more targeted promotions;
2.
They reward loyal customers without resorting to price cuts and discounts;
3.
They are better-suited to facilitate customer data collection;
4.
These programs provide consumers with clear objectives in terms of required
point totals for specific rewards; and
5.
Perhaps most importantly, there is no certainty that consumers will actually
redeem points to take advantage of their benefits.
The drawbacks of cumulative programs relate to their:
1.
Complexity;
2.
Cost of administration;
3.
They often require a sizable ‘hard’ investment in redemption opportunities;
4.
The potential perception of unrealistic or unattainable point thresholds may
discourage certain consumers from program participation.123
The second category of loyalty program is “immediate” in nature. These
immediate programs allow members to receive a reward, discount or rebate
123 Op. Cit., www.crmtrends.com.
94
Fall 2008
at the time of each purchase. Given their relative simplicity (i.e. get 10% off
of all purchases), immediate programs are much easier (and less expensive)
for the retailer to implement and administer than cumulative programs.
Another benefit of immediate programs is that they provide the program
member with immediate benefits and gratification at the time of purchase.
The shortcomings of immediate programs are:
1.
Offering a price discount to a select group of customers implies that the
regular prices may be too high, potentially discouraging future purchases;
2.
Discontinuing a discount program effectively represents a price increase that
a retailer is imposing on its better customers;
3.
Immediate discount programs reward profitable and unprofitable customers
alike;
4.
Discounts can lead to margin degradation if they are not vendor funded; and
5.
Unlike cumulative programs, it is certain that the retailer (or brand manager)
will incur the cost of the benefit with each purchase.124
Immediate programs
are often thought of as
discount plans.
“Customer loyalty programs that focus solely on pricing
benefits deliver no loyalty at all...” W. Janowski, Analyst,
Forrester Research125
Immediate programs tend to be more common in the grocery industry.
According to Forrester Research analyst Christine Overby, seven out of
the top ten U.S. Grocers now offer frequent-shopper cards.126 In total, 53
percent of food retailers offer loyalty programs with 75 percent of program
customers using their loyalty cards at least weekly and 88 percent at least
once a month.127
Immediate plans are
most common in the
grocery industry.
Market Structure
“...the goal of the Clubcard is to earn and grow the lifetime
loyalty of the customer...”
Terry Leahy, CEO, Tesco128
The structure of the industry makes it difficult to determine the actual
dollars spent on redemption, discounts and program administration on an
124 Spethman, Betsy. “Loyalty’s Royalty.” Promo Magazine. March 1, 2004.
125 Op. Cit., Oracle Corporation.
126 Ferguson, Rick and Hlavinka, Kelly. “Sizing up the U.S. Loyalty Marketing Industry.”
Colloquy Talk. April 2007.
127 “Loyalty-Marketing Programs in the Retail Food Industry.” FMI Backgrounder. 2005.
128 Woolf, Brian. “Loyalty Marketing or Loyalty Selling.” Retail Strategy Center Inc.
November 9, 2006.
Fall 2008
95
$2,500
LOYALTY PROGRAM CONSUMER
PROMOTION SPENDING
(in millions)
2,000
1,500
1,000
$1,833
$1.861
$1,902
$1,991
$2,010
$2,060
500
annual basis. The only data that we could identify that
actually attempted to quantify the annual spending
was drawn from a study by Veronis Suhler Stevenson.
Their analysis, which is reflected in the graph on the left
estimates that total promotional spending across all
categories amounted to approximately $2.1 billion in
2006. Assuming that retail accounts for approximately
37 percent of total loyalty membership programs, that
would imply that retailers invest more than $775 million
per year. We believe that this figure substantially
understates the annual loyalty spending of the retail
industry.
0
Loyalty programs have become prolific in the U.S.
retail industry. As a result, an entire category of service
Source: PROMO Magazine, Veronis Suhler Stevenson
and technology businesses has emerged to help to
design, create, implement and administer these programs. In our view,
the market is bifurcated and companies that provide services and support
for retail loyalty programs fall into two main categories. First, there are a
While several large small number of large, independent program administrators and consulting
players play a leading firms that work with retailers, brand managers and others to implement
role in the sector... and manage their loyalty programs. Companies in this category include
Affinion Loyalty Group, Alliance Data, Maritz Loyalty Marketing, Fair Isaac,
and several others. A number of these companies will be profiled in the
Company Summaries section of this report.
2001
2002
2003
...there are an
abundance of small,
technology-oriented
companies in the
loyalty space.
96
2004
2005
2006
The second category includes a multitude of smaller, independent
businesses that provide a broad range of products and services that
facilitate successful retail loyalty programs. These companies provide
program design services; data mining software and analytical services;
predictive modeling; loyalty program audits and measurement services;
benefits analysis; identification and negotiation of program alliances; CRM
system design and development; outsourced data processing and other
related services. Technology plays an important role in loyalty program
administration, and most of the companies that are active in the space
incorporate sophisticated technologies into their product and / or service
offerings.
Fall 2008
For the reasons discussed above, retailers continue to recognize how
important loyalty programs are to their sales momentum and profitability.
A properly configured loyalty program can drive a retailer’s most lucrative
customers to spend more at the register. Accordingly, retail executives
continue to invest significant amounts of capital in their loyalty initiatives.
According to a study conducted by McKinsey & Co., the start-up costs for a
loyalty program could total as much as $30 million, with annual maintenance
costs of up to $5 million to $10 million per year.129 Given the magnitude of
the investment required, retailers are typically quite thoughtful about the
third parties who they choose to work with. Our research has left us with the
impression that retailers take several important considerations into account
as they are selecting, and working with, loyalty program services companies.
Innovative Technologies: Technology has always been an important
component of any loyalty program. Successful programs provide retailers
with the ability to track and analyze massive amounts of data on the
membership base and their purchasing behavior. Accordingly, successful
loyalty program services companies must have a proven ability to develop,
implement, administer, maintain and work with the sophisticated technology
platforms that are used to drive a program. Frankly, one of the most exciting
aspects of the loyalty program services industry is that it is characterized by
a multitude of dynamic technology and services companies that continue to
push the threshold of functionality to entirely new levels.
Start-up costs for a
loyalty program can
exceed $30 million.
Perhaps more so than
in any other segment
of retail services,
technology has a huge
role to play in the
loyalty space.
Portfolio of Programs: Our research indicates that retailers prefer to work
with loyalty program services companies that understand the retail industry
but that also have the ability to ‘cross-fertilize’ ideas from other industries
and regions. Most of the leading loyalty program services companies work
with clients in a variety of industries apart from retail and have the ability to
offer a different perspective that may be helpful as retailers consider their
loyalty alternatives. This allows a retailer to adopt proven techniques without
necessarily ‘following the crowd’ of comparable retailers. Additionally, many
retailers are keen to learn the lessons of international retailers with regard
to loyalty programs. A number of international players – including Tesco
and Sainsbury’s – have been progressive in terms of the development and
adoption of loyalty programs. U.S.-based retailers look positively upon
loyalty program services companies that have international experience and a
proven ability to migrate creative ideas from foreign markets into the U.S.
129 Op. Cit., www.crmtrends.com.
Fall 2008
97
Retailers are looking
for service providers
who have a proven
ability to target
specific customer
segments.
Retailers will also
favor companies
that understand how
loyalty programs can
impact the value of
their brand.
Segment Experience: One of the many benefits of successful loyalty
programs is that they allow a retailer to better understand who their best
customers are and how best to target them. Accordingly, retailers prefer
to work with loyalty program service providers who have a proven ability to
target the specific customer segments that are most important to them. For
instance, affluent adults (males and females with annual income in excess
of $125,000) are significantly more likely than other cohorts to participate
in loyalty programs. According to a study by Colloquy, as many as 80
percent of Americans in this category are participants in loyalty programs.130
Retailers who are looking to target this group will be more inclined to work
with loyalty program service providers who have designed, implemented or
administered programs that have successfully targeted this group in the past.
Brand Sensitivity: Successful loyalty programs are an extension of a
retailer’s most valuable asset – its brand. Accordingly, retailers are looking
for their loyalty program service providers to have a track record of success in
incorporating programs into the overall ‘brand’ vision. For example, Neiman
Marcus’s InCircle loyalty program is an extension of the exclusive brand
positioning that Neiman Marcus enjoys. The famous program, which was
founded in 1982, is well-known for offering unparalleled high-end benefits
and perks to Neiman’s wealthy customer base. On the other end of the
value spectrum, Target has made the strategic decision to avoid discounting
and rebates with their loyalty card because it would conflict with the retailer’s
perceived low-cost image. Instead, Target offers to contribute a percentage
of the total spent to a designated school, reminding customers of Target’s
community-oriented brand position. Retailers are looking for loyalty
program service providers who are more than just number crunchers. They
need to have a broader strategic perspective that recognizes the impact that
a loyalty program will have on the overall value of their brand.
While the implementation of loyalty programs has been an important
strategic imperative for retailers for some time, we believe that there is
still a terrific market opportunity for companies in the space. The primary
objective of successful retailers in this challenging environment will be
differentiation. Shoppers have grown bored by their options and, combined
with tighter discretionary spending, have been pulling back. Progressive
retailers will increasingly look towards their loyalty programs to enhance the
130 Op. Cit., Ferguson, Rick and Hlavinka, Kelly.
98
Fall 2008
quality of the shopping experience for their best and most loyal customers.
This will translate into a number of exciting opportunities for loyalty program
services companies:
Penetrate New Retail Accounts and Target Related
PERCENTAGE OF ACTIVE
Markets: While retail loyalty programs may seem prolific, the
LOYALTY MEMBERSHIPS IN U.S.
fact of the matter is that as many as 65 percent of retailers in
the United States have yet to develop and implement a loyalty
program. Additionally, as illustrated in the graph on the right,
only 40 percent of all loyalty program members are currently
active in their programs. We believe that this translates
Active Members
into a substantial market opportunity for companies that
521Million
39.5%
design, create, implement and administer loyalty programs.
Inactive Members
Additionally, we believe that there are several related ‘retail’
798 Million
60.5%
markets that loyalty program service providers can aggressively
target. For instance, we were surprised to see that restaurant
loyalty programs have only registered 27 million members
(approximately 2% of the total membership base in the U.S.).
Companies that develop retail loyalty programs are wellpositioned to expand their reach into the restaurant sector,
Source: Colloquy.
which has many similarities to retail. Additionally, we have
previously mentioned the industrial supply sector, which is in
Despite the number
many ways morphing to a retail business model. These distributors are
of programs out
also well-suited for the programs that many retail-focused loyalty program
there, a lot of retailers
services companies have been designing, implementing and administering.
have yet to take the
We believe that there continues to be a massive opportunity for loyalty
loyalty program
program services companies to target new retailers and related businesses.
plunge.
“...Insight derived from consumer data should be applied at
an enterprise level to drive strategies for merchandising, store
operations, store experience and marketing. Using customer
behavior data to drive these strategies will create the relevance
and experience that truly engender loyalty...”
Bryan Pearson, President, Alliance Data Loyalty Services131
Translate Data into Effective Merchandising Strategies: Many
retailers have dedicated the time and resources required to establish a
loyalty program. Surprisingly few have exhibited the ability to successfully
analyze and understand the invaluable data that these programs can
provide. The following graph reflects the extent to which retailers lack the
ability to analyze and interpret data garnered from their loyalty initiatives.
Translating data into
loyalty is the primary
objective.
131 Ibid.
Fall 2008
99
It is simply shocking to us that fewer than five percent of the respondents
to a survey conducted by RSR Research believe that they have the ability to
conduct ‘repeatable sophisticated’ analysis of the data derived from their
DATA ANALYTICS CAPABILITIES
(% of Respondents)
50%
40%
30%
20%
10%
0%
Drowning in data
but don't do
much with it
Capable of basic
analysis but don't
have the time for
sophisticated analysis
Capable of basic
analysis, but don't
have tools for
Capable of
but takes too long and
is not easily repeatable
Capable of
repeatable
sophisticated
analysis
Source: RSR Research.
Retailer’s are
surprisingly behind
the curve in terms
of understanding
the data that their
programs provide...
...and this represents
a huge opportunity
for loyalty program
services companies.
100
loyalty programs. The technology required to compile and analyze the data
from loyalty programs has become much more cost-effective and accessible:
point-of-sales systems have become more sophisticated; CRM and retailfocused database management systems provide greater analytical capability
than ever before. That being said, retailers need help taking advantage
of everything that these technologies have to offer. In our view, the single
most important objective of any loyalty program should be to increase sales
to the retailer’s most profitable customers while strengthening the value
of the overall brand. The data garnered from a loyalty program provides
a retailer with an exceptional opportunity to learn about the preferences
of their best customers: what, where, when, how and why they buy the
products that they do. By thoroughly analyzing and understanding the data
collected, retailers are able to cater their merchandise mix, store design
and layout, and promotional activities to appeal to their most profitable
customers.
Fall 2008
“...[a lot of retailers don’t have the ability to] use the
information to their advantage...After 15 or 20 years, there are
just not many examples of a retailer who is doing a great job
with its loyalty program...”
Stephen Hoch, Professor of Marketing at Wharton132
Data should be a
primary driver of
every merchandising
strategy.
% of Respondents who Measure
Another attribute of this
LOYALTY PROGRAM EFFECTIVENESS
MEASUREMENT METRICS
data analysis issue relates to
100%
loyalty program performance
evaluation. Too few retailers
80%
are properly measuring the key
metrics that reflect the success
60%
(or failure) of a loyalty initiative.
As the graph on the right
40%
illustrates, only 55 percent of
55%
respondents to the RSR survey
45%
20%
track the impact that their
35%
30%
30%
20%
20%
loyalty program has on sales
10%
0%
levels. Even more surprising
Loyalty
Customer
Customer
Loyalty
Loyalty
Proj.
Loyalty
Avg.
Based
Movement
Impact
ROI
Customer Profitability
Impact
Loyalty
is the fact that only 30 percent
Offer
(i.e. Gold
on
on Sales Transaction Lifetime
Response
to
Mgn
use the data to understand
Value
Size
Rates
Platinum)
customer-level profitability and
Source: RSR Research.
20 percent can evaluate if their
program positively impacts
their overall profit margins. Given the substantial investment that must be
Loyalty program
made by a retailer to design, develop, implement and administer a loyalty
service companies
program, the lack of performance measurement capabilities completely
need to have the
undermines the retailer’s ability to determine ROI and overall levels of
ability to ‘slice and
effectiveness. Loyalty program services companies are exceptionally welldice’ the data for
positioned to work closely with retailers to provide them with the tools,
capabilities and insights necessary to ‘slice and dice’ the data to determine if optimal analysis.
they are maximizing the value of their loyalty investment.
“...Given the scale of the opportunity, we strongly believe that
loyalty program services companies that deliver sophisticated
data mining, predictive modeling and analytic capabilities
to their retail clients represent one of the most outstanding
investment opportunities in the retail infrastructure industry...”
132
“Love those loyalty programs: but who reaps the real rewards?” Knowledge@Wharton.
April 4, 2007.
Fall 2008
101
Enhanced Customer Targeting: In helping retailers
better understand the data being collected on their
100%
best customers, loyalty program services companies
can also use that data to target specific customer
80%
groups. We have already discussed how retailers
have been more successful in using their loyalty
60%
programs to target affluent consumers. However,
other demographic cohorts are much less active
80%
40%
and we believe that loyalty programs, if properly
60%
57%
54%
configured, can be used by retailers to build solid and
44%
20%
41%
lasting relationships. For instance, as the graph on the
left reflects, only 44 percent of young adults and 41
0%
percent of Hispanic Americans, both of which represent
Affluent
Core
Gen'l
Seniors
Young
Hispanic
Women Population
Adults
highly attractive customer bases, currently participate
Source: Colloquy.
in a loyalty program. According to the Colloquy survey,
despite the fact that they are not as active as other
groups, they are highly receptive. An impressive 38 percent of Hispanic
Loyalty service survey respondents stated that a retailer became their primary shopping
companies with destination because of a loyalty and rewards program.133 This was higher
specific demographic than any other demographic group surveyed and illustrates that the Hispanic
expertise are well- population is an attractive target for loyalty efforts. Loyalty program services
positioned for companies that have a proven ability to design programs that target these
growth. (and other) attractive demographic groups will be invaluable to retailers that
are looking to increase their focus on new customer categories.
LOYALTY PROGRAM PARTICIPATION
RATES BY DEMOGRAPHIC GROUP
M&A can be a key
growth driver for
companies in the
loyalty space.
Mergers and Acquisitions: We strongly believe that loyalty program
services companies are facing an outstanding market opportunity and
have ample ground to grow organically. However, we also believe that this
growth rate can be accelerated through a thoughtful acquisition strategy.
Specifically, the convergence of services and technology companies in this
sector is likely to continue. Loyalty program services companies recognize
that understanding how to select, implement and maintain advanced
information systems on behalf of their retail clients is one of their primary
value propositions. Similarly, many executives of companies that provide
advanced technologies to the loyalty sector believe that providing valueadded services alongside their applications can further increase customer
stickiness and strengthen the overall quality of the customer relationship.
Accordingly, there is a natural convergence underway that we expect
will continue and, in our view, mergers and acquisitions will become an
increasingly important growth driver in the space.
133 Op. Cit., Ferguson, Rick and Hlavinka, Kelly.
102
Fall 2008
Coalition Forming: While the concept of loyalty program coalitions is
certainly not new, we continue to believe that there are opportunities for
service providers to facilitate them. A loyalty program coalition is a group
of retailers who work together to offer ‘cross-benefits’ to members of other
retail loyalty programs. For instance, a grocery retailer may offer benefits to
the loyalty program members of a nearby book retailer and vice versa. We
believe that loyalty program service providers have a continuing roll to play
in facilitating these relationships and enhancing the breadth of benefits that
are offered in specific loyalty programs.
Loyalty companies
have always been
progressive in terms
of collaboration.
It is our view that loyalty program service providers represent a dynamic and
exciting segment of the retail services industry. That being said, companies
that participate in the sector have concerns that they must address if they
are to remain successful and maximize value over the long-term. We identify
and discuss many of these concerns below:
Potential Oversaturation of Loyalty Programs: One of the concerns
that loyalty program services companies must be prepared to address is,
quite simply: are there too many loyalty programs already? With more than
1.3 billion memberships in the U.S., does the low ‘active’ versus ‘inactive’
ratio reflect the fact that consumers are bored and no longer motivated by
loyalty programs (and retail loyalty programs, specifically)? We certainly
do not believe that this is the case. In fact, we believe that the low ‘active’
ratio reflects a terrific opportunity for loyalty program services companies
to ‘clean the white-board’ of their retail clients and to help them rewrite the
tired loyalty plans that they have in place. A more comprehensive analysis
of the customer data, combined with greater creativity in terms of program
structure and benefits, can pull millions of inactive consumers back into the
fold of a good loyalty program. Loyalty program services companies have
an excellent opportunity to help retailers reinvigorate what may be tired
relationships with their customers.
Are there too many
programs out there
already?
Privacy Concerns: One of the primary concerns that retail loyalty programs
must address relates to the privacy of consumer data. Given the number
of high profile data security breaches that have taken place in recent years,
consumers have grown very sensitive about who is able to collect and use
their personal data. This concern certainly extends to loyalty programs
which, by and large, consumers correctly view as ‘pay for data’ programs.
While we do not believe that concerns about data security are likely to
Fall 2008
103
Some consumers feel
that loyalty programs
are nothing more than
privacy grabs.
compel consumers to leave a loyalty program, we do think that it may
increase their reluctance to join – particularly if that specific retailer had
been victim of a data breach in the past. It does not take a data breach,
however, to temper a consumer’s interest in a specific loyalty program.
Retailers with loose privacy policies who share customer information with
third parties also risk alienating some of their most loyal customers. While
concerns about privacy can impact participation rates for loyalty programs,
they also represent a potential opportunity for loyalty program services and
technology companies with a focus on data security.
While loyalty
investment is
important in good
markets and bad,
some retailers may be
inclined to cut back.
Economic Environment: We would argue that the current economic
environment presents retailers with an outstanding opportunity to strengthen
their relationships with their best and most loyal customers through their
loyalty initiatives. However, we are not under the illusion that retailers are not
constrained by short-term financial considerations that may motivate them to
curtail their loyalty activities. In fact, several retailers have already announced
that they are terminating their loyalty programs and, presumably, the difficult
consumer economy played a role in their decision-making process. As
mentioned, these programs are costly to establish and maintain and, as we
have discussed, many retailers have never truly recognized the benefits that
a successful program should provide. In situations where retail clients are ‘on
the fence’ regarding the viability of their programs, the onus will be on the
loyalty program service providers to clearly communicate a value proposition
and help the retailer understand that small incremental investments can yield
enormous returns if properly executed.
Private equity will have a significant role to play in loyalty program services.
In fact, several companies in the space have received private equity backing
in one form or another. In addition to all of the services and technology
firms that have received venture capital over the years (and there are many),
more traditional private equity players have also invested in the space. For
instance, Apollo Management is the controlling shareholder of Affinion, one
of the largest players in the industry. A group of investors led by Plainfield
Asset Management now controls what remains of Pay By Touch, a troubled
company that acquired S&H Greenstamps. Escalate Retail, a retail-focused
CRM provider, is controlled by Golden Gate Capital. Perhaps the highest
profile private equity story in the loyalty industry was Blackstone’s withdrawn
$6.4 billion bid for Alliance Data.
104
Fall 2008
We believe that private equity will continue to be active in the sector for a
variety of reasons:
Substantial Growth Opportunities: Loyalty program services and
technology companies represent one of the fastest-growing segments of
the retail services industry. In the U.S. alone there are thousands of sizable
retailers who have yet to implement loyalty programs and millions of
consumers who are not yet members. Loyalty program services companies
with the capital and the resources to target this market represent appealing
potential investment opportunities.
The organic growth
opportunity is still
huge.
Significant Barriers to Entry: Loyalty program services companies
benefit from several important barriers to entry. First, many of these
businesses have developed technologies that are patent-protected and
possess substantial amounts of intellectual property. Even without the
patents, it would often take a sizable amount of capital to replicate these
technologies and to make them commercially viable. Other companies in
the space possess deep and long-standing relationships with retailers and
other loyalty clients that would be difficult for a new entrant to duplicate.
Low Capital Requirements: As is the case with other segments of the
retail services industry, successful companies in the loyalty program services
sector generate substantial growth and margins and do not have significant
capital expenditures or working capital requirements. Growth, when
combined with strong free cash flow characteristics, can drive impressive
investment returns.
Retail Needs You! Perhaps most importantly, we believe that retailers
truly need help when it comes to their loyalty programs. Too many retailers
have ‘missed the tap-in putt’ and failed to capitalize upon the potential
that their programs provide. Their programs generate a treasure trove
of invaluable data that they are not mining successfully; provide benefits
that reward the bad customers along with the good; offer ‘rewards’ that
customers don’t value; and do little to engender true loyalty. There are a
multitude of exciting and fast-growing businesses in the loyalty program
services sector that provide retailers with the tools and perspective that
they need to accomplish their primary objective – turn transactions into a
lifelong relationship with their most loyal (and profitable) customers. In an
increasingly challenging retail environment, we believe that the services that
these companies can provide are more important, and valuable, than ever.
Fall 2008
Retailers need loyalty
programs more than
ever.
105
Warranty Program Services
The Basics
Picture this: you are walking the aisles at Best Buy and, after a year of
deliberation, decide to purchase a brand new Sony BRAVIA XBR 70”
1080p 120Hz Flat-Panel LCD HDTV for the low price of $32,999.98.134
Congratulations – this behemoth is truly the TV of kings. Now one more
decision remains – whether you would like to purchase the four-year
performance service plan for a paltry $1,249.99. In other words, you are
being asked to purchase an extended warranty. What do you do? Do you
buy it? Is it worth it?
Warranties are now
a common purchase
option on a broad
range of consumer
products.
Third party
warranties are not
an extension of
the manufacturer’s
warranty.
As consumers, we all encounter this type of situation, although not always
to this magnitude. The fact that extended warranties are offered on
consumer electronics, domestic appliances, and automobiles indicates
that the industry affects people from the entire socioeconomic spectrum.
However, this leads to the question, what exactly is an extended warranty
and how does it work? By definition, an extended warranty is a service
plan under which the provider promises to repair, replace, or maintain a
product for free, or at a lower price, over a certain period of time after the
manufacturer’s original warranty expires.135
There are two types of extended warranties. The first is one in which
the manufacturer extends the original warranty of the product, but at an
additional cost. This type of extended warranty is considered the best
because it carries the same terms as the manufacturer’s warranty. If the
extended warranty is purchased through the manufacturer, the consumer
can get the product repaired by the company that best knows the unit.
Another type of extended warranty is one in which the retailer or a thirdparty provides coverage for future repair costs. These third-party warranties
are not an extension of the manufacturer’s warranty, but are actually
independent service contracts. The problem is that these contracts may
not insure the product the same way that the manufacturer’s warranty
does.136 Therefore, it is important for consumers to know exactly which type
of extended warranty they are purchasing. Yet, a Better Business Bureau
national survey conducted by Kelton Research found that 42 percent of
Americans admit they do not look at the extended warranty policies that
134 www.bestbuy.com
135 Moore-Thorpe, Angela P. “Do You Really Need that Extended Warranty?” Black
Enterprise. November 2007.
136 Walker, Connie. “What is an Extended Warranty?” CBS Marketplace. November 12,
2002.
106
Fall 2008
come with their purchase.
The cost of an extended warranty to the consumer can vary depending on a
number of factors, including: the product, the retailer, and the length of the
contract. Although the typical extended warranty costs between 10 percent
and 25 percent of the product’s price, they can actually range from as little
as one percent to as much as 43 percent of the retail price, according to
Warranty Week.137
“Extended warranties generate $16 billion per year in
premiums paid out by consumers, half of which is retained by
the seller (retailers and dealers)...”
Eric Arnum, editor of Warranty Week138
As this quote suggests, proceeds from the sale of extended warranties are
split between retailers and third party warranty program service providers
(or administrators). For retailers, extended warranty sales typically translate
into substantial profits, especially considering that more than 100 million
consumer goods service contracts are purchased annually.139 The $16
billion in premiums paid out by customers includes retail, home, automobile
and all other industries that offer extended warranties. However, for the
retail industry alone, we estimate that the money generated by extended
warranties exceeded $4 billion in 2007. To put this into perspective, in
2006, Best Buy collected $790 million in commissions from the sale of
extended warranties, which represented more than half of the company’s
$1.4 billion in earnings.140 In addition, for some retailers, the profit derived
from selling warranties can be more than the sale of the actual product.141
Industry analysts have concluded that profit margins on extended warranty
contracts typically range from 50 percent to 60 percent.142 Overall, extended
warranties can be highly profitable for both retailers and the service
providers that administer them.
Warranty sales
represent a sizable
portion of consumer
electronics retailers’
earnings...
...and are highly
profitable.
Retailers are positively inclined towards warranties due to the strong margin
profile, but what has been driving consumer purchases? The first driver has
been the increasing complexity of consumer electronics and appliances.
137 “Extended Warranty Pricing.” Warranty Week. October 24, 2006.
138 Ibid.
139 “Over 100 Million Service Contracts Sold Annually.” Service Contract Industry Council.
November 15, 2007.
140 Serres, Chris “Consumers Frown on Extended Warranties.” Minneapolis Star Tribune.
July 28, 2007.
141 Quinn, Michelle. “Extended Warranty Firm Touts Quick Fix.” Los Angeles Times.
December 17, 2007.
142 Berner, Robert. “Watch Out, Best Buy and Circuit City.” Business Week. November 21,
2005.
Fall 2008
107
Consumers have a
variety of motivations
for purchasing
extended warranties.
Accordingly, consumers are more likely to depend upon technical support
staff to address their questions and issues and extended warranties typically
offer that service (albeit at a price). A second driver relates to price.
Consumers are more inclined to purchase an extended warranty if the
purchase price of the item is substantial. Expensive items are simply more
costly to replace or repair. As high definition television sets and expensive
stereo systems have become more popular with consumers of all income
levels, demand for extended warranties has grown accordingly. Finally,
the increasing technological complexity of the products has also led to
reliability issues, particularly for early product generations. For example, in
2005, purchasers of Microsoft’s high profile Xbox 360 experienced a number
of service problems and hardware failures that often left the consoles
completely ineffective. Since the manufacturer’s warranty only lasted for
90 days, and since the cost of repairs was $140 (approximately one-third of
the $400 console price), it would have been more prudent to purchase the
$60 extended warranty.143 All of these factors, and others, have driven an
increase in demand for extended warranties in recent years.
Market Structure
There are three
primary categories
of competitors in the
warranty business.
Companies that provide and administer extended warranties can be divided
into three primary groups: large insurance companies that underwrite and
administer extended warranties; insurance companies that are underwriters
only; and “pure play” companies that focus solely on administering
extended warranties. This section of our report is focused on the last group
of warranty program service providers. Although warranty program service
providers play an important role in the industry, large insurance companies
like Aon Corp., Assurant Inc., American International Group (“AIG”), and
Great American Insurance Group are actually the largest underwriters
of extended warranties.144 Specifically, Assurant and Aon Corp. act as
both administrators and underwriters, while AIG and the Great American
Insurance Group are underwriters only. The reason insurance companies
play such a meaningful role in the industry is that they typically have the
financial resources and underwriting capabilities needed to successfully offer
extended warranties.145 Their important role, however, has not precluded
highly successful ‘pure play’ companies from establishing a profitable
presence in the industry.
143 “When Extended Warranties Make Sense.” MSN Money. April 22, 2008.
144 “Manufacturer’s Extended Warranties.” Warranty Week. November 14, 2006.
145 “Report on Extended Warranties.” Warranty Week. March 3, 2003.
108
Fall 2008
There are several independent warranty program
service providers that have established themselves as
major players within the extended warranty industry.
Some of the key administrators include: Warrantech,
Service Net, and N.E.W. Customer Service
Companies / Asurion. These administrators cater
directly to retailers, manufacturers and distributors of
consumer goods, including autos, homes, consumer
electronics, furniture and appliances.146 These
companies offer a variety of different retail-focused
services that are meant to drive sales and enhance
customer satisfaction.147 For example, N.E.W.
offers extended service and product replacement
plan programs, both of which are meant to “give
customers enhanced product coverage and peace
of mind.”148 They also help retailers reduce the
number of product returns and repair damaged floor
merchandise through sophisticated return reduction
programs and store stock programs. Warrantech, like
other warranty program service providers, provides
retail clients with the option of selecting between
customized programs or pre-packaged service
plans.149 The success of these dedicated extended
service providers is validated by the fact that Service
Net’s revenue grew by an impressive rate of 628
percent between 1999 to 2004.150 Despite being
smaller than the large insurance companies, these
independent service providers have been able to
play an important and profitable role in this highly
competitive industry.
Extended Warranty Service Providers
Company Name
Ford / APC
Sales
Mkt
Share
$1,200
16%
1,100
15%
Assurant / GE
750
10%
AON Warranty Group
700
9.3%
American Home Shield
475
6.3%
GMAC / Universal
400
5.3%
JM&A Group
385
5.1%
Eastman Kodak
377
5.0%
CNA Financial
310
4.1%
Cross Country Group
300
4.0%
NEW Customer Service
275
3.7%
Gateway
134
1.8%
Warrantech
120
1.6%
First American
100
1.3%
Toyota Motor
80
1.1%
INDS / Warranty Direct
80
1.1%
VAC Service
65
0.9%
Service Net
60
0.8%
American Standard
55
0.7%
Apple Computer
50
0.7%
Hewlett Packard
50
0.7%
Warranty Corp. of America
50
0.7%
355
4.7%
$7,500
100%
Dell
Other
Total
146 “The Warranty Group Announces Agreement with Mantage Furniture Services.” May 29,
2008.
147 www.newcorp.com
148 Ibid.
149 www.warrantech.com
150 “Service Net Poised for Strong Year Following Record 04’.” Warranty Week. March 25,
2005.
Fall 2008
109
We believe that there will be a number of exciting growth opportunities for
warranty program service providers to pursue in the coming years:
Surprisingly, many
retailers are late to
the warranty game.
Many manufacturers
are reducing the
duration of their
product warranties.
New Retailers Offering Extended Warranty Plans: As the competition
for consumer dollars increases in a challenging retail environment, retailers
must continue to offer new products and services that will enhance
profitability levels. Retailers that previously did not offer extended warranties
are increasingly aware of the benefits that they can provide. First, extended
warranties represent an excellent source of highly profitable revenue for
the retailer. Second, in many cases retailers are being forced to offer these
warranties in order to remain competitive in the industry. If a customer
purchases a home theatre system and is looking for additional consumer
protection, the retailer must be able to provide that service in order to stay
competitive in consumer electronics. This is particularly important given
Wal-Mart’s entry into the extended warranty business in 2005. In 2007,
Target followed Wal-Mart’s lead in a defensive move. As more and more
retailers begin to offer extended warranties, we believe that they will turn to
experienced companies like Assurant and The Warranty Group to administer
and underwrite these protective service plans. In other words, warranty
program service providers will become the beneficiary of retailers’ desire
to increase profit and to stay competitive in the highly competitive retail
industry.
Changing Manufacturer’s Warranties: Over the past few years, many
manufacturers have reduced the duration of their product warranties. For
example, a number of leading appliance manufacturers have decreased their
in-box warranties from five years to as little as one year. Similar decreases
are beginning to permeate the television market, particularly with microdisplay warranties, which are shrinking from one year to between 30 and
90 days.151 Warranty program service providers can capitalize on this trend
because the shortened manufacturer warranty will force those consumers
who are looking for longer protection to purchase extended warranties.
Consequently, shorter manufacturer warranties may benefit the independent
service providers who are underwriting and administering the extended
warranties.
151 Am Trust Financial Group 10K. March 14, 2008.
110
Fall 2008
“The service aspect of [extended warranties] is also huge,
because it takes the right kind of service network and the right
kind of administration in order to make sure the customer
has a very positive experience. If they’re sold correctly, and
if they’re administered correctly, they can end up being a
tremendous enhancement to the brand of that retailer...”
Paul Swenson, EVP, AON Warranty Group152
International Expansion: As retailers expand into fast-growing markets
such as China and India, warranty program service providers will have the
opportunity to follow suit. For example, N.E.W. has already established
a presence in China and has become the first warranty program service
provider to bring full-service extended warranty products and care center
support services to China’s retail consumers.153 Jacky’s Electronics, which is
the United Arab Emirates’ largest multi-brand retailer, decided in September
of 2007 to begin a customer care initiative – Extended Warranty – with the
insurance giant AIG.154 Together, these examples illustrate that continued
international retail expansion will foster an array of growth opportunities for
companies that underwrite and administer extended warranty programs. As
U.S. retailers and consumer products companies look abroad for growth,
they are likely to favor warranty program service providers that have
developed their international capabilities.
Retailer Focus on Customer Loyalty: Another opportunity for warranty
program service providers is to help retailers and manufacturers build and
maintain their customer relationships. As discussed in the loyalty section
of this report, retailers are increasingly aware of how important it is to
retain loyal customers. Warranty programs are an essential component
of this customer care strategy. It is of the utmost importance that a
customer who utilizes his or her extended warranty is provided with an
outstanding customer experience. Keep in mind that a customer only
makes use of a warranty because they have purchased a faulty product
from a retailer. If their issues are not addressed with the utmost of concern
and responsiveness the customer relationship may be seriously damaged
or destroyed. Similarly, outstanding customer service may turn a negative
experience into a positive one and lead to repeat business and additional
purchases of extended warranties.155 Warranty program service providers
need to understand the importance of delivering exceptional service during
The warranty
industry is much
less developed
internationally than it
is in the U.S.
Retailers now
realize that
warranty programs
are an important
component of the
overall customer
relationship.
152 Source: www.crmtrends.com.
153 Am Trust Financial Group 10K. March 14, 2008.
154 “Jacky’s Partners with AIG to Launch New Customer Service Initiative.” Business
Intelligence Middle East. September 2, 2007.
155 “Extended Warranty Advice.” Warranty Week. March 28, 2006.
Fall 2008
111
a sensitive point in a retailer’s relationship with the customer.
Warranty program
service companies
are well-positioned to
gather and interpret
valuable product
data.
Warranties are often
bundled with other
value-added services.
Data Gathering: Warranty program service providers can also help provide
important customer and product data for retailers and manufacturers. For
example, warranty program service providers can use data that they have
collected to help a retailer decide which brands to stock, based not only on
how likely customers are to buy service plans but how likely those service
plans are to be utilized. The addition of this type of service would certainly
help warranty program service providers expand their business and overall
profit potential. Data collection services provided by warranty program
service providers can also aid manufacturers in their attempt to improve
products, enhance brand loyalty, build stronger and longer-lasting customer
relationships and provide buyers with product reliability data. This type
of information can greatly enhance a company’s product development
capabilities and management’s ability to identify problems early in a
product’s life cycle in order to make improvements in a timely manner.156
Bundled Products and Services: Another potential opportunity for
warranty program service providers is to offer additional bundled services
alongside the traditional extended warranty. For example, warranty
program service providers could include identity-theft products for notebook
computers to enhance a traditional ‘break or fix’ coverage. This type of
program provides compensation for compromised data, and can also be
bundled with unlimited data backup service and remote location tracking.
Additionally, some service providers have decided to offer a ‘lojack’ type
service with extended warranty programs for notebook computers.157 The
inclusion of these types of services, coupled with a traditional extended
warranty, will enhance revenue and overall profitability levels.
Although we believe there are opportunities for warranty program service
providers to gain market share and expand their core businesses, there are
also a number of concerns that must be considered.
Economic Uncertainty: Economic uncertainty and its effect on the retail
industry can have a negative impact on warranty program service providers.
For example, the fear of recession and other macroeconomic concerns might
influence people to hold off on purchasing non-essential consumer goods
156 Wolf, Alan. “Warranty Providers Kick Off New Year With Innovative Programs.”
TWICE Magazine. February 11, 2008.
157 Ibid.
112
Fall 2008
– particularly expensive discretionary items such as consumer electronics.
A decline in consumer electronics sales will likely translate into a decline
in the volume of extended warranties purchased. Somewhat surprisingly,
some are still expecting healthy consumer electronics sales for 2008. The
Consumer Electronics Association (an obviously biased source) forecast sales
for consumer electronics to increase from $161 billion in 2007 to $173 billion
in 2008, which represents a healthy growth rate of 7.5 percent.158 Despite
these rosy statistics, there is certainly a greater degree of caution regarding
consumer electronics sales and that can have a negative impact on warranty
program service providers.
It is amazing to
us that consumer
electronics sales
continue to be robust.
Rapid Evolution of the Consumer Electronics Industry: The
impressive pace of new product introductions and shortening upgrade
cycles can create significant pricing problems for warranty program service
providers. Typically, reliable statistics regarding the reliability of a specific
product do not emerge until months after that product is released.159
Therefore, warranty program service providers must make use of data from
related products in order to establish prices – an imperfect methodology
that can negatively affect profitability. If a new product has glitches that
cause consumers to call on their warranties for relief, service providers and
underwriters will suffer reduced profitability.
It is also imperative that warranty program service providers understand
the effects that consumer replacement might have on the sale of extended
warranties. Rapid technological developments might encourage consumers
to replace products rather than purchase warranties that would cover future
repairs. As technology and innovation grow, consumers often find the need
to purchase the newest version or the latest model in order to be at the
forefront of the most recent trend. This, in turn, can reduce demand for
extended warranties. For example, Apple appears to have mastered the
ability to introduce and market new products at an astounding rate. Because
consumers flock to purchase Apple’s newest gadgets, people are less
inclined to purchase an extended warranty knowing that it is only a matter of
time before Apple introduces a newer or entirely different product. While
Apple remains at the forefront of new product innovation, other consumer
electronic manufacturers are learning to follow suit. If this trend continues,
sales of electronic warranties may be negatively impacted. Consequently,
warranty program service providers must continue to innovate and offer new
products and services to remain relevant in this fast evolving sector.
Rapid product
obsolescence can
negatively impact
warranty sales.
158 “2008 Consumer Electronics Sales Seen Up.” Reuters. January 7, 2008.
159 Wolf, Alan. “Warrantors Tackle New-Tech Dilemma.” TWICE Magazine. November 5,
2007.
Fall 2008
113
Wal-Mart’s move
into the extended
warranty business
is pressuring pricing
and margins.
Extended warranties
get a bad rap in the
press.
Potential Margin Pressure: Wal-Mart’s decision to offer extended
warranties is problematic for both consumer electronics chains and warranty
program service providers. This is primarily due to the fact that Wal-Mart’s
extended warranties were priced at an average of 50 percent of the price of
comparable plans offered by Best Buy and Circuit City.160 On a $1,000, RCA
52-inch digital projection TV, for example, Wal-Mart is charging $29 a year
for an extended warranty, while Best Buy is charging $62 and Circuit City
$100.161 Major price discrepancies like this will force chains like Best Buy and
Circuit City to make a decision: either cut warranty prices and hurt profits or
not respond and potentially lose sales.162 Although the number of extended
warranties sold will increase with Wal-Mart’s entry into the market, overall
margins may actually decline, which would negatively impact the retailer and
the extended service provider.
Public Perception: Due to a number of high-profile campaigns targeting
the merits of purchasing extended warranties, public perception has become
somewhat negative. Many consumers believe that extended warranties are
either superfluous or too expensive, acting as a deterrent for purchasing
warranties. In November 2007, Consumer Reports led a campaign against
extended warranties in an effort to dissuade consumers from buying
them. The Consumer Reports position is that extended warranties do not
provide sufficient value since a) some repairs are covered by the standard
manufacturer warranty that comes with the product; b) statistically, products
rarely break within the extended warranty timeframe (after the standard
warranty has expired but within the typical two to three years of purchase);
and c) when electronics and appliances do break, the repairs, on average,
cost about the same as an extended warranty.163
“I think people are behaving irrationally when they buy
[extended warranties]. For most people, at the level they
spend on these products, it’s not a risk you need to insure....”
David Cutler, Professor of Applied Economics, Harvard
University164
Consumer Electronics Pricing: Another issue that warranty program
service providers face relates to the pace of price erosion for many popular
consumer electronics. For instance, Christmas of 2006 saw a series of
dramatic price cuts take place between manufacturers of flat panel television
160
161
162
163
164
114
Op. Cit. , Berner.
Ibid.
Ibid.
“Why You Don’t Need an Extended Warranty.” Consumer Reports. November 2007.
Source: www.crmtrends.com.
Fall 2008
sets. Prices for popular television sets declined by as much as 25 percent
over a six month period leading into the Christmas season. While this
price competition was a positive in that increased unit volumes can lead
to extended warranty sales, the rapid pace of the price declines led to a
substantial mis-pricing of the attached extended warranty plans. When the
warranty prices failed to adjust to lower television prices, consumers simply
chose to forgo the warranty. This effect was seen in the financial results of
Best Buy and Circuit City, which reported a decline in extended warranty
revenue of 12 percent and 8 percent, respectively, in 2007.165 Warranty
program service providers need to be much more proactive in adjusting
prices in a dynamic consumer electronics marketplace.
Rapid price declines
on consumer
electronics can wreak
havoc on the sale of
warranty contracts.
Despite some negative publicity and a difficult retail environment, we
believe that private equity has a role to play in the warranty program
services industry. Private equity firms have already been active in the space,
as evidenced by Berkshire Partners’ and Freeman Spogli’s investment
in N.E.W. Customer Service Companies. The industry has a number of
attributes that would appeal to private equity investors. First, retailers
recognize the attractive margin profile of extended warranty sales. Second,
the successful administration of warranty programs has a direct impact on
a retailer’s customer relationships and loyalty. Accordingly, they take these
relationships seriously and are most interested in working with larger service
providers with a track record of success. Smaller competitors in the industry
are growing less competitive and, in our view, may be willing to consider
partnering with a private equity firm to gain scale and more substantial
financial capabilities. These factors, combined with others discussed above,
have contributed to an attractive industry growth profile and outsized
margins for retailers and service providers alike. We believe that private
equity firms will continue to seek new platforms that can be positioned as
value-added partners to retailers and consumer brand managers.
There have been a
few sizable private
equity investments in
the warranty industry.
165 Paulson, Matthew. “Extended Warranty Sales Decreasing in Retail Stores.” Associated
Content. September 24, 2007.
Fall 2008
115
Retail Security Services
The Basics
“...Right now retailers are focused on growing sales and they’re
basing their budgets on that. They need to invest more in
security too, because it’s just as important to make a customer
feel safe in your store...”
Chris McGoey, Founder, McGoey Security Consulting. As
quoted in CNNMoney166
Loss prevention
spending in the U.S.
was only $11.8 billion
in 2007...
One of the most important priorities of any retail business is to establish
an organized and efficient security system. The main task of retail security
and loss prevention professionals is to observe, detect, deter and report
perceived, potential or actual security threats.167 However, these individuals
should work to achieve these goals within the “larger context of the
[retailer’s] strategy and culture.”168 Although security measures represent
an integral part of the retail industry, many operating executives consider
security to be somewhat of an afterthought. According to the Global
Research Theft Barometer, loss prevention spending in the United States was
only $11.8 billion in 2007, which is a mere 0.45 percent of total retail sales.
The fact that security measures constitute such a small proportion validates
the claim that security and safety implementation is not as much of a focus as
it should be.
...but retail shrinkage
is a growing problem.
One of the most pressing issues in the retail industry today involves the
problem of shrinkage. The National Retail Federation defines shrinkage as
“inventory losses occurring from employee theft, shoplifting, organized retail
crime, administrative error and vendor fraud.”169
“...Retail theft is a multibillion-dollar industry. It takes place on
the loading docks, at the cash register and through organized
rings of shoplifters...”
Toni Whitt, Herald Tribune, 2008170
Because retail shrinkage does not originate from a single source, it is simply
impossible to completely prevent and eliminate. A recent survey of North
American retailers (the results of which are shown in the graph on the right
166 Kavilanz, Parija B. “One more merchant worry: Mall violence.” CNNMoney, February
12, 2008.
167 Form 10-K. Allied Security Holdings. U.S. Securities and Exchange Commission. 2007.
168 Wren, Andrew. “The Big Picture.” Security Solutions. November 1, 2005.
169 Pohle, Linda. “Retail: In a league by itself.” SDM Magazine. January 1, 2008.
170 Whitt, Toni. “You May be Paying $400 to $600 a Year to Offset Shoplifting Costs.” The
Herald Tribune. 2008.
116
Fall 2008
SOURCES OF U.S. RETAIL SHRINK
concluded that the largest cause of shrinkage is
(Total: $41.6 Billion)
internal theft. In other words, 47 percent of retail
shrink is associated with dishonest employees.
Vendor Fraud &
This statistic should caution retailers and force
Other
$3.0 Billion
them to take a more in-depth look at potential
7%
Administrative
employees. Shoplifters, who comprise the second
Errors
$5.8 Billion
largest source of shrinkage, are responsible for 32
14%
Employees
percent of retail shrink. A recent speaker at the
$19.5 Billion
47%
National Retail Federation’s 2008 Loss Prevention
Show shared a shocking anecdote about a FloridaShoplifting
$13.3 Billion
based crime ring that had been responsible for
32%
between $60 million and $100 million of stolen
merchandise – and that was just one criminal
gang. Vendor crime, which includes losses in the
distribution chain and theft by delivery employees,
Source: National Retail Federation.
is responsible for seven percent of shrink. Lastly,
administrative error, which includes accounting
mistakes, pricing errors and process failures, accounted for 14 percent of
shrink losses.171
It should also be noted that shrinkage rates are inversely related to the state
of the economy: as the economy weakens, shrinkage rates inevitably rise.
Basically, a downturn in the economy tempts consumers and employees
alike to turn to shoplifting and theft. Conversely, shrink will typically decrease
during times of prosperity, which suggests that shrink is cyclical by nature.
A weak economy
typically drives an
increase in shrink.
“It’s clear that both employee theft and shoplifting are up…the
most recent rise is being driven by the economy. A lot of
people are on the financial edge...”
Richard Hollinger, Professor of Criminology at the University
of Florida172
Shrinkage can have a tremendous influence on a retailer’s profitability levels.
For example, it is estimated that crimes such as theft, fraud and scams
currently cost retailers more than $42 billion in lost sales.173 Total shrink
in the U.S. increased by 2 percent over 2006 levels. In addition, in 2007,
shrink cost every man, woman and child in the United States $139.06.174 In
a December 2007 survey, Aberdeen Group concluded that 60 percent of
Retail theft costs
retailers an estimated
$42 billion each year.
171 http://www.nrf.com/modules.php?name=News&op=viewlive&sp_id=318
172 Dugas, Christine. “More Consumers, Workers Shoplift as Economy Slows.” USA Today.
2008.
173 http://www.nrf.com/modules.php?name=News&op=viewlive&sp_id=318
174 Op. Cit., Pohle.
Fall 2008
117
Shrink costs Wal-Mart
more than $3 billion
each year.
retailers recorded shrink of 1.75 percent of their total sales. How might
this 1.75 percent affect a large retail store like Target or Wal-Mart? Based
on their most recently reported annual revenue of $60 billion, Target’s
loss due to shrink would cost roughly $1 billion a year. Wal-Mart, the
world’s largest retailer, has an estimated annual shrink of $3 billion. These
statistics highlight the growing problem of shrinkage in the retail industry
and illustrate the profound monetary impact on specific companies and
the retail industry as a whole. The table below reflects the estimated profit
enhancement potential of an integrated shrink-reduction strategy on the part
of several different retailers:
Potential Profit Improvement From Improved Shrink Rates
Metric
An increased focus
on security and
loss prevention can
dramatically enhance
retail earnings.
Revenue
Current Net Margin
Grocery
Retailer
Consumer
Electronics
Retailer
Specialty
Apparel
Retailer
$25 billion
$15 billion
$10 billion
1.34%
2.00%
7.28%
$335 million
$300 million
$728 million
2.32%
0.87%
2.14%
$580 million
$131 million
$214 million
Improved Shrink Rate
1.16%
0.44%
1.07%
New Net Margin
2.92%
2.56%
8.84%
$730 million
$386 million
$884 million
Current Net Profit
Current Shrink Rate
Total Shrink
New Net Profit
“Retailers are hungry for more and more information about
what people buy and, especially, what they steal and how they
get away with it....”
Michael T. Grady, Senior Vice President, Vector Security. As
quoted in SDM Magazine
Many professionals in the retail industry believe that shrinkage can be
reduced with the implementation of new loss prevention initiatives. In
addition, the development and employment of better-trained security
personnel and sophisticated video surveillance will, over time, increase
efficiency, lower costs, reduce risks and offer “more enterprise-wide
benefits.”175 The most successful security firms with a retail focus are,
generally speaking, investing more time and resources into increasing their
technology capabilities and the overall training levels of their employees.
The majority of firms, however, are still not following their lead.
175 “Research: Video Surveillance Market Posed for Explosive Growth.” Securityinfowatch.
com Wireless News. March 25, 2008.
118
Fall 2008
As the graph on the right reflects,
U.S. RETAIL LOSS PREVENTION SPENDING
(in Billions)
only 31 percent of the money
$5.0
used for retail loss prevention
is currently spent on security
4.0
equipment like electronic
surveillance. The remainder is
3.0
invested in security personnel,
employee screening and
2.0
$3.970
$3.900
monitoring, and other security$3.100
related initiatives. Like electronic
1.0
surveillance, video analytics
$0.880
could play a crucial role in the
0.0
Contract
Security
Direct
Vehicle Cash
improvement of retail security.
Employees
Equipment
Employees
Collection
Video analytics have the ability to
Source: SDM Magazine.
automatically detect suspicious
behavior or track items inside and
outside the store. This sort of technology has the ability to not only reduce
shrinkage, but also revolutionize the retail security industry as a whole.
“Retailers expect to substantially increase the amount of
technology they will be using in their stores. The types of loss
prevention systems they indicate that they will be adding all
involve newer, more sophisticated technology....”
Richard Hollinger, Professor of Criminology at the University
of Florida176
$0.880
Other
Technology is
becoming a bigger
piece of the retail
security puzzle.
Market Structure
Although many contract security firms provide services to multiple industries
and venues, the majority of these companies concentrate their efforts on
office buildings and retail environments. The contract security industry, as a
whole, is highly competitive and fragmented. According to some estimates,
there are more than 5,000 contract security service providers nationwide,
a large majority of which are relatively small, independent businesses.177
While smaller businesses might generate less than one million dollars in
annual revenue, some of the larger national and international companies
have annual revenue that exceeds $1 billion. The ten largest players (in
terms of annual revenue) combine for nearly 70 percent of the total market
The retail security
industry is highly
fragmented.
176 Lindstrom, Ann. “Shoplifting Costs U.S. Retailers $40.5 Billion According to ADTSponsored Survey.” December 4, 2007.
Fall 2008
119
Securitas, ABM,
Allied and IPC are
some of the largest
players in retail
security.
Smaller security firms
tend to focus on a
specific niche.
share.178 Four of the firms that have strong footholds in retail security
include: Securitas Security, ABM Security Services, Allied Security Holdings
and IPC. ABM and Allied alone generate total revenue of $2.6 billion and
$1.5 billion, respectively. While the details of their retail billings are unclear,
we estimate that ABM, Allied and IPC generate several hundred million
dollars of retail security revenue each year. The graph on the previous page
asserts that nearly $4 billion is spent each year on ‘contract employees’. We
are more conservative in our market size estimate, assuming that retailers
spend approximately $2 billion each year on security services (guards and
monitoring services). We readily admit that our figure may be somewhat
conservative.
Smaller firms, which greatly outnumber the larger companies, primarily focus
on a particular niche. The reason that smaller firms specialize is because
these companies generally lack the resources and manpower to fill every
potential customer’s needs. It should also be noted that the contract
security industry continues to consolidate as larger firms seek to acquire
smaller, local companies in order to gain a foothold in different markets and
to increase market share. For example, Allied Security’s acquisition of Barton
Protective Services in 2004 and Initial Security LLC in 2006 expanded Allied’s
already well-known presence within the contract security industry.
There are several factors that retailers and mall operators consider when
evaluating a potential security provider. The first, unfortunately for industry
participants, is generally price. Given that retail is, in many cases, a lower
margin business, store operators are focused on operating costs, including
security. Security providers who can deliver quality service at the lowest cost
will typically prevail over more expensive options. It is important to note,
however, that this is not universally the case. Retailers are also looking for
companies that will provide the most competent and professional security
personnel. Many of the larger firms provide more sophisticated training
and higher wages for their guards. This investment typically leads to
higher pricing for retailers. Better trained guards may cost more, but they
are typically more reliable, tactful, and observant than their counterparts
who may lack such training. Accordingly, many retailers may feel that
it is appropriate to pay a little more given the incremental quality and
effectiveness of the personnel.
Another driver of competition in the industry relates to geographic reach.
As mall operators and retailers have consolidated and expanded their
178 Parformak, Paul W. “Guarding America: Security Guards and U.S. Critical Infrastructure
Protection.” CRS-Report for Congress. November 12, 2004.
120
Fall 2008
footprint across the country (and, increasingly, abroad), they are looking
to deal with a more limited number of security service providers who have
the ability to service their entire network of locations. Accordingly, security
service providers that have a proven ability to deliver high-quality guards on
a regional or national basis are more likely to win repeat business from the
large mall operators and retailers than their smaller competitors.
Although improving security can be costly, retailers need to make significant
improvements to a) ensure customers that they are shopping in a safe and
secure environment and b) reduce the massive level of shrink. Malls, for
example, should employ a visible, well-trained, uniformed security force on
foot inside the mall, and on bicycles outside. It is essential for malls to set
up security plans with local police to ensure that if a situation does arise,
police know the best way to get in and out of the property.179 Lastly, it is vital
that these measures are organized and administered by individuals who are
experienced, have good judgment, and possess strong leadership skills.180
The increase in mall shootings over the last several years, coupled with the
threat of terrorism in the post-9/11 world, should influence retail owners to
invest more time and money in developing a more efficient security system.
While it may be a tough business, we believe that there is a greater need
than ever for effective mall and retail security services and that the most
progressive players in the industry will be able to distinguish themselves.
Unfortunately, in
a post-9/11 world
security needs to
become a growth
business.
In addition to the general need for greater security, we believe that security
service providers have several other specific opportunities to address in
today’s retail environment.
Pop-Up Stores and Other Non-Traditional Retail Formats: Once
an interesting novelty, pop-up stores continue to gain traction in the retail
industry. Pop-up stores are temporary retail stores that are established in
non-traditional store locations for what is typically a limited period of time.
The key strategy of pop-up stores is to create additional buzz for products
and to occupy space that would otherwise be unused. For example, Gap
used a school bus as a traveling pop-up store in order to promote a ‘60s style
tour.181 Target opened a temporary, 1,500 square foot store in Rockefeller
Center for six weeks to celebrate Isaac Mizrahi’s new clothing line.182 Since
179
180
181
182
The emergence of
non-traditional retail
stores presents
a unique growth
opportunity for
security firms.
Misonzhnik, Elaine. “On High Alert.” Retail Traffic Magazine. February 1, 2008.
Gaier, David W. “Malls as Terrorist Targets.” Security Solutions. November 1, 2004.
Gogoi, Pallavi. “Pop-Up Stores: All the Rage.” Business Week. February 9, 2007.
Source: www.trendwatching.com
Fall 2008
121
every pop-up store is unique, traditional retail security measures are often
ineffective. Normal retail locations are built, configured and equipped
to reduce the probability of theft. Pop-up stores, by definition, are nontraditional retail locations that can lack many of the ‘structural’ protections
that retail stores will typically have. Accordingly, as the concept continues
to gain in popularity there will be a significant need for well-trained retail
security personnel to monitor the locations and protect against theft.
Security needs are
much more pressing
overseas.
International Expansion: As has been mentioned many times in this
report, retail continues to evolve into a global business. We believe that
the expansion of retailers into dynamic and fast-growing markets in Asia
and South America will make security a much more important concern.
Many of these countries have lax legal standards, sophisticated organized
crime networks and appalling crime rates. This is especially true in Latin
America, which is home to eight of the top ten countries with the highest
murder rates.183 According to data from The Center for Retail Research, in
2007 retailers in India reported a shrink rate of 2.9 percent, nearly double
the 1.5 percent found in North America and the 1.3 percent experienced in
Europe.184 Because of the excessive crime, retailers in some countries, such
as Argentina, are investing an increasing amount of money on retail security.
A senior industry executive in Argentina recently stated that mall owners
spend five times more money on security than what the average mall owner
spends in other regions of the world.185 Accordingly, we believe that leading
security service providers in the U.S. have an outstanding opportunity to
grow globally alongside their retail customers.
Security service providers operate in a challenging marketplace. Retailers
and mall operators are cost-conscious but, at the same time, demand
quality and performance. However, there are a number of other threats
and concerns that security service providers must address if they are to be
successful over the long-term.
How do you maintain
a balance between
security and a
comfortable shopping
environment?
Maintaining a Delicate Balance Between Security and Invasiveness:
One of the most important concerns in the retail industry is the possibility of
a terrorist-related incident or random shooting. Since malls and other retail
venues are considered high-risk targets, retail security must adapt to meet
the challenge of protecting against possible security threats while trying not
183 “50 Reasons to Love Retail Real Estate.” Shopping Center Today. May 2007.
184 Op. Cit., Bamfield.
185 Op. Cit., Shopping Center Today.
122
Fall 2008
to detract from the quality of the shopping experience for the consumer.
“Increasing security would spook shoppers, reducing the
frequency and duration of shopping trips...”
David Bodamer, Retail Traffic Magazine, 2007186
As this quote suggests, some retail operators believe that an increase
in security might deter potential buyers or have a negative impact on a
customer’s shopping experience. However, experts in the industry agree,
“It‘s more about doing the bare minimum, rather than metal detectors or
arming guards to the teeth.”187 Fearing that customers will have a negative
experience, retailers would often prefer to have lax security and deal with
the shrink and other risks than operate a store that resembles Fort Knox.
Therefore, the challenge for security service providers will be to find creative
ways to minimize security-related risks, while at the same time, preserving a
customer-friendly environment.
Some feel that visible
security degrades
the quality of the
shopping experience.
“I’d say there’s a heightened level of anxiety today that needs
to be addressed. The goal of a shopping center is to create
a welcoming and enjoyable experience—and that can only
happen if people feel safe...”
Candace Corlett, President, WSL Retail. As quoted in the
Chicago Tribune
Potential Liability Concerns: Although security personnel are important
components of retail security, they can also be viewed as a potential liability
to retailers. Security service providers may be held liable for the negligent
acts or misconduct of any of their security professionals.188 Considering the
fact that many security personnel lack proper training, occasions might arise
when a guard behaves inappropriately. For example, a security guard might
mistakenly restrain a customer who is wrongfully suspected of committing a
crime. This highlights one of the underlying concerns for retailers and mall
operators. In essence, there is meaningful concern that providing security
personnel with more authority might increase the likelihood that they will
misuse their powers or inappropriately interact with customers. Furthermore,
a well-publicized incident or violation will result in a negative perception
of the retailer or the shopping mall, impacting sales and profitability.
This challenge highlights the need for security service providers to make
an appropriate level of investment in the selection and training of their
personnel.
Retail security firms
have unique liability
concerns.
186 Bodamer, David. “Editor’s Letter: Insecurity Complex.” Retail Traffic Magazine. 2007.
187 Ibid.
Fall 2008
123
Employees can
be coopted by
criminals...
Employee Malfeasance: Another potential concern is the risk that
uniformed security personnel might collaborate directly with criminals or
perpetrate crimes themselves. Such collaboration would allow criminals
to gain easier access to merchandise, while at the same time, limiting the
possibility of being apprehended. In order to reduce the possibility of
this occurring, there needs to be more thorough background checks and
stringent hiring requirements for uniformed security personnel.
“Loss prevention is a critical priority for all retailers, large and
small. Retail organized crime affects retailers of every type,
every size and in every part of North America...”
Diane Brisebois, President, Retail Council of Canada. As
quoted in Nanaimo Daily News
...so recruiting
the right people is
imperative.
Recruiting and Retaining Qualified Employees: While security-related
technology continues to evolve, the effectiveness of uniformed security
personnel is, by some accounts, following a more regressive path. In other
words, the lack of security-related spending has fostered a system that is
often characterized by poor candidate pools, high turnover rates, and a
sense of vocational apathy, all of which translate into a lack of desire for
career advancement.189 One reason why retail security is a difficult business
relates to employee turnover – which in some cases can be as high as 100
percent per year.190 This disturbing statistic can be attributed, in large part,
to low wages. According to a survey released in December 2006 by the
U.S. Department of Justice, the median starting hourly rate for mall security
personnel was $8.50 and the average for all security staff was $9.50. These
wages offer little incentive for security personnel to remain in the profession
for the long-term. Another issue relates to training. The Department of
Justice report stated that out of the 120 mall security directors surveyed, 60
percent said that training for security staff at their location had not improved
meaningfully since 9/11 and another 94 percent said that there has been
no change in hiring requirements for security officers.191 Security service
providers need to develop and enforce more consistent training standards
for security personnel.
“Security guards have no authority, aren’t adequately trained,
and are not paid what they should be...”
Paul T. Kinney, Executive Director, National Retail Tenant
Association. As quoted in Retail Traffic Magazine
189 “Facility Management Forecast.” International Facility Management Association. 2007.
190 “Mall Security Back in Spotlight after Omaha.” Retail Traffic Magazine. December 12,
2007.
191 Misonzhik, Elaine. “Safe and Sound.” Retail Traffic Magazine. March 1, 2007.
124
Fall 2008
Finally, due in large part to the reasons stated above, most security
personnel are not given the authority to act even when situations do
arise. Rather than allowing security personnel to respond when there is an
immediate threat, many security firms and mall owners require their guards
to report questionable activity to management or to the police. It is a widely
held belief that the goal of mall security personnel is not to act as a police
force, but to be “mall ambassadors.” Essentially, mall security personnel
have the task of controlling disruptive shoppers and creating a “feeling” of
safety. Security personnel are also limited in the sense that their greatest
weapons are typically a can of mace and a set of handcuffs.192 The fact that
they are limited in this regard perpetuates the negative stereotypes relating
to security personnel. In order to improve the public perception of security
personnel, it is imperative that retailers and mall operators give uniformed
security professionals more authority. However, this increase in authority will
only be warranted once there is a new set of standards in place for hiring and
training. .
The simple fact is,
security personnel
need more respect.
“...The fact is they are $8 to $11 an hour guards without
guns. Outside of wearing a uniform, they don’t carry a lot of
authority…[Often] they are younger than the people they have
to confront...”
Paul T. Kinney, Executive Director, National Retail Tenant
Association. As quoted in Retail Traffic Magazine
From a private equity perspective, we believe that there are profitable
investment opportunities to be found in retail security services. While
the initial reaction of private equity investors may focus on the negatives
(barriers to entry, liability concerns, lower margin profile), we would highlight
the fact that private equity firms have been successful in the space in
the past (for example, Gryphon and MacAndrews & Forbes both made
profitable investments in Allied Security).
Private equity has
been active in the
retail security space.
In addition to those detailed above, there are a number of reasons that
security represents an interesting opportunity for private equity investors.
First, the risk of increasing shrink and the potential for mall violence will,
despite a weak economy, compel retailers and mall operators to continue
investing in security services. Second, the consolidation that has taken
place among retailers and mall operators has created a dynamic in which
192 Ibid.
Fall 2008
125
Sponsors have an
opportunity to marry
security services
with advanced
technologies.
126
the large players are looking for security service providers who can provide
regional or nationwide coverage. Since the substantial majority of security
service providers are still small local operations, we believe that a sizable
consolidation opportunity continues to exist. Finally, sponsors will, in most
cases, have a greater opportunity to marry security services with technology
than existing business owners in the space (i.e. family-owned businesses).
Over the longer term we believe that technology will continue to play a
more important role in the industry and that the larger, better capitalized
competitors will be best positioned to make the required investments.
Retail security may not resonate as the most outstanding investment
opportunity in the retail services industry but, in our view, there will be
successful private equity investments made.
Fall 2008
Design, Build and Installation Services
Overview
“The immersive experience that happens at a store is the
brand’s starting point. The store is where I, as a consumer,
have the ultimate experience from a more global point
of view and then when I see the brand in advertising or a
Web experience, the recall is back to the store, because my
experience there was, on all levels, more fulfilling. Ten or
fifteen years ago, advertising would have led that charge, but
now the store is the brand billboard...”
Paul Lechleiter, Chief Creative Officer, FRCH Design
Worldwide.193
To this point, our report has been focused on providing an overview of the
service providers who help retailers and brand managers move product
within a store. Now, we turn our attention to the companies that help
retailers design those stores and turn those designs into reality. There are
three main categories of service providers that do so:
1.
Architecture and design firms that work with retailers to create unique and
appealing store designs that enhance the value of the retail brand and
optimize the quality of the shopping experience;
2.
Construction firms (primarily general contractors) that work with retailers,
mall operators and developers to build new stores and refurbish existing
locations;
3.
Installation firms that work with general contractors, retailers and brand
managers to install fixturing and POP displays.
This section of our
report will focus on
firms that help get
the stores up and
running.
This section will discuss each of these segments in detail but will be
structured somewhat differently than other parts of this report. We will
provide a basic overview of the design, build and installation segments; a
summary of the market structure for each; but, given the similarities between
the three, we will provide a combined commentary regarding opportunities,
threats and the private equity play.
Before doing so, however, we believe that it is important to provide some
background on recent trends in retail construction.
193 Ryan, John. “Design for Life.” Retail Week. January 11, 2008.
Fall 2008
127
What’s the Story with Retail Construction?
“...Retail follows rooftops...”
Retail Traffic Magazine.194
Retail construction
fell by 23 percent
during the first six
months of 2008.
Although retail construction levels witnessed strong growth over the past
several years, the difficult retail environment has certainly been having a
negative impact on building activity in recent months. Retail building has
followed residential construction downwards in recent quarters and has
been trailing off in most areas of the nation. Many new malls and outdoor
lifestyle centers have been planned (or are being constructed) in oncehot residential real estate markets such as Florida, Nevada, Arizona and
Southern California. With foreclosures rising at an alarming rate in these
communities, it is not surprising that many of these retail projects are being
put on hold or cancelled altogether. According to Reed Construction Data,
retail construction was down 23 percent during the first six months of 2008
versus 2007 levels.195
BILLINGS BY CATEGORY
(Three Month Moving Average)
70
60
50
40
30
May
Aug
2007
Nov
Feb
Institutional
Mixed Use
Commercial / Industrial
Residential
Source: American Institute of Architects
Retail capex has
started to trend
downwards for the
first time since 2003.
128
May
2008
Recent data from the American Institute of Architects
(“AIA”) reflect this weakening trend. As the graph on
the left illustrates, architectural billings have declined
over the past year, with residential and commercial
(retail) projects falling substantially before rebounding
somewhat over the past couple months. When the index
falls below 50, it means that there has been a decline
in billings at architecture and design firms. Despite
a bounce in June, billings still remain well-below the
historical average of recent years. Inquiries for new
billings have fallen at an even greater rate, clouding
the outlook for coming months. It is important to note
that demand for design services is a leading indicator
of construction activity. If a project is in the design
phase now it may take nine months to three years
before construction is actually underway and completed.
The current decline in billings and inquiries will have
a negative impact on demand for construction in the
coming years. The prospects for 2009 are very mixed.
Retail capital expenditure levels have also been weakening in recent
months. Lincoln International’s “Retail CapEx Monitor” tracks the capital
194 “Falling Construction Prices, Upside and Down.” Retail Traffic. August 29, 2007.
195 Haughey, Jim. “Construction Starts Rise in June.” Reed Construction Data. July 10, 2008.
Fall 2008
expenditures of fifty of the nation’s leading retailers
CAPITAL EXPENDITURES FOR
50 TOP U.S. RETAILERS
on a quarterly basis to provide insight into overall
(Trailing Twelve Month Data, $ in Billions)
retail investment levels and allow for trend analysis
50
to forecast future activity. The graph on the right,
which reflects retail capital expenditure data for
40
every quarterly period since 1997, seems to confirm
that we are in the midst of another downturn for
30
retail construction and investment. Recent capital
expenditures reflect the increasing caution and
20
restraint being exercised by retail construction
departments. There has been a substantial
10
deceleration in capital spending over the past four
quarters. Total capital spending for the fifty retailers
0
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06
increased by 14 percent year-over-year for the twelve
months ending July 31, 2007. Since that time, the yearExcluding Wal-Mart
Wal-Mart
over-year capital investment increases have declined
to 8 percent, 4 percent, (-1 percent) and (-11 percent)
over the past year, respectively. In fact, the April 2008 trailing twelve month
values represents the first year-over-year decline since April 2003, which was
the end of the last retail downturn.
'07
'08
If we were to extrapolate the peak to trough decline from the last downturn
to the peak capital expenditure levels seen in July 2007, total capital
investment for our fifty retailers would decline by roughly 11 percent to
$37.6 billion before rebounding. The pullback would be more severe if
you analyze the data excluding Wal-Mart. During the last downturn, the
other 49 retailers saw capital spending levels decline by approximately 18
percent. If those retailers were to pull back at a similar pace today, their
capital spending levels would decline from a recent peak of $26.8 billion
to approximately $21.9 billion. Given that we have already reached $37.8
billion on a trailing twelve month basis, we expect that this capital spending
downturn will likely be more substantial than the previous slowdown.
If we extrapolate
from the last
downturn, we could
see a 15%+ decline in
capex levels.
The decline in capital spending has been accompanied by a long list of
“store closing” headlines in the financial press. The following table reflects
a small sample of retailers who have announced store closing programs:
The headlines
have been filled
with store closing
announcements.
Fall 2008
129
Recently Announced Store Closings
Retailer
Stores
Closing
Comments
Starbucks
600
First major closings in history
Wilson’s Leather (PreVu)
260
Unable to secure funding, closing stores
Linen’s ‘n Things
177
Chapter 11 filing
Pacific Sunwear
163
Closing 154 demo Stores and 9 One Thousand Steps locations
Charming Shoppes
207
Closing 130 Fashion Bug stores and 77 Added Dimension / Answer stores
Foot Locker
140
Closing 140 stores
Sprint Nextel
125
Closing 125 company-owned outlets
Ann Taylor
117
Closing 39 Ann Taylor and 78 Ann Taylor Loft stores nationwide
Zales
105
Closing 55 full-sized retail stores and 50 kiosks in 2008
Phillips-Van Heusen
100
Closing 100 Geoffrey Beene outlet stores
Retailers are using
the slowdown as an
opportunity to prune
their store base.
Store closings have
migrated from home
furnishings to apparel
and other segments.
“Many of the nation’s largest retailers see this as a time when
they can close underperforming stores without being judged
too harshly by the public and investors. For several retailers,
this year can be a cleansing process that could put them in a
strong position in 2009.”
Sasha Pardy, Senior Editor, National Retail News.196
The retailers listed in the previous table reflect the sizable number of
companies that are currently reevaluating the retail environment, their
operating strategies and the overall performance of their store base. As the
previous quote suggests, we believe that savvy retailers can take advantage
of the situation by using the slumping economy as an opportunity to remove
non-productive stores without being punished by investors. While store
closings are normally viewed as a sign of weakness, in a poor economy they
are often seen by Wall Street as an act of fiscal responsibility. According to
a recent report published by the International Council of Shopping Centers,
approximately 5,770 store closings are expected in 2008 – the highest
number of closings since 2004.197 Not surprisingly, many of these closings
have been related to the downturn in the housing market. Approximately
one quarter of the store closings in 2007 were in the home furnishings
sector. For instance, Bombay Company went out of business, liquidated
inventories and closed 508 stores. This year, retailers in other sectors appear
to be more active in terms of pruning their store counts. These closings
196 Tenser, James. “Everybody’s Doing It: Cutting Jobs, Closing Stores etc…” RetailWire.
February 1, 2008.
197 Davies, Jennifer. “Housing-Market Bust Has Retailers in Retreat.” San Diego UnionTribune. February 17, 2008.
130
Fall 2008
are spreading to specialty retailers broadly, and apparel retailers seem
particularly active. To put this in perspective, of the closings that have been
announced so far this year, 41 percent have been in the apparel sector.198
The weak retail environment is being driven by a
reluctant consumer who is concerned about too much
U.S. ISSUANCE OF COMMERCIAL
MORTGAGE BACKED SECURITIES (”CMBS”)
debt; too little savings; high inflation; and creeping
($ in Billions)
unemployment. However, the lingering effect of
250
$230
the credit crunch is also having a devastating impact
$203
on retail construction right now. The commercial
200
$169
mortgage-backed securities (“CMBS”) market, which
was a primary funding source for commercial real estate 150
development (including retail), has shut down. The
graph on the right illustrates the huge boom in CMBS
$93
100
$78
$74
volumes in recent years, followed by the unprecedented
$67
$61
$56
$52
$47
collapse that began last summer. The closure of the
50
$37
$26
CMBS market has translated into a broad credit freeze
$16
$6
that has seen most commercial lenders step away from
0
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '07Q1 '08
new (and, in some cases, existing) retail construction
Q1
Source: www.cmalert.com
projects. A mixed use property investor provided us
with some context regarding the current financing
markets. Advance rates, which in certain cases were as high as 80 to 85
percent of a project’s total value, have now declined to the 60 percent
range. These financing levels require developers to inject substantially
higher levels of permanent capital into a project and, even if they are
willing to do so, lenders may still back away. The developers who are overequitizing their projects are doing so with the expectation that the financing
The financing meltmarkets will recover at some point soon, allowing them to recapitalize the
down is having a very
project in a manner that will allow them to realize their targeted investment
negative impact on
returns. The difficulties involved in securing financing are having a trickleretail construction.
down impact as well. Anchor tenants, who recognize how important their
presence in a development is to ensure financing and attract additional
tenants, are using their substantial leverage to aggressively negotiate (and
renegotiate) improved terms with developers. Recognizing that the loss of
an anchor may spell the end of a project, developers have little choice but to
accommodate.
So what do all of these factors say about the outlook for retail construction
for the remainder of 2008 and 2009? Given where we now stand in the year,
visibility for 2008 is quite good. As the graph on the left illustrates, the AIA
So what is the
outlook?
198 Ibid.
Fall 2008
131
AIA RETAIL
CONSTRUCTION OUTLOOK
(% Growth)
20%
10%
6.6%
0%
-10%
-20%
Our conversations with people throughout the industry
reflect far greater concern about the outlook for 2009.
(3.7%)
(4.5%)
While the AIA data reflects a nearly 10 percent decline
(8.3%)
(9.9%)
(9.9%)
in 2009, some sources are expecting that build levels
(11.1%)
(12.3%)
could be even lower. In their view, the true impact
of the current financing market will not be felt until
Total Commercial
Office
Retail
Hotel
current projects (most of which were financed long
2008
2009
before the market shut down) are completed. It is
Source: AIA
also important to understand the impact that the
coming Christmas season will have on retailers and
their store construction plans. A weaker-than-expected Christmas season
will lead retailers to recalibrate their capital spending budgets in February
We are going to of 2009. We are inclined to stick our necks out and be contrarians on this
stick our necks out point. Given how low expectations are right now regarding the outlook for
and predict a better Christmas 2008, we believe that there is the potential for a positive surprise,
2009 than many are which may (emphasis on may) translate into a higher-than-expected level of
expecting... capital spending in 2009. This outcome certainly becomes more likely if the
commercial lending environment begins to improve.
...but clearly everyone
must remain cautious
about the outlook.
132
is estimating that overall retail construction spending
will decline by approximately 8.3 percent in 2008. This
is somewhat more optimistic than data from McGrawHill, which expects that construction starts on stores and
shopping centers in 2008 will decline by 10 percent to
270 million square feet (versus the 301 million square
feet built in 2007).
Retailers, architects, and contractors are all concerned about the current
state of the economy and its effect on the consumer’s ability and eagerness
to spend. With this in mind, it is important to understand that retailers (and
their investors) place a great deal of emphasis on store growth. While comp
store sales are important to Wall Street, analysts also pay close attention to
the pace of store openings and the metrics of those new locations. While
retailers are cautious and guarded regarding 2009, over the longer term we
firmly believe that there is still substantial opportunity for growth in the U.S.
retail industry.
Fall 2008
Retail Design Services – The Basics
Retail architecture and design is a highly creative segment that, like many
other traditional professional services categories, attracts highly educated
(and highly compensated) individuals. Architecture and design professionals
work closely with retailers to create stores that successfully capture the
spirit of their surroundings while, at the same time, convey a sense of
differentiation and individuality. Retail designers need to create stores that
are visually appealing, healthy, comfortable, flexible, secure and efficient.199
In today’s competitive retail environment, it is not enough for retailers to
simply display their merchandise on shelves and wait for customers to buy
– they must create the “buying experience,” and store design is one of the
most essential ways of doing so.200 Successful store design professionals
possess, in many respects, an equal blend of marketing / advertising
acumen and technical architectural expertise. Their primary objective is
to create environments that develop and enhance brand identity for their
clients.
Retail design is a
highly creative field.
“Retailers and retail developers are banking on the fact that
given a more three-dimensional shopping experience replete
with sights, colors, sounds, textures and movement, consumers
will stay longer, shop more, and leave with lasting memories.”
David Gester, Vice President, RTKL.201
The importance of store design has not always been so apparent. In fact,
the 1990s and early 2000s saw a meaningful shift take place in terms of retail
design strategy. It was during this time that most of the nation’s retailers
reconfigured their operating strategies in response to the competitive threat
posed by Wal-Mart. As they attempted to do so, retailers emphasized the
delivery of inexpensive goods as efficiently as possible to an increasingly
standardized store base. There was little focus on building customer loyalty
through a differentiated shopping experience – it was all about price. The
economic downturn that followed the 9/11 terrorist attacks compounded
this emphasis on price and standardization – store design suffered as a
result. The in-house store design departments of most retailers were cut
back significantly and the pace of store openings and refurbishments
slowed. Retail billings for architecture and design firms were pressured as
well.
Store design has not
always been viewed
in a strategic manner.
199 www.gensler.com
200 www.c-b.com
201 Thandi, Kiren. “Design’s Role in Experiential Retailing.” July 10, 2007.
Fall 2008
133
Thankfully, the ‘cookie-cutter’ design philosophy that characterized these
years does not appear to have been permanent. We are of the view that
many retailers have now moved to a new era of store design. After years of
attempting to confront Wal-Mart at its strongest point – pricing – retailers
have come to realize that they have other weapons in their arsenal. Target
has taught the industry that you can challenge Wal-Mart by offering a
differentiated shopping experience and value – Expect More, Pay Less.
Part of this success has been driven by competitive pricing and creative
merchandising, but it can also be attributed to well-designed stores and a
higher-end ‘look and feel.’
There has been a
backlash against the
bland big-box design
movement.
Alpha retailers are
continuing to invest
in their stores.
The rebellion against standardization is continuing. Because the markets
have become more competitive, consumers have become more aware,
more particular and more discerning in terms of where they want to spend
their time.202 In other words, consumers do not want to go to any old store;
they want to go to a place where they are going to experience the brand.
Despite their recent difficulties, we believe that Whole Foods has arguably
been at the forefront of this transition. While the emergence of the organic
foods category has been a primary driver of their growth, their ability to
redefine the shopping experience through design and layout has also
played an important role. Their stores are creative, bright and well-designed
to convey the wholesome image that their brand represents to consumers.
Retailers in all categories have watched with interest as consumers have
made clear that they are actually willing to pay more for a higher-quality
shopping experience at Whole Foods than they are at traditional grocery
retailers who now offer many of the same products.
At this difficult stage of the retail cycle, we believe that store design is more
important than ever before. ‘Alpha’ retailers – those that are looking to
take advantage of this market environment to expand market share and
strengthen their presence in the U.S. – are working diligently to recalibrate
their business models to optimize unit economics and the return on new
store investment. There is now an abundance of evidence that store design
drives foot traffic; extends the duration of stay; draws new consumers
into eye catching stores; and, ultimately, improves overall levels of comp
store performance. While we recognize that tough times will constrain the
amount of capital that is available for new store design initiatives, we also
believe that the most successful retailers will take this opportunity to recraft
their ‘look and feel’ to draw more consumers into their stores. This will
undoubtedly benefit those architecture and design firms that have a track
record of success in working with the Alphas.
202 Op. Cit., Thandi.
134
Fall 2008
“...Traditionally, retailers talked only about their products. Now
it’s about creating stories around the brand that connect with
people beyond merchandising or designer names...”
Mark Gobe, Founder & CEO of Desgrippes Gobe.203
Retail Design Services – Market Structure
“As the country braces for a possible recession in 2008, there
will likely be an easing in demand for design services [but
because billings were so strong in the past two years, architects
should remain busy and nonresidential construction could
be] one of the sources of strength in the otherwise uneven
economy.”
Kermit Baker, Chief Economist, American Institute of
Architects.204
The total architectural and design market is estimated at $35 billion, with
approximately $25 billion related to non-residential construction. We
We believe that retail
estimate that retail, restaurant and mixed-use design projects comprise
design is a $2 billion
approximately $2 billion of total industry billings. The design industry,
business.
particularly in the retail sector, has grown significantly over the past few
years. In 2007, the top 100 design firms employed a total
of 17,000 professionals, which represented an increase of
Top Ten Retail Design Firms
21 percent over 2006 levels. The top ten firms produced an
Retail
Firm Name
impressive 237 million square feet of designed retail space in
Billings
2007.205 DDI Magazine’s 10th Annual Design 100 survey, which
Callison
$85
provides an overview of the retail design industry, reported that
WD Partners
75
the 100 largest design firms generated a total of $946 million
Jacobs Carter & Burgess
70
of retail design fee revenue in 2007. This represented a 10
MulvannyG2 Architecture
64
percent increase compared to the 2006 total of $860 million.
Gensler
55
Moreover, 2006 revenue increased 16 percent from $744 million
MBH Architects
47
reported in 2005. The sales for the top ten firms increased
Perkowitz
+
Ruth
Architects
46
18 percent to $559 million, which was more than half of the
FRCH Design Worldwide
45
revenue for the top 100 design firms. The table on the right,
Pavlik Design Team
37
which was drawn from the survey, reflects the ten largest retail
MillerZell
34
design firms in 2007.206 It is important to note that these figures
203 “Retail Design for 2008: Thinking Outside the Big Box.” Brandweek.com. December
2007.
204 “Architecture Index Moves Slightly Higher.” The Wall Street Journal. January 23, 2008.
205 “Architecture Firms Struggle with the Economic Outlook for 2008.” American Institute of
Architects. Kermit Baker. January 25, 2008.
206 “2008 Top 100 Design Firms.” DDI Magazine. March 1, 2008.
Fall 2008
135
reflect estimated retail billings and that total billings can be higher.
The structure of the retail design industry is similar to that of other
professional services industries, including the legal profession. Several large
firms are viewed as market leaders and are best able to provide service
While a few large to their clients on a national and international basis. These firms offer a
firms lead the pack, breadth of capabilities and technical expertise that cannot be matched by
design is a very smaller competitors. These attributes allow the larger firms to attract and
fragmented business. retain some of the best people and strengthen their ability to win business
from the largest and most demanding customers. This is not meant to
imply that smaller firms cannot be successful in the retail design industry. In
fact, some retailers prefer to work with smaller
Architecture & Design - Market Structure
firms that focus on a particular niche or have
Firm Size (# of Share of
Share of
Share of
a specific technical expertise that larger firms
Employees)
Firms
Staff
Billings
lack. Additionally, retailers often prefer to work
1
23%
2%
2%
with smaller firms that can guarantee more
2 to 4
38%
11%
6%
senior-level attention to their projects. The
5 to 9
19%
12%
8%
table on the left provides a general snapshot
10 to 19
11%
14%
12%
of the architecture and design industry’s
20 to 49
6%
19%
20%
market structure.207 Larger firms have a more
50 to 99
2%
15%
18%
substantial share of people and billings, but
100 or more
2%
27%
34%
there are still an abundance of small practices
that continue to be successful.
The in-house store
design departments
are, in effect,
competitors to the
design firms.
There are large store design firms; mid-sized store design firms; small store
design firms; and then there are the in-house store design departments. It
is important to understand that, in many cases, third party retail architecture
and design firms actually compete with the in-house store design teams that
many retailers maintain. Some retailers have determined that store design
is simply too important a function to outsource to a third-party – particularly
given the view that store design is an increasingly essential component of a
retailer’s overall brand identity. While retail architecture and design firms do
work together with the store design department at times, there is certainly a
competitive dynamic at play.
207 Baker, Kermit. “Practicing in a Challenging Economy.” American Institute of Architects.
July 10, 2008.
136
Fall 2008
Retail Design Services – Drivers of Competition
“...The best retail designers do it with showmanship. They set
up the windows so the displays will stand out and the interiors
reflect the merchandise...”
www.designerpreviews.com
In order to better understand the industry, it is important to evaluate the
competitive advantages that determine retail design market positioning
and profitability. Successful companies in the sector possess a number of
winning attributes that others do not:
Diversified Portfolio of Work: As is the case in most professional
services, one of the most important distinctions between successful retail
design firms is their previous work experience. Companies that have
consistently demonstrated their ability to provide superior performance
to a demanding and well-regarded client base will have a clear advantage
over a company that has a less distinguished track-record. As mentioned,
design is a highly creative profession and firms that have proven themselves
able to bring ingenuity to the job are at an advantage. In addition, a design
firm’s portfolio of work illustrates that firm’s ability to successfully marry
store design with the broader brand message that the retailer is trying to
communicate. This is extremely important because retailers, as discussed
in earlier sections, are no longer looking for a standardized big-box store
design. Instead, they are looking for a store design that epitomizes and
advertises a brand identity. The best way to ensure that store design reflects
brand identity is by selecting a design firm that has accomplished this in
their previous work.
Retailers prefer to
work with firms with
a broad portfolio of
relevant project work.
Breadth and Depth of Retail Relationships: Another key determinant
of success in the retail architecture and design industry is the depth (and
breadth) of a firm’s retail relationships. By breadth, we are referring to
relationships with a large number of different retailers – preferably spanning
both geography (regional, national and global) and category (department
stores, specialty apparel retailers, etc.). The broader the relationships, the
less likely a design firm is to be negatively impacted by weakness in one
geographic market or retail category.
The best design firms
have relationships
with multiple
retailers and multiple
relationships within
each one.
Just as important as breadth, however, is the depth of relationships that a
design firm has within a given retailer. It is not sufficient for a design firm
to have a casual relationship with a member of the store construction team.
Given the growing importance of store design to a retailer’s overall success,
we believe that successful design firms must have close relationships
Fall 2008
137
within the store construction department and elsewhere in the executive
suite. In Lincoln’s 2007 report entitled “Store Design Departments – The
Pendulum Swings...” we surveyed a number of store design professionals
to gauge the role of C-level executives in the store design process. While
several people interviewed for the report stated that their company’s most
senior executives remained fairly ‘hands-off’ in terms of design, a significant
majority of respondents expressed the opposite view. In most cases, CEOs
had increased their focus on the store design process in a meaningful way.
Accordingly, we believe that it is more important than ever for successful
retail design firms to maintain an active dialog with a retailer’s most
senior executives in addition to their day-to-day relationships with store
construction teams.
Working on some
non-retail projects is
always a plus.
While the focus of this report is on retail, we also believe that architecture
and design firms with exposure to other end markets are best-positioned for
success. Given the cyclicality of the retail industry, those firms that maintain
relationships in a number of different practice areas will cleary be able to
mitigate economic slowdowns better than less diversified competitors.
Breadth of Service Offerings and Technical Expertise: Many
successful retail architecture and design firms have broadened their service
capabilities to enhance the strength and stickiness of their customer
relationships. In addition to traditional architectural and design services,
many firms now offer a range of other services such as project management,
graphic design, brand design, master planning, real estate strategic
planning, strategic consulting, engineering and prototyping, and, in some
cases, manufacturing and installation services. We believe that the ability to
provide retailers with these additional service capabilities can give successful
design companies a meaningful competitive advantage.
Delivering unique
technical capabilities
is a big competitive
differentiator.
Another key competitive differentiator is a proven ability to provide unique
technical capabilities to the retail client base. The most timely example
of this relates to the green movement currently taking place in the retail
industry. Winning official environmental certifications can be a highly
complex undertaking from a design perspective. Design firms that have
made the investment to develop their ‘sustainability’ credentials are well
positioned to win business from retailers who have made environmental
considerations a top strategic priority.
Scale: The size of the firm can also be an important consideration as
retailers go about selecting an architecture and design firm for a new
project. There are three primary reasons for this. First, larger firms tend to
138
Fall 2008
have broader design capabilities and service offerings and, as discussed,
this can be an important consideration for many retailers. Second, larger
firms typically have more substantial financial resources at their disposal and
have a greater ability to pay the most talented designers and keep them
on staff. Third, larger firms tend to be less dependent upon one or two
key individuals for their success and are less likely to ‘close up shop’ in the
middle of an important project. This is an important issue for many retailers
– particularly during difficult economic times.
Permitting and Local Jurisdictional Knowledge: One of the most
crucial differentiators between successful retail architecture and design
firms is the relationship between the architects and engineers and the
various regulatory bodies. This is an important consideration because
retail design professionals who are intimately familiar with the codes of
local municipalities are better able to facilitate and expedite the permitting
process. Permitting problems are one of the most common reasons for
a retail project to be delayed – a very costly problem for a retailer to deal
with. If the architect and engineer have a keen understanding of zoning and
permits, then the rest of the construction process can proceed much more
efficiently. Design professionals who do not have adequate permitting and
local jurisdictional knowledge could potentially create problems for both
the construction team and overall project management. Therefore, those
design firms with a deep understanding of permits and zoning will be in
much greater demand.
A proven ability
to navigate the
complexities of local
regulations and
permitting is a big
advantage as well.
Retail Building Services – The Basics
“...In retail, the opening date is sacred, which means all of your
people have to be on their toes to overcome all obstacles...”
Gus Vratsinas, Chairman, VCC208
In many different respects, the ‘build’ section of this report is one of the
most difficult to tackle. There are so many different constituencies involved
in the retail construction process, and so many blurred lines between
them, that it is difficult to define the landscape. From a high level, retail
construction companies take the finalized plans of the architects and store
designers and turn them into reality. The following illustration attempts to
delineate the design and construction process to provide some context:
Generally speaking,
retail build firms take
designs and turn
them into bricks and
mortar.
208 Mattson-Teig, Beth. “The High-Tech Tools of Retail Construction.” Retail Traffic.
January 1, 2000.
Fall 2008
139
THE RETAIL CONSTRUCTION PROCESS
Design
Pre-Design
Construction
Close-Out
Commissioning &
Start-Up
Construction
Construction
Documents
Design
Development
Schematic
Conceptual
Programming
Feasibility
PROJECT STAGE
Post
Construction
Source: Whiting-Turner Contracting Co.
Retail contractors
provide a broad range
of services.
As you can see, there is a significant overlap of responsibility between
design firms and contractors at several stages of the process. This blurring
of responsibility has become more substantial as general contractors
have attempted to expand their service offerings into more of the frontend, design-driven stages and many of the larger design firms have been
increasing their focus on project management services. Generally speaking,
leading retail general contractors now provide a range of services that
span the life of the construction process. Pre-construction services include
devising detailed budgets and schedules; coordinating permitting; detailing
utilities and municipal requirements; making certain that the design
plans conform with the construction requirements; and aligning a group
of subcontractors to execute the process within the budgeted amount.
Site evaluation services determine the suitability and unique building
requirements of a specific location. Construction services relate to the dayto-day management of the construction process. This includes oversight
of the subcontractors; executing a daily reporting plan to ensure that the
client is kept abreast of all developments; and hands-on cost management
initiatives to ensure that the project proceeds as per the original budget.
As is the case
with residential
construction, general
contractors take
responsibility for the
overall project.
The actual construction process (beginning after design development) is
typically executed under the umbrella of a general contractor. General
contractors are a vital component of the retail construction process because
they take full responsibility for the entire construction project, except
for specified portions of the work that may be omitted from the general
contract. Although general contractors may do a portion of the work
with their own construction crews, they will typically subcontract most of
the work to heavy construction firms and specialty trade contractors. By
140
Fall 2008
specialty contractors we are referring to individuals who usually do the
work of only one trade, such as painting, carpentry, or electrical work; or
two or more closely related trades, such as plumbing and heating. Beyond
coordinating their efforts to those of the other trades working on a specific
project, specialty trade contractors have no responsibility for the structure
as a whole. They obtain orders for their work from general contractors,
architects, or property owners.
One of the most significant attributes of retail construction projects
are the highly aggressive time schedules. Rigid time frames are crucial
because store opening dates are linked directly to revenue. Each day
that a store opening is delayed due to a slipping construction timetable
is a day of lost sales. While the math may be simplistic, assume that the
average Target store generates $40 million of revenue per year.209 Based
upon that assumption, delaying a new store opening by one week would
result in nearly $750,000 of lost revenue. Given the magnitude of the
dollars involved, retailers put a great deal of pressure on contractors and
developers to complete the construction projects on schedule.
Avoiding these delays is no small feat given the hurdles that are
commonplace within the construction industry. Although there are a
seemingly infinite number of reasons why construction setbacks can occur,
some of the more common include: weather delays; inability to receive
permits on time; change-orders; and failure to coordinate the efforts of
subcontractors and other project members. Miscommunication between
members of the construction team can cause a variety of problems which,
in turn, might create a ripple effect throughout the project. Because
there are so many different parties involved in the construction process,
managers must find a way to “maintain visibility into the project status and
keep everyone on the same page.”210 According to a report conducted by
Evoco, a leading provider of project and program construction management
software, 54 percent of retailers reported that working to aggressive time
lines is one of their most substantial construction-related challenges.211
Late store openings
are enormously
expensive...
...but delays seem to
be inevitable.
209 Target generated trailing twelve month revenue of $64.1 billion through May 31, 2008
and had a store base of 1,648 locations.
210 “Autodesk Buzzsaw Retail Building Overview.” Autodesk. 2004.
211 Wilson, Marianne. “Technology Offers Widespread Benefits.” Chain Store Age.
December 2007.
Fall 2008
141
Retail Building Services – Market Structure
$125
100
75
$63
50
25
0
'99
Source:
The construction industry, as a whole, represents a large component
of the U.S. economy. With approximately 7.3 million employees, the
industry comprises more than $1.2 trillion, or eight
U.S. RETAIL CONSTRUCTION
percent, of total U.S. GDP.212 The housing boom and
PUT-IN-PLACE VALUE
($ in Billions)
the strength of the commercial construction market
drove impressive rates of growth prior to the credit
freeze. Nonresidential construction accounted for
approximately 4.3 million workers in May 2008, and total
$86
nonresidential spending amounted to $629 billion. This
$76
$70
$68
$68
$67
represented a 15 percent increase over 2006 levels. As
$63
$62
the graph on the left reflects, Reed Construction Data
estimates that the value of retail construction “putin-place” accounts for approximately $86 billion of
the total. This value represented a compound annual
growth rate of approximately 8.5 percent since the low
point of the last retail downturn in 2003. This rate is
'00
'01
'02
'03
'04
'05
'06
'07
Reed Construction Data
more modest rate if you consider the data going back
to 1999.
Despite the large scale of the industry, the typical construction firm is
relatively small in terms of number of employees. Industry statistics show
that 92 percent of construction firms have fewer than 20 employees and
only one percent has more than 100 workers.213 According to
Top Ten Retail Contractors
the latest figures from the Bureau of Labor Statistics, there were
Retail
268,000 construction firms in the U.S., with approximately 117,000
Firm Name
Billings
designated as non-residential, in 2006. Similar to design, while
Whiting-Turner
$1,156
the large firms account for a disproportionate share of total retail
EMJ
844
construction revenue, there is an abundance of smaller competitors
Walton Construction
750
who compete in the marketplace.
VCC
710
The table on the left reflects the largest players in the retail
Shawmut Design & Const.
495
construction industry.214 Whiting-Turner and EMJ continue to top
R&O Construction
425
the list as the largest competitors in the sector. Both companies
S.D. Deacon
364
have nationwide footprints and work with some of the nation’s
Graycor Construction
346
largest retailers. Similar to the retail architecture and design
Skanska USA Building
324
segment, many of the larger companies in the retail construction
Hardin Construction
280
industry have diversified their revenue stream into other areas
212 Simonson, Ken. “Quick Facts About the Construction Industry.” The Associated General
Contractors of America. June 24, 2008.
213 Ibid.
214 “Top Retail Contractors.” Retail Construction. March / April, 2008.
142
Fall 2008
of commercial construction. While some of the largest firms are almost
exclusively retail-focused (VCC’s billings are 98% retail-driven; EMJ derives
88% of its revenue from retail clients), others have a less concentrated
business model. For instance, Whiting-Turner derives only 28 percent of its
revenue from retail; Hoar Construction generates 48 percent of its billings
through retail; and S.M. Wilson & Co. attributes only 47 percent of its sales
to retail clients.215 As is the case in most industries, many of the smaller
competitors in the marketplace tend to have a much greater degree of
concentration – both in terms of end market and customer.
Some of the larger
retail contractors
have diversified well
beyond retail.
Retail construction is considered by most to be a relatively low-margin
industry. According to the 2007 Construction Industry Annual Financial
Survey, the pre-tax margin of construction firms during their most recent
fiscal year averaged only 2.7 percent. The median return on assets was 8.8
percent.216
Retail Building Services – Drivers of Competition
“...[the best firms] make a real good plan before you start,
not kidding yourself with the budget and schedule, and
immediately adjust as things start to happen. Tweak it as
you go along, because stuff goes wrong. You really have to
anticipate things, and when they do you have to act quickly...”
Daniel P. McQuade, Executive Vice President, Tishman217
General contracting is a tough business. Margins are slim; competition is
intense; the projects are highly complex; and the clients are relentless in
their demands. The most successful companies in the industry are able to
prosper for a variety of reasons:
“...GC’s fall short on meeting their commitments, not delivering
what they said they would...”
Senior Construction Executive at a leading U.S. retailer
Reliability and Consistency of Execution: One element that separates
the most successful retail builders from their peers is a proven ability to
manage projects (and client expectations) efficiently and consistently. The
construction process is complex and there seem to be a limitless number
of things that could, and often do, go wrong. Therefore, retailers will
Retailers want
to work with
contractors who
deliver on their
commitments.
215 “2008 Top Contractors.” Retail Traffic. July 1, 2008.
216 Op. Cit., Simonson.
217 Palmer, Thomas C. “Ups and Downs of the Building Business.” The Boston Globe.
September 3, 2006.
Fall 2008
143
always prefer to work with contractors who consistently produce superior
results and meet the expectations that are communicated at the beginning
of the project. As the previous quote suggests, the general contracting
industry suffers from an image problem – too much over-promising and
under-delivering. The key to success is extensive project experience; a
dynamic project management team that can creatively tackle problems as
they arise; and a client manager who has the ability to communicate issues
to the retailer in a timely and thoughtful manner. Our conversations with
construction professionals throughout the retail industry supports our view
that ‘nimbleness’ and creativity are key success drivers for the top general
contractors.
“...The construction industry is a people business...”
Jim Sattler, Chief Executive Officer, EMJ218
Successful retail
construction
professionals need
to possess a unique
blend of attributes.
Building a store today
is a highly complex
undertaking. That
wasn’t always the
case.
Recruiting and Retaining Qualified Employees: Finding and retaining
quality employees can be a difficult task for any industry. Having sub-par
employees in retail construction, however, can be costly to both the retailer
and the builder. Successful construction professionals need to possess a
broad mix of technical and interpersonal skills. They need to understand
the complex dynamics at play during a large building project – addressing
engineering concerns or municipal code requirements as they arise.
However, top professionals will also be called upon to manage a disparate
group of subcontractors who may very well have conflicting perspectives
and agendas. And, as was discussed in the previous paragraph, the best
builders have an outstanding ability to communicate with clients throughout
the life of the project (and often under stressful circumstances). Finding
individuals with the appropriate blend of skills is difficult and costly. Those
firms which have invested aggressively recruiting, training and retaining the
best people are sure to distinguish themselves from their competitors.
Ability to Manage Highly Complex Building Processes: Retail stores
have evolved dramatically over the years. Stores once consisted of little
more than a glass door, several aisles of gondola shelving, a cash wrap, a
simple register, a plug-in AT&T telephone and, in some states, a doublebarreled security system under the counter. Today’s retail environment
contains multi-material fixturing and POP displays; highly complex point-ofsale and merchandise tracking systems; sophisticated security monitoring
and fire protection systems; energy-efficient cold fixturing; and a variety of
other features that would make a 20th Century merchant’s head spin. While
some of these systems may be beyond the responsibility of the general
218 Op. Cit., Mattson-Teig.
144
Fall 2008
contractor, the point is valid – building a retail store is an enormously
complex process. Successful general contractors need to marry traditional
building practices with today’s most sophisticated technologies.
They also need to be able to identify and mobilize a network of highly skilled
specialty contractors and engineers who possess the requisite technical
capabilities. The efficiency, quality and overall success of the construction
project can be greatly affected by the relationship between the architects
and designers, general contractors and the various subcontractors. In order
to minimize setbacks and ensure optimal results, the most successful general
contractors will be able to maintain a close working relationship between
each of the parties involved in all facets of the design, construction and
installation process.
Strength of Retail Relationships: Similar to design companies, retail
construction firms can distinguish themselves through the strength of their
retail relationships. While each retail organization is structured differently,
we also believe that it is important for retail construction firms to have
multiple touch points within the company. In addition to the requisite
relationships with store design and construction professionals, the most
successful retail builders will also have an active dialog with top executives
and decision-markers in the purchasing and procurement departments.
Those general contractors who have the ability to market their services to
several constituencies within the retail organization will always be better
positioned for new mandates than their competitors.
Similar to design,
successful
builders maintain
a deep network
of relationships
within their clients’
organizations.
Installation Services – The Basics
The final segment that we will review relates to installation. While certain
installation services are provided during the broader construction project
(and therefore we have included installation in our design and build section),
a good deal of installation work is actually performed on a regular basis
within stores that are fully operational.
Installation in a retail context takes several forms. First, during the store
construction process specialized subcontractors may perform a variety of
installation work to support the project. Installation that takes place at
this stage may include heating, ventilation and air conditioning; data and
telecommunications systems; lighting systems; cold fixturing; electrical work,
etc. Second, when stores are being built, refurbished or are executing rollout programs, installation service providers are often used to install fixturing
Fall 2008
There are several
categories of retail
installation firms.
145
and permanent POP displays. Third, third party installers are often used by
brand managers and retailers in the normal course of business to deliver,
assemble, install and breakdown temporary and permanent POP displays
that are used to promote specific product lines or categories. In each case,
installers provide an essential service to the general contractor, retailer
or brand manager. A failure to properly plan and execute the installation
process can lead to project delays, cost overruns, poor product placement
and, in certain cases, damaged merchandise.
Successful
installation firms
work in close
coordination with
other project
participants.
Like any other subcontractor on a construction job, installers need to closely
coordinate their efforts with the general contractors and other participants
on a project. As discussed, retail construction projects have grown much
more complex over the years with many ‘moving pieces’ that have to fall
into place at exactly the right time. The same can be said for installers
of displays used in refurbishments and roll-outs. Since, in many cases,
merchandise cannot hit the shelf until the displays are in place, the timing of
the installation process is of the utmost importance. Accordingly, installers
need to be closely coordinated with the store managers, fixtures and / or
display manufacturers, and whoever is overseeing the project at the retailer’s
corporate level.
While there is a technical aspect to the installation business model, it is
important to note how these businesses have evolved over the years,
particularly as it pertains to installers with a focus on fixturing and displays.
In the past, successful retail installation companies consisted of carpenters
and craftsmen who were skilled at handling and installing millwork and
displays based on a variety of other materials. Now, however, the business
model has changed dramatically. In essence, the best installation firms are
now sophisticated logistics companies which are responsible for procuring,
warehousing, delivering and installing fixtures and displays from a broad
range of global sources.
Installation Services – Market Structure
The remainder of this
section is focused
on firms that install
fixturing and displays.
146
This section of our report will be focused on the installation firms that
concentrate on fixtures and POP displays (temporary and permanent). While
it is difficult to estimate with any precision, Lincoln estimates that retailers
and brand managers spend up to $2 billion each year on these types of
installation services. Of this total, we believe that approximately $1 billion
is attributable to the installation of fixtures and permanent POP displays.
The remainder is related to the delivery, installation and breakdown of
Fall 2008
temporary displays (sometimes this may also include filling the displays with
merchandise before they are delivered).
Like other segments of the retail services sector, the market for installation
services is also fragmented. While there are a handful of large firms that
have significant scale relative to their smaller competitors (i.e. DAVACO,
Footprint Retail, Marmon Retail Services, American Installation Companies),
the majority of competitors are significantly smaller and lack a nationwide
footprint. While there has been M&A activity in the space, most of the
larger players have grown organically as opposed to rolling up their smaller
competitors.
The mention of Marmon in the previous paragraph is important. Marmon
Retail Services is one of the nation’s largest store fixture and display
manufacturers. Through its acquisition of Alexander Otto in 2005, Marmon
reflected a trend among manufacturers to diversify their business models by
providing more value-added services, including installation. Other fixtures
manufacturers, including Leggett & Platt, Madix and idX, either have (or are
developing) their own installation capabilities. These captive installation
operations represent a competitive threat to independent installation
companies. That being said, the independents can mitigate that threat by
emphasizing the potential for conflict that exists with captive installers. Since
many of the larger installation companies provide a full range of services,
including sourcing, they can position themselves as ‘neutral’ parties who
are working for the best interests of the retail client. The captives, however,
are incented to offer fixtures and displays from their parent company even if
better value may be available elsewhere.
Many fixtures
and display
manufacturers have
also been providing
installation services.
The market for temporary POP display installation is also somewhat
different than fixturing and permanent POP displays. On the temporary
side, installation is often carried out by SMMAs, wholesalers and other
in-store merchandising companies. These firms have massive armies of
‘boots on the ground’ that are going into retail stores on a daily basis to
carry out a variety of store-level tasks. Delivering, assembling, stocking and
breaking down temporary POP displays is a natural service offering for these
companies to provide to their retail and brand management customers.
An important consideration in the installation industry relates to the manner
in which installation companies staff their projects. While some installers
maintain a team of W-2 employees to execute their projects, a number of
players in the industry operate under a different business model. Similar
to some of the SMMAs and sampling and demonstration companies, other
Fall 2008
Some firms maintain
W-2 employees while
others have built
broad networks
of installation
specialists.
147
Each approach has its
own pros and cons.
installation companies develop and maintain vast networks of independent
contractors who have specific product capabilities and are based in each
geographic region. When a new installation opportunity arises, these firms
will reach into their established network of service providers to assemble a
team that is best suited to execute that project. There are pros and cons
to each business model. Building a team of dedicated employees allows
for better quality control and coordination, but carries a significant cost in
terms of wages and benefits. The network staffing model is more difficult to
execute and carries more risk, but is also scalable and allows for a business
to minimize overhead in softer demand environments.
Installation Services – Drivers of Competition
Store design is driven by creativity. Store building is driven by an ability to
coordinate a wide range of contractors and service providers to complete
a project on time and under budget. So what differentiates a successful
installation company from the competition?
Reliability and Proven Ability to Execute Complex Roll-Outs:
Retailers and brand managers are depending on their installation
companies to get the job done, and done right, under extraordinarily tight
time constraints. Let’s discuss getting the job done right. Fixtures and
permanent POP displays can range in price from several hundred to several
thousand dollars. While some are made of rugged steel, many are made
of wood or are based on multiple materials that are expensive and prone
to damage. Poor installation can physically damage these costly displays
and undermine the working relationship between the retailer, the brand
manager and the display manufacturer. A damaged display can also result
in damaged merchandise and, in catastrophic cases, injury to employees or
shoppers. Retailers are looking to work with installers who they can rely on
to get the job done right.
A successful track
record of executing
complex roll-outs is a
must.
148
Successful installation firms also have a proven ability to execute complex
roll-outs across geographies under tight time constraints. Given that many
of these firms manage the entire display supply chain (in addition to just
installing the display), this means that they may need to procure displays
in China or elsewhere; ship them to warehouses in various regions across
the United States; assemble the displays and, in some cases, fill them with
branded product; wrap them and ensure that they are shipped to the
targeted stores at a specific time; and coordinate with the store managers
and retail executives to ensure that the displays are installed at the right
Fall 2008
point in the store and are in full compliance with the rules and regulations
of that location. This process would be difficult enough to execute
simultaneously with a handful of stores, let alone the hundreds (or potentially
thousands) of locations that must be managed in any particular program.
Installation firms have evolved into sophisticated logistics businesses.
Geographic Reach: As has been the case with most other segments of
the retail services industry, retailers are looking to partner with vendors and
service providers who have the ability to service their stores on a regional,
national and, in some cases, global basis. Installation companies that have
the ability to execute roll-outs across a broad geographic area are better
positioned to win business than their smaller competitors. In an effort
to address this issue, some smaller competitors have worked to create
partnerships (formal and informal) with installation service providers in other
geographic regions in an effort to provide greater geographic coverage to
retail customers.
Providing regional,
nationwide and global
coverage is becoming
very important.
Staffing: Installation service companies also struggle with the need to
recruit and retain qualified staff. Installation often requires a significant
amount of technical expertise – particularly when dealing with expensive
fixturing and multi-material permanent POP displays. Many installers are
highly skilled, accredited carpenters and craftsmen who are comfortable
dealing with expensive millwork in the field. Retailers will always favor those
installation companies that have a deep bench of qualified installation
professionals.
Operating-Level Retail Relationships: A final driver of competition in
the installation market relates to operating-level retail relationships. The
best installation companies maintain multiple relationships within any
retail organization. The most successful, however, have solid working
relationships with store managers and have an exceptional understanding
of the rules and regulations that govern the use of displays within that
particular retail location. Maintaining these relationships and store-level
knowledge represents a significant competitive advantage for successful
retail installation companies.
Fall 2008
Understanding the
rules and regs of each
store is crucial.
149
Retail Design, Build and Installation – Growth Opportunities
“...Stores feeling special and custom are definitely offering the
best customer experience...it makes the merchandise look and
feel more special...”
Christine Belich, Executive Creative Director, Sony Style219
Despite near-term
difficulties, the longterm outlook is
bright.
Despite the near-term difficulties that the retail industry is facing, we believe
that demand for store design services will be robust in the coming years.
Specifically, there are several identifiable growth opportunities that retail
design, build and installation firms are likely to pursue.
International Growth Opportunities: The retail industry is growing at
a rapid pace in developing markets around the globe. As countries such
as China and India continue to industrialize, expand the size of the middle
class and improve the overall standard of living of their citizens, the demand
for retail stores will certainly increase. This will, in turn, lead to a significant
acceleration in demand for retail design, build and installation services.
As U.S. retailers look
overseas for growth,
DBI firms will do the
same.
An increasing number of major U.S. retailers are looking abroad for growth
opportunities – particularly given the difficult domestic economy at this
point. As they look overseas for growth, many retail design firms are
beginning to do so as well. As is the case in other segments of the retail
services industry, we believe that U.S. retailers would prefer to deal with their
existing service providers in global markets as well – provided they have the
ability to provide a level of service that is comparable to that offered in the
United States. This is particularly true for design firms. There is a perception
in the retail industry that the quality of foreign design firms is not always at
the same level as that found in the U.S.
It should also be noted, however, that one of the greatest challenges for
U.S. design companies doing business in foreign countries is trying to
embrace the local culture:
“...The biggest challenge to designing in a foreign country
is not the language barrier or currency exchange, but
the understanding of the culture and not trying to overly
Westernize everything...”
Darrell Pattison, Chief Strategic Officer, KA Architectures220
While it may not be accurate in all cases, we believe that most U.S. retailers
will attempt to modify their concepts to better suit the demands and
219 “The Economic Factor.” Display & Design Ideas. November 2007.
220 Sway, RoxAnna and Brown, Rachel. “Retail Expansion Continues.” DDI Magazine.
March 2007.
150
Fall 2008
sensitivities of the local marketplace. Most will follow the lead of companies
such as France’s Carrefour, one of the early movers into China’s retail
market. When Carrefour first moved into China, it made the strategic
decision to maintain the same store size that it had developed in other
markets. However, local management allocated more space for bulk
products and snack foods, and they also stocked fresh fish given Chinese
shoppers’ preference for purchasing live seafood. Additionally, they made
an effort to allocate a large share of parking spaces for bicycles given how
few Chinese consumers were driving automobiles at that point.221
As reflected in the table on the right, many U.S. retail
design firms have already been pursuing opportunities
in foreign markets. Only 28 percent of the design firms
surveyed in the DDI Design 100 report do not currently
work on projects outside of the United States. Of those
that do, 39 percent conduct up to 10 percent of their
work outside of the United States, and 10 percent of
firms conduct 25 percent or more of their work offshore.
By offering their services to clients on a global basis,
retail design firms will be able to diversify revenue
across numerous countries and regions, alleviating risks
associated with downturns in any one market.
Store design firms
will cater the retail
experience to the
local market.
Global Reach of Design Firms
Country
% of Design
Firms Active
Canada
28
Caribbean
28
China
28
Mexico
26
South America
26
Dubai, U.A.E.
23
Southeast Asia
21
United Kingdom
20
Continental Europe
19
Gensler has been working to establish itself as one of
India
19
the premier U.S. design firms in China. In February 2008,
Other Middle East
19
Gensler was selected by Shanghai Greenland Group to
South Korea
12
design the Greenland Luwan Project in Shanghai. The
Saudi Arabia
11
2.9 million square foot mixed-use project, which will
Hong Kong
10
include office, retail, residential and hotel space, is a high
Japan
9
profile development in China and one of the largest to
Russia
9
be designed by a U.S. firm. WD Partners, the second
Australia / New Zealand
6
largest design firm in terms of retail billings, opened an
office in Mumbai in May 2007. The Mumbai office will
assist global retailers seeking to expand in India, as well as target multi-unit
Leading design firms
Indian retailers to grab a slice of the expanding Indian retail market. We
have already planted
believe that international growth will continue to represent an outstanding
the flag overseas.
opportunity for U.S. retail design firms in the years to come.
It is interesting to note that the top retail construction and installation
firms do not seem to have been active in international markets. In fact, of
221 Lannes, Bruno and Li, Jerry and Charveriat, Stephanie. “China’s Great Retail Race.” Far
Eastern Economic Review. July 18, 2008.
Fall 2008
151
Retail construction
and installation firms
have been slower
to look abroad for
opportunities.
the top ten retail contractors, only Skanska (which is a Swedish company)
and Graycor have any international offices (and Graycor’s international
operations, which are based in Mexico, do not seem to be doing any retail
work). Frankly, we believe that it is much easier for design firms to establish
an overseas presence than it is for a builder or an installation company.
Given the extent of the building opportunity that existed in the U.S. over the
past decade, general contractors and installers had more than enough work
to do domestically. However, the current economic environment and the
increasing focus of U.S. retailers on overseas growth will make them rethink
their international strategies. That being said, given the local complexities
and regulations (not to mention relationships) involved in executing a
retail construction project in foreign markets, we believe that U.S. general
contractors may be more successful in pursuing a joint venture or an
acquisition of a local player. Regardless of the tactic, we believe that U.S.
retail construction companies will ultimately look to faster-growing global
markets to compliment their existing domestic business.
Brands will continue
to open their own
stores, creating
opportunity for DBI
firms.
Work Directly with Brands to Develop Retail Stores: In a retail
environment in which consumers are confronted with a seemingly endless
number of product choices, some branded consumer products companies
have chosen to establish a dedicated retail footprint. Having tired of
seeing their products placed next to those of a competitor or private label
brands; of lacking control over in-store pricing decisions and promotional
displays; and not having direct touch points with the consumer, these
companies decided that controlling the retail channel provides a number
of tangible benefits and, if done successfully, significantly strengthens
their brand. Opening retail stores allows these companies to create a
welcoming environment that is best suited to market their products, to
control and optimize the customer shopping experience and, ultimately, to
enhance brand identity and customer loyalty. While we realize that some
consumer brands have had dedicated retail stores for many years (Coach
serves as an outstanding example), it is our view that this trend has been
gaining significant momentum in recent years due to some high profile
success stories.
“The stores have been super successful and a real contributor
to Apple’s success. It’s bringing a whole new generation of
customers to Apple and the Mac, and that’s really important to
us...”
Steve Jobs, CEO, Apple222
222 “Apple Sets the Standard for Retail Therapy.” The Age. March 19, 2006.
152
Fall 2008
Industry observers often joke that electronics stores are candy stores for
adults, but consumer electronics manufacturers are taking this assertion
seriously. Capitalizing upon the consumer’s need to test a product before
making a costly purchase and the natural appeal of playing with the newest
gadget, manufacturers of computers, audio / video devices and cell phones
are offering their own sandbox for people to play in. These stores are built
around the company’s products, facilitate the consumer education process
and provide a comfortable, home-like environment to prompt the purchase
impulse. Several consumer electronics companies have determined that it
is much more effective to exhibit advanced product capabilities in a store
environment created and controlled by the manufacturer and to staff it with
representatives who are trained to have detailed knowledge on the latest
offerings. Consequently, brand-specific electronics stores appear to be on
the rise and, if their initial success continues, they may be more than just a
showcase but an important component of the overall brand strategy.
Apple has been one of the industry’s biggest success stories, evolving
from a single-product personal computer manufacturer to a multi-faceted
consumer brand. Since opening its first retail store in 2001, the company
has not looked back on its decision. Their well-conceived store design and
exceptional consumer focus is a major reason for the success of these stores.
Anyone who has been to an Apple store can attest to the fact that the
environment they have created strengthens the company’s corporate image.
The aesthetically simplistic, spacious, and welcoming stores are an extension
of what the company markets to consumers through their TV commercials
and print ads. In many respects, Apple has successfully replicated the
Starbucks model – creating an environment in which the consumer feels
comfortable ‘hanging out’ and spending time in addition to money. They
can freely use and test Apple’s latest product offerings, surf the web and sit
in for product tutorials. The visual displays and fixturing reflect the design of
the products themselves – modern, clean, simple, and efficient.
We believe that brands opening dedicated retail stores will continue to be
a growth opportunity for retail design, build and installation firms in coming
years. In many respects, brands are the ideal customers for retail design
firms. They understand better than many traditional retailers that the store
is an expression of their brand identity, and are willing to invest to ensure
that the stores are as visually appealing as possible. Similarly, construction
quality is of the utmost importance – shoddy materials and construction
or installation quality will completely defeat the purpose. We believe that
more brands will follow in Apple’s footsteps and that retail design, build and
Fall 2008
The Apple stores
reflect the creativity
that brands can
bring to the retail
environment.
High quality brands
need high quality
design, construction
and installation
services.
153
installation firms stand to benefit.
“I thought GE was big. But Wal-Mart? Whoa, that’s big…”
Alyson Slater, Global Reporting Initiative, on Wal-Mart’s
energy efficiency initiatives223
Retailers have
discovered that
going green helps
their brand and their
bottom line.
While it’s still early,
the nation’s leading
retailers are making
green a priority.
The Green Retail Movement: As consumers grow increasingly conscious
of environmental concerns, many are beginning to factor these concerns
into their purchase decisions. Accordingly, it is not surprising that many
retailers are responding by implementing a range of environmentallyfriendly initiatives. Becoming more sensitive to environmental issues can
do much more than just bolster a retailer’s image in the community. In fact,
it is now becoming apparent that ‘going green’ can also have a positive
impact on the bottom line. The sooner retailers explore and implement
environmental alternatives, the better positioned they will be to reduce
operating costs and benefit from being eco-friendly.
Though still in the early stages, there is growing evidence that retailers are
building stores that are more environmentally friendly. Store design and
construction teams are beginning to make use of energy efficient equipment
and fixtures that are derived from recycled materials. Generally speaking,
going green means that retailers are focusing on design and construction
practices that deal with water and energy efficiency, conservation of
materials and resources, and sustainable site planning.224 Currently, some
of the nation’s largest retailers are leading the charge, using their size, scale
and influence over the supply chain to spread the high costs of going green.
“We all have an opportunity to be more sustainable, but even
more, we have a responsibility...”
H. Lee Scott, President & CEO, Wal-Mart Stores Inc.225
What makes a building green? In order to be designated “green,” buildings
must be evaluated by either Energy Star or Leadership in Energy and
Environmental Design (“LEED”). Energy Star, which is a joint program of
the U.S. Environmental Protection Agency and the U.S. Department of
Energy, focuses on energy efficient products and practices, and rewards
the top 25 percent most energy-efficient buildings in the nation.226 In
order for buildings to earn the Energy Star designation, they need to use
approximately 35 percent less energy than the average building.
223 Barbaro, Michael and Barringer, Felicity. “Wal-Mart to Seek Savings in Energy.” New
York Times. October 25, 2005.
224 “2007 Green Building Survey.” National Real Estate Investor. November 2007.
225 “Sustainability 360: Doing Good, Better, Together.” February 5, 2007.
226 Ibid.
154
Fall 2008
“[Green initiatives have] been bubbling below the surface, and
it’s reached a critical mass within the [retail] industry. But
there’s still a long way to go, considering the millions of square
feet of retail space out there built 20 or 30 years ago...”
Ken Jeffreys, International Council of Shopping Centers227
Among the 100 largest retailers in the U.S., an impressive 83 percent are
now involved in green practices of one form or another. A total of 62
percent of those have increased their green investments during the past
two years. Among those retailers involved with green practices, 34 percent
are pursuing internal activities (environmentally modifying operations and
structures) exclusively while nine percent are focused solely on external
practices (selling green products).228
Of the top 100
retailers, 83% are
implementing green
practices of one form
or another...
Two of the largest retail chains, Target and Wal-Mart, have already made
significant headway with regard to their environmental initiatives. Target
is in the process of launching two store prototypes that are green certified.
Sustainable design features include: low-flow fixtures in the rest rooms
that reduce water usage by 30 percent and HVAC systems that cut energy
usage by 30 percent. Additionally, 75 percent of construction waste will be
recycled or salvaged and more than 55 percent of construction materials will
be manufactured using raw materials from within 500 miles of the project
site.229 Wal-Mart opened the first of a new generation of energy-efficient
super-centers in January 2008. The store is expected to cut energy use by
approximately 25 percent compared to regular super-centers. The store will
use new refrigeration and other technologies to improve on the 20 percent
energy savings of Wal-Mart’s first generation High Efficiency Stores, or HE 1,
that opened in 2007. The HE 1 stores included heating and cooling systems
that recycled heat from refrigerators and freezer cases, and higher-efficiency
LED lights and sensors that turn off those lights when customers are not
around.230
...including Wal-Mart
and Target.
Clearly retailers are becoming more environmentally aware to bolster
their image in the marketplace. However, there are also tangible financial
benefits to doing so. First, as discussed with regard to Whole Foods and
other organic food retailers, many consumers are willing to pay a premium
227 Stribling, Dees. “Green Design Goes Mainstream.” National Real Estate Investor. May
1, 2007.
228 “Retailers Embracing Green Practices, According to New Survey.” Facilities
Management Link. October 3, 2007.
229 Vomhof, John. “Target’s Future Stores Will be Bigger, Greener.” Minneapolis St Paul
Business Journal. February 8, 2008.
230 “Wal-Mart Introduces Energy- Efficient Stores.” Cbs2Chicago.com. January 15, 2008.
Fall 2008
155
Many shoppers have
proven that they’re
willing to pay more
for a green shopping
experience.
for a more environmentally friendly shopping experience. Second,
going green can result in significant cost savings. According to a recent
survey, a grocery store that reduces energy costs by 10 percent through
the installation of more efficient lighting and cold fixturing can enhance
operating profit margins by as much as six percent.231 These savings can
be bolstered by an attractive array of tax credits that are now offered by
many states. Whether retailers are being driven by concerns about their
corporate image or the pursuit of environmental tax credits, the end result is
a significant green movement that is taking place in the retail industry.
“GREEN” DESIGN OPPORTUNITY
IS GROWING
(% of Respondents)
100%
80
60
100%)
40
79%)
20
35%)
37%)
0
Firms w/ Green Projects
Small Design Firms
Source: AIA
Green as % of Total Projects
Large Design Firms
We believe that this growing retail green movement
translates into a substantial growth opportunity for
retail design, build and installation firms. In terms of
design, retailers require a great deal of education and
‘hand holding’ as they begin to contemplate more
environmentally friendly stores. From energy efficient
lighting to fixturing made from recycled materials, the
range of options is large and confusing and retailers
are relying on their design firms to provide them with
guidance. Similarly, the rules and regulations involved
in securing LEED and other environmental certifications
are confusing and difficult to comply with. Accordingly,
retail builders who have invested to develop relevant
expertise will be exceptionally well-positioned to
work with retailers as they enhance their green store
credentials.
“Grocery retailers answered the call to build bigger, more
efficient one-stop shops where their customers could buy
merchandise and groceries in the same place. Now, the
pendulum seems to be swinging back, as consumers are saying
they prefer more intimate, smaller, customized grocery stores.”
Susan Reda, Executive Director, National Retail Federation’s
Store Magazine232
Is big really beautiful
anymore?
New Store Formats: Another recent development in the retail industry
relates to the introduction of new, and typically smaller, store formats. There
are three reasons for this movement. First, while the era of the big-box
may not be coming to an end, it is certainly getting tired. Accordingly, in
231 Rygiel, Larry. “Serious Reductions in Energy Costs Require Gathering, Analyzing Data.”
Retail Construction. Jan/Feb 2007.
232 Lukovitz, Karlene. “Retail Food Formats: Bigger Isn’t Necessarily Better Anymore.”
Marketing Daily. March 7, 2008.
156
Fall 2008
an effort to differentiate themselves retailers are working hard to roll-out
new store concepts that are more ‘personal and inviting’ to the shopper.
Second, smaller store sizes are also being influenced by the success of
similar concepts overseas. Tesco’s move into the U.S. with the introduction
of its Fresh & Easy concept, which has stores that typically have only 10,000
square feet of selling space, has sparked similar steps by Wal-Mart and other
competitors. Third, smaller footprints are also a response to expensive
real estate and a move by the suburban big-box retailers (who have picked
over most of the prime suburban locations) into more congested urban
environments.
In an effort to
differentiate, retailers
are devising new
store formats that
stand out from the
crowd.
“...We’re consciously choosing not to pull back on our
investments, even in a difficult economy, because we are
making the bet that the opportunities are rich, over the
long term. When the U.S. economy regains its momentum,
we believe that our results will show these to be good
investments...”
Brad Anderson, Chief Executive Officer, Best Buy233
Food retailers are not the only ones moving towards smaller store
footprints. For example, Circuit City is adding smaller-scale “The City”
stores; JCPenney is trying smaller, off-mall shops; and Best Buy is opening
new locations that are up to 40 percent smaller than its current stores.234
In addition, Tiffany & Co. announced in February that they will test a new
concept store in Glendale, CA. This store will be only 2,600 square feet, a
fraction of Tiffany’s traditional 7,100 square foot locations. This move has
the potential to “significantly accelerate U.S. sales growth over the medium
to long-term and enhance profitability.”235 Not only do these small footprint
stores create a more intimate environment for consumers, but they also
provide financial benefits such as lower inventory requirements.
Even big-box retailers
are moving towards
smaller boxes.
While the stores may be smaller, we believe that retail design, build and
installation firms stand to benefit from this trend. First, all new store
growth is good for the industry, even if they have smaller square footage.
Second, designing and building these stores will require a great deal
of creativity. Smaller stores will need to be designed to conform with a
retailer’s merchandising strategy (fit more product into less space while, at
the same time, creating a comfortable and enjoyable shopping experience).
Additionally, some of the new stores will be in unique and difficult locations
233 Hazel, Debra. “Best Buy US Stores to Pass 1,000.” GlobeSt.com. February 18, 2008.
234 Reda, Susan. “Eight Predictions for ’08.” Stores Magazine. December 2007.
235 Earnest, Leslie. “Tiffany Will Try Out Smaller Store Concept.” Los Angeles Times.
February 29, 2008.
Fall 2008
157
These new retail
formats represent an
opportunity for DBI
firms.
(i.e. on congested Manhattan streets with tough permitting requirements)
relative to those that the retailer’s store design and construction teams
are accustomed to. Accordingly, they are going to turn to design, build
and installation firms that have a proven ability to execute under those
circumstances. In short, retailers will likely need more help rolling out these
stores than they do with their standard template and that represents an
opportunity for design, build and installation players.
Retail Design, Build and Installation – Threats and Concerns
While we believe that there are significant opportunities for growth in the
design, build and installation sector, there are also a number of concerns
that firms (and investors) in the space must address.
Clearly a weak
economy pressures
DBI firms as well.
200
Economic Uncertainty: There is not much more for us to say about the
impact that a weak economy will have on retail. While design firms and
builders may not have felt the full impact of the downturn yet due to the
timing of project backlogs, there is not doubt that the soft economy has had
a negative impact on business. Retail is a cyclical industry, and construction
is a cyclical segment of a cyclical industry.
HISTORICAL ALUMINUM PRICES
(Three Years)
180
160
140
120
100
Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr
2006
2007
2008
Source: Department of Labor, Primary Aluminum Data, Indexed
Raw Materials Pricing: A major threat to retail
construction companies is the potential resumption of
rising commodity costs. Increasing commodity prices
have had a meaningful impact on overall construction
costs and have influenced the build- or not-build
decision making process that retailers are currently
going through. Raw materials inflation has impacted
every aspect of the store construction process. Cemex
has announced a 20 percent increase in the price of
their concrete; steel (and rebar) prices continue to sit
at historic levels despite a weakening U.S. economy;
and aluminum prices have also contributed to the
increasing cost of erecting the shell. Store fixturing,
storage products, cash wraps and other interior
structures have also risen in price significantly over
the past two years, driving up the overall construction
cost.
Rising commodity prices are detrimental for two reasons. First, the rising
cost of construction may lead retailers to cut back their store build and
158
Fall 2008
refurbishment schedules even more aggressively.
Fewer store openings and refurbishment projects
will have a negative impact on store design, build
and installation firms. The second reason has a
more direct and severe impact on some of the retail
builders. While many retail construction contracts
include price escalation clauses that protect against
further increases in key commodity costs, many
subcontractors have been unable to pass on the rising
prices to their clients and have therefore seen their
margins impacted in a meaningful way.236
300
HISTORICAL STEEL PRICES
(Three Years)
260
220
180
140
We do, however, believe that there is a silver lining for 100
Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr
retail design, building and installation firms. Just as
2006
2007
2008
Source: Department of Labor, Steel Mill Products Data, Indexed
they have been pursuing opportunities to help their
clients become more environmentally sound, design,
DBI firms are working
build and installation firms are also working diligently to ensure that the
designs and construction processes make the most expeditious use of costly with their clients to
mitigate the cost of
commodities as is possible. That being said, there is no doubt that rising
raw materials price
commodity prices pose a threat to the industry overall.
“...The construction industry is a people business, and finding
skilled trades and technical people is going to create a real
dilemma in the future...When subcontractors need to beef up
because they are behind, they can’t find the skilled people to do
it...”
Jim Sattler, Chief Executive Officer, EMJ237
Recruiting and Retaining the Best People: Another concern for retail
design, build and installation companies is their ability to attract, recruit and
retain motivated, talented and commercial-minded employees. According
to the a recent AIA survey, 21.6 percent of design firm respondents stated
that attracting qualified new staff was one of their key concerns for 2008.238
Design firms compete vigorously against one another for top architectural
talent. Those firms that are able to attract and retain the top performers will
be much better positioned than those competitors who have a shallower
bench of qualified professionals. That being said, hiring those people and
inflation.
Hiring and retaining
the best people is
always a challenge.
236 Harvey, Ian. “Canadian Construction Industry Steels Against Rising Rebar Prices.”
Journal of Commerce: Western Canada’s Construction Newspaper. August 18, 2008.
237 Op. Cit., Mattson-Teig.
238 Zeballos, Isabel. “The Looming A/E/C Workforce Shortage.” Society for Marketing
Professionals Services. August 2007.
Fall 2008
159
keeping them aboard can require a substantial investment.
The downturn
in residential
construction has
eased the pressure
somewhat.
Similarly, retail builders and installation firms have also had a difficult
time hiring enough of the best people. While the downturn in residential
construction has loosened the supply of qualified laborers, those with strong
expertise in specific specialties can still be difficult to find and retain. As
is the case in any professional services industry, successfully managing the
workforce in the retail design and construction business is a primary concern
for business owners, operators and investors.
Retail Design, Build and Installation – Competitive Landscape
The following tables reflect some of the key competitors in each of the
segments discussed.239
Selected Participants in the Retail Design Industry
Company Name
Retail Billings
Company Name
Retail Billings
Callison
$85
MCG Architecture
$26
WD Partners
$75
Little Diversified
$25
Jacobs Carter Burgess
$70
ka Architecture
$19
MulvannyG2 Architecture
$64
Arrow St.
$15
Gensler
$55
Tricarico Architecture
$14
MBH Architects
$47
Herschman Architects
$12
Perkowitz + Ruth
$46
Shive-Hattery
$11
FRCH Design
$45
C.M. Architecture
$10
Pavlik Design
$37
Bergmann Associates
$10
MillerZell
$34
Continuum
$8
239 Source: Lincoln International; DDI Magazine; Retail Construction Magazine; NARMS.
160
Fall 2008
Selected Participants in the Retail Building Industry
Company Name
Retail Billings
Whiting-Turner
Company Name
Retail Billings
Hoar Construction
$246
EMJ
$844
John S. Clark
$236
Walton Construction
$750
Pepper Construction
$229
VCC
$710
Weis Builders
$226
Shawmut Design & Const.
$495
White-Spunner
$201
R&O Construction
$425
Konover Construction
$199
S.D. Deacon
$364
Hawkins Construction
$193
Graycor Construction
$346
Rockford Construction
$190
Skanska USA
$324
Structure Tone
$189
Hardin Construction
$280
Brasfield & Gorrie
$187
$1,156
Selected Participants in the Retail Installations Industry
Company Name
Website
Company Name
Website
Alexander Otto
aoinstall.com
Nationwide Retail Services
nationwideretailservices.com
American Installation Cos.
americaninstallationcompany.com
National Mktg Services
natlmktg.com
Beam Team
thebeamteam.net
Prime Retail Services
primeretailservices.com
BrandPartners
brandpartners.com
Prism Retail Services
prismretailservices.com
Chandler Group
thechandlergroup.com
Quest Service Group
DAVACO
davacoinc.com
Rhodes Retail Services
rhodesretail.com
Diamond Retail Services
diamondretailservices.com
Store Opening Solutions
storeopeningsolutions.com
fprs.com
Tab Merchandising
tabmerchandising.com
Get Set Services
getsetservices.com
The Guyan Group
guyangroup.com
Mallard Group
mallardgrouplp.com
The Set Up Group
thesetupgroup.com
Retail Design, Build and Installation – The Private Equity Play
As is the case with every segment of the retail services industry, we believe
that there is substantial opportunity for private equity firms to find profitable
investment opportunities in the design, build and installation segment.
There have been several private equity firms that have made investments
in the sector to date. Blue Point Capital made an investment in Callison;
Rosewood made a minority investment in DAVACO; Chicago Growth
Partners has an investment in Footprint Retail Services; and Goense Bounds
has an investment in CrossCom National. Each of these investors will seek
Fall 2008
161
liquidity at some point, creating new opportunities for private equity firms to
pursue an investment in these businesses.
Growth, as opposed
to leverage, will drive
returns on designrelated investments.
Retail construction
has not attracted
much private equity
interest to date.
A private equity firm will view each of the three categories in different
ways. In terms of design, we believe that a private equity firm investing in a
design company can profitably pursue a strategy of growth and geographic
diversification. The large firms will get larger in the design space for
reasons already discussed and, if partnered with a private equity firm with
sufficient resources, we believe that the leading players in the industry can
expand their U.S. market share significantly. In addition to penetrating
new retail accounts and expanding their suite of service offerings, these
firms have an opportunity to establish a presence in each of the core cities
in the U.S. Doing so will allow them to attract the best local talent and
strengthen relationships with the leading retailers in that geographic region.
Additionally, growth can be accelerated by making a larger investment in
the design firm’s international capabilities. While returns on a private equity
investment in a design firm will not be driven by heavy leverage, we feel
that the growth opportunities that lay ahead and the potential for multiple
arbitrage as the business gains scale will push IRRs to very attractive levels.
As best as we can tell, private equity firms have not been active in the
retail construction sector. The leading retail construction firms tend to be
large, privately-owned businesses that seem to have either stayed in the
family or attracted strategic interest if they hit the market. Construction is,
in our mind, a more difficult private equity play than design or installation.
Construction firms are the most cyclical of the group, making it more difficult
to put significant leverage on the balance sheet to facilitate a transaction.
Specific bonding requirements may further limit the amount of financing
that may be available for a deal. To the extent that a private equity firm did
make an investment in the space, we believe that an international growth
strategy may be a logical part of the investment thesis. U.S. retailers are
taking steps to expand abroad and, in our view, would be open to working
with their domestic construction firms to the extent that they were able to
establish their international capabilities.
Installation has been a more active area of private equity activity in recent
years and we would expect this trend to continue. The installation industry
has a number of attributes that should appeal to a private equity firm. The
market remains fragmented; retailers and brand managers are looking
for players with scale and the resources to weather good markets and
bad; there are a number of impressive, aggressive and growth-oriented
management teams that are determined to expand their national footprints;
162
Fall 2008
and many segments of the installation business should be less cyclical than
the design and build segments (particularly those that are focused on POP
displays). We would expect to see significant private equity interest in the
space as new installation opportunities hit the marketplace.
Fall 2008
Installation fits the
bill for private equity
on many levels.
163
Retail Service Company Summaries – Alphabetical Index
164
Company Name
Page
Company Name
Page
Acosta
166
Mass Connections
204
Adspace Networks
167
206
Advantage Sales & Marketing
169
207
Affinion
170
N.E.W. Cust Svcs / Asurion
208
Allied Security Holdings
171
PlayNetwork
211
Andrews International
173
Premier Card Solutions
212
Bozzuto’s
174
213
Callison
175
PRN Corporation
215
Catalina Marketing
177
PromoWorks
217
CBS Outernet
178
RGIS
219
CPI Card Group
180
SAJO
220
CrossCom National
182
SeeSaw Networks
221
CROSSMARK
183
Service Net Solutions
223
DAVACO
184
Sperry & Hutchinson
224
Daymon Worldwide
186
Storeimage
225
Driveline Holdings
187
Stratmar Systems
226
dunnhumbyUSA
189
The National Print Group
227
Fair Isaac Corporation
191
The Sunflower Group
228
FMW Inc.
192
The Warranty Group
229
193
United Natural Foods
230
Gensler
194
U.S. Security Associates
232
Global Compliance Solutions
195
Vesdia Corporation
233
Groupe Aeroplan
196
Vestcom International
234
InStore Broadcast Network
198
Vomela Specialty
236
IPC International
199
Warehouse Demo Services
237
Johnson O’Hare Food Brokers
200
Warrantech
238
Maritz
201
Whiting-Turner Construction
239
Market Force Information
203
WIS International
240
-
Fall 2008
Retail Service Company Summaries – By Segment Index
Company Name
Page
Company Name
Page
In-Store Mkt / Sampling &
Demo (Con’t)
Sales, Mkt & Mrchdising Agencies
Company Name
Page
Loyalty Program Service
Providers
Acosta
166
PromoWorks
217
Affinion
170
169
RGIS
219
Catalina Marketing
177
Bozzuto’s
174
Storeimage
225
CPI Card Group
180
CROSSMARK
183
Stratmar Systems
226
dunnhumbyUSA
189
DAVACO
184
227
191
Daymon Worldwide
186
The Sunflower Group
228
Groupe Aeroplan
196
Driveline Holdings
187
230
Maritz
201
200
234
212
206
Vomela Specialty
236
Sperry & Hutchinson
224
207
237
Vesdia Corporation
233
213
WIS International
240
RGIS
219
230
Retail Media Networks
WIS International
240
Adspace Networks
In-Store Mkt / Sampling & Demo
Warranty Service Providers
N.E.W. Cust Svcs / Asurion
208
167
223
CBS Outernet
178
The Warranty Group
229
FMW Inc.
192
Warrantech
238
Acosta
166
InStore Broadcast Network
198
169
PlayNetwork
211
Retail Sercurity Services
Bozzuto’s
174
PRN Corporation
215
171
Catalina Marketing
177
SeeSaw Networks
221
173
CROSSMARK
183
IPC International
199
Daymon Worldwide
186
Mystery Shopping
232
Driveline Holdings
187
Global Compliance Solutions
195
FMW Inc.
192
Maritz
201
Design, Build & Install
200
203
Callison
175
203
Mass Connections
204
CrossCom National
182
Mass Connections
204
PromoWorks
217
DAVACO
184
206
Stratmar Systems
226
193
207
Gensler
194
213
207
SAJO
220
Storeimage
225
239
Fall 2008
165
Company Summaries
Acosta Inc.
Headquarters: Jacksonville, Florida
Revenue: Estimated at $900 million240
Ownership: Privately Held – Private equity investment by AEA Investors
Chief Executive: Gary Chartrand
Categories: Sales, Marketing & Merchandising; In-Store Marketing
Key Services: Headquarter sales; in-store merchandising (resets, cut-ins, etc);
category management (planograms, etc); retail software solutions; event
marketing (retailtainment); sampling and demonstration services; consumer
marketing services (creating marketing campaigns); staffing solutions;
display set-up / installation; remodels / new store openings
Acosta is one of the
largest retail services
companies in the U.S.
Acosta has acquired
13 companies since
2004.
Founded in 1927 and based in Jacksonville, Florida, Acosta is one of the
largest retail services companies in North America and employs more than
11,000 workers. The company claims to represent more top brands than
any other sales and merchandising company, servicing approximately
1,300 manufacturers in total. The company provides sales, marketing
and merchandising support both domestically and internationally across
multiple channels including grocery, mass, club, drug, convenience, extreme
value, fresh foods, ethnic and natural / specialty. In addition, Acosta offers
headquarter selling services; retail sales support; category management
services such as pricing and ad tracking; as well as syndicated data analysis;
space technology services that utilize proprietary software to ensure ideal
placement of products on store shelves; and sales support such as customer
service and contract processing.241
Acosta has been viewed as a consolidator in the retail services space, as they
have acquired 13 companies since January 2004. Moreover, the company
continues to enter new markets. For instance, Acosta management
has identified fresh foods as an area of growth. In March 2007, Acosta
accelerated its push into fresh foods with the acquisition of Crawford &
Company Brokerage, Impact Food Sales, and Amalgamated Brokerage
240 Basch, Mark. “Acosta Exploring Financial Options.” The Florida Times Union, May 10,
2006. This article cited Florida Trend Magazine as stating 2005 revenue was $730
million. Based on that figure, we assume a current revenue number of $900 million.
241 Acosta website.
166
Fall 2008
Corporation. In fact, seven of the 13 acquisitions completed since 2004 have
been focused on the fresh foods sector.242 Furthermore, in December of
2006, the company expanded its existing portfolio of organic and natural
food products by entering into an agreement with Amish Naturals, a
manufacturer of premium, organic, Amish-produced foods, to market and
sell their product to major food retailers.243 Earlier this year, the company
continued its acquisition strategy and strengthened its position in the
drug channel with the purchase of Hynes, a sales and marketing agency
specializing in selling into the drug, grocery and mass channels.244 Acosta
also acquired Norfolk, Virginia-based C. Lloyd Johnson Company. This
acquisition marked Acosta’s first foray into the military services channel.245
Acosta continues to be privately held. In February 2003, private equity
firm Berkshire Partners infused $150 million into Acosta to facilitate a
recapitalization.246 In June 2006, Acosta sold an unspecified stake to AEA
Investors at an implied enterprise value of $1.5 billion – 10 times estimated
EBITDA of $157 million.247 Berkshire Partners is no longer an equity holder
in the company. Based on a 2005 revenue estimate of $730 million, we
would expect annual revenue to now be approximately $900 million.
AEA Investors made
an investment in
Acosta in 2006.
Adspace Networks, Inc.
Headquarters: San Francisco, California
Revenue: Nearly $20 million, goal of $100 million over next few years248
Ownership: Private equity investment by AIG Capital Partners, Allen & Co.,
Amicus Capital, Angel Investors LP, Doll Capital Management, GIC Special
Investments, Steelpoint Capital Partners, The Hauser Davis & Tysoe Group,
The Walnut Group, TWB Investment Partners
Chief Executive: Dominic Porco
Adspace is the largest
in-mall digital video
advertising network
in the country.
Categories: Retail Media Networks
Key Services: Digital media networks; creative services
242 “Acosta names Jack Laurendeau Vice Chairman.” Progressive Grocer. March 5, 2007.
243 “Amish Naturals Inc. – Signs Sales & Marketing Agreement With Acosta’s – National/
Speciality Sales.” Market News Publishing. December 19, 2006.
244 “Acosta Announces Acquisition of Hynes Inc.” Acosta Press Release. February 2008.
245 “Acosta Acquires C. Lloyd Johnson Co. Inc.” Acosta Press Release. March 31, 2008.
246 Berkshire Partners website.
247 Biswas, Soma. “AEA rings up Acosta.” The Deal. June 12, 2006.
248 Monk, Dan. “Digital Screens Sell Ad Messages to Kenwood Shoppers.” Business
Courier (Cincinnati). July 21, 2008.
Fall 2008
167
The Adspace network
exposes more than
100 million mall
visitors to a six
minute programming
loop.
Adspace raised a
$20 million venture
capital round in 2007.
Headquartered in New York, New York, Adspace Networks operates the
Adspace Media Network, the largest in-mall digital video advertising
network in the country. The Adspace network consists of more than 1,400
digital displays and plasma screens in more than 100 malls and theatres in 39
cities across the United States. Each mall typically has 13-15 smart screens
located in the highest traffic areas, and each mall installation typically
costs $250,000. Management claims that the network exposes more than
100 million mall visitors to a six minute programming loop that is a mix of
consumer content and advertising messages. The content is anchored by
what the company calls, “Today’s Top Ten,” a twelve second ad showcasing
the current sales and promotions from ten different retailers located in that
specific mall. For mall operators, the digital media network provides an
enticing additional stream of revenue. Typically, Adspace pays the mall
operator a flat rental fee plus a percentage of advertising revenue generated
at each location.249 According to the Adspace website, in a 2007 study
conducted by Nielsen Media Research, Adspace’s in-mall advertisements
were viewed by 47 percent of mall shoppers and average commercial recall
was an impressive 34 percent. Additionally, shoppers viewed the Smart
Screens an average of 3.3 times per visit with an average total viewing
time of 1.9 minutes (or 114 seconds). Consumers were exposed to almost
three ad spots per view during that duration.250 Advertisers on the network
have included leading brands such as Adidas, the Coca-Cola Company,
Interscope Records, Lions Gate Entertainment, Macy’s, MTV, Sony Sprint,
Verizon, Victoria’s Secret, and the U.S. Navy. Advertisers pay up to $15,000
per month to advertise on the Adspace network.
The company continues to expand its network of screens. In January 2008,
the company extended its current relationship with one of the country’s
largest mall and shopping center operators, CBL Properties, to install
Adspace digital displays at 67 CBL properties across the country.251 In
August of 2007, the company received $20 million in additional venture
funding from Cincinnati, Ohio-based private investment firms The Walnut
Group and The Hauser Davis & Tysoe Group. Follow-up funds were also
provided by current investors AIG Capital Partners, Steelpoint Capital
Partners, Doll Capital Management and GIC Special Investments.252
249 Ellaby, Liz. “Not Sure What to Buy? Just Look into the Screen.” Birmingham News.
September 26, 2007.
250 “Nielsen Media Research to Adspace: People are Watching!” PR Newswire US. July 17,
2007.
251 “Adspace Networks Expands Partnership With CBL & Associates Properties.” Press
Release. Adspace website. January 16, 2008.
252 Bonanos, Paul. “Dealflow: Aug. 2, 2007.” The Deal. August 2, 2007.
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Fall 2008
Advantage Sales & Marketing
Headquarters: Irvine, California
Revenue: Revenue estimated at $900 million253
Ownership: Privately Held – Private equity investment by J.W. Childs
Associates and Merrill Lynch Global Private Equity
Chief Executive: Sonny King
Key Services: Headquarter sales; in-store merchandising; category
management; event marketing; sampling and demonstration services; order
management; consumer marketing services; mystery shopping; staffing
solutions; fulfillment; display set-up / installation; remodels / new store
openings
Based in Irvine, California, Advantage Sales and Marketing (“ASM”) is one of
the three largest national providers of sales, marketing and merchandising
services to the CPG and food industries. The company employs
approximately 13,000 people and services 1,200 manufacturers, including SC
Johnson, Georgia-Pacific and Del Monte Foods.254 ASM provides services
to a variety of trade channels including convenience, drug, grocery, dollar,
club, consumer electronic, hardware, home, and pet. With a strong focus on
technological capabilities, ASM provides brand and category management
services, consumer marketing services, financial management, and supply
chain services, among others, both domestically and abroad.
In addition to its traditional SMMA services, ASM offers flexible workforce
solutions through its Marketwide Advantage subsidiary, providing temporary
staffing solutions for ASM’s CPG and retail clients. Extending services
beyond the United States, Advantage has become a key member of the
Global Marketing Services (“GMS”) organization. ASM has aligned with
other SMMAs across six continents to provide global retail solutions for CPG
manufacturers and retailers worldwide. The companies in the GMS network
work with one another to support international brands that are expanding
into new markets by providing local coverage and utilizing existing
knowledge of regulations and supply chain management services. ASM also
Advantage is one
of the three largest
providers of sales,
marketing and
merchandising
services.
Advantage has taken
steps to address
international growth
opportunities.
253 Nguyen, Hang. “Irvine Firm’s CEO Turns Page; Advantage Sales Plans to Sell its
Majority Interest for $1 Billion.” The Orange County Register. March 10, 2006. Based
on a stated revenue of $750 million in 2005, we would expect that Advantage now
generates revenue of roughly $900 million.
254 Advantage Sales & Marketing website.
Fall 2008
169
provides additional niche services through its complementary business units
Adesso Solutions (trade promotion and deduction management software),
Try-Foods International (retail merchandising and marketing programs),
Campaigners (in-store demonstration services), Integrated Marketing
Services (specialized marketing programs), Marketration (field marketing
services), PromoPoint Marketing (multi-client marketing program), and
SuperFridge (frozen and refrigerated foods point-of-purchase support and
initiatives).
Advantage was
acquired by J.W.
Childs in 2006.
Until 2004, ASM was structured as a cooperative among various SMMA
organizations. That year, Allied Capital, a Washington-based investment
firm, acquired ASM and realigned the company into a more typical
corporate structure. Two years later, in March 2006, Allied sold a majority
equity interest to J.W. Childs and Merrill Lynch Global Private Equity for
$1.05 billion – approximately 10 times estimated EBITDA of $100 million.255
According to public reports, the transaction netted Allied $435 million of
proceeds on a $75 million investment in the span of almost three years.256,257
Current net revenue is estimated to be $900 million, with targeted revenue
goal of $1.5 billion within three to four years.
Affinion
Headquarters: Norwalk, Connecticut
Revenue: Estimated at $1.3 billion
Affinion is a leading
global provider of
loyalty program
solutions.
Ownership: Privately held – Private equity investment by Apollo
Management
Chief Executive: Nathaniel Lipman
Categories: Loyalty Program Services
Key Services: Loyalty programs; consumer marketing services; membership
programs; employee training; insurance products and services
Headquartered in Norwalk, Connecticut, Affinion Group is a leading
provider of marketing and loyalty program solutions to clients worldwide.
Affinion’s loyalty division, known as Affinion Loyalty Group, designs and
administers points-based loyalty programs that manage points with an
255 Biswas, Soma and Moreira, Peter. “Childs, Merrill Gain Advantage.” The Deal. March
6, 2006.
256 O’Hara, Terence. “Allied Capital to Sell Large Holding; D.C. Firm to Book Gain of $415
Million on Sale of Advantage Sales & Marketing.” The Washington Post. March 3,
2006.
257 “Allied Capital Announces 2007 Financial Results.” Business Wire. February 20, 2008.
170
Fall 2008
estimated redemption value of $4.7 billion.258 The division has partnerships
with more than 100 companies in the retail, financial, hotel, airline, and
automotive industries. Specifically, they administer programs such as the
Wyndham Worldwide Trip Rewards Program and the General Motors reward
program.
In 2005, Affinion was acquired by Apollo Management, a New York-based
private equity group, from Cendant Corporation for $1.8 billion. In January
2007, Apollo received $200 million in a dividend recapitalization, recouping
almost all of its initial investment.259 The Company also announced plans to
launch an initial public offering of 32.5 million shares worth $520 million. The
IPO was withdrawn in November 2007.260
Apollo acquired
Affinion from
Cendant Corporation
in 2005.
As a whole, Affinion employs approximately 3,300 individuals in the U.S.
and abroad, with 70 percent of the workforce domestic, 17 percent in the
U.K. and 13 percent in Europe and South Africa.261 Clients span a wide
breadth of industries including retail, travel, telecommunications, utilities,
financial services and the internet. As of December 31, 2007, the company
generated total revenue of $1.3 billion. The sale of loyalty-related products
and services generated revenue and EBITDA of $58 million and $20 million,
respectively.262
Headquarters: King of Prussia, Pennsylvania
Revenue: Approximately $1.5 billion263
Ownership: Privately held – Pending acquisition by The Blackstone Group
from MacAndrews & Forbes
Chief Executive: Bill Whitmore
Categories: Retail Security Services
Allied Security is the
largest Americanowned provider of
security services in
the U.S.
Key Services: Uniformed security; loss prevention; security consulting;
investigation services
Headquartered in King of Prussia, Pennsylvania, Allied Security Holdings
is the largest American-owned provider of contract security officers and
258
259
260
261
262
263
Affinion Group Holdings 10-K. December 31, 2007.
Beltran, Luisa. “Affinion Announces $520M IPO.” The Deal. September 25, 2007.
“Affinion Group Holdings, Inc. withdraws IPO.” Factiva. November 15, 2007.
Affinion Group Holdings 10-K. December 31, 2007.
Ibid.
Capital IQ.
Fall 2008
171
Allied Security
provides retail
security services
under the
AlliedBarton brand.
MacAndrews &
Forbes acquired
Allied from Gryphon
Investors in 2003.
security solutions in the United States. Doing business as AlliedBarton
Security Services, the company employs more than 52,000 individuals and
has 111 offices nationwide. Allied offers security services to shopping
centers and retailers, residential communities, colleges and universities,
commercial real estate, government facilities, and to clients in the chemical
and petrochemical, health care, industrial and manufacturing industries.
Additionally, the company services high-tech facilities, cultural institutions
and companies in the entertainment, transportation and utilities industries.
Within the retail sector, AlliedBarton engages in the screening, recruiting,
training, outfitting, supervising and scheduling of security personnel.
Through their involvement with the International Council of Shopping
Centers, the company is a frontrunner in identifying industry trends,
allowing them to excel in the handling of emergency response drills; risk
management and liability; terrorism awareness; loss prevention; fire safety
operations; interior and exterior patrols; CPR and First aid; customer
service; and special events management. In an industry where the average
turnover in security personnel is 75 percent, Allied, through one of the most
comprehensive training programs in the industry, has experienced turnover
of 58 percent.264 Recently, the company was recognized for its intense focus
on employee training. For the third consecutive year, the company was
named to Training Magazine’s Top 125 list, which recognizes top companies
of employer-sponsored workforce training and development.
Founded as Spectaguard in 1980, the company was acquired by San
Francisco-based private equity group Gryphon Investors in 1998. In 2000,
the company became the third largest security firm in the United States
with the acquisition of Allied Security. Three years later, the company
was acquired by MacAndrews & Forbes Holdings, a New York-based
private investment firm founded by Ronald Perelman, for approximately
$300 million.265 According to Gryphon’s website, the firm realized 3x its
original investment in the transaction. In 2004, the company expanded
further, acquiring Barton Protective Services for $181 million, forming
AlliedBarton Security Services and becoming the largest domestic-owned
contract security company in the United States.266 On July 25th, 2008, The
Blackstone Group announced that it had signed a definitive agreement to
acquire the company for up to $750 million, including an earn-out of up to
$50 million based on 2009 performance metrics.267 The company generated
264 Allied Security Holdings, 10-K. December 13, 2007.
265 Grocer, Stephen. “Street Still Envisions Command Securing a Takeout.” Mergers &
Acquisitions Report. June 14, 2004.
266 Allied Security Holdings, 10-K. December 13, 2007.
267 Johnson, Greg. “Blackstone to Buy Allied Security.” The Deal. July 30, 2008.
172
Fall 2008
LTM (as of March 31) revenue and EBITDA of $1.5 billion and $79 million,
respectively.
Headquarters: Valencia, California
Ownership: Privately held – Private investment by Audax Group, a private
equity firm based in Boston
Chief Executive: Randy Andrews
Key Services: Uniformed security; loss prevention; investigation services;
security consulting; employee education
Based in Valencia, California, Andrews International is one of the leading
full service providers of security and risk mitigation services in the United
States. The company provides a range of services, including uniformed
security; special event security; security vulnerability and risk assessments;
occupational fraud and abuse investigations; personal protection and threat
assessment services; disaster and emergency response services; and a range
of other security-related services. Andrews provides these services to mall
operators and retailers; the media and entertainment industry; financial
institutions; energy infrastructure; and other clients with unique security
concerns and requirements. In June 2007, the company strengthened its
commitment to the retail sector by hiring David Levenberg to the position
of Senior Vice President of the Shopping Center and Mall Vertical Market
Business. Levenberg was previously the Vice President of Security and Loss
Prevention for General Growth Properties.
Andrews, which was founded in 1988, has grown substantially through
a series of acquisitions. In March 2006, Andrews merged with Copstat
Security, creating a $100 million national security firm. Greyrock Capital
Group, a private investment firm based in San Francisco, provided $8.0
million in subordinated debt and a $2.5 million equity co-investment in
the deal.269 In June 2007, Andrews acquired SeTec Protective services,
a Houston-based security services firm and former subsidiary of Hines.
Additionally, in November 2007, the company acquired Nagy Protective
Andrews provides
a range of ‘risk
mitigation’ services
to retailers and other
clients.
Andrews has been an
active consolidator of
the security services
industry.
268 DFW Capital Partners website.
269 Greyrock Capital website.
Fall 2008
173
Audax Group
recently announced
the acquisition of
Andrews.
Services, a provider of security services and products to retailers, highrise buildings, schools, movie theaters and other businesses located in
the greater Los Angeles area. These acquisitions, along with additional
contracts, increased revenue by $16 million.270 Andrews has continued to
increase revenue by acquiring additional security contracts through the first
half of 2008. These multi-year contracts contributed more than $20 million in
incremental revenue for the firm.
On October 6th, Audax Group announced that it was acquiring Andrews
from New Jersey-based DFW Capital Partners, and Pennsylvania-based MVP
Capital Partners. Andrews generates estimated revenue of $175 million.
Bozzuto’s
Headquarters: Cheshire, Connecticut
Revenue: Estimated at $1.2 billion271
Ownership: Privately Held – Bozzuto Family
Chief Executive: Michael Bozzuto
Categories: Sales, Marketing & Merchandising (Food wholesaling); In-Store
Marketing
Key Services: Food wholesaling and distribution; category management;
in-store merchandising; employee education; sampling and demonstration
services; marketing services; administrative services; retail technology
systems; food retailing
Bozzuto’s utilizes one
million square feet of
warehouse space.
Based in Cheshire, Connecticut, Bozzuto’s is a leading full-service food
and CPG wholesale distributor to independent retailers in the northeastern
and mid-Atlantic region of the United States. Bozzuto’s utilizes one million
square feet of warehouse space to distribute goods to independent grocers
that are part of the IGA network, a voluntary network of more than 3,500
supermarkets with aggregate worldwide retail sales of more than $19
billion per year.272 Additionally, the company owns eight supermarkets
in Connecticut and Massachusetts under the Adams Super Food Stores
banner. Bozzuto’s is representative of a food wholesaler that has expanded
its service offerings to be more competitive with SMMAs. Services stretch
beyond the traditional warehousing and distribution of branded and
270 “Andrews International Experiences Rapid Growth in 2007.” Press Release. March 4,
2008.
271 Capital IQ
272 IGA website: www.iga.com/aboutIGA/international.asp
174
Fall 2008
private label goods and include merchandising and retail solutions such as
advertising and marketing; in-store merchandising; category management;
demonstration services; business process outsourcing for independent
grocers; reselling of retail hardware and software technology; and retail
employee training and workshops.
Bozzuto’s illustrates
the move that
wholesalers have
made into the SMMA
space.
Bozzuto’s has successfully navigated the wave of consolidation that has
occurred at the manufacturer and retail levels and has even acquired new
business because of it. For example, in 2003, C&S Wholesale Grocers, a
direct competitor of Bozzuto’s, purchased the wholesale grocery business
of bankrupt grocery retailer Fleming for $400 million.273 C&S decided to
shed the assets that did not fit into the company’s strategy or geographic
presence and agreed to swap assets with SUPERVALU. SUPERVALU
would take over Flemings’ old Midwest business while C&S would gain
SUPERVALU’s New England territory. As a result of the swap, some regional
retailers decided to change to Bozzuto’s rather than stay with C&S.
Although the company appears to have equity remaining in the public
market (OTCPK: BOZZ), it continues to be primarily family-owned and
operated. The company has experienced impressive growth over the
past ten years. Revenue in 1996 was reported to be $400 million and 2007
revenue was estimated to be $1.2 billion, representing a compound annual
growth rate of 10.2 percent.274
While Bozzuto’s
trades on the pink
sheets, it is effectively
a family-owned
business.
Callison
Headquarters: Seattle, Washington
Ownership: Privately held – Private equity investment by Blue Point Capital
Chief Executive: Bill Karst
Categories: Design, Build & Installation
Key Services: Graphic and interior design; architectural design; master
planning; program management; real estate strategic planning
Based in Seattle, Washington, Callison is one of the world’s leading
273 Egerstrom, Lee. “SUPERVALU, C&S to Swap Assets.” Saint Paul Pioneer Press.
September 9, 2003.
274 Veiders, Christina. “Family Affair; Bozzuto’s is Dedicated to the Long-Term Survival
and Growth of Family-Run Independents Like Ancona’s Market.” Supermarket News.
May 1, 2006. See above CAGR calculated: ((1.168/.4)^(1/11))-1)
275 “Is the Boom on Its Last Legs?” Engineering News-Record. June 23, 2008.
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175
Callison employs
more than 800 people
globally.
Twenty percent of
Callison’s revenue is
generated overseas.
providers of architectural and design services and solutions. Callison
provides architectural services including graphic and interior design,
architectural design, consulting, master planning, program management,
as well as real estate strategies to clients domestically and abroad. Callison
specializes in design services across many industries including retail, mixeduse, corporate, health care, multifamily residential, hotels and resorts. The
company employs more than 800 people and maintains additional offices
in Dallas; Los Angeles; New York; London; Mexico City; and Shanghai.
Domestic clients have included Ann Taylor, Apple, Cabela’s, Gap Inc.,
Goldman Sachs, Hilton Hotels, Microsoft, Nike, Nordstrom, Starbucks,
Starwood Hotels and Resorts, Victoria’s Secret, and Williams-Sonoma.
The company has also developed a strong international presence and has
completed projects for the Aekyung Company (South Korea), Bank of China
(China), Emaar Properties (Dubai), Seibu Department Stores (Japan), Sun
Hung Kai Properties (China) and Wangfujing Department Stores (China).
Additionally, Callison was selected by Tameer Holding Investments (Dubai),
a leading developer of real estate in the Middle East, to lead the design
of two projects in the United Arab Emirates.276 International projects now
comprise 20 percent of Callison’s revenue.277
The firm’s success is driven by the unique design culture that the
management team has fostered through initiatives such as Cal U (an
in-house professional development program) and the Callison Lecture
Series (a speaker series that has hosted lectures by Pritzker Prize winner
Glenn Murcutt and anthropologist Jennifer James).278 Investing in these
initiatives has allowed Callison to assemble an outstanding team of design
professionals and to ensure that they are up to date on the most recent
industry trends and developments.
Over the past two years, Callison has expanded its domestic and
international footprint with the acquisition of Architectural Group
International in Dallas and AGI Mexico in Mexico City. As further evidence
of the company’s leading position in the retail space, World Architecture
News has named Callison as #1 in Retail Design for the past five years.
Additionally, the company has been named first in retail design by trade
publications such as VM+SD and Display and Design Ideas. In 2006, Callison
was acquired by Blue Point Capital, a Cleveland-based private equity firm
276 “Callison and Tameer Making History at MAJAN and ARJAN.” Press Release. June 16,
2008.
277 Grunbaum, Rami. “Local Firms Designing Faraway Skylines.” The Seattle Times.
February 17, 2008.
278 Callison Architecture website.
176
Fall 2008
with a regional office in Seattle. Callison generated estimated 2007 revenue
of $150 million, $30 million of which was derived from international projects.
While we do not have the specific breakdown of business for 2007, in
2006 the company generated $78 million of revenue through retail related
projects, including department stores (30% of retail projects), big box (5%),
specialty apparel (20%), and non-apparel specialty (20%).279
An estimated $78
million of Callison’s
2006 revenue was
derived from retail
billings.
Catalina Marketing
Headquarters: St. Petersburg, Florida
Ownership: Privately held – Private equity investment by Hellman &
Friedman
Chief Executive: L. Dick Buell
Categories: In-Store Marketing; Loyalty Program Services
Key Services: Consumer marketing services; printing services; loyalty
programs
Based in St. Petersburg, Florida, Catalina Marketing Corporation is the
global leader in behavior-based marketing communication solutions for
retailers, CPG manufacturers, and pharmaceutical companies. Based on
consumer purchase behavior, the company provides targeted marketing
solutions via its network of more than 22,000 supermarkets and drugstores
and 14,000 pharmacies in the United States. Additionally, the company
has a presence in approximately 8,000 retail locations in Europe and Japan.
Catalina operates in three segments: 1) Catalina Marketing Services, the
division that provides point of sale marketing solutions to retail consumers;
2) Catalina Marketing International, which offers retail marketing services
to CPG companies in France, Italy, the United Kingdom, Belgium, the
Netherlands, Germany, and Japan; and 3) Catalina Health Resources, which
provides direct-to-patient marketing communications, including health care
patient education, based upon patient medication purchase behavior and
condition. Domestic clients include Fred Meyer, Giant Eagle, HyVee,
Kroger, Meijer, Ralphs, SUPERVALU, Walgreens, and Winn Dixie.
Catalina is a
leader in behaviorbased marketing
communication
solutions.
According to a study conducted in late 2007 by comScore, an Internet
marketing research firm, Catalina Marketing’s targeted advertising solutions
279 “DDI Design 100.” DDI Magazine. March 2007.
280 Capital IQ
Fall 2008
177
Catalina delivers
more than 4.5
billion customized
promotional
messages each year.
Catalina was taken
private by Hellman &
Friedman in 2007.
raised ad awareness for brands studied by 16 percent and improved ad
recall rates by 24 percent.281 Additionally, compared to non-targeted
promotional methods, the redemption rate for Catalina Marketing’s
incentives averaged 6.3 percent, more than eight times greater than
traditional methods.282 Through its retail network, Catalina gains access
to more than 250 million transactions per week and delivers more than 4.5
billion customized promotional messages every year.283 Catalina utilizes
sophisticated data mining processes to identify and target those consumers
most likely to respond to loyalty programs, incentives, coupons and
promotions. The company’s database contains the purchase history of more
than 100 million households, making it one of the six largest databases in
the world.284
In October 2007, the company was taken private by San Francisco-based
private equity group Hellman & Friedman for $1.7 billion, including the
assumption of approximately $136 million of indebtedness.285 According
to Capital IQ, the company generated trailing twelve month revenue and
EBITDA of $477 million and $143 million, respectively, when the transaction
closed.
CBS Outernet
Headquarters: Fairfield, Connecticut
Revenue: N/A
Ownership: Public Subsidiary – CBS
Chief Executive: Virginia Cargill
Key Services: Digital media networks; advertising sales; creative services;
installation
Headquartered in Fairfield, Connecticut, CBS Outernet is a leading
provider of in-store media networks for grocery retailers nationwide. The
company began in 2000 as a venture between Gerber Scientific (a diversified
manufacturer of sign making equipment, flexible material systems, and
lens processing systems) and Next Generation Ventures to take advantage
281
282
283
284
285
178
“In-Store, Targeted Advertising Works.” Press Release. October 11, 2007.
Catalina website.
“Catalina Marketing Corp. Vendor Close-up.” MMR. October 29, 2007.
“Vsurance, Inc. Signs Deal with Catalina Marketing.” Business Wire. October 2, 2007.
“Hellman & Friedman acquires Catalina Marketing.” Financial Deals Tracker. March
27, 2008.
Fall 2008
of the growing out of home advertising medium.286 Formerly known as
SignStorey, the company provides turnkey solutions including installation;
national program distribution; content design and creation; media asset
management; advertising sales; and network operations to retailers and
CPG companies. CBS Outernet now has screens in six of the top ten
markets in the United States and approximately 1,500 stores nationwide.
The company’s growth has been fueled by partnerships with some of the
largest grocery chains in the country, including SUPERVALU’s Albertsons
chain, Acme, Shaw’s, Jewel-Osco, Pathmark, Price Chopper and Big Y. The
company’s content partners include Meredith Publishing (Family Circle,
More, Traditional Home, and American Baby Magazine), Answers TV and
Your Produce Man, a syndicated television show with produce news, tips
on selecting produce and recipes. Other content on the network includes
CBS News, Inside Edition, CBS Sports, Entertainment Tonight and The
Early Show. According to the company website, impact studies measure an
average 18 percent lift in sales for products advertised on the CBS Outernet
network.
Earlier this year, the company agreed to form a partnership with RippleTV.
The partnership will leverage CBS Outernet’s robust national footprint and
Ripple’s local targeting capabilities to deliver more relevant and targeted
advertisement opportunities for companies. According to the press release,
the newly formed network will reach more than 100 million viewers every
month.287 In the wake of this new partnership, the company expanded its
network even further by providing content and advertising sales solutions
to the Automotive Broadcasting Network, an in-dealership television
network; Lifeclinic International, the world’s leading supplier of freestanding,
automated, vital signs monitoring equipment; and GameStop Corporation,
the world’s largest game retailer. With this latest partnership, the CBS
Outernet digital media network reaches more than 150 million shoppers per
month.288
CBS Outernet has
screens in six of the
top ten markets in the
U.S.
Products advertised
on the CBS Outernet
network receive,
on average, an 18
percent lift in sales.
In May 2005, Golden Gate Capital and CIC Partners, private equity
firms based in San Francisco and Dallas, respectively, completed a joint
investment into the company.289 A follow-up investment was made in
286 “Gerber Scientific and Venture Partner, NextGen, Launch SignStorey, a New Technology
Start-Up Computer-Based Advertising Medium Demonstrates Increased Sales/Profit
Potential in Retail Environments.” PR Newswire. January 25, 2001.
287 “CBS Outernet teams with Ripple to create leading out-of-home advertising network.”
Press Release. CBS Outernet website. January 17, 2008.
288 “Gamestop, CBS Outernet and Reflect Systems to Bring New In-Store Digital Video
Network to Over 4,000 Gamestop Locations.” Press Release. June 5, 2008.
289 “Golden Gate Capital and CIC Partners Announce Investment in SignStorey, Inc.”
Businesswire. May 2, 2005.
Fall 2008
179
CBS acquired the
business from Golden
Gate Capital and CIC
Partners in 2005.
September of 2006 by an undisclosed asset management company.290 The
company expanded the number of stores in the network by 250 when,
in April 2007, it entered into a purchase agreement to acquire Captive
Audience, an in-store television network provider.291 In September of
2007, CBS agreed to purchase SignStorey for $71.5 million and rename the
company “CBS Outernet” upon closing.292 CBS had already established a
relationship with the Company by becoming a programming partner a year
earlier, supplying original content through the company’s in-store network.
CPI Card Group
Headquarters: Littleton, Colorado
Revenue: Estimated at $150 million
Ownership: Privately held – Private equity investment by Tricor Pacific
Capital
Chief Executive: Ted Fick
Key Services: Loyalty and gift card manufacturing; credit card manufacturing
CPI is a leading
manufacturer of retail
gift cards.
Headquartered in Littleton, Colorado, CPI Card Group is the largest
manufacturer and distributor of financial payment cards and other laminated
card products and services in the country. CPI operates three state-of-theart manufacturing facilities in Colorado, Nevada and Indiana. The company
manufactures loyalty cards, gift cards, retail cards, credit cards, debit cards,
ATM cards, membership cards, gaming cards, direct marketing cards,
biodegradable cards, player tracking cards, ID cards, contactless cards,
casino cards, and hotel key cards. In addition to manufacturing services, CPI
provides card design, thermal graphics, ink-jet printing, affixing, fulfillment,
distribution, encoding and embossing services. Clients include retail stores,
credit card companies (Visa, Mastercard, American Express, Discover
and Diners Club), banks and other financial institutions, hotels, casinos,
universities and toll booths.
The company’s manufacturing footprint consists of highly efficient facilities.
The Nevada facility is capable of producing and distributing general290 “SignStorey Closes Round of Funding from Golden Gate Capital and New Fortune 1000
Investor.” Businesswire. September 26, 2006.
291 Johnson, Greg. “PE briefly noted: April 30, 2007.” The Deal. April 30, 2007.
292 “CBS Corporation to Acquire SignStorey, a Leading Nationwide Provider of In-Store
Programming and Advertising Content.” PR Newswire. September 6, 2007.
180
Fall 2008
purpose, magnetic stripe and smart cards. The Colorado facility, which
increased its capacity by more than 100 percent in 2006, is ISO 9001:20001
certified and is the largest plant dedicated to producing secure, magnetic
strip and contactless cards for major credit card issuers.293 In 2006, the
company manufactured more than 700 million plastic cards. CPI was the
recipient of Frost & Sullivan’s Smart Card Entrepreneurial Company of the
Year award.
CPI manufactured
more than 700 million
cards in 2006.
To accelerate growth and expand the range of services offered to its
customers, CPI recently acquired secured card manufacturer Didier Printing
Company. Financial details were not disclosed, and we were only able to
find a revenue range of $10 million to $25 million in public information.294
Moreover, the company announced in September 2007 that it had formed a
partnership with Latin ID S.A., a card manufacturer based in Mexico City, to
increase its presence in the Latin American market.295
More recently, CPI announced in August 2008 that it had acquired PCC, a
leading plastic card manufacturing, personalization and fulfillment company.
Based in the U.K., PCC is a major supplier to the western European market.
The acquisition was made to ensure that CPI develops its ability to service its
existing customers as they expand into international markets.
In June 2007, the company was acquired by Vancouver, British Columbiabased private equity firm Tricor Pacific Capital and company management.296
While the purchase price was not disclosed, Jefferies & Co. did complete a
$70 million senior secured credit facility in connection with the transaction.297
McKenna Gale Capital provided subordinated debt for the deal and for
the follow-on acquisition of Didier.298 Following the closing of the deal,
Ted Fick was named President and Chief Executive Officer.299 Apart
from one public mention of $55 million of revenue in 2000, little financial
information is available on the business.300 We would estimate that CPI now
generates revenue of approximately $150 million (not including the revenue
contribution of PCC).
CPI was acquired by
Tricor Pacific Capital
in 2007.
293 “CPI Card Group – Colorado Inc. Increases Capacity by 100% Through Multi-Million
Dollar Expansion.” PR Newswire US. April 18, 2006.
294 http://center.spoke.com/info/c5qWBEp/DidierPrinting
295 “CPI Card Group Opens Offices in Mexico.” PR Newswire. September 11, 2007.
296 “Tricor Pacific Capital, Inc. Acquires CPI Card Group.” Market Wire. July 3, 2007.
297 www.jonesday.com
298 http://www.mckennagale.com/investments_cpicardgroup.shtm
299 “Credit Card Maker Names CEO.” Denver Business Journal. December 17, 2007.
300 www.adobe.com/products/extreme/pdfs/cs_cpicard.pdf
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181
CrossCom National
Headquarters: Deerfield, Illinois
Ownership: Privately held – Private equity investment by Goense Bounds &
Partners
Chief Executive: Greg Miller
Key Services: Installation services; maintenance
CrossCom is the
nation’s leading
provider of turnkey
retail voice, POS,
data and wireless
solutions.
CrossCom generated
estimated revenue of
$100 million in 2007.
Headquartered in Deerfield, Illinois, CrossCom National installs and services
voice and data systems for large U.S. retailers such as Wal-Mart, Blockbuster
and TJX. CrossCom is the nation’s leading single-source provider of
turnkey retail voice, POS, data and wireless solutions. Through its Lifecycle
Solutions, the company offers staging and configuration solutions,
including serialization of components, pre-installation testing, asset tagging
and tracking, consolidation, system assembly, and configuration and
programming. CrossCom also offers in-store implementation solutions
such as single and multi-site implementations, flexible workforce solutions,
cabling services, installations and remodels, nationwide roll-outs and expert
project management; and maintenance and refurbishments services. These
services benefit retailers by streamlining their inventory, extending the
life cycle of their store assets, increasing their efficiency, reducing system
downtime and decreasing the total cost of ownership, management and
maintenance.302 The company specializes in the planning, installation and
maintenance of data and POS systems, voice communication systems, retail
automation, wireless systems and cable infrastructure.
Originally founded in 1981 as Cross Communications, CrossCom National
currently maintains facilities in Buffalo Grove, Illinois; Lenexa, Kansas; and
Memphis, Tennessee. In November 2004, the company was acquired
by Lake Forest, Illinois-based private equity group Goense Bounds &
Partners. Concurrently, CrossCom acquired Image Technology Solutions,
a nationwide provider of refurbishment solutions for POS and retail data
systems. In 2003, the company, looking to expand its communications
installations, project roll-outs and services capabilities, purchased Lenexa,
Kansas-based Integrated Retail Solutions. CrossCom generated estimated
2007 revenue of $100 million.
301 The May Report, www.tmronline. May 17, 2008.
302 CrossCom National company website.
182
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CROSSMARK
Headquarters: Plano, Texas
Revenue: Estimated at $500 million to $750 million303
Ownership: Privately Held – David Baxley and Butch Smith
Chief Executive: David Baxley
Key Services: Headquarter sales; in-store merchandising; category
management; event marketing; sampling and demonstration services;
retail software solutions; order management; staffing solutions; consumer
marketing services; display setup and installation; remodels and new store
openings
Headquartered in Plano, Texas, CROSSMARK is one of the nation’s largest
sales and merchandising service providers to the CPG and retail industries.
Formed in 1995 through the merger of The Gordon Company, SALES
MARK/ALPHA ONE, and The Phillips Company, CROSSMARK employs
more than 17,000 people in 50 offices in the United States, Canada, New
Zealand and Australia. The company provides headquarter sales, retail
merchandising solutions, in-store marketing, marketing solutions, category
management and business process outsourcing services to the supermarket,
mass, convenience, drug, dollar, home and specialty channels. In addition,
the company offers order management solutions through its subsidiary
eXhange Bridge; business technology solutions through Best CROSSMARK;
and sales and marketing solutions to retailers of private label goods through
CROSSMARK Private Label. CROSSMARK clients include Coca-Cola, Dole,
General Mills, Johnson & Johnson, Kimberly Clark, Kodak, Kraft, Nestle and
Pfizer.304 To provide a sense of scale, consumer packaged goods worth
more than $25 billion pass through the CROSSMARK system each year.305
The company’s representatives performed 8.5 million store visits at more
than 344,000 locations in 2006.306
CROSSMARK is one
of the nation’s largest
sales, marketing
& merchandising
agencies.
Consumer packaged
goods worth more
than $25 billion
pass through the
CROSSMARK system
each year.
CROSSMARK continues to focus on expanding its portfolio of services to
include order management solutions, new technologies and software. In
early 2007, in an effort to boost its presence in the in-store demonstration
303 We were unable to find public revenue information and have estimated this range based
upon our view of CROSSMARK’s market share versus Acosta and Advantage.
304 Spethmann, Betsy. “Shades of Grey.” Promo Magazine. November 1, 2004.
305 www.qualcomm.com/enterprise/pdf/Alist_Crossmark.pdf
306 “Elevating Execution Through In-Store Services.” Retailing Today. April 23, 2007.
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183
CROSSMARK is
privately owned.
category, the company acquired Marketing Solutions International, a leading
provider of event and in-store marketing programs to the warehouse
club industry.307 In 2001, ACNielsen established a strategic alliance with
CROSSMARK to be the primary provider of business and market-level
information to the company. This alliance was formed to strengthen the
collaboration and communication within the consumer product value chain
and allow CROSSMARK to leverage ACNielsen’s core capabilities in order
to enhance the effectiveness of merchandising solutions.308 Additionally,
in 2004, CROSSMARK joined forces with advertising agency Grey Global
Group to form a joint venture called G2 (formerly known as J.Brown
Agency). The combination of CROSSMARK’s marketing unit, Crosscut, with
Grey’s advertising and promotion specialist created a turnkey advertising
and marketing solutions provider to the CPG and retail industries.
CROSSMARK remains a privately held company with Butch Smith, the
former CEO and executive of Gordon & Company and David Baxley, CEO
and former executive of SALESMARK, owning a majority of equity.309 We
estimate that CROSSMARK generates annual revenue of $500 million to
$750 million.
DAVACO
Headquarters: Dallas, Texas
Ownership: Privately held – Private equity investment by Rosewood Capital
DAVACO is a leading
turnkey services and
solutions provider
to top retailers
nationwide.
Chief Executive: Rick Davis
Categories: Design, Build & Installation; Sales, Marketing & Merchandising
Key Services: Project management; in-store merchandising; category
management; display set-up and installations; remodels and new store
openings; logistics and warehousing; fulfillment; design services
Headquartered in Dallas, Texas, DAVACO is a leading turnkey services
and solutions provider to top retailers nationwide. Founded in 1990 as
Fixture Perfect Installations, DAVACO specializes in the execution of highvolume roll-outs, retrofits, resets and new store openings. Additionally,
307 CROSSMARK website.
308 “ACNielsen and CROSSMARK Form Strategic Alliance.” Business Wire. July 18,
2001.
309 Quinn, Steve. “Once a Food Broker, CROSSMARK Keeps Growing.” The Dallas
Morning News. June 17, 2001.
310 “Top Companies in Dallas-Fort Worth-Arlington, TX.” Inc. 5000. 2007.
184
Fall 2008
the company offers fixture and graphic installation services; project
management services, which include the planning, evaluation and
implementation of new store designs or remodels; project management
services including architectural surveys, design services, construction
management, product display support, FFE and material sourcing, and
close-out documentation; hard-line and soft-line merchandising such as
planogram execution, graphic and POP display installations, new item
cut-ins, new store sets, and visual and window displays; site and marketing
surveys; logistics and consolidation services coordinating the warehousing,
sourcing, fulfillment and delivery of goods; and design services delivering
bid documents, 3D renderings, store layouts, and architectural engineering
documents. The company’s full suite of services are offered to companies
in the specialty retail; drugstore; convenience; home center; big box
and supercenter; restaurant; discount and outlet store; and department
store categories. Clients have included leading retailers such as Target,
Starbucks, Pier 1 Imports, Home Depot, Federated Department Stores, CVS,
Limited Brands, Sally Beauty and Abercrombie & Fitch. DAVACO continues
to expand its global logistics and consolidation division and, in early 2007,
relocated the unit to a new 150,000 square foot warehouse in Nashville,
Tennessee. The company has also been proactive in pursuing green
building solutions for its retail clients. In a move to reinforce its commitment
to sustainable building solutions, the company recently joined the U.S.
Green Building Council.311
DAVACO continues
to expand its
global logistics
and consolidation
capabilities.
Rick Davis, the founder and Chief Executive Officer of DAVACO, has been
at the forefront of the retail services industry since founding Fixture Perfect
Installations. In 2006, he was recognized by Ernst & Young as a finalist for
the Entrepreneur of the Year and was inducted into the Retail Construction
Hall of Fame for his contributions to the retail industry. In 2002, the retail
division of the Staubach Company acquired a minority interest in DAVACO.
In turn, DAVACO purchased a minority stake in the Staubach Company.312
The company is also owned by management and San Francisco-based
private equity group Rosewood Capital. The company generated estimated
2006 annual revenue of $115 million and has averaged more than 35 percent
year-over-year growth since 1990.313 DAVACO is well-capitalized and debtfree.
Rosewood Capital
made a minority
investment in
DAVACO.
311 Davis, Riccardo A. and Misonzhnik , Elaine. “Targeting Systems.” Retail Traffic
Magazine. June 1, 2008.
312 “Staubach Allies Retail Services With Buxton, Davaco.” Dallas Business Journal. May
8, 2002.
313 “Rick Davis Shares Insights on DAVACO’s Stunning Retail Success.” The Leadership
Series: CEO Insights for Winners of the Dallas 100. 2007.
Fall 2008
185
Daymon Worldwide
Headquarters: Stamford, Connecticut
Ownership: Privately held – Milton Sender and ESOP
Chief Executive: Milton Sender (Chairman) and Alex Miller (President)
Key Services: Headquarter sales; in-store merchandising; consumer
marketing services; sampling and demonstration services; sourcing
solutions; employee education
Daymon is a leading
provider of sales and
marketing solutions
to private label
consumer brands.
Headquartered in Stamford, Connecticut, Daymon Worldwide is one of the
leading providers of sales and marketing solutions to private label consumer
brands worldwide. Through its network of 11,000 associates, the company
represents more than 3,500 private label manufacturers and provides
services to all channels of retail including warehouse, supermarket, drug,
specialty, and food service. The company works with manufacturers and
retailers through the entire life cycle of developing and ultimately selling
private label offerings. In addition, the company also sources private label
products into other mass retailers, including office supplies for Office Depot,
general merchandise for Sears and auto supplies for Auto Zone. Daymon
counts many of the world’s top retailers as customers, including Carrefour,
Sainsbury, Lotte, Ahold, 7-Eleven, Kroger, Rite Aid, and SUPERVALU.
Daymon’s operations
are divided into four
primary units.
The company segments its operations into four primary units: Daymon
Worldwide; Daymon Worldwide Demos; Daymon Worldwide Design; and
Daymon Worldwide Trading. Through its Daymon Worldwide Demos
unit, the company provides best in class demonstration events that build
brand equity, create excitement about the product and increase sales.
Club Demonstration Services, headquartered in San Diego, provides
demonstration services to 223 Costco Warehouse Stores in 32 states, as well
as Japan, Korea, Mexico and Taiwan. Other companies within Daymon’s
Demo division include Elite Marketing Solutions, exclusive to Meijer grocery
stores; One to One Demonstrations servicing Giant Eagle stores; and Aeon
Demonstration Service, providing in-store demos to supermarkets in Japan.
In addition to the sales and marketing of private label goods, the company,
through its Worldwide Design division, partners with leading retailers
to develop, design and brand their own private label goods. Clients of
314 http://sec.edgar-online.com/2005/09/13/0001193125-05-184775/Section18.asp stated $8
billion of product volume in 2005. We estimate $10 billion in 2007 and net sales of 2.5%.
186
Fall 2008
Worldwide Design have included Meijer, Wegmans, Winn-Dixie, Raley’s
and Roundy’s. Daymon Worldwide Trading, through a global, interactive
platform called Daymon Marketplace, facilitates the connection between
buyers and sellers worldwide. This community allows both parties to obtain
best pricing and fulfill their procurement objectives.
Daymon Worldwide
Trading facilitates the
connection between
global buyers and
sellers.
In October 2005, the company merged its Costco broker division with
Anderson Chamberlin to form Anderson Daymon Worldwide. Prior to
the merger of Price Club and Costco in 1993, Daymon provided sales and
marketing solutions exclusively to Price Club. After the merger, Costco
continued to use Daymon as one of two in-house brokers. Anderson
Chamberlin, the other broker utilized by Costco, had been exclusively
representing the warehouse club since 1983. The formation of the new
company, 50 percent owned by Daymon and Anderson, employs more
than 200 people in eleven offices worldwide and is the largest supplier of
goods and services to Costco.315 Daymon continues to garner additional
business. In February 2007, the company was named by SUPERVALU as
the exclusive sales and marketing partner for its newly combined “Own
Brands” organization. While Daymon had previously been the broker for
SUPERVALU’s private label goods, the recent acquisition of Albertsons
facilitated the combination of accounts under one umbrella.316 Until 2001,
the company was entirely owned by Chairman and Co-founder Milton
Sender. That year, Daymon created an employee stock ownership program.
The company continues to be owned by both Sender and company
employees.317 There is no reliable financial information available. However,
there was mention of Daymon as an “$8 billion global marketing company”
in 2005. We have grossed this up to $10 billion of product volume and
assumed that net sales are 2.5% of that total, or $250 million.318
Daymon is owned by
Milton Sender and an
ESOP.
Driveline Holdings
Headquarters: Malvern, Pennsylvania
Revenue: N/A
Ownership: Privately Held – Private equity investment by Lake Capital
Partners
315 “Anderson Chamberlin and Daymon Worldwide Merge Costco Businesses.” Warehouse
Club Focus. October 28, 2005.
316 “SUPERVALU Names Daymon Worldwide as Own Brands Strategic Partner.” Business
Wire. December 5, 2006.
317 “Daymon Worldwide.” Harvard Business School. September 27, 2007.
318 http://sec.edgar-online.com/2005/09/13/0001193125-05-184775/Section18.asp
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187
Chief Executive: Vince Willis
Key Services: In-store merchandising; category management; event
marketing; sampling and demonstration services; employee education;
display set-up and installations; retail sales support; remodels and new store
openings
Driveline Holdings
consists of four retailfocused operating
businesses.
Storecast, one of
the holdings, was
acquired by Lake
Capital in 2006.
Headquartered in Malvern, Pennsylvania, Driveline is a leading
merchandising organization providing a vast range of services and
solutions to CPG companies and retailers. The company, formerly known
as Storecast Merchandising Corporation, was re-branded Driveline in 2007
and is composed of four companies: Storecast, Archway Merchandising,
The Service Team and National Retail Services. Driveline employs more
than 10,000 individuals and provides category management, retail selling
and execution, new store remodels and installations, demonstration and
event planning, sales analysis, store employee and consumer education
events and DSD support services to more than 70,000 retail locations. The
company serves various channels including home center, dollar, mass, club,
convenience, food and drug.319
In 2002, Storecast received a $3.5 million ($2.5 subordinated debt and
$1.0 million in equity) infusion of capital from Nashville, Tennessee-based
venture capital firm Petra Capital Partners to fund the company’s future
growth.320 Two years later, Chicago, Illinois-based private equity firm Lake
Capital Partners purchased Storecast for an undisclosed sum. In 2006,
Lake Capital combined Storecast with Archway Merchandising Services
(the merchandising business of Archway Marketing Services) to enhance
the company’s reach into the mass merchant, dollar store, and home
improvement channels, among others. To complement this transaction,
the company hired former P&G director of strategy and planning for North
America, Glenn Hartman, as Chief Customer Officer. Hartman is expected
to manage customer acquisition and retention as well as establish strategies
and priorities for growth.321
In 2006, Storecast strengthened its relationship with P&G by signing a multiyear agreement to enhance the P&G in-store retail merchandising effort.
319 “Driveline…A Major New Retail Merchandising Services Brand Debuts.” Business
Wire. April 11, 2007.
320 Petra Capital Partners website.
321 “Storecast Merchandising Corporation Names New Chief Customer Officer; Former P&G
Veteran to Spearhead Retail-Focused Growth Initiatives.” Business Wire. January 17,
2006.
188
Fall 2008
Although P&G maintains many sales and merchandising activities internally,
Storecast was seen as a solid partner for in-store retail execution.322
Although revenue figured for Driveline are unavailable, it was reported that
Storecast had grown at an average annual rate of 40 percent since 1996.323
Storecast has seen
its revenue increase
by 40% per year since
1996.
dunnhumbyUSA
Headquarters: Cincinnati, Ohio
Ownership: Tesco and Kroger
Chief Executive: Clive Humby (Chairman) and Edwina Dunn (Chief Executive
Officer); Simon Hay (CEO, USA)
Key Services: Loyalty programs; consumer marketing solutions; data
analytics; market research
Headquartered in Cincinnati, Ohio, dunnhumbyUSA is the U.S. division
of loyalty marketing company dunnhumby Limited. Founded in 1989,
dunnhumby Limited is one of the leading customer management, analysis
and insight solutions providers in the U.K. As a subsidiary of Tesco, the
loyalty program operator has been instrumental in facilitating Tesco’s growth
into one of the world’s most successful retailers. dunnhumby works with
more than 150 companies worldwide and employs 850 people in offices in
the U.K., Ireland, France, India and the United States. In addition to offering
loyalty program solutions, the company works with the world’s largest CPG
companies including P&G, Nestle, Unilever, Coca-Cola, Kellogg, KimberlyClark and Diageo to provide unique customer information, insights and
data analytics. In 2003, dunnhumby established its first U.S. operations in
Cincinnati, Ohio. This unit, structured as a joint venture between Tesco
and Kroger, now has three offices in the United States (additional offices
can be found in Atlanta, Georgia and Chicago, Illinois). In addition to
Kroger, the company works with retailers such as Home Depot and Best
Buy. The company has been widely cited as being instrumental in Kroger’s
dunnhumby is a
subsidiary of Tesco.
322 “Storecast Merchandising Awarded Retail Execution Contract; Deal with P&G Makes
Storecast Preferred Partner for Retail Execution Services.” Business Wire. May 30,
2006.
323 “Storecast and Lake Capital Partner for Continued Growth of Leading Merchandising
Services Firm.” Business Wire. September 8, 2004.
324 Crooke, Lynne. “Grocery shoppers report lack of loyalty to stores.” CPG Matters.
December 2007.
Fall 2008
189
continued success in the hyper-competitive food retail space. The company
has utilized its data-driven insights and solutions to improve Kroger’s
merchandising and pricing strategy, and has allowed Kroger to improve
customer loyalty through targeted direct mailings.325
dunnhumby
expanded its data
collection universe
from 13.5 million card
holders to 60 million
Tesco customers
worldwide.
The data analytics that dunnhumby provides can impact many areas of
retail, including store layout, inventory, distribution and marketing. Utilizing
the predictive models developed by the company, retailers can see which
products are purchased together and by whom; understand buying patterns
and seasonality to adjust inventory mix; increase distribution of popular
brands; and conduct mailings containing relevant promotional coupons.
Out of the 12 million mailings that Tesco sent to households in the fourth
quarter of 2006, eight million consisted of a unique mix of coupons tailored
to that specific household.326 Recently, the company expanded its data
collection universe from 13.5 million cardholders in the U.K. to more than 60
million Tesco customers worldwide, including customers in Thailand, South
Korea and China.327
The company
recently started
working with Macy’s,
its first department
store client.
dunnhumbyUSA has been active in signing new clients to its roster
recently. In August 2008, the company announced that it had been
retained by Macy’s to assist the retailer in further developing its localization
initiative. dunnhumbyUSA has been tasked with analyzing and interpreting
Macy’s sales data to allow the retailer to refine its customer targeting
methodologies and, ultimately, enhance same store sales performance.
Macy’s is dunnhumbyUSA’s first department store client in the U.S.328
dunnhumby was founded, and continues to be led, by husband and
wife team Edwina Dunn and Clive Humby. Simon Hay is the CEO of
dunnhumbyUSA. In 1999, 30 percent of the company was purchased by
media and communications company Primedia.329 The following year, the
company sold 53 percent to Tesco, with whom it had been working since
1995, for an undisclosed sum.330 In 2006, Tesco acquired an additional 31
percent stake for £30 million in cash.331
325 Davis, Glynn. “Data Analysis Guides Kroger’s Marketing, Merchandising.”
Supermarket News. July 9, 2007.
326 Jordan, Andrew. “dunnhumby Shops For Marketing Insights.” Optimize. February 1,
2007.
327 Hawkes, Steve. “Tesco Rolls Out Trolley Watch Around World.” The Times (London).
April 12, 2008.
328 Shields, Amy. “Tesco’s dunnhumby Seals Deal with Macy’s.” Retail Week. August 15,
2008.
329 “dunnhumby Sells Up.” Customer Loyalty Today. February 1999.
330 “Tesco/dunnhumby Merger Leads to Clubcard Data Deal.” Precision Marketing.
February 12, 2001.
331 Capital IQ
190
Fall 2008
Headquarters: Minneapolis, Minnesota
Revenue: $803 million
Ownership: Public (ticker: FIC. TEV: $1.148 billion on October 17, 2008)
Chief Executive: Mark Greene
Fair Isaac provides
decision management
solutions to
companies on a
global basis.
Key Services: Retail software solutions; data analytics
Headquartered in Minneapolis, Minnesota, Fair Isaac Corporation is a
provider of enterprise decision management solutions to leading companies
around the world. The company offers application software and technology
solutions to companies in more than 80 countries within various industries,
including retail, financial services, insurance, telecommunications, health
care, pharmaceutical, and governmental agencies. Fair Isaac counts as
its clients more than 150 retailers worldwide; two-thirds of the world’s top
ten banks, including more than 90 percent of the top 100 U.S. banks; all
of the top 50 credit card issuers; and 17 of the top 20 U.S. wireless and
wireline providers. The company operates in four segments: Scoring
Solutions; Professional Services; Analytic Software Tools; and Strategy
Machine Solutions. The Scoring Solutions segment is best known for the
development of the FICO credit scores utilized by U.S. financial services
companies in determining the credit worthiness of consumers. For retail
industry participants (retailer, consumer and manufacturer), the company
provides services and solutions addressing retail marketing, merchandising,
store credit management, and online fraud detection. In addition, through
its Precision Marketing solutions, the company offers analytics services,
software and technology to enhance a retailer’s understanding of customer
loyalty and allow for the successful execution of customer retention
programs. By leveraging Fair Isaac’s services and solutions, clients are able
to identify and understand their best customers’ purchasing behavior and
can craft and implement strategies that engender true customer loyalty.
Companies utilizing the Precision Marketing solutions include eight of the
top ten general merchandisers; three of the top ten food and beverage
companies; and three of the top ten household and personal care products
companies.
Fall 2008
Fair Isaac counts
more than 150
retailers as its clients.
191
Fair Isaac has been
working through
a restructuring
program.
In May 2008, Fair Isaac completed a $275 million private placement of senior
notes through Banc of America Securities.332 In April 2008, the company
announced that it had completed a strategic review of its business and plans
to divest a number of non-core and unprofitable business units including
Insurance Bill Review, Cortronics neural research; the advertising services
segment of the Marketing Services unit; Government-related research
contracts; “Fast Panel” diagnostics for veterinary medicine; and select
telecom applications. These divestitures, along with work force reduction,
facility consolidation and aggressive cost management will yield the
company annual pre-tax savings of $35 million.333 As of October 17, 2008,
the company generated LTM revenue and EBITDA of $803 million and $176
million, respectively, and was trading at 6.5x TEV / EBITDA.334
FMW Inc.
Headquarters: Valencia, California
Ownership: Privately held – Private equity investment by Blackstreet Capital
and BIA Digital Partners
Chief Executive: Brendan Ross
Categories: In-Store Marketing; Retail Media Networks
Key Services: Consumer marketing services; printing services
FMW offers a range
of in-store marketing
and media services.
Based in Valencia, California, FMW (formerly Fanfare Media Works) operates
as a leading in-store media company offering retail advertising solutions
to clients in the United States and Canada. The company specializes in
placing highly targeted advertising on various mediums including coupons
on supermarket register tape (Register Tape Network); shopping cart
promotions (Adcart); weekly supermarket tear sheets (Market Information
Center); movie news through a monthly publication featuring previews
of movies, television shows and new video releases; a sports and soap
opera publication; and online through its supervalues.com website. FMW
advertisements can be seen in more than 9,500 supermarkets in eight of the
top ten markets. Clients have included A&P, Albertsons, Food 4 Less, Food
332 Ruiz Switzky, Bryant. “Fair Isaac Completes $275 Million Private Placement.” The
Business Journal. May 9, 2008.
333 “Fair Isaac Drives Growth and Profitability Through Reengineering Plan.” Press Release.
April 1, 2008.
334 Capital IQ.
335 Blackstreet Capital Management website.
192
Fall 2008
Lion, Blockbuster, Jewel-Osco, Kroger, Marsh, Pathmark, Pavilions, Piggly
Wiggly, Ralphs, Safeway, Shaw’s, Von’s and Winn-Dixie. The company
operates from a 100,000 square foot headquarters facility in Valencia and 35
regional sales offices nationwide.
FMW advertising can
be seen in more than
9,500 supermarkets
nationwide.
Founded in 1951, Fanfare Media Works was originally acquired by ABRY
Partners in 2000. Unable to successfully execute their operating strategy,
the debt incurred during the ABRY transaction was sold to Hunt Valley,
Maryland-based investment firm Beltway Capital Partners. In 2007,
Beltway sold their position in FanFare Media to Bethesda, Maryland-based
private equity group Blackstreet Capital Management. Subsequent to
that transaction, the business was renamed FMW, Inc. At the time of the
transaction, Blackstreet installed Brendan Ross, the former president of
Reserve American Holdings, as Chief Executive Officer.336 Six months later,
FMW received $5.2 million of additional growth capital from Chantilly,
Virginia–based private investment firm BIA Digital Partners.337 The company
generates annual revenue of $66 million.
The company
generates annual
revenue of $66
million.
Headquarters: Lisle, Illinois
Revenue: Approximately $50 million in 2005338
Ownership: Privately held – Private equity investment by Chicago Growth
Partners and Twin Bridge Capital Partners
Chief Executive: William McKenna
Key Services: Display set-up and installations; remodels and new store
openings; third party logistics
Based in Lisle, Illinois, Footprint Retail Services is a leading provider of
third-party logistics (“3PL”) services and solutions to retailers nationwide.
The company, formerly known as Hub Group Distribution Services, offers
turnkey fixture solutions including the delivery, assembly and installation
of fixtures and displays. With nearly one million square feet of warehouse
space under roof, the company assists retailers with the storage and staging
336 Adler, Neil. “Blackstreet Capital Buys In-Store Media Company.” Washington Business
Journal. August 24, 2007.
337 Killian, Erin. “BIA Digital Partners Invests $5.25M in Calif. Firm.” Washington
Business Journal. December 5, 2007.
338 Hub Group Annual Report. December 31, 2005.
Fall 2008
193
of fixtures and displays for new store openings, remodels or refurbishments.
In addition, the company offers in-store services such as light construction
and carpentry and electrical work; auditing and compliance review; in-store
data gathering of store measurements and competitor product information;
as well as electronic program management, providing clients with real-time
reporting of projects.
Chicago Growth
Partners led a
recapitalization of
Footprint in 2007.
Formerly a subsidiary of the Hub Group, the company was sold in 2006 for
$12 million to the former President of the subsidiary, and current President
of Footprint, William McKenna.339 In June 2007, Chicago Growth Partners,
a middle market private equity firm, led a recapitalization of the company.
TwinBridge Capital Partners, another Chicago-based investment firm,
and the company’s management team participated in the transaction.340
According to Hub Group SEC filings, the company generated revenue of
approximately $50 million in 2005. While specific financial information is
unavailable, we would guess that revenue has grown substantially since the
Chicago Growth investment was made last year.
Gensler
Headquarters: San Francisco, CA
Ownership: Privately held
Chief Executive: Art Gensler (Chairman); Andy Cohen (Exec. Director);
Diane Hoskins (Exec. Director); David Gensler (Executive Director)
Key Services: Architectural services; interior design; urban design &
planning; strategic consulting; brand design; and graphic services
Gensler is one of the
world’s leading retail
design firms.
Headquartered in San Francisco, California, M. Arthur Gensler Jr. &
Associates (“Gensler”) is one of only a handful of “pure design” firms.
Founded in 1966 by chairman and principal owner Art Gensler, the firm
consistently ranks among the largest architectural firms in the United States.
Over the years, Gensler has evolved into a worldwide firm with offices in
28 cities. As one of the world’s leading design firms, Gensler offers their
339 “Hub Group Inc Reports Record Second Quarter 2006 Revenue and Earnings.” PR
Newswire US. July 20, 2006.
340 “Chicago Growth Partners Leads Recapitalization of Footprint Retail Services.” Press
Release. June 19, 2007
194
Fall 2008
clients architecture, interior design, urban design and planning, strategic
consulting, and graphic services. Moreover, Gensler caters to almost every
industry sector and works on approximately 3,600 projects each year. The
firm’s work can be found in malls and retail stores, government institutions,
banks, commercial offices and schools. Notable projects include the design
of the JetBlue terminal at JFK Airport in New York City; the London Stock
Exchange; and the Department of Homeland Security in Omaha, Nebraska.
Some of Gensler’s leading retail clients include Apple, Barneys, Gap Inc. and
Westfield Corp.
In 2007, Gensler ranked second among design firms and generated annual
billings of more than $530 million. Of the $530 million, $55 million can
be attributed to retail billings, which places Gensler fifth among all retail
design firms. As of 2007, Gensler’s retail project categories were divided as
follows: 5 percent department stores; 5 percent big box; 30 percent apparel
specialty; 20 percent non-apparel specialty; 5 percent supermarket; 5
percent restaurant; and 30 percent split between retail banking, automotive
dealerships and other retail centers.342
Gensler generated
$55 million of retail
billings last year.
Global Compliance Services
Headquarters: Charlotte, North Carolina
Ownership: Privately held – Private equity investment by Angelo, Gordon &
Co. and Coda Capital Inc.
Chief Executive: Dennis Muse
Categories: Mystery Shopping
Key Services: Mystery shopping; employee education; retail inventory
solutions; dispute solutions provider; investigation services
Headquartered in Charlotte, North Carolina, Global Compliance Services
is a provider of compliance products, services and solutions to leading
companies worldwide. Clients include public and private corporations
including half of the Fortune 100 and one-third of the Fortune 1000
companies; colleges, universities; not-for-profit organizations; and
government entities. The company’s portfolio of services includes a variety
of evaluation and communications services designed to validate compliance
Global Compliance
Services has built
a presence in the
mystery shopping
segment.
343 Capital IQ.
Fall 2008
195
with regulations and procedures, including mystery shopping, site
evaluation, inventory and audits, ethics and compliance program evaluation,
and organizational culture assessment. The company maintains additional
office locations in Calgary, Alberta; Atlanta, Georgia; Washington, D.C.;
and Rockland, California. In 2006, the company strengthened its retailrelated evaluation offerings by acquiring Service Intelligence and National
Shopping Service, two leading providers of mystery shopping services.
Both companies offer customer service research and training solutions
through the provision of specialized mystery shopping to clients in the retail,
convenience, restaurant, consumer banking, service, transportation, lodging
and hospitality industries.
The company is
controlled by Angelo,
Gordon and Coda
Capital.
Global Compliance was formerly known as Pinkerton Compliance Services
and operated as a subsidiary of Securitas Security Services. Following a
management buyout in 2003, funded by New York-based alternative asset
managers Angelo, Gordon & Co. and Coda Capital, the company was
renamed Global Compliance Services. The transaction was valued at $15
million.344 Global Compliance generated estimated 2007 revenue of $19
million and is highly profitable.
Groupe Aeroplan Inc.
Headquarters: Montreal, Canada
Revenue: Estimated at $584 million
Ownership: Public (ticker: TSX:AER. TEV: $1.235 billion on October 17,
2008)
Chief Executive: Rupert Duchesne
Key Services: Loyalty programs; consumer marketing solutions
Aeroplan is a leading
provider of loyalty
marketing solutions.
Headquartered in Montreal, Canada, Groupe Aeroplan is one of the
leading providers of loyalty marketing services and solutions worldwide.
Through its Aeroplan Miles program, the company offers consumers the
opportunity to accumulate Aeroplan Miles through designated retailers
and service providers by purchasing goods or services. Groupe Aeroplan
has two divisions: Aeroplan, Canada’s leading provider of loyalty marketing
solutions; and Loyalty Management Group, the operator of the Nectar
program, the U.K.’s largest customer loyalty program. The Aeroplan
344 Ibid.
196
Fall 2008
program has relationships with more than 70 commercial partners including
American Express, CIBC, Air Canada, Air China, FTD.com, Home Hardware,
Imperial Oil, ING, and Star Alliance member airlines, representing over 150
brands, through which members can earn Aeroplan Miles. Additionally, in
June 2008 the company launched a new website which allows cardholders to
earn points by shopping at more than 75 major retailers such as Apple, Dell,
Hammacher Schlemmer, PetSmart and Sony Style.345 The four million active
members of the Aeroplan Miles program can then redeem accumulated
miles for air travel as well as other rewards offered by redemption partners.
According to the company’s annual report, the majority of revenue is
generated through selling loyalty marketing services.
The company also operates the largest loyalty rewards program in
the U.K. In 2007, Aeroplan acquired London-based loyalty marketing
company the Loyalty Management Group from private equity firm
Warburg Pincus and founder Sir Keith Mills for £350 million plus a working
capital adjustments of £18 million.346 With this acquisition, the company
added the U.K.’s largest loyalty program to its portfolio with more than
50 percent participation of all U.K. households. The Loyalty Management
Group subsidiary operates in three principal divisions: 1) the Nectar
Program; 2) Insight and Communication business, which provides analytical
services to retailers, service providers and consumer packaged goods
companies; and 3) Rewards Management Middle East Limited, the owner
and operator of the Air Miles program in the Middle East. Through the
Nectar Program, ten million active members earn points on purchases of
goods and services through companies such as Sainsbury’s, Barclaycard,
BP, Threshers, Vodafone, Adams, e-Energy, Winemark, Hertz, Magnet,
and Ford. Launched in 2002, the Nectar program has since grown beyond
rewarding points to consumers and has expanded into business rewards
with Nectar Business. Nectar Business allows small to mid-sized businesses
the opportunity to earn points on business expenditures. The company also
offers the Nectar eStore, where consumers can earn points on purchases
made through almost 200 e-tailers. Given the success of the Loyalty
Management Group acquisition, Aeroplan continues to look for strategic
growth opportunities. In a 2007 conference call discussing the pending
acquisition of LMG, company management noted that they are looking to
make an investment in, or acquisition of, a frequent-flier loyalty program in
Aeroplan acquired
the largest U.K.-based
loyalty company in
2007.
Aeroplan continues
to search for
strategic acquisition
opportunities.
345 Drolet, Daniel. “Aeroplan Takes Client Loyalty Beyond the Skies.” Ottawa Citizen.
June 27, 2008.
346 “Warburg Pincus Exits LMG.” Financial Deal Tracker. March 11, 2008. Deal valued at
USD$740 million.
Fall 2008
197
Europe to compliment their Nectar loyalty program.347 In May of this year,
Aeroplan executives again reiterated their desire to acquire a frequent flier
program from a foreign carrier.348
Aeroplan converted
from an income trust
to a regular equity
structure.
In a move allowing greater access to capital markets and foreign investors,
Aeroplan Income Fund unit holders agreed to convert the company from
an income trust to a dividend-paying corporation. As a tax-exempt income
trust, Canadian law prevented foreign investors from owning more than
49.9 percent of the company, limiting the market for Aeroplan’s equity.349
According to company executives, this change in corporate structure will
also allow additional flexibility for the company to look for acquisitions
or other strategic growth opportunities.350,351 The company generated
trailing twelve month revenue and EBITDA of $584 million and $128 million,
respectively, through September 2007, and is expected to generate 2008
EBITDA of $281 million.352,353 Enterprise Value, as of October 17, 2008 was
$1.235 billion, implying a TEV / 2008(e) EBITDA multiple of 4.4x.354
InStore Broadcasting Network
Headquarters: Salt Lake City, Utah
Revenue: N/A
Ownership: Privately Held – Private equity investment by Great Hill Partners
Chief Executive: Robert Brazell
Key Services: Digital media networks; creative services; installation
IBN is one of the
largest in-store media
networks in the
country.
Headquartered in Salt Lake City, Utah, InStore Broadcasting Network
(“IBN”) is one of the largest in-store media networks in the country. To put
this into perspective, InStore delivers almost one billion shopper impressions
per month in over 15,000 grocery and drug stores throughout North
America. Through the company’s proprietary process called PerfectMedia,
347 “Aeroplan Income Fund Analyst Meeting to Discuss Pending Acquisition of LMG –
Final.” Fair Disclosure Wire. December 13, 2007.
348 “Aeroplan Looks Abroad; Wants to Invest In, And Then Carve Out, Foreign Frequentflier Plans.” The Globe and Mail. May 23, 2008.
349 “ACE Sells Off Last Stakes in Aeroplan, Jazz.” The Gazette. May 29, 2008.
350 Jang, Brent. “Aeroplan’s Capital Play.” The Globe and Mail. May 10, 2008.
351 Marowits, Ross. “Tax Fears Prompt Aeroplan Income Fund to Convert to a GrowthOriented Corporation.” The Canadian Press. May 9, 2008.
352 Aeroplan Income Fund Annual Report. December 31, 2007.
353 Capital IQ.
354 Ibid.
198
Fall 2008
IBN distributes integrated audio and video advertisements to multiple
contact points throughout a retail environment. IBN delivers audio and
visual content via LCD screens around the perimeter of the store; smaller
screens located in the aisles and checkout lanes; via on-cart devices and
overhead speakers. Advertising clients have included Johnson & Johnson,
Kellogg’s, S.C. Johnson, Kodak, General Mills, Pfizer, FedEx, ABC and
Wells Fargo. IBN’s retail media network can be found in Kroger, Safeway,
SUPERVALU, Ahold, Walgreens, Duane Reade, Meijer, JoAnn Stores,
Tommy Hilfiger and the United States Post Office. IBN generates revenue
through two primary channels: (1) advertising sales and (2) fixed fee musiconly services. According to the company website, since IBN is considered
‘measured media’ by the VNU companies, it can more easily be integrated
into the overall media plans of retailers and advertisers.
Clients include S.C.
Johnson, General
Mills and Pfizer.
In a dramatic move intended to enhance the content creation capabilities of
IBN, the company announced in October 2007 that Patti Burke had joined
the executive management team. Burke, who will oversee production
and programming at IBN, was formerly the Head of PDI / DreamWorks
Animation Studio in California, overseeing such projects as Shrek 2,
Madagascar, and Over the Hedge. A month later, the company reportedly
reached a deal with Subway Restaurants to deliver advertising and video
content to nearly 30,000 locations in 86 countries worldwide. Terms of
the deal were not disclosed.355 In 2004, Great Hill Partners, a Bostonbased private equity group, invested $16 million of equity in IBN. To our
knowledge, no financial available is publicly available.
IBN has been
strengthening its
management team.
IPC International
Headquarters: Bannockburn, Illinois
Chief Executive: Howard Kaplan
Key Services: Uniformed security; loss prevention; investigation services;
security consulting; video surveillance; security outfitter; event management
355 Mandese, Joe. “InStore Heads Into Subways: The Restaurants, Not The Transit System.”
MediaDailyNews. November 27, 2007.
356 Capital IQ.
Fall 2008
199
IPC is a leading
provider of security
solutions to owners,
developers and
managers of shopping
malls.
Headquartered in Bannockburn, Illinois, IPC International is a leading
provider of security solutions to owners, developers, and managers of
shopping centers nationwide. The company provides security consulting
services to clients and protective services including uniformed security;
loss prevention; event security; corporate security; and confidential
investigations. Founded in 1978, IPC provides security for more than 500
shopping centers in the United States, United Kingdom, and Puerto Rico.
The company recently announced the formation of a “Special Operations
Group” that would encompass critical issues response management;
domestic and international security consulting; executive and celebrity
(personal) protection; field inspectional services; K-9 services; special
operations training; and street gang assessment and suppression tactics.
IPC coordinates
closely with a variety
of security related
government agencies.
In order to stay ahead of the curve on security related issues, company
management regularly meets with representatives from the Bureau
of Alcohol Tobacco and Firearms, Department of Homeland Security,
Department of Justice, Federal Emergency Management Agency, the
Federal Bureau of Investigation), U.S. Attorney’s Office, U.S. Customs
Service, United States Secret Service and major metropolitan police and
fire agencies. In addition to IPC, the family of companies includes IPC
Technologies, a leading provider of digital video surveillance systems;
Uniformity, a provider of apparel and equipment to the safety industry; St.
James Security, a leading provider of security solutions in the U.K. which
was purchased by IPC in 2005; and Touchline Events Management, an event
management firm. The company generated estimated revenue of $316
million in 2007.
Headquarters: Billerica, Massachusetts
Revenue: Approximately $1 billion357
Ownership: Privately Held – O’Hare Family
Chief Executive: Chip O’Hare (President)
Marketing
Key Services: Headquarter sales; category management; in-store
merchandising; consumer marketing services; display setup and installation;
357 Johnson O’Hare website.
200
Fall 2008
consulting services; sampling and demonstration services
Based in Billerica, Massachusetts Johnson O’Hare Food Brokers is a leading
sales, marketing and merchandising organization providing outsourced
solutions to retailers and CPG manufacturers across the eastern United
States. Johnson O’Hare is representative of a food wholesaler that has
successfully migrated its business into a broad range of SMMA services.
Founded more than 50 years ago, the company’s services include
headquarter and retail sales; category management; cut-ins and resets;
media and advertising; post set-up and maintenance; local marketing; and
consulting services such as product development, budgeting, forecasting,
business planning and market analysis. The company divides its sales
division across eight product categories composed of grocery, frozen
foods and dairy, perishables, produce, home beauty care and general
merchandise, confection, specialty and private label. Clients include
Wal-Mart, K-Mart and club stores. Johnson O’Hare continues to win new
business, and has added several new clients over the past two years.
Selected new clients include On Cor Frozen Foods; Green Mountain Coffee
Roasters (Green Mountain Coffee and Newman’s Own organic coffee
brands); Saputo, USA (Saputo Cheese Dairy brands Dragone, Frigo and
Treasure Cave); and Gold Pure Food Products (Gold Pure, Nathans, Uncle
Dave’s, and Chef Allen brand condiments); Marie (Marie’s Dressing and
Dips); and Elmer’s Product. In 2007, the company’s Perishable Division won
the Broker of the Year award from Seafood America, a national manufacturer
of premium quality prepared seafood products.358 In 2006, the company
generated more than $1 billion in revenue. The company continues to be
owned and operated by the O’Hare family.
Like Bozzuto’s,
Johnson O’Hare is an
excellent example of
a wholesaler that has
migrated its business
model into SMMA
services.
The company
generated revenue of
more than $1 billion
in 2006.
Maritz
Headquarters: Fenton, Missouri
Revenue: Approximately $1.5 billion359
Ownership: Privately held – Stephen Maritz
Chief Executive: Stephen Maritz
Categories: Loyalty Program Services; Mystery Shopping
Key Services: Loyalty programs; market research; mystery shopping;
358 Ibid.
359 Edwards, Greg. “Steve Maritz Moves On; With Family Squabble Resolved, Firm’s
Revenue Rises to $1.45 Billion.” St. Louis Business Journal. March 5, 2007.
Fall 2008
201
employee education; employee rewards; event marketing; fulfillment;
meeting and event management; sponsorship marketing
Maritz is a
leading provider
of performance
improvement
market research and
Headquartered in Fenton, Missouri, Maritz is a leading provider of
performance improvement market research and other marketing solutions
to retailers and a broad range of clients worldwide. As one of the nation’s
largest privately held companies, the Maritz portfolio of services includes
meeting and event management; loyalty marketing; market research
services; learning solutions; experiential and sponsorship marketing; rewards
and recognition services; and incentive travel management. Maritz operates
through six main divisions: Maritz Interactions, which designs and executes
promotional events, conferences, and public relations programs for clients
such as Acura, Cisco, Coca-Cola, Pacific Life, Ritz Carlton and Sprint; Maritz
Loyalty, one of the nation’s leading providers of loyalty marketing solutions
for clients including American Express, Bank of America, HSBC, Purina Pet
Care, UBS and Wells Fargo; Maritz Research, which offers comprehensive
market research capabilities including brand research, new product
development research, customer experience measurement and satisfaction,
national mystery shopping, competitive loyalty modeling and lost customer
research; Maritz Learning, which designs customized sales training
programs for clients in the automotive, software, energy and consumer
products industries; Maritz Motivation, the division that offers incentive and
recognition solutions, rewards programs and fulfillment services to clients
such as AllSteel, Caterpillar, Dave & Buster’s, HON, Shell, Sun and Xerox;
and Maritz Travel, which provides meeting, event and incentive travel
management services to the automotive, financial services, pharmaceutical
and information technology industries.360
Maritz works with
30 of the Fortune 50
companies.
In addition to its offices in the U.S., Maritz has operations in Canada, the
U.K., Germany and South Africa. Maritz has partnered with numerous
Fortune 500 companies and has 30 of the Fortune 50 companies as active
clients. In a strategic move to build traction in the gaming industry, Maritz
acquired Redwood City, California-based Cascade Promotion Corporation
in May 2008. Cascade is a provider of relationship marketing and rewards
fulfillment services with a focus on the gaming industry. In addition, the
company expanded its offering of green rewards by partnering with
OurEnergy, a global climate change solutions provider that enables clients
to offer carbon credits as a green employee incentive reward option.361
360 Maritz website.
361 “Maritz Makes It ‘Easy To Be Green’ With Carbon Credits And New Green Rewards For
Employees.” PR Newswire. March 26, 2008.
202
Fall 2008
The company was founded in 1894 and continues to be run by the Maritz
family. Ownership was divided among the great grandchildren of the
founder until 2007, when Stephen Maritz, the Chairman and Chief Executive
Officer, purchased the shares from his siblings and gained full control of the
company.362 Maritz has more than 4,100 employees and generated 2007
revenue of $1.5 billion, a 14 percent increase over 2006 revenue.363
The business is
controlled by Stephen
Maritz.
Headquarters: Boulder, Colorado
Ownership: Privately held – Private equity investment by Centennial
Ventures, Boulder Ventures, Vista Ventures and Monitor Clipper Partners
Chief Executive: Karl Maier
Categories: Mystery Shopping; In-Store Marketing
Key Services: Mystery shopping; employee education; retail inventory
solutions; in-store merchandising; display set-up and installations; remodels
and new store openings; fulfillment; market research
Based in Boulder, Colorado, Market Force Information (“MFI”) is a leading
provider of customer experience information solutions to retailers and other
clients worldwide. Services include mystery shopping, market research,
in-store merchandising, and Internet survey solutions. The company
provides services to retailers, restaurants, CPG companies, convenience
stores, wireless telecommunications providers, financial institutions, motion
picture studios and theatres, and drug and grocery stores. It operates in
the Americas, Europe, and the Pacific Rim. MFI offers on-sight evaluation
services including mystery shopping, web surveys, merchandising and
promotional display audits, in-stock audits, pricing audits and competitor
price audits. The company maintains a network of more than 300,000
consultant mystery shoppers nationwide. Additionally, the company offers
analytics and insights including: factor analysis, correlation, regression
analysis and hypothesis testing in order to provide actionable initiatives to
improve the customer experience.
Market Force
Information is one of
the nation’s largest
mystery shopping
companies.
362 Op. Cit., Edwards.
363 Ibid.
364 Wallace, Alicia. “Market Force to Buy N.Y. Firm.” Daily Camera. February 6, 2008.
Fall 2008
203
The business was
founded in 2005 by
Paul Berberian and
Karl Maier.
Monitor Clipper
invested $32 million
in MFI in 2007.
MFI was launched in 2005 when entrepreneurs Paul Berberian and Karl
Maier identified the mystery shopping sector as being ripe for consolidation.
In 2006, the pair raised $19 million in financing from a consortium of venture
capital firms. According to a company press release, $11 million in equity
was provided by Denver, Colorado-based Centennial Ventures along with
Boulder Ventures and Vista Ventures. The debt portion ($8 million) was
provided by Hercules Technology Growth Capital. That same month,
the company announced its first acquisition – leading mystery shopping
company Shop’n Chek, Inc.365
MFI maintains a growth strategy of acquiring leading mystery shopping
companies. In March 2007, the company closed an additional $32 million
capital raise led by Monitor Clipper Partners. The new capital infusion was
intended to provide funds for further acquisitions.366 A month later, the
company announced the acquisition of Speedmark Information Systems,
a Houston, Texas-based mystery shopper provider and industry leader in
marketing information services.367 The company has continued to pursue
its roll up strategy in 2008. In February, MFI acquired Certified Marketing
Services, a Kinderhook, New York-based marketing and merchandising
services firm. This acquisition expands MFI’s portfolio of services into retail
resets, recalls and displays; phone and web-based customer surveys; and
movie theatre audits.368 The latest acquisition also increased revenue to $50
million. Management has stated that they intend to achieve $150 million of
annual revenue within the next five years.369
Mass Connections
Headquarters: Cerritos, California
Chief Executive: Sandra Cotten
Categories: In-Store Marketing; Mystery Shopping
365 “Market Force Information Acquires Shop’n Chek.” Press Release. MFI website.
February 28, 2006.
366 Carlsen, Clifford. “Mystery Shopper Nets $32M.” The Deal. March 7, 2007.
367 “Market Force Information Acquires Speedmark.” Business Wire. April 3, 2007.
368 Queen, Nicole. “They’ve Got a Secret: Many Mystery Shoppers.” The Denver Business
Journal. February 29, 2008.
369 Ibid.
370 “Mass Connections CEO Earns Coveted Spot as a Top Woman in Grocery.”
PrimeNewsWire. October 3, 2007.
204
Fall 2008
Key Services: Event marketing; sampling and demonstration services;
mystery shopping; display setup and installation; consumer marketing
services; POP and display creation; staffing solutions; fulfillment
Based in Cerritos, California, Mass Connections is one of the nation’s
leading retail marketing service providers, assisting CPG manufacturers and
retailers with engaging shoppers, building brand awareness and ultimately
driving brand sales and loyalty. Originally founded as a staffing agency,
the company conducts more than one million marketing events each
year for companies such as Kraft Foods, ConAgra Foods, General Mills,
Albertsons, Masterfoods, Wal-Mart, Target and Smart & Final.371 In addition
to in-store sampling and promotions, Mass Connections offers the design
and development of POP displays; sourcing of components; fulfillment
and distribution services; survey and focus group implementation; and
IT solutions. The company is the only ISO 9000 certified company in the
industry. The company operates through four divisions: event planning and
promotion; SPI, the nation’s leading staffing agency focused on sampling
and demonstrations; MC2, the marketing unit that creates and develops
branded promotional programs and material; and CarSan Distributors,
which provides fulfillment and distribution services with warehouses in
California and Ohio.
Mass Connections is
one of the nation’s
leading retail
marketing service
providers.
Through its MC2 subsidiary, Mass Connections combines traditional
marketing tactics with event marketing activities. From the initial creation of
a campaign, to the production, development and execution, the company
has the turnkey capability to implement integrated marketing initiatives for
clients such as Clorox, Purina and Pepsi.372 The company also places a high
importance on recruiting top talent for its events. Through its SPI division,
the company recruits and trains quality part-time event staff and matches
their skills and talents with specific brands and events. The company is able
to track and rank the sales performance of the staff through its proprietary
MC Card technology.
In October 2007, CEO and founder Caroline Cotton-Nakken was named
to the Progressive Grocers’ “Top Women in Grocery” list. The award
recognizes 62 women who have made significant contributions to the
grocery industry.373 In an effort to bolster the retail industry’s understanding
of consumer and shopper behavior, in May 2006 the company released
The business was
founded by Caroline
Cotton-Nakken.
371 “Mass Connections Announces Marketing Partnership With Smart & Final.” Food
Online. June 22, 2007.
372 Mass Connections website.
373 “Mass Connections CEO Earns Coveted Spot as a Top Woman in Grocery.”
Primenewswire. October 3, 2007.
Fall 2008
205
We estimate that
Mass Connections
generates annual
revenue of roughly
$100 million.
its second market research study entitled “Touch America – The Shopper
Connection.” The 140-page study, conducted by an independent market
research firm, examines the various factors that drive purchase behavior
and highlight the benefits of in-store marketing initiatives. The report
was a follow-up to the first study entitled “Touch America: The Consumer
Connection.”374 We estimate annual revenue of more than $100 million.
Mosaic Sales Solutions Corporation
Headquarters: Irving, Texas
Ownership: Privately Held – Private equity investment by Court Square
Partners
Chief Executive: James Malcolm Rose
Key Services: In-store merchandising; event marketing; sampling and
demonstration services; retail sales support; employee education
Mosaic maintains a
network of more than
10,000 trained sales
representatives.
Founded in 1947, Mosaic Sales Solutions is a leading sales and marketing
agency providing merchandising solutions to clients in the apparel,
communications, CPG, entertainment, financial services and technology
industries. Based in Irving, Texas, the company offers dedicated client
sales teams for event marketing, customer acquisition, selling services
and merchandising. Revenue is generated through three channels:
merchandising (62% of sales), selling (30%) and event marketing (8%).376 As
one of the largest field sales and marketing companies in North America,
the company maintains a network of more than 10,000 trained sales
representatives who work in retail locations in the United States and Canada
on behalf of manufacturers and retailers. Mosaic leverages technology to
increase the accuracy of data collection while decreasing the reporting time.
The handheld devices used in the field allow Mosaic’s retail teams to collect
regional and store specific customer data and provide much richer and
relevant consumer insights. Mosaic clients include Disney, Wal-Mart, Epson,
P&G, MBNA, Best Buy and Microsoft.
374 “New, Groundbreaking Study Demystifies Why Americans Tend to ‘Try and Buy’.”
Primezone Media Network. May 31, 2006.
375 “81 Mosaic Sales Solutions Holding Co.” The Dallas Morning News. May 4, 2008.
376 JLL Partners website.
206
Fall 2008
In 2003, New York-based private equity group JLL Partners purchased the
core assets of bankrupt Toronto-based marketing services company Mosaic
Group, Inc for $76 million.377 In April 2007, New York-based private equity
group Court Square Partners purchased the company from JLL for $165
million. In 2007, the company generated annual revenue of $175 million, an
increase of 10% over 2006.378 Revenue was $147 million in 2005.379
Court Square
acquired Mosaic in
2007 for $165 million.
Headquarters: Irving, Texas
Ownership: Privately Held – Private equity investment by H.I.G. Capital,
Antares Capital, and RoyNat Capital
Chief Executive: Richard Damico
Categories: Sales, Marketing & Merchandising; In-Store Marketing; Design,
Build & Installation
Key Services: Retail inventory solutions; in-store merchandising; category
openings; staffing solutions; retail inventory solutions; assembly services;
employee education; sampling and demonstration services
Based in Irving, Texas, National Product Services (“NPS”) is a leading
provider of third-party retail merchandising solutions to major retailers and
CPG manufacturers nationwide. The firm operates through two subsidiaries
that specialize in retail merchandising, in-store demonstrations, and in-store
and in-home product assembly services. The company provides services
to retailers such as Lowe’s, Wal-Mart, Target, Home Depot, Staples, Sports
Authority, Best Buy, Toys R’ Us, Staples, Meijer, Shopko, and Dillard’s.
IMPACT Resources Group, a division of NPS, provides in-store and in-home
product assembly solutions for manufacturers and retailers as well as display
resets and maintenance, product resets and other merchandising support
services. The company specializes in the assembly of ready-to-assemble
furniture, bicycles, grills, outdoor power equipment, fitness equipment
and lawn and garden furniture. The division expanded with the 2000
acquisition of The Assembly Service Company from Bush Industries and the
377
378
379
380
NPS is a leading
provider of thirdparty merchandising
solutions.
“Briefs.” Buyouts. June 9, 2003.
“81 Mosaic Sales Solutions Holding Co.” The Dallas Morning News. May 4, 2008.
“2007 Agency Report.” Advertising Age. April 22, 2007.
Capital IQ.
Fall 2008
207
2004 acquisition of Huffy Corporation’s retail services unit for $30 million.381
The second division, National Vendor Services, provides merchandising
solutions including category management; new product set-up; employee
training; account management services; and inventory solutions to power,
electrical and hand tool equipment manufacturers selling through Lowe’s.382
Manufacturer clients include Cooper Lighting, Stanley, Troy-Bilt, and Lowe’s
private label brand, Kobalt.
H.I.G. Capital is
still the controlling
shareholder of NPS.
The company was formed in 1999 with the acquisition of three companies
by Miami, Florida-based investment firm H.I.G. Capital. Antares Capital and
Toronto, Ontario-based RoyNat Capital provided financing and are also
shareholders. We estimate that NPS generates revenue of more than $400
million.383
N.E.W. Customer Service Companies / Asurion
Headquarters: Sterling, Virginia
Ownership: Privately held – Recently merged with Asurion, a cell-phone
warranty company backed by Madison Dearborn, Providence Equity and
Welsh Carson. Berkshire Partners had been a majority shareholder of
N.E.W. with Freeman Spogli & Co. in a minority position.
Chief Executive: Tony Nader had been CEO of N.E.W., unclear post-merger
Categories: Warranty Program Services
Key Services: Warranty solutions; consumer marketing solutions; employee
education; installation services; replacement and repair solutions
N.E.W. is a leading
third-party
administrator of
extended service
plans.
Based in Sterling, Virginia, N.E.W. Customer Service Companies (“N.E.W.”)
is a leading third-party administrator of extended service plans, buyer
protection services, and product support programs for major retailers,
utilities, manufacturers, wireless carriers and financial services firms. The
company employs more than 3,000 individuals and protects the purchases
of more than 150 million consumers annually. The company offers product
replacement programs, wireless handset insurance, retail support service,
manufacturer warranty administration, and customer care programs that
381 Robertson, Jason. “Huffy Sells Sports Division for $30 Million.” Dayton Daily News.
July 19, 2004.
382 NPS website.
383 Capital IQ.
384 O’Hara, Terence. “Return on Warranties: $1.2 Billion; Dulles Firm Founded on Law
Student’s Credit Card Is Sold.” The Washington Post. August 9, 2006.
208
Fall 2008
provide coverage for consumer electronics, computers and peripherals,
major and small appliances, home improvement products, sporting goods
and fitness equipment, toys, jewelry and watches, and HVAC equipment.
The company operates nine call centers around the United States and has
a history of innovation. According to the N.E.W. website, the company
was the first retail administrator to offer round-the-clock customer service;
the first service contract administrator to fully insure the obligations under
those contracts; and the only service contract provider to hold a patent on
packaged extended service contracts. Most recently, the company launched
a first-of-its-kind lifetime jewelry warranty program that bundles the most
popular jewelry protection benefits into one policy.385 Additionally, the
company recently announced a new service called ecoNEW. This program
allows consumers to trade-in and recycle their old consumer electronics in
exchange for retail branded gift cards.386 Moreover, the company became
the first company to provide full-service extended warranty products and
customer care solutions to retail consumers in China with the opening in
January of N.E.W. China in Shanghai.387
N.E.W. has been
expanding its
international
footprint.
In order to expand the company’s breadth and depth of service offerings,
in January 2008 N.E.W. completed the acquisition of ServiceBench, the
leading provider of technology-based service management solutions for
U.S. retailers and manufacturers. This transaction will enhance N.E.W.’s
ability to provide turnkey solutions for the administration of customer care
and warranty programs.388 N.E.W. continues to be recognized as a preferred
vendor by major retail chains. In the past two years, N.E.W. has received
five awards including “Supplier of the Year” from Sam’s Club and Wal-Mart,
“Top Supplier” from Sears Holdings Corporation and “2007 Partnership
Award” from BJ’s Wholesale Club. Additionally J.D. Power and Associates
has recognized N.E.W. for outstanding customer service for the third year in
a row by awarding the company the “Certified Call Center Program” award”
in 2007.389
N.E.W. has been
recognized as a
“Supplier of the Year”
by Wal-Mart.
385 “Warranty Co. Launches Lifetime Jewelry Guarantee.” National Jeweler. February 29,
2008.
387 “Find Out What’s NEW in China.” Business Wire. January 7, 2008.
388 Adler, Neil. “N.E.W. buys ServiceBench.” The Washington Business Journal. January
18, 2008.
389 “J.D. Power and Associates Reports: N.E.W. Customer Service Companies, Inc.
Recognized for Providing an Outstanding Customer Service Experience.” PR Newswire
US. May 17, 2007.
Fall 2008
209
N.E.W. was acquired
by Freeman Spogli in
2004.
Founded in 1983, N.E.W. was acquired by Los Angeles-based private
equity firm Freeman Spogli & Co., along with TH Lee Putnam Ventures (an
affiliate of Thomas H. Lee Partners and Putnam Investments) and company
management in 2004. In 2005, the company completed a $370 million
recapitalization. A year later, the company received an additional infusion
of capital from current shareholders and Berkshire Partners, Boston-based
private equity firm. This event allowed TH Lee Putnam Ventures to realize
their initial investment and gave N.E.W. an enterprise value of approximately
$1.2 billion.390 TH Lee, which invested $70 million, realized a return of
approximately 400 percent on their investment.391 Berkshire invested
$350 million in equity, and paid 12.0x projected 2006 cash flow for N.E.W.
Between 2002 and 2006 N.E.W. revenue grew by approximately 35 percent
per annum.392 N.E.W. generated estimated 2006 revenue of $400 million.
The combination of
N.E.W. and Asurion
will create a leading
player in the warranty
service sector.
In a strategic move to strengthen its product and service offerings, N.E.W.
recently merged with Nashville, Tennessee-based cell-phone warranty
provider Asurion. While no financial terms were disclosed, the companies
formed a new holding company called NEWAsurion and will operate, at
least in the near term, as independent entities.393,394 Asurion, the largest
provider of wireless handset insurance, is controlled by Madison Dearborn
Partners, Providence Equity Partners, and Welsh, Carson, Anderson &
Stowe. The respective ownership of these private equity groups, Berkshire
Partners and Freeman Spogli in the combined company is unclear at this
point. Asurion seems to have been a much more sizable entity than N.E.W.,
implying that Berkshire and Freeman Spogli are in the minority position.
While the total transaction value was not disclosed, there is speculation
that Providence, Madison Dearborn and Welsh Carson valued Asurion at as
much as $3.5 billion when they invested in July 2007.395
390
391
392
393
Freeman Spogli & Company website.
Carey, David. “Berkshire into N.E.W. Customer.” The Deal. August 9, 2006.
Ibid.
“Asurion Confirms it has Combined with Va.-Based Company.” The Tennessean. June
11, 2008.
394 Beltran, Luisa. “PE Firms Merge Warranty Companies.” The Deal. May 23, 2008.
395 Ibid.
210
Fall 2008
PlayNetwork Inc.
Headquarters: Redmond, Washington
Ownership: Privately Held – Private equity investment by Chartwell Capital,
Talon Asset Management, Velocity Equity Partners, and Cedar Grove
Investments
Chief Executive: Lon Troxel
Key Services: Digital media networks; creative services; installation;
promotional services
Founded in 1996 and headquartered in Redmond, Washington,
PlayNetwork provides integrated audio and video solutions for retailers,
restaurants, hotels, health clubs and banks. Services include branded video
programming featured on digital signage networks; customized audio
programming including music and messaging; systems integration ensuring
audio and visual systems perform consistently across locations; promotional
services such as podcasts, private-label music compilations and in-store
artist appearances; and other professional services.397 Clients include
Starbucks; Krispy Kreme Doughnuts; Abercrombie & Fitch; The Finish Line;
T.G.I. Fridays; Verizon; Zales; Tiffany; Under Armour; Chili’s Restaurants; and
Brinker International. With affiliate partnerships in Asia and Europe (Nippon
Rediffusion Ltd and Imagesound Music), the company has extended its
reach to 35 countries. In December 2007, the company announced a
strategic relationship with XM Satellite Radio under which PlayNetwork will
manage all commercial business sales and services on behalf of XM. The
new venture, called “XM for Business,” available to business customers
across the country, will enable business customers to experience XM and
benefit from PlayNetwork’s industry expertise and specialized direct-sales
workforce.398
In October 2007 the company was selected by Under Armour to provide
custom media solutions for its first retail location. PlayNetwork worked
closely with Under Armour to create a unique branded in-store experience
PlayNetwork
provides integrated
audio and video
solutions to retail
clients.
High-profile clients
include Under
Armour.
396 Martinez, Amy. “PlayNetwork Helps Stores Use Music, Video to Boost Business.” The
Seattle Times. October 4, 2007.
397 Capital IQ.
398 “XM Satellite Radio and PlayNetwork Announce Strategic Relationship.” Press Release.
December 12, 2007.
Fall 2008
211
Starbucks has
also been a strong
relationship for the
company.
PlayNetwork has
received funding from
a number of private
equity firms.
that utilized in-house music, video media and compelling design features to
convey the brand identity. As a testament to the retail environment created
by PlayNetwork (and others), the store, located in Annapolis, Maryland
was announced as a winner in the 2007 “Retail Store of the Year” by Chain
Store Age Magazine.399 In March of 2008 the company announced that it
had extended its long-term partnership with Starbucks to provide in-store
music and related services to locations throughout North America.400 The
company has been instrumental in the execution of several recent Starbucks
promotional events. For instance, PlayNetwork’s technology was used when
Starbucks teamed up with Apple iTunes for the “Song of the Day” giveaway
to promote the launch of their Now Playing service.401
PlayNetwork has received funding from a number of sources, including
Chartwell Capital; Edgewater Private Equity Fund; Talon Opportunity Fund;
Velocity Capital; and WHP Partners. The company continues to grow rapidly.
In 2006, the company was named, for the fourth straight year, to Deloitte’s
prestigious Technology Fast 50 Program as one of the Pacific Northwest’s
fastest growing companies. According to the press release, revenue grew
190 percent from 2001 to 2005.402 We estimate that PlayNetwork generated
2007 revenue of $40 million.
Headquarters: Elk Grove Village, Illinois
Ownership: Privately held – Private equity investment by Valor Equity
Management
Chief Executive: Dan Frederickson
Key Services: Loyalty and gift card manufacturing; event ticket
manufacturing; printing services
399 “Under Armour Takes Top Honors in 2007 Chain Store Age ‘Retail Store of the Year’
Awards.” BusinessWire. February 20, 2008.
400 “Starbucks Renews Pact with PlayNetwork for In-store Music Services.” Wireless News.
March 2, 2008.
401 “PlayNetwork Continues to Deliver Starbucks Music.” Business Wire. February 26,
2008.
402 “PlayNetwork Named One of Pacific Northwest’s Fastest Growing Technology
Companies in Deloitte’s Technology Fast 50 Program.” Business Wire. October 3, 2006.
403 Linkedin Profile: Board Member. (www.linkedin.com/pub/4/7b/9b0).
212
Fall 2008
Based in Elk Grove Village, Illinois, Premier Card Solutions is a leading
provider of secure printing solutions, products and services to customers
worldwide. Premier Card Solutions is a combination of the expertise and
capabilities of four companies: Plastag Holdings, Lucas Color Card, Globe
Ticket and most recently, UV Color. Originally a subsidiary of Norwood
Corporation, Plastag is a leading manufacturer of printed plastic products
with facilities in Illinois and Oklahoma. The company manufactures retail gift
and loyalty cards, ATM, casino, pre-paid phone, membership, identification,
and hotel cards. In 2005, the company produced more than 500 million
cards and had an on-time delivery record of 97 percent for all orders.404
Retail clients include five of the top 15 retail gift card programs operating
in the United States. It is the largest blank card manufacturer in the world
and is the only one with both PVC (gift cards) and Teslin (loyalty cards)
production capabilities.405 Headquartered in Oklahoma City, Oklahoma,
Lucas Color Card is a manufacturer of Teslin-based transaction cards
such as retail loyalty cards, gift cards, library cards and telecards. Globe
Ticket is a leading producer of tickets to customers in the entertainment
and transportation industries. Products include general admission tickets,
reserve seat tickets, wrist bands, parking badges, ticketing equipment,
badges, and credentials. The newest member of the organization, UV Color,
is a leading manufacturer of gift, secure and prepaid phone cards to the
retail, telecommunications, trading, collectable and game card industries.
The company is owned by Chicago, Illinois-based private equity group Valor
Equity Management. While revenue information was difficult to find, we
estimate that the combined companies generate revenue in excess of $100
million.
Premier is a leading
provider of retail gift
and loyalty cards.
The company
generates revenue
of more than $100
million.
Headquarters: Chesterfield, Missouri
Ownership: Privately Held – Ron Travers
Chief Executive: Ron Travers
Key Services: In-store merchandising; display set-up and installations;
404 Premier Card Solutions website.
405 Valor Equity Management website.
406 Capital IQ.
Fall 2008
213
remodels and new store openings; retail inventory solutions; assembly
services; employee education; sampling and demonstration services;
fulfillment
Premium provides
a range of
merchandising and
Founded in 1985 and headquartered in Chesterfield, Missouri, Premium
Retail Services provides retail merchandising and marketing services to
retailers and manufacturers nationwide. Premium offers a full range of
retail services, including continuity coverage; resets; audits; assembly
services; POP and signage placement; demo days and assisted selling; instore training; rapid deployment; store remodels; and promotional selling.
Premium markets its services to a variety of retail channels, including drug,
food, mass, consumer electronic, big box retail and home centers.
Premium has been very progressive in terms of identifying new
market opportunities. In October 2007, having recognized a need for
knowledgeable third-party employees at the retail level to answer questions
from consumers and educate store employees (particularly concerning
technology-related products), Premium created a new division dedicated
to providing assisted selling solutions to retailers and manufacturers.407 The
company also launched an initiative to provide merchandising solutions to
insurance providers and retailers, helping them to enroll retail consumers
into Medicare Part D.408 Launched in January 2006, the company sent
certified, knowledgeable employees to pharmacies across the country to
enhance the in-store merchandising efforts of insurers and retailers and to
address any Medicare Plan D related questions that consumers may have.409
We estimate that
Premium generates
revenue of $218
million.
Premium provides its retail services on a nationwide basis, as well as in
Puerto Rico and the Virgin Islands. The company was founded by Ron
Travers, a former sales executive at Nabisco, and continues to be family
owned. Kevin Travers heads up sales and marketing and Brian Travers leads
the operations group. Revenue was reported to be $218 million in 2007.
407 “Premium Retail Expands Assisted Selling Service.” Retailing Today. October 8, 2007.
408 Medicare Part D is a federal program to subsidize the costs of prescription drugs for
Medicare beneficiaries in the United States.
409 www.digital50.com/news/items/PR/2006/01/20/CGTH044/premium-retail-services-incrxbrief-.html
214
Fall 2008
PRN Corporation (Premier Retail Networks)
Revenue: Approximately $117 million in 2004
Ownership: Public Subsidiary – Thomson
Chief Executive: Richard Fisher (President)
Key Services: Digital media networks; creative services; installation
Headquartered in San Francisco, California, Premier Retail Networks (“PRN”)
is one of the largest in-store television network providers in the world. The
company’s network of more than 225,000 screens reaches over 300 million
viewers each month in 6,500+ store locations worldwide. The company
generates revenue from three main sources: (i) advertising airtime sales,
(ii) media management services, and (iii) creative services.410 Retail clients
include ACME, Albertsons, Best Buy, Carrefour, Costco, Jewel-Osco,
Pathmark, Sam’s Club, ShopRite and Wal-Mart. PRN’s extensive network
includes the Home Electronic Network, a collection of screens in more than
5,600 stores used by retailers to market HDTV’s and related technology;
Checkout TV, a multi-paneled TV display network in almost 2,000 locations
designed to enhance and improve the checkout experience; Department
TV, a network of 35,000 screens in more than 3,000 stores delivering relevant
category, item and department messages; and Display TV, an interactive
media product designed to merchandise a single product at the point
of purchase. The company has also announced a strategic partnership
with the Cabco Group, a leading operator of electronic shopping carts, to
coordinate content between PRN’s network and Cabco’s TV Kart displays.411
The company also provides creative services, generates in-store television
programs, including entertainment, product information, and advertising
for retail and advertising clients. Through the PRN Network, consumers
are exposed to advertisements from some of the largest CPG brands in the
world, including Kraft, Nestle, Pepsi and P&G, as well as programs from the
Food Network, The Fox News Channel, Discovery Health, The NBC Agency,
Reuters World News, and Oxygen Network. In addition to these offerings,
the company announced in June 2008 that it has signed a programming
agreement with the Associated Press to bring a blend of AP News content
PRN is one of the
largest in-store
television networks in
the world.
Clients include Kraft,
Nestle and P&G.
410 “PRN Corporation 10-K.” August 3, 2004.
411 “Thomson’s PRN and Cabco Group Enter Strategic Alliance to Enhance In-Store Media
Experience for Retailers and Shoppers.” Press Release. May 5, 2008.
Fall 2008
215
to PRN’s network, further expanding its in-store offering.412
PRN has established
an impressive
international
footprint.
PRN was acquired by
Thomson S.A. in 2005
for $245 million.
PRN has been active in developing relationships with international retailers
to develop in-store media networks abroad. In 2007, the company extended
the reach of its in-store network into Brazil, Poland and China. PRN’s
international strategy is focused on creating leadership positions in selected
markets in collaboration with best-in-class partners such as CGen Media, a
leader in in-store TV in China; Cereja, a leading out-of-home digital media
company in Brazil; and Globosat, the leading pay TV broadcaster in Brazil.413
In July 2007, PRN announced that it had entered into an agreement with
NBC Universal that would extend its longtime collaboration with the media
firm to include developing customizable content for advertisers on the PRN
Network.414 This was seen by some as a strategic move to counter the CBS
acquisition of SignStorey (CBS Outernet).
The company has been a division of Thomson S.A since 2005, when it was
purchased for $245 million in cash.415 Previous investors included Steelpoint
Capital Partners, Allen & Company, GE Equity, Moore Capital Partners and
Shamrock Capital.416 In November 2007, Thomson, recognizing the growth
potential of out-of-home media, repositioned the leadership team in its Outof-Home (“OOH”) networks business unit. The company promoted long
time chief strategy officer of PRN to the position of president of the OOH
business unit.417 Additionally, in January 2008, Thomson named the founder
of ZDTV and the former CEO of eMotion, Richard Fisher, to the position of
President of PRN Worldwide.418
We were unable to find recent estimates of revenue. However, to provide a
sense of scale, the company generated revenue and EBITDA of $117 million
and $14 million respectively (prior to the acquisition by Thomson).419
412 “PRN Adds Associated Press to Checkout TV Network.” Supermarket News. June 3,
2008.
413 “Thomson’s PRN Launches Retail Media Network in Brazil.” Press Release. Company
website. November 7, 2007.
414 “NBC Universal, PRN Team for Strategic Sales and Marketing Alliance.” Progressive
Grocer. July 23, 2007.
415 “Thomson to Acquire PRN Corporation, the Leading Operator of In-Store Digital Video
Networks.” Press Release. Company website. July 28, 2005.
416 Capital IQ.
417 “Thomson Names Sean Moran President of Out-of-Home Media Networks.” Business
Wire. November 26, 2007.
418 “Thomson’s PRN Names Richard Fisher as President of PRN Worldwide.” Wireless
News. January 9, 2008.
419 Capital IQ.
216
Fall 2008
PromoWorks
Headquarters: Schaumburg, Illinois
Ownership: Privately held – Private equity investment by Eos Partners with
financing from Allied Capital
Chief Executive: Mike Kent
Key Services: Event marketing; sampling and demonstration services; Instore merchandising; category management; mystery shopping; display
setup and installation; inventory solutions; consumer marketing services;
POP and display creation; staffing solutions
Headquartered in Schaumburg, Illinois, PromoWorks is a leading provider of
experiential marketing solutions nationwide. The company represents more
than 200 CPG manufacturers and offers in-store sampling, retailtainment,
and promotional services to various classes of trade including grocery,
mass and drug, convenience, pet, home improvement and specialty.
Clients include Kimberly-Clark, Unilever, Kellogg, Kraft, Safeway, Kroger
and Albertsons.421 PromoWorks uses its resources to deliver an extensive
collection of marketing solutions to increase brand equity, drive brand
awareness and increase client revenue. It provides traditional sampling
services; retailtainment events focused on experiential marketing; consumer
segment sampling, targeting specific consumer demographics; and event
sampling at NASCAR Racing, football tailgate events and minor league
baseball games. In addition, the company offers merchandising solutions
such as POP placement; mystery shopping programs; category resets; new
product cut-ins; display installation and maintenance; surveys and audits. A
separate division, GameDayWorks, provides innovative marketing solutions
at sports venues nationwide (such as Wrigley Field) including product
sampling events, product placement at seats, sponsorship opportunities
and scratch-and-win promotions. Moreover, the company offers a national
convenience store program that targets the ‘gas-and-go’ consumer at the
pump. The division has realized 100 percent promotion compliance at all
c-stores and driven sales by an average of 97 percent in all categories.422
PromoWorks has also focused efforts on Hispanic American marketing
PromoWorks is a
leading provider
of experiential
Clients include
Kimberly-Clark,
Unilever and Kraft.
420 “PromoWorks Achieves No. 9 Ranking on Crain’s Fast 50 List of Chicago’s Fastest
Growing Companies.” Press Release. June 11, 2007.
421 Le Beau, Christina. “Calling all Shoppers.” Crain’s Chicago Business. April 17, 2006.
422 PromoWorks website.
Fall 2008
217
campaigns by acting as the retail services arm of MiConexxion, a dedicated
Hispanic marketing agency comprised of three leading firms – Custom
Consulting Group, Malone Advertising and PromoWorks. The company
leverages the resources of its partner companies to provide bilingual and
tailored solutions to this growing market.
PromoWorks has been named as one of Chicago’s top 10 fastest growing
companies, and the second-ranked company among the “Nation’s Top
100 Promotion Agencies” in 2007 by Promo Magazine. The company
has implemented a number of initiatives in an effort to differentiate
itself in a crowded market. For instance, PromoWorks has introduced
PromoReports – a real-time Internet communication and reporting system
that allows clients to assess the effectiveness of the campaigns. Similarly,
the PromoPin card, which tracks and ranks sales performance for individual
event personnel, enhances overall levels of accountability. In a move to
further assist clients in quantifying the ROI on in-store promotion dollars, the
company recently launched proprietary technology called PromoIntelligence
Reports. This technology provides clients with access to historical data
analysis tools that allow for more effective allocation of future capital
spending.
PromoWorks has
focused its efforts on
Hispanic marketing.
The company has also been active in pursuing value-enhancing joint
ventures and acquisitions. In January 2008, PromoWorks entered into a joint
venture with Mobile Media Enterprises, a leading provider of experiential
marketing services. The purpose of the joint venture was to enhance their
portfolio of services to provide a comprehensive one-stop solution for
client promotion and brand marketing needs.423 Additionally, in 2007 the
company expanded its service offerings by acquiring Segment Promotions,
a leading provider of marketing services into specific consumer segments.
PromoWorks has
been recognized as
one of Chicago’s
fastest-growing
companies.
PromoWorks completed a $100 million recapitalization in 2005 with Eos
Partners, a New York-based private equity firm. The transaction included
$65 million of financing provided by Allied Capital. PromoWorks generated
estimated 2006 revenue of $173 million, continuing an impressive pace of
growth. According to a report, PromoWorks generated revenue of $78.5
million in 2003; $92.3 million in 2004; and $130 million in 2005.424
423 “PromoWorks, Mobile Media Unveil Joint Venture.” Promo Magazine. January 2, 2008.
424 Carey, David. “Eos Partners Buys PromoWorks.” The Deal. January 4, 2006.
218
Fall 2008
RGIS, LLC
Headquarters: Auburn Hills, Michigan
Revenue: Estimated at $1.2 billion425
Ownership: Privately Held – Private equity investment by The Blackstone
Group
Chief Executive: Paul Street
Key Services: Retail inventory solutions; in-store merchandising; category
openings; event marketing; sampling and demonstration services; staffing
solutions
Based in Auburn Hills, Michigan, RGIS, LLC (formerly known as RGIS
Inventory Specialists) is one of the leading inventory and retail services
companies in the world. The company employs more than 40,000 people
in 400 offices worldwide. RGIS provides outsourced inventory solutions
to the retail, medical and health care, automotive and industrial supply
industries. The core inventory business allows retailers to hold accurate
counts, reduce out-of-stock inventory, enhance product availability and
improve overall inventory management practices. The company’s Retail
Services Division focuses on providing a broad range of services to retailers
and CPG manufacturers by providing merchandising services such as set-ups
and resets; new store remodels and fixture assembly; category management
solutions; demonstrations and training; data collection and reporting; and
blitz merchandising. RGIS also provides staffing services, allowing retailers
to better manage their workforce during peak times. RGIS clients include
a wide range of customers in multiple end-markets, including Wal-Mart,
Target, Food Lion, CVS, Woolworth’s, Omnicare, Boston Scientific and Eli
Lilly.
Management has taken a number of steps to position RGIS for continued
growth on a global basis. In 2006 the company extended its international
reach into Australia, New Zealand and Singapore with the acquisition of
Lotons, a complimentary inventory service provider. On the heels of this
strategic move, the company strengthened its presence in the Middle East
and Europe with the acquisitions of ISICS (the largest inventory company
in Israel), Gin Soft, Knopfle Inventory, and EXACOD.426 Moving forward,
RGIS is one of the
largest inventory
services companies in
the world.
RGIS has been very
aggressive in terms
of international
expansion.
425 Capital IQ.
426 RGIS website.
Fall 2008
219
The company
conducts operations
in Australia, New
Zealand, Singapore
and the U.K.
RGIS was acquired
by Blackstone in 2007
for an estimated $1
billion.
the company has identified the Asian market as a key area of strategic
growth. In September 2007, RGIS acquired JKIS, the leading inventory
service provider in Singapore and Malaysia, for an undisclosed sum. Most
recently, in April of this year, RGIS acquired U.K.-based PDSRS, a leading
developer of retail space planning software. The company continues to
expand overseas and recently announced that it will invest $12 million
into its Brazilian operations by 2009. According to company executives,
Brazil represents five percent of global operations and represents the most
important growth opportunity in Latin America.427
Founded in 1958, the company was under family ownership until March
2006, when a majority interest was purchased by Impala Partners for $750
million.428 The ownership change resulted in new strategic initiatives,
expanding the company’s presence in Europe, Asia and the Middle East,
and into new service offerings with the launch of their Retail Services
Division. In early 2007, ownership once again changed hands when The
Blackstone Group, a New York-based private equity firm, acquired a
controlling interest in the company. Although terms of the agreement
were not disclosed, the deal was estimated to be valued at upwards of $1
billion.429 Goldman Sachs arranged $575 million in debt financing for the
leveraged recapitalization that closed in May 2007.430 We estimate the RGIS
generated 2007 annual revenue of $1.2 billion.
SAJO
Headquarters: Montreal, Quebec
Revenue: Estimated at $100+ million
Chief Executive: Sal Guerrera
Key Services: Construction services; display set-up and installations;
project management; fixtures manufacturing
Headquartered in Montreal, Quebec, SAJO has two primary businesses: the
provision of general contracting services and store fixture manufacturing.
427 “Technology: RGIS Announces $12mm U.S. Investment in Brazil.” Gazeta Mercantil
Invest News. May 20, 2008.
428 “Impala RGIS Holdings LLC Agreed to Acquire RGIS Inventory Specialists.” Factsheet
Flashwire. March 14, 2006.
429 Cadwalader, Wickersham & Taft LLP website. William P. Mills Bio.
430 Carey, David. “Blackstone to Recap RGIS.” The Deal. April 6, 2007.
220
Fall 2008
The fixtures business is an outgrowth of the firm’s historical focus on store
design and construction. Having established itself as a leading player in
the Canadian marketplace, SAJO management has worked aggressively
to expand the company’s geographic footprint in the U.S. and abroad.
Accordingly, the firm opened offices in Chicago and the U.K. in recent
years and now provides services to clients on a global basis. In 2003, the
company’s U.K.-operations reportedly generated revenue of nearly $10
million on an annualized basis.431 Clients have included Tommy Hilfiger,
Calvin Klein, Crabtree & Evelyn, DKNY and Esprit. We estimate that SAJO
generates revenue of more than $100 million (between general contracting
activities and fixtures sales).
SAJO offers retail
general contracting
services and
store fixtures
manufacturing.
SeeSaw Networks
Revenue: N/A
Ownership: Privately Held – Private equity investment by Sutter Hill Ventures
Chief Executive: Peter Bowen
Key Services: Digital media network aggregator
Launched in 2006 and headquartered in San Francisco, California, SeeSaw
Networks is the leading provider of ‘life pattern marketing solutions’
utilizing the world’s most extensive digital out-of-home media network. The
company has pioneered the concept of placing relevant advertisements
on digital signs and billboards at locations where the target audience goes
during their daily life patterns. By aggregating access to hundreds of retail
media networks across a broad range of categories such as health clubs,
retail outlets and medical offices, SeeSaw Networks provides advertisers
with unique marketing solutions that can be incorporated into national
advertising plans. Additional services include campaign planning and
inventory management. Campaign planning provides advertisers with
the ability to perform a variety of digital media planning and buying tasks
using an easy-to-use web browser. Inventory management services, which
leverage software by BroadSign International, manages and analyzes
the networks’ inventory of signs to provide real-time availability data for
SeeSaw provides a
range of “life pattern
marketing solutions”
to retailers and brand
managers.
431 “Top Shopfitters in 2004 – Who Comes Out on Top?” Retail Week. September 3, 2004.
Fall 2008
221
clients.432 The company, through SeeSawAds.com, allows advertisers to
plan, buy, and measure digital signage by campaigns, venues, markets, and
demographics.
The SeeSaw network
generates 35 million
weekly impressions
in over 22,000 venues.
SeeSaw’s advertising and agency clients reach consumers through an
extensive collection of affiliate networks located in bars and restaurants
through Buzztime; bookstores through BordersTV; gas stations through
PetroTV and PumpTopTV; office buildings provided by Ripple TV; university
campuses; convenience stores; retail locations; health clubs through
Netpulse; coffee shops; executive airports; travel centers; veterinary clinics;
casinos; and quick service restaurants. The company also segments
consumers into ten different life patterns: college students; mobile
millennials; affluent baby boomers; business professionals; alpha moms;
Hispanic families; entertainment fans; young urban professionals; families
on the go; and night lifers in order to further assist clients in reaching their
target audience. The network provides advertisers and agencies with more
than 35 million weekly impressions in over 22,000 venues.
The company continues to expand its affiliate networks. In February
2008, SeeSaw added eight new affiliate networks to bring the total to 36.
According to the company website, SeeSaw’s affiliate network delivers
more impressions than a spot on the average of the top five prime time
television shows in 2007, including American Idol, Dancing with the Stars
and NBC Sunday Night Football. In April 2008, the company announced a
partnership with LocaModa, a provider of a mobile social platform, enabling
advertisers to connect digital out of home media with social networks,
further expanding its consumer reach.433
SeeSaw has raised
$13.5 million of
venture funding to
date.
In November 2006, SeeSaw received $10 million in Series A financing from
Palo Alto-based investment firm Sutter Hill Ventures. In June, SeeSaw
raised an additional $3.5 million in Series B funding from Sutter Hill.434 We
have been unable to find any additional financial information in the public
domain.
432 Bachman, Katy. “SeeSaw Gets ‘Real’ With Web Tool.” Media Week. February 25,
2008.
433 “SeeSaw Networks and LocaModa Partner to Connect Digital Out-of-Home Media to
Social Networks.” Press Release. April 15, 2008.
434 “SeeSaw Networks Raises $3.5 Million in Series B Round of Funding.” Financial Deals
Tracker. June 24, 2008.
222
Fall 2008
Headquarters: Jeffersonville, Indiana
Ownership: Privately held – Private equity investment by GTCR
Chief Executive: Kevin Callahan
Key Services: Warranty solutions; installation services; employee education;
replacement and repair solutions
Headquartered in Jeffersonville, Indiana, Service Net Solutions is a
leading provider of service contracts and extended warranty solutions to
major retailers and manufacturers. The company offers extended service
programs including repair and replacement; accidental damage and
express replacement plans; warranty management administration, including
underwriting and logistic services; customer service and support such as
repair services and troubleshooting; service network management services;
claims processing; and installation services. Service Net began offering
three new services in 2007. In partnership with CyberAngel, the company
now offers theft recovery assistance and data protection for notebook
computers; online data backup in conjunction with Carbonite; and annual
notebook cleaning and maintenance services through Nexicore.436 The
company provides its services in the appliance, home office product, lawn
and garden, and personal computer categories, as well as HVAC, consumer
electronics, pool and spa, and peripheral equipment categories. Clients
include Crutchfield Electronics, Dell, Epson, Fujitsu, Hoover, Ken Cranes,
Maytag, Samsung, Sony, Staples and Toshiba.
Founded in 1996, the company has undergone three ownership changes.
In 2001, the founders sold 51 percent of the business to Kemper Insurance
Company, only to buy the entire company back in 2003. In 2004, H.I.G.
Capital purchased 70 percent of the company.437 Three years later, H.I.G.
exited the investment and sold the company to GTCR of Chicago, Illinois.
Terms of the deal were not disclosed. Service Net generates estimated
annual revenue of more than $100 million.
Service Net is a
leading provider of
service contracts and
extended warranty
solutions.
Service Net generates
estimated annual
revenue of $100
million and is
controlled by GTCR.
435 “Service Net Adds Clients, Moves into New Markets in 2005; Expects up to $30 Million
Revenue Increase in 2006.” Business Wire. January 23, 2006.
436 Wolf, Alan. “Service Groups Add New Programs.” TWICE Magazine. August 20, 2007.
437 Jeffords, Sarah. “Service Net Grows with Broader Focus, Ownership Change.” Business
First of Louisville. March 25, 2005.
Fall 2008
223
Sperry & Hutchinson Company
Headquarters: Delray Beach, Florida
Revenue: NA
Ownership: Privately held – Private equity investment by OZ Management
LP, Denarius Touch LLC, Highbridge International LLC and Plainfield Asset
Management LLC
Chief Executive: Ron Pedersen
S&H was the original
pioneer of the retail
loyalty industry...
...and is a leading
provider of retail
loyalty solutions.
224
Headquartered in Delray Beach, Florida, Sperry & Hutchinson (“S&H
Solutions” or “S&H”) is a leading full-service provider of retail loyalty
solutions. Founded in 1896, S&H Solutions was the creator of the S&H
Green Stamps rewards program that first became popular in the 1960s.
Customers would receive Green Stamps after their purchase from selected
merchants, placing the stamps in booklets and exchanging those booklets
for merchandise. In the 1960s, the S&H catalog became the largest
publication in the country with the company printing three times as many
stamps as the U.S. Postal Service. In 2000, the company established the
Greenpoints reward program, an online version of the Green Stamps
rewards. Consumers could earn points by using the S&H Greenpoints credit
card, shopping at selected merchants, or shopping online through the
S&H website. Along with the Greenpoints rewards program, S&H solutions
offers the management and administration of private branded rewards
programs; in-lane messaging systems that provide targeted promotional
offers and coupons at the point of purchase; strategic consulting services
enabling retailers to gain a greater understanding of consumer spending
habits and ultimately drive consumer loyalty; technology and administration
solutions such as POS system customization, database administration,
data warehousing, software development, transaction log collection and
warehouse query and reporting; strategic marketing management services
including the design, implementation and tracking of loyalty promotions;
and customer relationship management solutions to the retail, wholesale,
financial and gaming industries. Clients include Shop’n Save; D’Agostino;
Harp’s Food Stores; Food Circus; and Price Cutter.
Fall 2008
In 2006, the company was acquired by San Francisco-based Solidus
Networks (Pay By Touch) for more than $100 million in cash and stock.438
In December 2007, Solidus Networks filed for Chapter 11 bankruptcy
protection and ceased operations in March 2008.439 In April 2008, the assets
of the company were sold to YT Acquisitions Corporation, which is an
entity supported by OZ Management LP, Denarius Touch LLC, Highbridge
International LLC and Plainfield Asset Management LLC, for $54.4
million.440,441 Unfortunately, we were unable to find specific revenue figures
for S&H.
S&H was caught
in the crossfire of
the Pay By Touch
bankruptcy.
Storeimage
Headquarters: Brantford, Ontario
Revenue: Estimated at $50+ million442
Ownership: Privately held – Company Management
Chief Executive: Janice Locke
Categories: In-Store Marketing; Design, Build & Installation
Key Services: Printing services; retail signage and graphics; fixtures; logistics
and warehousing
With three locations in North America, Storeimage is one of the leading
providers of retail solutions to department stores, supermarkets, specialty
stores, drug stores and big box retailers. Based in Brantford, Ontario,
the company takes a holistic approach to helping retailers strengthen
their brands through customer communications products and offers an
array of value-added services, including strategy and design services;
project management; single-source production capabilities; and logistics
and warehousing. The company’s product and service offerings include
communications (customized signage, etc.); pricing systems (pricing boards
and signage); décor (environmental signs and displays); and merchandising
products (including fixturing). Storeimage also provides a broad array
Storeimage is a
leading provider
of a range of retail
438 “Pay By Touch Buys Marketing Company for $100M.” San Francisco Business Times.
December 6, 2006.
439 “Pay By Touch to Shut Down All Biometric Services Immediately.” PR Newswire.
March 19, 2008.
440 Schoek, Mike. “Solidus Assets Sold for $54.4M.” The Deal. April 1, 2008.
441 “Pay By Touch Fades into History As Lenders Buy Core Assets.” Digital Transactions
News. April 07, 2008.
442 Srinivasan, Kirsten. “Shaping Images: From Start to Finish, Storeimage Says it Helps
Retailers Set the Stage for Their Customers’ Retail Experience with the Convenience of
One Holistic Partner.” US Business Review. January 1, 2006
Fall 2008
225
Clients include
Staples, Best Buy and
Wal-Mart.
of related services. Storeimage’s resources include 450,000 square feet
of manufacturing and warehousing space located in Ancaster, Canada;
Hebron, Kentucky; and Brantford. Clients include leading big box retailers
such as Staples, Best Buy, Wal-Mart, The Brick and PetSmart; supermarkets
including Giant Eagle, Safeway, A&P and Roundy’s; department stores
such as Target, Sears, Kmart and Kohl’s; drug retailers including Rexall and
Shoppers Drug Mart; and specialty retailers such as Sit’n Sleep, Hard Rock
Café, Dollar Tree and Luxottica.
To ensure a full pipeline of skilled labor (a difficult task in the retail services
industry), the company announced a partnership with Mohawk College in
April 2008. Under the agreement, Mohawk provides Storeimage’s 350+
employees with continuing education, as well as skilled. The company will
donate equipment to Mohawk, offer co-operative education opportunities
and financial assistance in the form of scholarships.443
We estimate that
Storeimage generates
revenue of more than
$50 million.
Founded in 1907 as Domino Signs, the company originally specialized in
gold-leaf hand lettering on horse-drawn carriages. Later, the company
changed its name to Screen Print Industries, focusing on the manufacturing
of retail signage. In 1996, in an effort to better reflect the broad suite
of services that the company now offers, the company renamed itself
Storeimage. A year later, the company was purchased by the executive
team.444 We estimate that Storeimage generates revenue of more than $50
million.
Stratmar Systems
Headquarters: Port Chester, New York
Revenue: N/A
Ownership: Privately held – Charas Family
Chief Executive: Ted McGrath
Key Services: Sampling and demonstration services; event marketing; instore merchandising; display setup and installation; category management;
mystery shopping; retail inventory solutions; staffing solutions
Headquartered in Port Chester, New York, Stratmar Systems provides
443 Desmond, Paige. “Mohawk, Storeimage Ink Partnership.” Brantford Expositor. April
23, 2008.
444 Henderson, Stephanie. “Never Give Up, Never Give In.” Profit: The Magazine for
Canadian Entrepreneurs. January 1999.
226
Fall 2008
retail marketing solutions for retailers and manufacturers nationwide. The
company specializes in innovative in-store sampling and demonstration
programs that build brand awareness and ultimately drive incremental
sales. Clients include the Home Depot, ConAgra Foods, Gillette, Tyson,
S.C. Johnson, Kraft, Target and CVS. In addition to its 1,000 direct hires,
the company has access to more than 15,000 field representatives who
have executed over one million demonstrations throughout the United
States. Specific services include in-store sampling and demonstration;
retailtainment events; in-store merchandising solutions including POP
placement and planograms; audits and in-store compliance; new item
cut-ins; mystery shopping; and event sampling. The company leverages its
information technology capabilities to enable clients to schedule and track
projects online; track real time program performance; as well as survey data
collection activities including demonstration audits and reports.
Stratmar provides
retail marketing
solutions and
specializes in
sampling and
demonstrations.
In an effort to streamline operations and position the business for future
growth, Stratmar hired Ted McGrath, the former president of FUJI Films
Photo Imaging Group, to head the organization. During his tenure at FUJI,
annual revenue increased from $400 million to $1.5 billion and market share
for FUJI Film grew from 8 percent to 25 percent. The founding Charas family
continues to be involved in the company. While the company does not
disclose revenue and D&B reflects sales of approximately $30 million, we
believe that this figure is substantially understated.
We believe that
revenue significantly
exceeds the $30
million estimate that
is publicly available.
Headquarters: Chattanooga, Tennessee
Ownership: Privately held – Private equity investment by Wingate Partners
Chief Executive: Phil Harris
Categories: In-Store Marketing
Key Services: Printing services; retail signage and graphics; fulfillment
Based in Chattanooga, Tennessee, National Print Group (“NPG”) is one
of the leading producers of large format printed materials for the retail
point-of-purchase and out-of-home advertising industries. The company
is the largest digital, screen, litho, out-of-home and large format POP
445 Cross, Lisa. “Big Printers Get Bigger; Industry Revenues Rise 12 percent and
Consolidation Continues.” Graphic Arts Monthly. June 1, 2008.
Fall 2008
227
NPG is one of the
nation’s largest
providers of large
format printed
materials for the instore environment.
We estimate that NPG
generates revenue of
approximately $78
million.
printer in the world. In addition to printing, the company, through its
Retail Merchandising Group (“RMG”), offers a variety of retail solutions
including analysis of signage programs; prototyping for 3-D samples;
hardware expertise; and graphic design and artwork creation with a focus
on the in-store environment. The company maintains 80,000 square feet of
warehousing and distribution space and provides fulfillment, distribution
and data management services. For the out-of-home advertising market,
the company produces fleet graphics, automobile wraps, building wraps
and billboard signage.
NPG has undertaken recent strategic steps to become more efficient and
boost sales. In May 2007, the company announced that it would invest $4.5
million to move its entire eastern United States operation to Chattanooga.446
In addition to the $4.5 million capital outlay, the company made a $12
million investment into an 81-inch KBA Rapida press and supporting
equipment. The press is said to be the largest in the world. According to
reports, the machine will allow NPG to increase sales by 15 to 20 percent per
year.447 In 2001, NPG was acquired by Long Point Capital for $70 million.448
In 2006, the company was purchased by Wingate Partners, a Dallas, Texasbased private equity firm. The company generates revenue of $78 million.
The Sunflower Group
Headquarters: Overland Park, Kansas
Revenue: Estimated at $45+ million449
Ownership: Privately held – Garberg Family
Chief Executive: Dennis Garberg
Key Services: Sampling and demonstration services; event marketing;
consumer marketing services; printing services; staffing solutions
Headquartered in Overland Park, Kansas, the Sunflower Group provides
a broad range of marketing solutions to retailers and CPG companies
nationwide. With four offices across the country and 600 employees,
446 Rexroat, Brooks. “National Print Group Expands in $4.5 Million Project.” Chattanooga
Times Free Press. May 9, 2007.
447 Pare, Mike. “$12 Million Press Speeds up Jobs.” Chattanooga Times Free Press. July 9,
2006.
448 “Long Point Capital Agreed to Acquire National Print Group.” FactSet Flashwire.
November 2, 2001.
449 http://biz.yahoo.com/ic/102/102860.html
228
Fall 2008
the company offers in-store product sampling services, newspaper bag
advertising, and promotional event planning and staffing. The company
executes 6,000 sampling events per week across a variety of channels
including grocery, mass and drug. Additionally, Sunflower has a partnership
with NewsAmerica Marketing, which provides opportunities for brands to
increase awareness and market share through advertisements and product
samples in newspaper bags. The company also drives brand recognition
by offering event planning services and utilizing various tactics ranging from
guerilla marketing and mobile tours, to sponsorship opportunities for clients
that include Heineken, Tostitos, Clamato and Dreyers. While the company
has diversified to offer a wide range of new services, it continues to maintain
its original roots in run of press, or traditional newspaper, advertisement.
The Sunflower Group
provides a broad
range of marketing
solutions to retailers
and CPG companies.
In order to meet the needs of its clients, the company employs the Six Sigma
management strategy which is designed to reduce variation and improve
the quality of all in-house processes. Moreover, in a move to promote
environmentally conscious business practices the company now offers
POS materials to retailers that are comprised of 30 percent post-consumer
recycled material.450 In 2006, the company was hired to provide all in-store
marketing events for every Fry’s Food & Drug Store, a Kroger subsidiary with
115 locations. In addition, since 2005, the company has been the exclusive
provider of in-store marketing services to Ralphs.451 Sunflower was founded
in 1978 and continues to be owned and operated by the Garberg family.
The company generated 2007 revenue of $45 million.
Sunflower generated
estimated 2007
revenue of $45
million.
The Warranty Group
Headquarters: Chicago, Illinois
Ownership: Privately held – Private equity investment by Onex Corporation
Chief Executive: David Cole
Key Services: Warranty solutions; consumer marketing solutions; employee
education; administrative services
450 Sunflower Group website.
451 “Fry’s Marketplace Hires Help to Enhance Marketing Events.” The Progressive Grocer.
December 15, 2006.
Fall 2008
229
The Warranty Group
is one of the nation’s
leading providers
of extended service
plans.
The company
generated total
revenue of $1.3 billion
in 2007.
Headquartered in Chicago, Illinois, The Warranty Group (“TWG”) is one of
the leading providers of extended service plan solutions with more than $5.4
billion in total assets.452 Operating in more than 33 countries, the company
specializes in underwriting, administering and marketing warranty and
service contracts for manufacturers, retailers, and distributors of consumer
electronics, appliances, homes, and automobiles. Additionally, the
company provides credit card enhancements and travel and leisure products
and programs. TWG offers solutions in four categories – Automotive, Home
Warranty, Consumer Electronics and Powersports. The company is one of
the world’s largest providers of consumer electronics warranty solutions
including parts ordering and fulfillment; claims entitlement; mechanical and
electronic repair agreements for the retail consumer channel; sales training;
and warranty programs for manufacturers.
Formerly known as AON Warranty Group, the company was acquired by
Toronto, Canada-based investment firm Onex Corporation. Onex acquired
the firm in late 2006 in a transaction valued at approximately $710 million
(C$800 million).453 While TWG generated 2007 revenue of $1.3 billion, it is
unclear how much of this revenue was attributable to retail-related sales.454
Headquarters: Dayville, Connecticut
Ownership: Public – (ticker: UNFI. TEV: $1.249 billion on October 17, 2008)
Chief Executive: Michael Funk
Marketing
Key Services: Food wholesale and distribution; food retail; food importing
Based in Dayville, Connecticut, United Natural Foods (“UNFI”) specializes
in the wholesale distribution of natural and organic foods and related
products. The company operates in four primary divisions: 1) United
Natural Foods East; 2) United Natural Foods West; 3) Albert’s Organics; and
4) Select Nutrition. Additionally, the company owns and operates 13 natural
products stores under the Natural Retail Group banner in Florida, Maryland
and Massachusetts. The stores offer a wide assortment of natural and
452 Onex Corporation website.
453 “Onex to Acquire Aon Warranty Group For $800 Million.” News Blaze. 2007
454 Onex Corporation website.
230
Fall 2008
organic foods, as well as supplements, vitamins and personal care products.
Albert’s Organics is the first certified Organic Distributor with nationwide
coverage and provides 5,000 food stores, supermarkets and restaurants with
high quality organic produce and perishable items from its six distribution
centers located throughout the United States. UNFI acquired the privately
held company in 1998 for $12 million.455 Select Nutrition was acquired by
UNFI in 2004 and distributes more than 14,000 products including minerals,
dietary supplements, and health and beauty supplies to pharmacies,
health food stores and sports clubs. Moreover, through its Edison, New
Jersey-based subsidiary Hershey Import Company, Inc., the company also
specializes in the international importing, processing and packaging of nuts,
seeds, trail mix, organic products and snack items. Hershey, which UNFI
acquired in 1998, sells its products under the EXPRESSsnacks, Woodfield
Farms, and Woodstock Farms labels, as well as providing private label
services to a variety of retail channels.
UNFI is another
example of a food
wholesaler that has
migrated into SMMA
services.
Similar to Bozzuto’s and Johnson O’Hare, UNFI reflects the overlap that
exists between traditional food wholesalers and SMMAs. In addition to its
distribution services, UNFI also offers its customers inventory management,
merchandising, marketing, promotional and event management services to
increase sales and enhance customer satisfaction.
The company distributes to all retail channels including independent health
food retailers, regional and national supermarkets, foodservice providers
and buying clubs. It has been the primary distributor to the largest natural
foods retailer in the United States, Whole Foods Markets, for the past 10
years. Other customers include Kroger, Wegman’s, Stop and Shop, Fred
Meyer’s, Lowe’s, Costco and BJ’s Wholesale. Product offerings include
organic grocery, nutritional supplements, vitamins, personal care products,
pet care, health and beauty, frozen foods and general merchandise.
UNFI maintains almost 3.3 million square feet of warehouse capacity in
18 distribution centers nationwide. The company was named by Fortune
Magazine to the list of “Most Admired Companies” in 2006 and 2007.
UNFI offers a
range of in-store
merchandising and
marketing services.
UNFI continues to expand, and in December 2007 it agreed to lease a
614,000 square foot industrial building in Moreno Valley, CA.456 In addition,
earlier this year the company announced that it will relocate its New Oxford,
Pennsylvania operations to a new 675,000 square foot distribution facility in
455 Capital IQ.
456 “IN BRIEF.” The Press Enterprise. December 22, 2007.
Fall 2008
231
UNFI has been
acquisitive in recent
years.
York, Pennsylvania. This move should be completed by the end of 2008.457
In November 2007 the company added $300 million to its top line by
acquiring specialty food distributor Millbrook Distribution Services for $85
million.458,459 The transaction accelerates UNFI’s strategic push into high
growth segments and gives the company an immediate presence in the
specialty food market.
As of October 17, 2008, the company generated LTM revenue and EBITDA
of $3.4 billion and $115 million, respectively, and was trading at 10.9x
EBITDA.460
Headquarters: Roswell, Georgia
Revenue: Estimated at $480 million in 2006461
Chief Executive: Charles Schneider
Key Services: Uniformed security; loss prevention; security consulting; video
surveillance; inventory solutions; facility maintenance
U.S. Security
Associates is one of
security services
providers.
Headquartered in Roswell, Georgia, U.S. Security Associates is one of the
largest providers of uniformed security personnel and related security
services in the United States. Employing more than 24,000 people, U.S.
Security offers armed and unarmed security officers, special events security,
risk analysis, security consulting and loss prevention services to mall
operators and retailers, financial institutions, office buildings, residential
communities, government facilities, colleges and universities, health care
and distribution facilities, as well as companies in the manufacturing and
industrial sectors. The company was the first uniformed security company to
become ISO 9001:2000 certified in all its locations. Other divisions include
Loss Prevention and OutSource Partners, a leading facilities management
company providing services to clients in the retail, commercial, industrial,
457 “Largest Distribution Center in the Company’s Nationwide Network, Facility Will Pursue
LEED Certification.” Press Release. April 15, 2008.
458 “UNFI Completes Merger with Millbrook Distribution Services, Inc.” Progressive
Grocer. November 6, 2007.
459 Capital IQ.
460 Ibid.
461 Healy, Peter. “Darien Entrepreneur Plans 2nd Security Company IPO.” The Stamford
Advocate. December 23, 2007.
232
Fall 2008
educational markets. The company’s growth can be attributed to a
number of aggressive acquisitions. Since 1994, U.S. Security has acquired
43 companies and continues to look for strategic add-ons. Most recently,
in August 2007, U.S. Security purchased Cranston, Rhode Island-based
Blackstone Valley Security.462 Terms of the deal were not disclosed. While
revenue information was difficult to find, we estimate that U.S. Security
generated annual revenue of $480 million in 2006.
Revenue was
estimated to be $480
million in 2006.
Vesdia Corporation
Headquarters: Atlanta, Georgia
Revenue: NA
Chief Executive: Jim Douglass
Headquartered in Atlanta, Georgia, Vesdia is a leading provider of merchant
funded loyalty marketing solutions for financial institutions, affinity groups
and merchants. These programs drive marketplace differentiation and
ultimately customer loyalty and profitability. Originally founded in 2000
under the name BabyMint, the company rebranded itself in 2003 to
more appropriately encompass the breadth of services offered, including
private-label loyalty programs. Leveraging the company’s proprietary
technology, Vesdia’s suite of services include: consulting services; credit,
debit, and affinity reward program design and management; customer
database management, targeting and analytics; loyalty and reward program
design and management; marketing services; merchant-funded rewards
solutions; relationship marketing tools and services; and reward redemption
solutions. The company’s merchant funded rewards network, comprised of
60 national brick and mortar retailers; more than 100,000 grocery and drug
store locations; over 8,500 restaurants and 600 online merchants, allows
consumers to received up to 30 percent back on purchases at participating
vendors.463 Redemption options include micro-investing (setting aside
rebates in the form of incremental investments in 529 college savings plans,
Vesdia is a leading
provider of merchantfunded loyalty
462 “Blackstone Valley Security Acquired by Ga. Firm.” Providence Business News. August
28, 2007.
463 “Vesdia Expands Merchant-Funded Rewards Network.” The Green Sheets. April 7,
2008.
Fall 2008
233
mutual funds or other investment products in exchange for consumer
loyalty), charitable donations or gift cards, merchandise, travel, etc.
Clients include
retailers such as
Macy’s, Apple, Target
and Staples.
For retailers, the company offers full-service loyalty program implementation
and monitoring including marketing of the program, tracking transactions,
and facilitating the redemption of rewards for members. The company
rewards customers based on spending levels, purchase frequency, sales
channel, product category and sales volume. Clients include leading
retailers such as Macy’s, Apple, Target, Staples, and Home Depot; hotel
chains such a Marriott; airlines such Hawaiian airlines; and four of the top five
credit card issuers. In order to further the growth of the company into the
financial services sector, James Douglass was appointed as Chief Executive
Officer in 2008. He was previously a member of the Board of Directors and
was formerly President of Swingvote. While the company does not disclose
annual revenue, according to a press release in 2006 the company drove
more than $100 million in sales to merchants that participate in its loyalty
and rewards program.464
Headquarters: Little Rock, Arkansas
Ownership: Privately held – Private equity investment by Lake Capital and
The Stephens Group
Chief Executive: Steve Bardwell
Categories: In-Store Marketing; Loyalty Program Services
Key Services: Consumer marketing services; printing services; loyalty and gift
card manufacturing
Vestcom is a leading
provider of instore marketing
communications.
Headquartered in Little Rock, Arkansas, Vestcom International is a leading
provider of in-store and point of purchase marketing communications
material specializing in shelf-edge communications. The company provides
shelf unit price labels, in-store signage, ad tags and loyalty cards to some
of the largest grocery, drug and mass merchant chains in the country. Its
services include processing, digital printing, electronic presentment and
on-time distribution of in-store retail communications with variable data.
Vestcom leverages its extensive resources to provide retailers with greater
464 “Vesdia To Drive $100 Million in Retail Sales.” PR Newswire US. September 28, 2006.
465 http://web.archive.org/web/20060622234635/vestcom.com/retail/faq.shtml
234
Fall 2008
efficiency in delivering accurate pricing information to store shelf and
reducing labor costs. Product information may be updated as frequently
as 5,000 to 7,000 times per week in a single store and can be delivered
to anywhere in the United States within 1-2 days through ten production
facilities.466 Vestcom has a long history of innovation, including the
development of the first unit shelf price labels in 1972; the introduction of
the digital color for shelf labels and shelf talkers in 1998, allowing retailers
for the first time to display full-color images of products; and in 2003 with
the introduction of AdTags (now known as Vestcom ShelfTalkers), a product
that merges point-of-purchase advertising in full color with the ability to
achieve 100 percent price compliance.467 The company’s client list includes
eight of the top ten grocery supermarket chains, including Kroger, Safeway,
Delhaize America (Food Lion), Ahold USA and SUPERVALU; four of the five
top drugstore chains including Walgreens, CVS and Albertsons Drug Stores;
and mass merchandisers such as Target and Dollar General. Additionally,
the company provides retail solutions to CPG companies including P&G,
Johnson & Johnson, General Mills and Unilever.468
Vestcom’s clients
include eight of
the ten largest
supermarket chains.
In April 2008, Vestcom announced the introduction of a turnkey health
and wellness grocery marketing program called Healthy Aisles. The new
program will be headed by nutritionist Anissa Buckley, who joined the
firm after her company, No Excuse Nutrition, was acquired by Vestcom.
The new program offers color coded labels that allow customers to easily
identify foods that are nutritious, organic or meet special dietary needs. This
program will enable consumer to make healthier food choices quickly by
identifying nutritional and health information at the shelf edge.469
Vestcom, which was founded in 1969, became publicly traded in 1997. In
2002, Cornerstone Equity Investors took the company private in a deal
valued at $85 million, with Cornerstone providing nearly $36 million in
equity.470 In 2007, a majority interest in the company was purchased by Lake
Capital and The Stephens Group, private equity firms based in Chicago and
Little Rock, respectively, for $158 million.471 Annual sales are estimated to be
approximately $200 million.
Vestcom was acquired
by Lake Capital and
The Stephens Group
in 2007.
466
467
468
469
Lake Capital website.
Vestcom website.
Ibid.
“Vestcom International, Inc. Launches Turnkey In-Store Nutritional Program.”
BusinessWire. February 4, 2008.
470 Monks, Matthew. “Cornerstone Equity Sells Label Maker Vestcom International.” LBO
Wire. April 20, 2007.
471 Cornerstone Equity Investors website.
Fall 2008
235
Vomela Specialty Company
Headquarters: St. Paul, Minnesota
Ownership: Privately held – Thomas Auth
Chief Executive: Thomas Auth
Key Services: Printing; signage and graphics; fixtures; display installations
Vomela is one of
companies with a
focus on in-store
signage.
Headquartered in St. Paul, Minnesota, Vomela Specialty Company is one
of the nation’s largest graphic printing companies specializing in retail
signage, fleet signage, motorsports, restaurant signage, OEM graphics
and environmental graphics. The company has locations in Santa Fe
Springs and San Francisco, California; Elkhart and Whitestown, Indiana;
Benton Harbor, Michigan; High Point and Concord, North Carolina; and
Atlanta, Georgia. Retail Signage solutions include visual merchandise
graphics, POP displays, store roll-outs, seasonal signage, permanent
fixtures, category signs and cash wrap visuals. The company provides fleet
graphics for trailers, tankers, service vehicles and vans, motorcoaches and
trailers. Through its MotorSports Designs subsidiary, Vomela is the leading
manufacturer of motorsports graphics providing more than 60 percent
of NASCAR teams with their racing graphics.473 The company is also the
leading provider in the design, printing and fabrication of OEM graphics for
motorhomes, towable RV’s such as travel trailers and fold downs, and marine
vehicles. Additionally, Vomela offers quick service restaurant signage and
environmental graphics for office buildings, sports venues and showrooms.
In addition to providing printing services, Vomela also provides a range of
value-added services to its client base. Services include design, fabrication,
kitting and installation.
Vomela has been very
acquisitive.
Founded in 1947, the company has grown tremendously since it was
purchased by Tom Auth in 1990. Since 1997, the company has acquired
seven companies, all of which are related to retail, fleet or commercial
graphics. In 2007, Vomela acquired San Francisco, California-based National
Corporate Identity Systems, a leading supplier of graphic products and
solutions. The corporate roll-up strategy reflects Tom Auth’s background.
As an investor or CEO, Auth has been involved in the acquisition of more
472 “Control Data’s Legacy Gets a Celebration.” St. Paul Pioneer Press. October 11, 2007.
473 “Motorsports Designs Acquired by Vomela Specialty Co.” Truckseries.com. May 1,
2006.
236
Fall 2008
than 20 companies. Most notably, he was Chairman and CEO of ITI
Technologies, overseeing $120 million in financing and generating annual
sales of $125 million. ITI eventually merged with Interlogix and was then
sold to General Electric in 2002.474 Vomela generated estimated annual
revenue of $80 million in 2007.
Vomela generates
revenue of
approximately $80
million.
Headquarters: Kirkland, Washington
Chief Executive: Ted Koehn
Key Services: Sampling and demonstration services
Based in Kirkland, Washington, Warehouse Demo Services (“WDS”) is one
of the nation’s leading product demonstration organizations providing
services exclusively to Costco. The company provides sampling and
demonstration services to 160 Costco locations throughout the western
United States, Hawaii and Alaska and employs more than 6,000 individuals.
Customers include General Mills, Heinz, Foster Farms, Kellogg’s, Nestle and
Tyson. Along with basic demonstration services, WDS offers more targeted
approaches including Costco Road shows, which are utilized to promote
special event products; and Profile Demos that provide demonstration
services for high end items. Founded in 1989, the company is led by
President Ted Koehn and CFO Brent Ellis. WDS generates estimated
revenue of $125 million.
Warehouse Demo
Services is a leading
provider of sampling
and demonstration
services to Costco.
474 Youngblood, Dick. “The Dealmaker: Since the Mid-1970s, Tom Auth has been Involved
in the Acquisition of 20 Companies.” Star Tribune. July 27, 2003.
475 http://www.manta.com/coms2/dnbcompany_0lc48x
Fall 2008
237
Warrantech
Headquarters: Bedford, Texas
Ownership: Privately held – Private equity investment by H.I.G. Capital
Chief Executive: Joel San Antonio
Key Services: Warranty solutions; installation services; employee education;
replacement and repair solutions; administrative services
Warrantech is a
leading provider of
service contracts and
extended warranty
solutions.
Based in Bedford, Texas, Warrantech is a leading provider of service
contracts and extended warranty services to the consumer products
and automotive industries worldwide. The company’s Consumer
Products Services group develops and administers customized extended
warranty and product replacement plans for consumer electronics,
major appliances, computers, security systems, jewelry, lawn and garden
furniture and other home office electronic equipment that is sold
through retailers, manufacturers, distributors and buying groups. The
Home Warranty program provides homeowners with coverage against
mechanical breakdowns of covered systems and appliances in the
home. The company’s Automotive Group administers extended warranty
and service contract plans for light trucks, motorcycles, recreational
vehicles, automobiles, and automotive components offered through
leasing companies, financial institutions, franchised and independent car
dealerships and repair facilities. Additionally, Warrantech offers direct
marketing of extended warranties and service plans to consumers, as well as
call center and technical computer support services to clients.
Warrantech was
taken private by
H.I.G. capital in 2007.
This year, Warrantech expanded its suite of service offerings for medium
and small sized retailers by joining forces with Support.com for computer
support services; MyStar for cell phone services; and CEI for home theater
installations.477 Faced with mounting corporate governance costs and
liquidity concerns, the company was taken private by Miami-based H.I.G.
Capital in 2007. The total transaction value was approximately $34 million,
with an assumption of $20 million in debt.478 At the time of acquisition,
Warrantech lost $2.7 million of EBITDA on $123 million of revenue.479
476 Capital IQ. LTM as of September, 30 2006.
478 Capital IQ.
479 Ibid.
238
Fall 2008
Headquarters: Baltimore, MD
Chief Executive: Willard Hackerman
Key Services: Construction services
Headquartered in Baltimore, Maryland, Whiting-Turner Construction is the
largest provider of construction services to the retail industry. The company
provides general contracting services, construction management and design
and build services and solutions.
The employee-owned firm provides services primarily to large commercial,
institutional, and infrastructure projects in the United States. A key player in
retail construction, the company also undertakes projects such as biotech
cleanrooms, theme parks, educational facilities, stadiums, and corporate
headquarters for clients such as AT&T and General Motors. G. W. C. Whiting
and LeBaron Turner founded the company in 1909 to build sewer lines. In
1955, Willard Hackerman became president of Whiting-Turner. As only the
second president in the company’s history, Hackerman has turned WhitingTurner into a leading player in the industry. Today, the company maintains
a 5A-1 Dun & Bradstreet rating, the only top 15 ENR domestic building
constructor with this highest rating, and has a bonding capacity of $4 billion.
The company, which operates without debt, generated total revenue of $3.3
billion and retail billings of $1.2 billion in 2007.480
Whiting-Turner is one
of the largest players
in retail construction.
The company
generated $1.2 billion
of retail billings in
2007.
480 “Top Retail Contractors.” Retail Construction Magazine. March/April 2008.
Fall 2008
239
WIS International
Headquarters: Mississauga, Canada
Ownership: Privately Held – Private equity investment by American Capital
Strategies
Chief Executive: Sean Davoren
Key Services: Retail inventory solutions; in-store merchandising; display setup and installations
WIS is a leading
inventory
management and
merchandising
solutions provider.
Clients include Rite
Aid, Lowe’s, New
York & Co. and WalMart.
Based in Mississauga, Canada, WIS International is a leading inventory
management and merchandising solutions provider to retailers and
manufacturers worldwide. The company has more than 220 offices with
an international footprint in the U.K., China, Japan, Mexico, Brazil and
Argentina. WIS provides a wide range of services to major retailers
including Rite Aid, Lowe’s, Walgreen’s, New York & Company, Wal-Mart
and Dollar General.482 The company conducts more than 200,000 physical
inventory counts per year, making it one of the world’s largest service
providers.483 Inventory services include price verification, cycle and physical
inventory counts and vendor audits. Merchandising and retail solutions
include fixture implementation, reset and remodels, reverse logistic
services, in-store surveys and other data collection services. Additionally,
the company provides in-store marketing solutions via its partnership with
Dallas, Texas-based Combustion Media. In November 2007, the companies
announced that they would be providing in-store media units to all 49 stores
of Texas-based regional grocer Minyard Food Stores and all 76 Lowe’s Pay
& Save stores located in Texas, New Mexico and Arizona.484,485 Combustion
Media provides retailers with the AirShow Aisle Marker, a two-sided
electronic fixture suspended above the floor at each end of the aisle, used
to list aisle categories and provide additional advertising space for CPG
manufacturers.
In January 2007, American Capital Strategies purchased an 81 percent stake
in WIS from Onex Corporation for $411 million. Four months later, American
Yahoo Finance.
American Capital Strategies press release.
WIS website.
“Minyard to Install Ad-Supported Aisle Markers in 49 Stores.” Progressive Grocer.
November 27, 2007.
485 www.combustionmedia.com.
481
482
483
484
240
Fall 2008
Capital successfully syndicated $164 million debt obligations for the
transaction.486 Onex, the Toronto-based private equity firm, realized a return
of 8x its original investment in WIS.487 Onex’s ownership began in 2003 with
the acquisition of Western Inventory Services. Under Onex’s oversight, the
business grew to become Canada’s largest inventory verification service
provider. In 2005, Onex merged the company with Washington Inventory
Services, one of largest inventory service providers to retailers in the United
States, to form WIS. San Diego, California-based Washington was part
of Huffy Corporation until 2001 when an investor group, including private
equity firm Sterling Investment Partners, purchased the company for $85
million.488 We estimate that WIS generates revenue of approximately $350
million.
WIS was acquired by
American Capital in
2007.
486 “American Capital Completes the Syndication of Over $1 Billion in Credit Facilities for
10 Portfolio Companies in 2007.” PR newswire. August 1, 2007.
487 “Q1 2007 Onex Corp. Earnings Conference Call – Final.” FD Wire. May 10, 2007.
488 Holman, Kelly. “Inventory Business Fetches $411M.” The Deal. January 25, 2007.
Fall 2008
241
Statistical Snapshot
HISTORICAL MONTHLY RETAIL SALES
300
RETAIL CAPITAL EXPENDITURES
Twenty-Four Months Ended September, 2008
280
40
$ in Billions
$ in Billions
Fifty Top U.S. Retailers
Trailing Twelve Months Data
50
260
240
220
30
20
10
200
Dec
Mar
Jun
2007
Sep
Dec
Mar
Jun
2008
0
Sep
Oct
Jan
Apr
Jul
2007
Oct
Excluding Wal-Mart
Source: Census Bureau, Excl. Auto & Auto Parts
Jan
Apr
Jul
2008
Wal-Mart
Source: SEC Filings, Lincoln International
CONSUMER CONFIDENCE
125
HISTORICAL GAS PRICES
University of Michigan Index of Consumer Sentiment
Twenty-Four Months Ended October, 2008
500
Fuel Prices at the Pump, All Grades
450
Index Base = 8200
110
95
80
65
400
350
300
250
200
50
Jan
APr
Jul
2007
Oct
Jan
Apr
Jul
2008
Dec
Oct
Jun
2007
Sep
Dec
Mar
Jun
2008
Sep
Source: Bureau of Labor Statistics
Source: University of Michigan
CONSUMER PRICE INDEX
225
Mar
UNEMPLOYMENT RATE
8.0
Index Base = 8200
220
6.5
215
5.0
210
3.5
205
200
Dec
Mar
Jun
Sep
2007
Dec
242
Mar
Jun
2008
Sep
2.0
Dec
Mar
Jun
Sep
2007
Dec
Mar
Jun
2008
Sep
Fall 2008
Comp Store Sales Tracker
Selected Comparable Store Sales Data
Company Name
Sep-08 Aug-08
Specialty Apparel / Goods
Abercrombie & Fitch
Aeropostale
American Eagle Outfitters
The Buckle
Cache, Inc.
Cato Corp.
Chico’s
The Children’s Place
Gap
Hot Topic
Limited Brands
Mothers Work
Neiman Marcus Group
Nordstrom
Pacific Sunwear
Ross Stores
Saks Inc.
TJX Cos.
Wet Seal Inc.
Zumiez, Inc.
General Merchandise
BJ’s Wholesale
Bon-Ton Stores
Costco
Dillard’s
Duckwall-ALCO
Fred’s
Gottschalks
JCPenney
Kohl’s
Stage Stores
Stein Mart
Target Corp.
Wal-Mart
Drug Store
Longs
Rite Aid
Walgreen
Total Comp Store Sales
Fall 2008
-4.9%
-14.0%
5.0%
-6.0%
19.7%
-6.0%
-3.0%
-15.6%
0.0%
-11.0%
-1.8%
-6.0%
-1.3%
-12.0%
-9.6%
-5.0%
-2.0%
-10.9%
-1.0%
-7.5%
-9.0%
-4.7%
10.4%
-4.6%
8.0%
-12.0%
-5.1%
1.1%
-11.8%
-12.4%
-5.5%
-13.6%
-14.8%
-3.0%
2.0%
1.6%
-1.7%
1.7%
4.7%
-4.3%
-2.0%
-11.0%
13.0%
-5.0%
22.4%
-6.0%
-8.0%
-10.0%
0.0%
-8.0%
-2.7%
-7.0%
7.2%
-0.5%
-7.9%
-6.0%
3.0%
-5.9%
0.0%
-8.7%
0.2%
-3.1%
15.4%
-10.3%
9.0%
-7.0%
-11.1%
2.1%
-11.1%
-4.9%
-5.8%
-8.3%
-9.9%
-2.1%
3.5%
0.2%
-1.4%
1.1%
0.9%
-2.2%
Jul-08
-1.6%
-7.0%
13.0%
-7.0%
20.9%
2.0%
-1.0%
-18.5%
0.0%
-11.0%
-2.1%
-5.0%
2.8%
-1.7%
-6.1%
-4.0%
4.0%
-5.3%
3.0%
-8.2%
-1.4%
-0.3%
16.7%
0.7%
10.0%
2.0%
-6.0%
4.6%
-2.1%
-6.5%
-10.4%
-6.2%
-8.7%
-1.2%
3.0%
0.6%
-3.5%
1.2%
4.1%
-1.0%
Jun-08
0.8%
-3.0%
12.0%
-11.0%
28.9%
6.0%
4.0%
-12.9%
16.0%
-7.0%
-0.3%
-9.0%
0.8%
-2.4%
-18.6%
3.0%
8.0%
1.9%
5.0%
-2.9%
-3.4%
1.8%
16.5%
-6.5%
9.0%
-5.0%
12.8%
6.5%
-9.5%
-2.4%
2.3%
1.2%
-7.7%
0.4%
6.4%
1.4%
1.1%
-0.4%
3.4%
1.2%
May-08 Apr-08
1.1%
-1.0%
6.0%
-9.0%
34.7%
5.0%
2.0%
-16.9%
10.0%
-14.0%
-0.2%
-6.0%
4.3%
0.2%
10.9%
-3.0%
7.0%
-8.7%
2.0%
-2.0%
0.2%
-1.7%
13.4%
-9.9%
9.0%
-7.0%
-2.0%
3.4%
-8.6%
-4.4%
-7.2%
0.1%
-12.4%
-0.7%
4.4%
1.3%
-1.4%
1.3%
3.9%
0.1%
5.0%
6.0%
25.0%
2.0%
34.0%
-1.0%
5.0%
-15.5%
15.0%
-6.0%
-2.5%
-5.0%
2.3%
-1.9%
-3.8%
4.0%
8.0%
23.9%
8.0%
-1.9%
4.1%
1.8%
17.8%
-0.9%
8.0%
-4.0%
-8.6%
4.3%
-3.9%
-1.7%
3.5%
-1.0%
3.2%
3.1%
3.8%
0.2%
-1.5%
0.5%
1.6%
3.4%
Mar-08
Feb-08
-5.1%
-10.0%
2.5%
-12.0%
20.9%
0.0%
-9.0%
-20.7%
-3.0%
-18.0%
-3.5%
-8.0%
-6.0%
0.4%
-9.1%
-8.0%
-2.0%
-2.9%
0.0%
-10.8%
-3.0%
-6.2%
6.0%
-5.3%
7.0%
-10.0%
-5.6%
1.2%
-15.4%
-12.3%
-15.5%
-10.3%
-17.1%
-4.4%
1.1%
3.3%
2.8%
2.6%
4.4%
-4.8%
0.1%
-2.0%
7.0%
-4.0%
24.3%
4.0%
3.0%
-14.9%
5.0%
-6.0%
-2.3%
-9.0%
4.8%
-7.3%
-5.8%
6.0%
4.0%
3.4%
3.0%
-8.2%
-2.6%
-2.4%
5.9%
-7.2%
7.0%
-2.0%
-6.8%
1.1%
-9.5%
-6.7%
-3.8%
-2.5%
-10.4%
0.5%
3.0%
3.9%
1.2%
2.2%
8.3%
-0.5%
Jan-08
-0.8%
0.0%
4.7%
-7.0%
19.1%
7.0%
-2.0%
-22.1%
6.0%
-2.0%
-3.6%
-8.0%
-2.1%
3.3%
-6.6%
-7.4%
1.0%
4.1%
3.0%
-5.7%
1.7%
0.1%
7.8%
-1.3%
7.0%
-12.0%
21.2%
-1.2%
-7.4%
-1.9%
-8.3%
1.0%
-2.5%
-1.1%
0.5%
2.3%
1.0%
2.0%
3.8%
-0.2%
243
Retail CapEx Monitor
Fifty Large U.S. Retailers (Last Twelve Months Ended, $ in Millions)
244
Company Name
LTM
31-Jul
30-Apr
2008
31-Oct
LTM
31-Jul
30-Apr
2007
31-Oct
LTM
31-Jul
Abercrombie & Fitch
% YoY Change
Aeropostale
% YoY Change
American Eagle Outfitters
% YoY Change
AnnTaylor Stores
% YoY Change
Barnes & Noble
% YoY Change
Belk Inc.
% YoY Change
Big Lots
% YoY Change
BJ’s Wholesale Club, Inc.
% YoY Change
Borders Group
% YoY Change
Bon-Ton Stores
% YoY Change
Casual Male Retail Group
% YoY Change
Charming Shoppes
% YoY Change
Chico’s FAS, Inc.
% YoY Change
Collective Brands
% YoY Change
Dick’s Sporting Goods
% YoY Change
Dillard’s, Inc.
% YoY Change
Dollar Tree Stores
% YoY Change
Foot Locker
% YoY Change
Fred’s, Inc.
% YoY Change
Gap Inc.
% YoY Change
Home Depot, Inc.
% YoY Change
Hot Topic
$401
-5%
$83
38%
$288
18%
$148
-4%
$226
20%
$172
-5%
$93
131%
$95
-33%
$130
-33%
$118
28%
$18
-31%
$102
-33%
$177
-20%
$153
-4%
$229
30%
$272
-28%
$166
-6%
$144
-14%
$28
0%
$568
-14%
$2,948
-18%
$38
$381
-14%
$83
69%
$259
0%
$152
-4%
$202
11%
$191
5%
$71
87%
$83
-52%
$138
-31%
$119
23%
$19
-22%
$122
-17%
$190
-12%
$154
2%
$202
11%
$334
-5%
$182
6%
$145
-17%
$31
12%
$674
12%
$3,311
-6%
$47
$403
0%
$82
83%
$250
11%
$140
-16%
$197
10%
$203
6%
$60
68%
$90
-53%
$143
-19%
$110
15%
$21
-6%
$138
3%
$202
-7%
$167
41%
$172
6%
$396
24%
$189
8%
$148
-10%
$31
18%
$682
19%
$3,558
0%
$49
$404
8%
$78
58%
$255
39%
$142
-4%
$192
7%
$202
13%
$49
36%
$113
-40%
$188
2%
$110
33%
$23
11%
$149
17%
$214
-5%
$157
50%
$174
30%
$389
0%
$188
14%
$153
-11%
$32
16%
$685
23%
$3,550
0%
$47
$422
31%
$60
5%
$243
66%
$154
5%
$189
13%
$181
-4%
$41
3%
$141
-14%
$193
-3%
$92
37%
$25
51%
$152
25%
$222
15%
$159
94%
$176
22%
$378
-12%
$176
15%
$168
6%
$28
18%
$661
18%
$3,609
2%
$41
$440
56%
$49
-15%
$260
169%
$157
-6%
$181
1%
$182
0%
$38
-36%
$173
21%
$201
3%
$97
132%
$25
51%
$147
33%
$217
23%
$151
131%
$181
40%
$353
-18%
$173
17%
$174
15%
$28
3%
$603
6%
$3,533
-6%
$37
$404
57%
$45
-23%
$226
177%
$166
-12%
$179
-4%
$191
15%
$36
-48%
$191
55%
$204
4%
$95
226%
$23
45%
$133
28%
$218
48%
$119
84%
$163
9%
$321
-30%
$175
26%
$165
6%
$27
-5%
$572
-5%
$3,542
-9%
$39
$374
63%
$49
-11%
$183
160%
$149
-23%
$179
-12%
$179
-7%
$36
-58%
$186
52%
$203
14%
$83
212%
$21
28%
$128
48%
$226
95%
$105
47%
$133
-28%
$387
-9%
$165
11%
$171
20%
$28
10%
$558
-3%
$3,538
-12%
$40
$323
47%
$57
11%
$146
86%
$147
-19%
$168
-17%
$189
19%
$39
-64%
$165
21%
$198
24%
$67
133%
$17
-6%
$121
64%
$193
85%
$82
0%
$144
-12%
$429
13%
$153
-6%
$158
5%
$24
-17%
$558
2%
$3,549
-16%
$42
% YoY Change
J. Crew Group
% YoY Change
JCPenney Company
% YoY Change
Jo-Ann Stores, Inc.
% YoY Change
Kohl’s Corporation
% YoY Change
Kroger Co.
% YoY Change
-7%
$83
34%
$1,141
9%
$50
6%
$1,298
-12%
$2,104
5%
27%
$85
66%
$1,268
42%
$44
-15%
$1,514
28%
$2,095
12%
26%
$81
76%
$1,243
61%
$38
-35%
$1,542
33%
$2,126
26%
19%
$76
119%
$1,151
64%
$45
-52%
$1,510
37%
$2,133
45%
-2%
$62
117%
$1,047
68%
$47
-67%
$1,471
32%
$1,995
43%
-42%
$51
116%
$890
58%
$51
-65%
$1,184
27%
$1,871
38%
-44%
$46
110%
$772
44%
$58
-59%
$1,163
36%
$1,683
29%
-45%
$35
78%
$700
44%
$94
-16%
$1,102
21%
$1,473
8%
-46%
$29
77%
$625
38%
$140
84%
$1,118
30%
$1,397
-4%
Fall 2008
Retail CapEx Monitor
Fifty Large U.S. Retailers (Last Twelve Months Ended, $ in Millions)
Company Name
LTM
31-Jul
30-Apr
2008
31-Oct
LTM
31-Jul
30-Apr
2007
31-Oct
LTM
31-Jul
Limited Brands, Inc.
% YoY Change
Longs Drug Stores
% YoY Change
Lowe’s Companies
% YoY Change
Macy’s Inc.
% YoY Change
Men’s Wearhouse
% YoY Change
Michaels Stores
% YoY Change
New York & Company
% YoY Change
Nordstrom, Inc.
% YoY Change
Pacific Sunwear
% YoY Change
Pep Boys
% YoY Change
PetSmart
% YoY Change
Ross Stores
% YoY Change
Saks Incorporated
% YoY Change
Sears (Pro Forma)
% YoY Change
Stage Stores, Inc.
% YoY Change
Staples, Inc.
% YoY Change
Stein Mart, Inc.
% YoY Change
Talbots, Inc.
% YoY Change
Target Corporation
% YoY Change
Tiffany & Co.
% YoY Change
TJX Companies, Inc.
% YoY Change
Wal-Mart Stores, Inc.
% YoY Change
Williams-Sonoma
% YoY Change
TRAILING 12 MOS CAPEX
% YoY Change
TTM CAPEX (EX-WMT)
% YoY Change
$621
-11%
$157
7%
$3,932
-3%
$875
-36%
$123
22%
$77
-43%
$71
-12%
$574
55%
$92
-42%
$155
177%
$286
0%
$242
31%
$137
-3%
$569
-7%
$114
50%
$434
-10%
$23
-31%
$80
-27%
$3,926
-10%
$166
-10%
$569
37%
$13,040
-18%
$234
19%
$37,803
-11%
$24,763
-6%
$707
17%
$163
18%
$4,108
6%
$950
-30%
$144
100%
$93
-29%
$79
2%
$557
84%
$95
-41%
$39
-31%
$295
16%
$231
-9%
$134
-6%
$637
17%
$105
38%
$480
0%
$26
-36%
$82
-24%
$4,136
-2%
$180
6%
$543
44%
$14,227
-9%
$234
27%
$40,339
-1%
$26,112
4%
$749
37%
$162
8%
$4,010
2%
$994
-25%
$126
73%
$100
-30%
$76
-9%
$501
89%
$106
-33%
$43
-14%
$294
22%
$236
5%
$141
14%
$570
12%
$95
33%
$470
-11%
$26
-47%
$85
-19%
$4,369
11%
$186
6%
$527
39%
$14,937
-5%
$212
11%
$41,478
4%
$26,541
10%
$753
49%
$157
12%
$4,104
7%
$1,213
15%
$116
87%
$121
-14%
$73
-7%
$435
71%
$146
5%
$59
28%
$291
47%
$220
1%
$147
-35%
$588
9%
$85
24%
$492
-5%
$30
-39%
$103
23%
$4,342
16%
$194
12%
$492
27%
$15,145
-3%
$206
16%
$41,918
8%
$26,773
16%
$699
46%
$146
10%
$4,058
14%
$1,367
49%
$101
81%
$135
6%
$81
5%
$371
45%
$158
28%
$56
-3%
$285
52%
$185
-18%
$141
-33%
$614
14%
$76
15%
$480
-10%
$33
-29%
$110
51%
$4,392
25%
$184
10%
$416
-9%
$15,825
6%
$197
24%
$42,241
14%
$26,416
19%
$606
29%
$138
6%
$3,891
12%
$1,356
56%
$72
19%
$132
2%
$77
-7%
$303
14%
$161
38%
$56
-22%
$255
39%
$253
42%
$142
-36%
$546
-3%
$76
3%
$478
-6%
$41
5%
$108
47%
$4,227
19%
$170
1%
$377
-23%
$15,613
4%
$184
18%
$40,709
10%
$25,096
14%
$548
14%
$150
41%
$3,916
16%
$1,317
39%
$73
10%
$143
20%
$83
2%
$264
-3%
$158
45%
$50
-42%
$241
46%
$224
27%
$124
-48%
$508
-7%
$72
-4%
$529
16%
$49
40%
$104
43%
$3,928
16%
$175
18%
$378
-24%
$15,666
8%
$191
26%
$39,815
10%
$24,149
12%
$507
11%
$140
49%
$3,826
24%
$1,051
-1%
$62
-24%
$140
34%
$79
-2%
$254
-11%
$138
43%
$46
-54%
$198
17%
$217
23%
$225
55%
$538
-19%
$68
-8%
$519
22%
$49
73%
$84
6%
$3,735
6%
$174
14%
$386
-29%
$15,567
11%
$177
13%
$38,685
8%
$23,118
6%
$479
8%
$132
58%
$3,570
20%
$916
-22%
$56
-42%
$127
28%
$76
2%
$256
-7%
$124
37%
$58
-43%
$187
10%
$226
22%
$211
2%
$539
-37%
$66
-7%
$536
44%
$47
87%
$73
-9%
$3,513
2%
$167
13%
$456
-11%
$14,887
9%
$159
-10%
$37,140
4%
$22,253
2%
Fall 2008
245
Glossary
Adjacency: The layout of the store that shows how each planogram or rack is
set next to each other.
Back Room: Stockroom or receiving area where reserve product is stored.
Back Tag: A printed card used to hang from a peg hook showing that a
product is out of stock, the number of facings, SKU and description.
Base: The bottom flat part of each gondola section, sometimes referred to
as shelf 1.
Blitz: A type of merchandising that denotes a rapid roll-out of a product or
planogram within a geographic area. A blitz is usually coordinated with an
ad date or promotional event.
Building a Display: Arranging and putting together merchandise or sample
products, usually from scratch.
Category: Refers to the section (set) in the store i.e. Domestics.
Clearance Merchandise: Merchandise that the retailer has discontinued and
cannot charge back to the manufacturer, usually seasonal and priced to sell
quickly.
CPG: Consumer packaged goods.
Cross Merchandise: Mixing merchandise from several different departments
on one merchandise display; a porduct merchandised in more than one
category.
Cut-In: When a new product is introduced, the manufacturer usually likes to
cut-in the new product into the existing planogram via a revision.
Cycle: A set period of time where a merchandising visit can be performed.
Demonstration: Showing how to complete a task. Sometimes called a
demo, often used in conjunction with food sampling.
Display: An entire gondola side, counter, category set complete with
product and point of purchase materials.
Divider: Used along with fencing to separate product on the shelves.
Dummy Facings: When the actual product is not in stock, another product
with the same dimensions is temporarily faced backwards to ensure correct
space is left on the shelf.
246
Source: National Association for Retail Marketing Services
Fall 2008
Dump Table: A table or bin used to display merchandise.
End Cap: A three or four foot section located at the end of a gondola used
to merchandise seasonal, temporary or promotional product. High margin
items are placed on end caps to generate impulse purchases.
Facing: The number of times a product is merchandised on the shelf or peg
hook. Some better selling products have more than one facing.
Fast-Back Hook: A two prong hook that attaches to the pegboard.
Fencing: Acrylic rails secured to the front of the shelf to contain product on
the shelf.
Fixture Accessory: Shelves, peg hooks, etc.
Fixture: A display furnishing to hold merchandise.
FMOT: An abbreviation for “First Moment of Truth.” A term used by P&G
to denotes the moment at which a shopper makes the decision to purchase
a specific product on a store shelf.
Free Standing Store: A retail outlet that stands by itself and is not attached
to a mall or shopping center.
Front Runner: Plastic strips that attach to the pegs to hold the labels.
Gondola: A type of free-standing shelving unit where products are
merchandised, usually secured to the floor.
Hang Tag: Manufacturer’s label describing the merchandise. Also a hanging
price tag used on garments and other merchandise.
Identified Sticker: A sticker adhered to product packaging which
communicates that the item is protected against theft or shoplifting.
Inventory Shrink: Reduction in inventory caused primarily by shoplifting and
employee theft.
J Hook: A hook so called because of its J shape. Placed on a shelf used to
merchandise impulse products.
Kiosk: A small leased area, booth or cart inside a mall or store. Or, an
interactive display or terminal giving access to an Intranet or to the Internet
from inside a store for ordering or checking on merchandise.
Lead In: The first product a consumer sees from the main aisle. Planograms
have lead in indicators to show which end of the planogram starts near the
main aisle.
Fall 2008
247
Mapping: The process of determining locations and adjacencies of
departments and merchandise inside of a store.
Merchandising: Presenting products in their best light to generate more
sales.
Mystery Shop: Store visit requiring merchandiser anonymity in order to
evaluate customer service or gather product information in an unbiased
manner; form of market research.
OOS: Abbreviation for Out of Stock; item not available for sale at this time.
Overhead: The shelf above a section holding overstocks or discontinued
items also called cap shelf.
Overstock: Additional stock of product that is full to capacity on the shelf or
peg.
POG: Abbreviation for planogram.
POP: Abbreviation for point-of-purchase material. Printed material that
draws attention to the product on the shelf.
POS: Abbreviation for point-of-sale. Term normally used to describe cash
register systems that record transactions or the area of checkout in a retail
store.
Peg board: The backing on many fixtures where hooks are inserted to
display products.
Peg Hook: Metal or plastic hooks that fit into the pegboard to hold product.
Pegged Merchandise: Product that is merchandised on peg hooks.
Physical Inventory: Physically counting the individual items in stock at a
particular date and time.
Planogram: A schematic drawing of fixtures that illustrate product
placement. Picture or layout plan describing where merchandise is to be
placed on the fixtures. Also known as a POG.
Preferred Product: Shelves that are located between hip level and eye level.
Rack Jobber: A wholesaler that is allowed by a store to install, stock and
replenish selected items on display racks.
Reserve Stock: Merchandise that is stored in an area inaccessible to
customers.
Reset: A major change or revision to an existing planogram, a section,
248
Fall 2008
department or an entire store.
Risers: Shelves above the shoppable portion of a gondola.
Rotate Stock: Stock new merchandise behind old merchandise when filling
displays. Can also mean replacing old stock with new stock.
Rounder: Round apparel rack fixture.
Salvage Goods: Merchandise that has been damaged in transit or storage.
Schematic: Line-art drawing of the planogram, showing how many shelves or
peg hooks to use.
Secret Shopper (Mystery Shopper): A merchandiser who samples service or
products without the knowledge of the employees and reports the findings
to the manufacturer or merchandising company.
Service Recovery: Dealing effectively with customer complaints, problems
and dissatisfaction.
Shelf Channel: The indented front of the shelf where labels or plastic label
strip holders are placed.
Shelf Extender: A seven metal extender used to merchandise and compare
a name brand product to a private label product.
Shelf Label: Label showing item placement on the shelf and description of
product size, price, UPC code, ordering code, movement and date tag was
printed.
Shelf Talker: A small sign that points out sale, product features and price.
Stock Turnover: A measure for determining how quickly merchandise is
being sold.
Surge: Expanded or increased need for a reset due to a new item initiative.
T-Stands: Basic apparel fixture with posts topped by cross bars.
Tri-Level Round: An apparel fixture with three fact-out arms.
Visual Merchandising: Arranging items for display. Also known as visual
presentation.
Wing Display: A display that flanks or attaches to the side of an end cap.
Fall 2008
249
Disclaimer Statement
All information presented in this research report is based on material
prepared by Lincoln International on a best efforts basis. No representation
or warranty is made as to the accuracy or completeness of such information.
Lincoln International expressly disclaims any and all liability for information
contained in, or for omissions from, this research report. Any estimates
and forecasts contained herein involve significant elements of subjective
judgment and analysis which may or may not be correct. This research report
does not purport to contain all of the information that may be required to
evaluate the industry or any potential transactions within the industry and
any recipient hereof should conduct its own independent analysis of the
businesses involved and the data and information contained herein. Lincoln
International assumes no responsibility for its accuracy or completeness.
250
Fall 2008
S teve W iesner
Director
Retail Infrastructure & Services
[email protected]
R ob E R T B rown
Managing Director
Co-Head, Business Services
[email protected]
M i C H A E L I an N ell I
Managing Director
Co-Head, Business Services
[email protected]
B rad A kason
Managing Director
Head, Consumer
[email protected]
D arren J ung
Private Markets Research Analyst
T odd G lass
Contributor
NORTH AMERICA
EUROPE
CHICAGO
FRANKFURT
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USA
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LOS ANGELES
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10940 Wilshire Blvd., Ste 600
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NEW YORK
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ASIA
LONDON
TOKYO
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Phone: +43 (720) 3320 38 0
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Lincoln International provides advice on mergers & acquisitions,
private placements and capital raising, corporate finance issues
and special situations. With offices in Chicago, Frankfurt,
London, Los Angeles, Madrid, New York, Paris, Tokyo and
Vienna, Lincoln International is the first and only truly global,
integrated, independent M&A organization focused on the
middle-market. Lincoln International leverages outstanding
people, practices and presence to provide clients with in-depth
industry knowledge and superior access to a comprehensive
range of buyers, sellers and investors. With market-leading
international capabilities and worldwide senior-level expertise,
no other middle-market M&A organization has the resources
you need to attain the superior results that you deserve.
Lincoln International’s Retail Infrastructure & Services team is
focused on providing a full-range of advisory and private capital
services to innovative companies throughout the industry. Our
Private Markets Research initiative serves as the cornerstone of
our efforts and allows Lincoln International to provide
management teams and ownership groups with a level of
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www.lincolninternational.com

retail services - Lincoln International

Transcription

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