Thin How to Succeed When Dollars Are Stretched
Transcription
Thin How to Succeed When Dollars Are Stretched
CHAIN STORE AGE ® THE NEWSMAGAZINE FOR RETAIL EXECUTIVES APRIL 2008 How to Succeed When Dollars Are Stretched Thin A Comprehensive Repor t on the Second Annual Main & Wall Conference WHERE MAIN STREET MEETS WALL STREET Rising to the Challenges Ahead Financing, while not abundant, is still available for middle-market companies By Connie Robbins Gentry -level executives from retail, consumer-product, David N. Deutsch, food and restauconference chair, co-host and president rant companies joined proof investment-banking fessionals from the finanfirm David N. Deutsch cial-services sector at the & Co., welcomed second annual Main & attendees to the second annual Wall conference, hosted Main & Wall by David N. Deutsch & conference. Co. and Chain Store Age. Held Feb. 11-13 at Miami’s exclusive Mayfair Hotel and Spa, attendees exchanged insights and experiences during a number of educational forums and relaxed social gatherings. The overarching theme of the conference—that 2008 will be a year of challenges—was underscored with a tone of cautious optimism for growthoriented middle-market retailers and consumer-product companies. David N. Deutsch, conference chair and founder and president of the distinguished New York City-based investmentbanking firm that bears his name, opened the conference with a short summation of current economic conditions and an overview of capital markets. “Public-equity markets saw huge gains over the last five years, but the last six months have been scary. IPO markets set records in 2007; but in January of this year, 17 planned IPOs were pulled. M&A (mergers and acquisitions) activity is flattening. For most companies, acquisition/sale values expressed as multiples of EBITDA (earnings before interest, Contents C 2A taxes, depreciation and amortization) peaked in 2007; they’re probably at the highest levels we’ll see for awhile. Debt-capital markets are on shaky ground and it’s hard to say if they are starting to recover or the worst is yet to come. There are many smart Wall Streeters on both sides of that fence.” “The good news,” he continued, “is that financing for middle-market retail and consumer companies is still available. Financial leverage among retail and consumer companies, expressed as a company’s total debt to EBITDA, was at the highest level we’ve seen in years. No one is sure what will happen in 2008, but asset-based lenders, those that lend on the basis of collateral values as well as cash flow, are licking their chops as cashflow lenders begin backing down.” This year’s “View from Main & Wall” presented a sharp contrast to the 2007 theme of financial markets flush with opportunity. If not completely dry, markets that were described last year as “dripping with liquidity” are now struggling to stay afloat. Turning to his fellow panelists in the opening Main & Wall session, Deutsch asked for their views of the general economic environment. Cheryl Carner, managing director, retail finance of Boston-based CapitalSource Finance, a lending, investment 2A Rising to the Challenges Ahead 16A Investing Capital for the Highest Return 8A Money Hunt 17A Leveraging the Internet 10A Strategic Growth Plans 18A Competing in a Consolidated World 14A Exiting With Style 18A A Sweet Taste for Growth www.chainstoreage.com CHAIN STORE AGE, APRIL 2008 WHERE MAIN STREET MEETS WALL STREET and asset-management business and sponsor of the Main & Wall conference, stated, “Whether the economy meets the technical definition of a recession or not, we all see what has been happening and companies across all sectors are being challenged.” Citing the decline in housing values and the volatility of the stock market, Jeffrey Bloomberg, principal and managing director, office of the chairman of Gordon Bros. Group, Boston, agreed. He characterized the prevailing economic mentality as a psychological recession that has impacted consumers at every income level, even the wealthy feel reservations about spending, and this psychological phenomenon is contributing to increased uncertainties throughout the financial sector. Gordon Bros., a platinum sponsor of Main & Wall, along with its real estate company, DJM Realty, provides advisory, financial and operating services to companies that are expe- grow; they need to focus on growing their multichannel presence with direct marketing and e-commerce,” she suggested. Growth through mergers and acquisitions may also prove trickier this year, Cherrick advised, “because it is difficult to get a board of directors to adopt more children when the children at home need so much attention—they are reluctant to bring more [stores] into the fold.” However, tough times for some will certainly create opportunity for others. In the same vein that prime real estate may come available, companies may go on the selling block that normally would not be offered. “Acquisition opportunities will be more prevalent and varied than before,” suggested Deutsch, “and retail and consumer companies, with ‘slow’ prospects for organic-growth in a tougher economy, may be wise to consider them.” Arguably, the issue is not whether or not there are good deals for the taking but rather whether there is financing Seated left to right are Main & Wall panelists Cheryl Carner, CapitalSource Finance; Jeffrey Bloomberg, Gordon Bros. Group; Michelle Cherrick, Thomas Weisel Partners; and Todd L. Hooper, Kurt Salmon Associates. riencing growth or restructuring. Echoing Bloomberg, San Francisco-based Michelle Cherrick, partner and co-director of consumer investment banking, Thomas Weisel Partners, said, “There is an unprecedented psychological factor affecting consumer spending, and I don’t think we’ll have any real data to tell us if this is changing until the back-to-school season.” What’s next? Defining the current state of affairs set the stage for addressing the more pressing questions that were on everyone’s minds. Asked “Where are we going over the next 12 to 24 months and how should companies adjust their strategies?,” Bloomberg responded, “Retailers should use this period to take their foot off the pedal and correct mistakes. Since December, there have been more than 900 announced store closings and there is a lot of pressure on malls.” The silver lining in this perfect storm, he predicted, would be opportunities to “cherry pick locations at better rates,” and retailers might find they are able to negotiate for more concessions with landlords. Cherrick agreed this might be a good time for retailers to be opportunistic with real estate deals. However, she noted that even retailers committed to growth have cut their expansion plans—in some cases by 50% or more. “Opening stores is the most expensive way for retailers to 4A available to support these transactions. Carner said there is money for retail growth—provided you know where to look, you’re shopping for the right amount, you have a proven track record of success and realistic goals for expansion. “In general, financial leverage is less available, but not to the degree that transactions cannot be done; there is debt capital available,” she advised. “If you are trying to raise $150 million, that would be really challenging, but smaller amounts—$40 million, $60 million or even $75 million in debt—that just takes a few institutions and we can get a transaction done.” “What people are looking to invest in,” she continued, “are stable performers, retailers that are successful at getting consumers to part with their money. Growth is fine; it’s the magnitude [of expansion] that makes the difference. How many units are you adding and how much capital do you need?” Although it is possible to finance growth, Cherrick cautioned retailers to beware the fate of recent success stories that have faltered. “Many people are surprised at where Chico’s, PacSun and Hot Topic are now, but I would argue they are victims of their own success and of the fact that we are over-stored in America,” she stated. In a faltering economy with consumer spending down significantly, markets that could once support multiple store locations are more susceptible to being overstored. When www.chainstoreage.com CHAIN STORE AGE, APRIL 2008 WHERE MAIN STREET MEETS WALL STREET they can’t maintain or grow comp-store sales, retailers resort identified environmental sustainability as another key trend to expense reductions, but that rarely compensates for slug- impacting consumer spending. gish performance. “We’ve reached the tipping point on environmental As Bloomberg explained, “Unless a retailer can grow its [awareness] and it is now part of the consumer mind-set top line, cutting expenses will take you only so far. The way and a reality in a much bigger way,” he said. “Businesses a retailer can grow its top line is not by expanding its store with a constituency for whom this is important will thrive. count but by expanding the productivity of each store.” In general, this is the [mind-set] of a younger consumer, Panelists agreed that mall-based department stores are who has longer purchasing power.” among the hardest hit, and as an overall sector, perhaps have Challenging times are like flush economies in one respect: the grimmest prospects for recovery. The domino impact on Retailers that engender customer loyalty are the ones that other retailers in B and C malls is likely inevitable. also attract the most interest from investors. “Specialty retail “When one department done right can always grow,” store anchor leaves a mall, the stated Deutsch. Unless a retailer can grow its top line, landlord brings in a Home However, 2008 may be the cutting expenses will take you only so far. Depot or Target,” observed year to postpone dramatic The way a retailer can grow its top line Bloomberg. “When a second shifts in financial structure. is not by expanding its store count but anchor pulls out, they bring in Retailers that watched stocks by expanding the productivity of each store. restaurant pads. But when a soar over recent years, only Jeffrey Bloomberg, principal and managing director, third anchor goes, the developto plummet in recent weeks, office of the chairman, er has a really difficult time getmight consider delaying corGordon Bros. Group ting someone to take that porate sales and equity financspot.” ings—although such transDeutsch lauded Steve & Barry’s University Sportswear, actions, particularly private-equity financings, remain viable which often moves into defunct mall anchors, for its oppor- in the middle market if handled carefully. tunistic growth strategy. However, Bloomberg countered Main & Wall panelists agreed the financial pendulum that retailers such as Steve & Barry’s had better be “careful swings too far in both good times and downturns. As busiwhat they wish for.” nesses that were over-valued struggle to accept the new real“Steve & Barry’s has found they don’t have the human ity, Deutsch said we have entered “a period of adjustment.” capital or the financial controls to support their growth,” Sellers who don’t want to lower their prices or expectations Bloomberg said. will have to wait it out and private companies considering an Growth potential: If one of the fastest-growing, hottest IPO should do the same. Cherrick predicted, “The IPO class retail concepts in the industry is potentially at risk, what of 2008 is looking instead to debut in 2009, although a few retail sectors have the most viable growth potential? stellar performers may go public after Labor Day.” Carner answered the question with a barbell analogy. Having set the stage with an overview of the current finan“Opportunities exist on the luxury end and the true-value cial markets and the challenges ahead, the conference proend,” she said. gressed with detailed discussions of growth management, exit Retailers and sectors that continue to perform well strategies and opportunities to leverage untapped resources. ■ despite economic downturns are those that are responsive to [email protected] their consumer base and to prevailing trends. For instance, restaurants historically suffered because consumers would Sponsor Recognition eat out less when money was tight. “Unlike prior economic downturns, this is not true in the Chain Store Age and David N. Deutsch & Co., procurrent climate,” noted Cherrick. “We have a generation of ducers of the second annual Main & Wall conference, consumers who don’t know how to cook and the quick-service extend grateful recognition to the companies that restaurants (QSRs) have responded well to consumer interests, helped to underwrite this event. like McDonald’s addition of salads and yogurt to its menu.” Gordon Bros. Group, based in Boston, as well as its It is premature to predict how well popular but slightly real estate consulting and advisory firm, DJM Realty, pricier quick-casual restaurants (QCRs) such as Chili’s will provided platinum-level support. weather economic fluctuations, but consumer preferences Additional sponsors include Boston-based Capboth for eating out and for convenience bode well for QSRs italSource as well as Dewey & LeBoeuf, Duff & Phelps, as well as QCRs. Kairos Capital Partners and Morgan Stanley, all headTodd L. Hooper, principal, private-equity services of quartered in New York City. Kurt Salmon Associates and also based in San Francisco, ‘ ’ 6A www.chainstoreage.com CHAIN STORE AGE, APRIL 2008 WHERE MAIN STREET MEETS WALL STREET Money Hunt Buyers and sellers of retail companies remain selectively active oderating a panel discussion Burns added, “We look for one to on the last day of the Main three people who we can build a good & Wall conference, Gary team around. They need to be strong Prager, managing director of entrepreneurs who have had successconference sponsor GB Merchant ful experiences building companies. Partners, Boston, posed the question: Diversity of experience is also impor“What will private-equity companies tant; it needs to be a well-rounded be looking for in the months ahead and CEO.” what should you look for in a privateOn the flip side of the equation, equity firm?” Steven Silverstein, CEO of Spencer David Heidecorn, partner, GreenGifts, Egg Harbor Township, N.J., wich, Conn.-based Catterton Partners, responded to the question “What should answered, “We are being patient and an entrepreneur look for in an investthoughtful. We look carefully at the ment firm?” demographics and the psychographics “It’s not just about capital,” he said. It’s not just about capital. served by a company, and we are look“You want to know what kind of partYou want to know what kind of ing for companies that fit with our ner they will be, how they react in partner an [investment firm] will overall investment thesis.” good times vs. bad times, can they add be—how they react in With more than $2 billion of equity value, and do they support aspects of good times vs. bad times. capital under active management, Catthe business such as operational upSteven Silverstein, CEO, terton Partners is one of the largest grades.” Spencer Gifts retail- and consumer-focused privateSilverstein was recruited to Spencer equity firms in the United States, and its focus is on growing Gifts in 2003 when the retailer was purchased by GB Palladin, middle-market consumer companies in North America. a joint venture between Boston-based Gordon Bros. Group Describing his company as a “growth investor,” John Burns, and New York City-based Palladin Capital Group. Having general partner, Highland Consumer Fund, a division of Boston- spent 11 years at Linens ’n Things culminating in his role as based Highland Capital that focuses on consumer goods and president of the company and having grown company sales services, responded to the question by saying, “We look for from $180 million to $2.1 billion, Silverstein was precisely the companies with a steep growth projection; we are working hard- kind of “well-rounded, experienced” CEO that investment er to find these [candidates] and we are being more selective.” firms seek. “The great thing about America,” Burns continued, “is that Another critical point made by the Main & Wall panelists is there are always pockets of growth, so we are still finding oppor- that investors and executives need to enter new ventures with an tunities.” exit plan. In some instances, investment firms will not consider To Prager’s next question, “What should a seller look for purchasing a company unless they perceive that it has the potenother than price?,” Steven Liff, managing director of Sun tial to become a public company or, as a plan B, that there is a Capital Partners’ Los Angeles office, advised to look closely at list of potential future acquirers. the company’s management team. Heidecorn noted that Catterton spends time researching “Especially in challenging times, you want to be with a group the category before investing in a retail company. “We that is decisive and not afraid to support growth,” noted Liff. expect to see continued consolidation in the industry and we “You want a group who understands how retail and consumer want to evaluate who will be the winners and losers in a catcycles [evolve] through good times and bad times—and who egory.” isn’t afraid of the tough times.” While everyone agreed it is imperative to enter deals with Since joining Sun Capital in 2000, Liff has led more than 25 “eyes wide open,” Silverstein cautioned, “Management cannot buyout transactions. His fellow panelists agreed that the man- appear to be mercenary and looking for the door. It’s a doubleagement team is one of the most important aspects to any cor- edged sword, there has to be an exit strategy but management porate sale or turnaround. also has to be committed to running the company.” ■ M ‘ ’ 8A www.chainstoreage.com CHAIN STORE AGE, APRIL 2008 WHERE MAIN STREET MEETS WALL STREET Strategic Growth Plans Crunch Fitness and Bruegger’s Bagels shared expansion philosophies nder the Main & Wall heading “Red Light or Green for most consumers, a fitness membership floats in a gray area Light on Growth,” two retail CEOs and a corporate- between a luxury and a necessity spend. Again, the key is to turnaround advisor shared their experiences for appeal to a psychographic rather than a demographic audigrowing companies. For the c-level executives ence. attending the conference, hearing case studies of what has For instance, in the past a personal trainer was perceived to worked and what has not worked provided valuable insights. be a luxury, but Crunch has recognized this service is an augSession moderator Cheryl Carner, managing director, retail mentation of what its customer needs and wants. finance of Boston-based CapitalSource Finance, noted that “Growth is dependent on understanding who your custhe examples would help retailers discern if it would be better tomer is and what they like. Our membership defies a specifto “hunker down and wait out the current economic challenges ic demographic; you’ll see a 26-year-old and a 66-year-old or take advantage of some of the emerging opportunities.” working out side by side, and it really is all about a commonCapitalize on your core: ality of thought,” continued The message from Crunch Miller. Fitness CEO Tim Miller Ultimately, human capital was one of energized carpe is the most critical resource diem. With 32 gyms in six needed to support growth. major metropolitan markets, “What will get us where we the New York City-based need to be is having the peofitness retailer is poised for ple who understand our expansion into new markets. brand—its service, experiFounded in the 1980s, ence and culture—and who Crunch’s approach to exercan be ambassadors of what cise as entertainment has we do.” resonated with a loyal folWith locations currently lowing of fitness enthusiasts. in New York City, Atlanta, “We have an opportunity to Ch icago, Los An ge le s , capitalize on our brand equity and Miami and San Francisco, Crunch is Growth is dependent on leverage our core differentiators, which exploring opportunities in Washunderstanding who your customers are is really about the psychographics of ington, D.C.; Austin, Texas; New and what they like. Our membership our community and the distinct, edgy Orleans; Philadelphia; Portland, Ore.; defies a specific demographic … it is all urban feel of our gyms,” said Miller. San Diego and Seattle. about a commonality of thought. The media, which is fueling conBuild, buy and franchise: CeleTim Miller, CEO, sumers’ worst-case fears over economic brating its 25th anniversary, BurCrunch FItness uncertainties, has proved to be Crunch’s lington, Vt.-based Bruegger’s Bagels, best ally, with frequent reports extolling located in 22 states, has 273 units, of the virtues of an exercise- and fitness-based lifestyle. What dis- which 165 are company-owned and 108 are franchises. The tinguishes Crunch from similar offerings is its commitment to quick-casual restaurant continues to expand through a combibuilding a fun community. nation of organic growth, acquisitions and franchises. “The idea that a fitness center is there just to collect money Bruegger’s CEO James J. Greco told attendees that just from members and that it doesn’t care if people use the facili- prior to Main & Wall, his company closed on the acquisition ty or not is a total misnomer. It’s worse for us if people don’t of a five-unit chain in Philadelphia and, for 2008, Bruegger’s come, because it creates a sense of disengagement,” explained plans to build 15 company-owned and 25 franchise units. Miller. There are several reasons for choosing this three-tiered expanTo help perpetuate involvement, Crunch recently ran a pro- sion strategy. motion that members who visited seven times in a month “This approach helps with risk management because we would receive the next month free. Miller also recognizes that, spread the risk associated with new construction,” explained U ‘ ’ 10A www.chainstoreage.com CHAIN STORE AGE, APRIL 2008 WHERE MAIN STREET MEETS WALL STREET Greco. “Also, it allows us to maintain [more favorable] debt levels because we would have to borrow more to grow faster organically. Additionally, there is only so much we can manage in terms of site selection, new construction and store openings, and through franchisees we can shift some of those responsibilities. Finally, acquisitions present a strategic opportunity to obtain prime sites or enter a new market in one fell swoop.” There are pros and cons with each strategy. For instance, the ROI is good on franchise units because they require little capital investment but company-owned units, which are capitalas well as management-intensive, return all of the income to the company. “Competition for sites can limit growth, and in our case it is very important that every unit is successful,” continued Greco. “Subway goes into sites we would never consider because they are less concerned with how each individual unit performs. With 28,000 units, they can get by with that “When growth goes awry for a well-established company, there are usually over-arching themes that we see in the turnaround process,” he explained. “Often, companies have funded growth at the expense of supporting their core business, or they have failed to respond to macro changes in the market. In some cases, the company has changed its strategy without adequate testing and validation of the new direction.” In the case of Portrait Corp. of America (PCA), which leased portrait studios in Wal-Mart stores throughout the country, Appel said the “perfect storm” was created when the company’s private-equity owners focused on accelerated growth rather than the core business. PCA failed to evolve with the tidal wave of change that cascaded across the industry when consumers embraced digital photography. Additionally, markets that could easily support Wal-Mart stores within five miles of one another were not necessarily candidates for multiple PCA locations Seated left to right are panelists Cheryl Carner, managing director, retail finance, CapitalSource Finance;Tim Miller, CEO, Crunch Fitness; and James J. Greco, CEO, Bruegger’s Bagels. approach, but we could not.” In recent months Greco has seen a shift in the balance of power with landlords in certain markets, noting that negotiations have become more flexible in Southern California, Southern Florida and Phoenix, areas where the economic downturn has had a significant impact on the business climate. When asked if there is an optimum ratio for companyowned to franchise stores in a retail portfolio, Greco admitted there is little agreement among franchisors on this topic. However, he said, “You should not become a franchisee unless the franchisor also operates a large number of companyowned stores. Those that do the best [job] for their franchisees tend to own one-third or more of the units in the portfolio.” Cautionary signals: For most middle-market CEOs, the growth traffic light is shining bright yellow. The risk of missing an opportunity for expansion would be disappointing, but the threat of making the wrong moves could be devastating. Michael C. Appel, managing director, Quest Turnaround Advisors, Purchase, N.Y., leads the firm’s retail and consumerproduct-goods division and has served as CEO for a number of merchants undergoing a turnaround process including MacKenzie-Childs and Laura Ashley. 12A in such close proximity. However, PCA owners pumped money into continued store expansion rather than updating equipment in the existing stores or offering incentives to store managers, who were critical to the success of each location. Even Wal-Mart’s mandate that PCA close 500 stores was too little too late, and the company folded into bankruptcy. The demise of Laura Ashley, Appel noted, was a classic case of a retail CEO who embarked on a growth strategy without doing her homework or staying focused on the core customer and drivers of the business. “Laura Ashley brought in a new CEO whose growth strategy for the U.S. was based on the success of its High Street stores in the U.K., which were large two- and three-level stores that sold home furnishings,” explained Appel. “In the U.S., Laura Ashley replaced its successful portfolio of small street shops and mall shops with large, 10,000-sq.-ft. stores in ‘A’ malls. These were high-rent stores with low-turnover, lowmargin product.” “Within a couple of years, Laura Ashley had opened 32 of these big stores and it was a disaster,” Appel concluded. Today, the majority of Laura Ashley’s North American locations have closed and the company has converted to a licensing model. ■ www.chainstoreage.com CHAIN STORE AGE, APRIL 2008 WHERE MAIN STREET MEETS WALL STREET Exiting With Style Position the business to succeed before you try to sell uite poss ibly the most popular person at the second annual Main & Wall conference was Marla Schaefer, former co-chairman and co-CEO of Claire’s Stores, Inc., and now a member of David N. Deutch & Co.’s Presidents Council. Certainly she was the person that other retailers appeared most eager to speak with during the informal networking breaks. CEOs wanted to hear how Marla and her sister, Bonnie, took command of the successful fashion-accessories company built by their father, Rowland. Q To transition the company forward, Schaefer had to identify and fortify opportunities for improvement within the corporate structure and she had to convince her father of the value of succession planning. The former was much easier than the latter. “No one wants to buy a business that doesn’t have the appropriate infrastructure and succession plans in place,” Schaefer noted. “We had a wonderful technology department, but we needed another platform. We actually purchased and implemented a new POS system because the business had to keep going as usual. Also, we had great [expansion] No one wants to buy a opportunities in the business that doesn’t have the Middle East, Russia appropriate infrastructure and and Poland, and our succession plans in place. joint venture in Japan needed attention.” Marla Schaefer, former co-chairman and co-CEO, Continuing to inClaire’s Stores, Inc. vest in the company, grow the business and plan for the future were necessary steps in the overall exit strategy. As Schaefer explained, “The things we were putting in place to make the business better were positioning us to sell.” However, the hardest sale was convincing her father it was time for a succession plan. The way she managed to sway him was by appealing to what mattered most to him about the business—the welfare of his employees. “He was fiercely loyal to his employees,” Schaefer continued, “and helping him to understand that the employees needed the company to have a succession plan was what finally got his attention.”` Her parting advice to CEOs contemplating a sale was to communicate with employees as early as possible about their intent to sell the company. “If you are mindful of the loyal people in your company and you keep them informed at every juncture along the way, it will hold you in good stead,” she ‘ ’ But even more, Main & Wall attendees wanted to know the exit strategy that enabled the Schaefers to walk away from the company with no regrets and a reputation for professionalism that made the $3.1 billion sale of Claire’s the quintessential model of how to exit a company with style. Privateequity firm Apollo Management purchased Claire’s in 2003. In a panel discussion moderated by David N. Deutsch, conference chair and president of David N. Deutsch & Co., New York City, Schaefer told highlights of their story. “Our father was a classic one-man-show entrepreneur. He opened stores all over the world through acquisitions and franchise deals, but he didn’t [appreciate] the need for succession planning,” she said. “Six months after Bonnie and I took over, we were saying, ‘Where did he get the energy for all this?’” 14A www.chainstoreage.com CHAIN STORE AGE, APRIL 2008 advised. Rutta also recommended that The devil in the details: Not business owners should review every corporate sale goes as all contracts prior to negotiating smoothly or as successfully as a sale. In particular, review the the Claire’s deal. Main & Wall assignment or non-assignment panelists discussed other aspects clauses in third-party contracts, of exit deals that merit considersuch as real estate leases. “You ation. need to tidy all your records and For instance, Matthew R. make sure the financial stateKahn, managing director of GB ments are understandable; idealMerchant Partners, an affiliate ly they should be prepared by an of Main & Wall’s platinum outside auditor,” she advised. sponsor Gordon Bros. Group, One of the most critical aspointed out that retail portfolios pects of a potential sale is the letthat are part company-owned and part ter of intent (LOI), which is created You need to tidy all your franchisee-owned have unique considwhen a serious buyer has been identirecords and make sure the financial erations. fied and essentially puts into writing a records are understandable; “We exited a company that was halfspecific outline of what is to be sold and ideally they should be prepared owned and half-franchised and, behow the deal-making process should by an outside auditor. cause the company was bought by its evolve. Michelle Rutta, partner, largest competitor,” he explained, “there In addition to the basic terms of a Dewey & LeBoeuf was franchisee overlap in several martypical LOI, such as the sale price and kets that had to be addressed. It’s best to address that kind of form of transaction, Rutta suggested including confidentiality situation early.” provisions and specific guidelines for access to records and how Similarly, it is important for any existing legal obligations to due diligence should be performed. be reviewed as early in the deal-making process as possible. “If you want to add bite to the LOI, you might include an Michelle Rutta, partner, Dewey & LeBoeuf, an international expense-reimbursement clause,” she noted. law firm headquartered in New York City and a Main & Wall Finally, the LOI should establish a short period of time dursponsor, said, “One of the first things a potential buyer will ask ing which the parties agree to negotiate exclusively with one is, ‘Are you suing anyone or being sued by anyone?’ It is best another, or as Kahn defined it, “The LOI gives clarity of comto address these disputes ahead of time.” mitment to the process.” ■ ‘ ’ Investing Capital for the Highest Return The night before he delivered a moving keynote speech at a Main & Wall dinner, Randy Lewis, senior VP of distribution and logistics at Walgreens, was featured on “ABC World News.” It’s hard to say which seems more unlikely, that a distribution and logistics VP would make primetime news—or that he would be the keynote speaker to an elite group of CEOs, CFOs, financial analysts and investment brokers. However, the story Lewis shared is in itself one of unlikely, yet unparalleled, successes. At the Walgreens’ distribution center in Anderson, S.C., more than 16A one-third of the work force has severe physical or cognitive disabilities.The employment model is even more unique because it is one of total inclusiveness. People with a wide range of skill levels, and limitations, perform the same jobs—with the same performance requirements and compensations for all. “This DC is not just as good as our other DCs,” explained Lewis, “it’s better than the others.” In fact, Walgreens is building another DC in Hartford, Conn., that will follow the same model, and by 2010 Walgreens expects to employ more than 1,000 disabled workers. www.chainstoreage.com Walgreens invested more than $100 million in automation, technology and process accommodations at the Anderson DC, but the returns are measured in dollars, productivity and, more importantly, changed lives. “This is the most meaningful thing we have ever done,” Lewis said. His parting message to Main & Wall executives: “People with a lot less authority and power than you have, did a lot of good—and you have an opportunity to make a difference also.” For detailed information, visit www.walgreensoutreach.com. CHAIN STORE AGE, APRIL 2008 Leveraging the Internet E-commerce enabled Smithsonian museums to test more products lthough not every e-commerce retailer publishes a catalog or opens bricks-and-mortar stores, it has become virtually imperative for all retailers to operate online. At the very least, single- or dual-channel retailers are finding that Web sites are mandatory for relaying information to consumers, even if they do not sell merchandise via the e-commerce channel. However, customers spend more with a retail brand when they can shop across multiple channels, and multichannel shoppers are much more likely to be loyal to For Smithsonian Business Ventures, the brand for an extended time. selling online was a natural, and D uring the Main & Wall session profitable, extension of its catalogs. Fellow Main & Wall panelist Don “Leveraging the Internet,” moderated by Steiner, managing partner of Webster Tom Cagnina, managing director, David N. Deutsch & Co., Capital, Waltham, Mass., discussed how to understand profattendees learned how retailers utilized e-commerce to increase itability and ROI relative to different channels. performance. For instance, Gary Beer, who served eight years, Prior to founding Webster Capital, Steiner spent eight years until August 2007, as the CEO of Smithsonian Business as founder and CEO of Cornerstone Brands, which included Ventures, explained how the Washington, D.C.-based mu- popular catalog and Internet retailers such as Ballard Designs, seum complex grew revenues by expanding its multichannel Frontgate, Garnet Hill, Smith and Noble, The Territory Ahead presence. and TravelSmith Outfitters. Smithsonian generates more than $200 million in annual “There is a tradeoff between the capital expenditures necesrevenue through magazine publishing and retail operations that sary for a physical store and the higher advertising costs associinclude catalog and e-commerce sales, as well as museum stores ated with attracting Internet customers,” explained Steiner. and off-site stores. Transitioning from a capital-expenditure mentality to an “The dot.com store is a traditional extension of our catalog. online-investment mentality has proved difficult for some Although it only grew revenue 10% over a five-year period, we retailers, who might not blink at spending $1 million to open a would have lost sales without it,” explained Beer. new store but would have strong reservations about investing $1 E-commerce also enabled the museum operator to test more million to purchase a keyword search. products than traditional store inventories could accommodate, Advertising for one channel will benefit other channels as and in some departments this had a dramatic impact. well, but the total impact of cross-channel marketing will be “Over a five-year period we grew top-line revenues 20% in difficult to completely quantify. Steiner cautioned, “If you mail travel and books [merchandise],” he continued. “Sixty percent of catalogs, and send e-mails, and buy a keyword, you have to ask: that 20% was facilitated by the Internet’s ability to [support] an ‘Are you overspending to reach your customer?’ It comes back to expanded merchandise offering.” identifying the cost of attracting a sale.” Additionally, Smithsonian augmented its portfolio with air“Marketing costs on the Internet can be 30%, 40% or even port-based stores. “Only 50% of D.C. conventioneers visit the 50% of sales, but marketing costs for catalogs are typically 15% museums,” noted Beer, so the airport stores penetrated an to 25% of sales and even less for stores,” he continued. unserved but viable market. His advice was to err on a “small scale,” test campaigns and Although multiple channels provide synergistic benefits, all analyze results before deploying on a large, pervasive scale. His channels cannot be measured by the same performance stan- approach clearly worked at Cornerstone, which grew from revdards. For instance, Beer noted that the average price point for enues of $150 million in 1998 to $750 million by the time he a bricks-and-mortar sale was $17, but the average catalog order sold the company in 2005—and Steiner attributed much of that totaled $100. growth to the Internet. ■ A CHAIN STORE AGE, APRIL 2008 www.chainstoreage.com 17A WHERE MAIN STREET MEETS WALL STREET Competing in a Consolidated World Success stories from Kings Supermarkets and Grocery Outlet ndependent food retailers are facing provide shoppers a variety of products at unprecedented challenges from concloseout prices. solidation within the industry, shrinkSpeaking on a Main & Wall panel, coing margins and the proliferation of CEO MacGregor Read, grandson of Jim supercenters, such as Wal-Mart and Read who founded Grocery Outlet in Target, which have achieved almost ubiq1946, described his stores as a treasure uitous penetration into the grocery sector. hunt for groceries. His family-owned Attendees at the Main & Wall conferbusiness has established long-term relaence heard successful strategies from two tionships with a number of consumermid-size grocery retailers that serve product-goods manufacturers, which opposite ends of the economic scale and provide the infrastructure for sourcing operate on opposite coasts. products at deep discounts. As much as Kings Supermarkets, headquartered in 70% of the inventory in Grocery Outlet Parsippany, N.J., has 26 stores serving stores is purchased from close-out deals. Mid-size regional grocers find high-end markets in New Jersey and For the more affluent shoppers in successful niches. New York with gourmet foods and the Kings’ upscale markets, fellow panelist freshest possible selection. On any given James Demme, chairman of the board at day, shoppers may find delicacies such as yak, rattlesnake and Kings Supermarkets, described a more pragmatic than opporbuffalo fresh from the range, as well as a vast assortment of tunistic approach to merchandising. “You have to buy what produce from around the world. you sell,” he advised, “because you don’t always sell what you On the West Coast, Berkeley, Calif.-based Grocery Outlet, buy.” with annual sales topping $600 million, has 130 stores locatThat said, he suggested independent grocers are typically ed in six Western states and Hawaii. The Grocery Outlet stronger with their perishable areas than the large consolidated stores occupy an average of 20,000 sq. ft. or less and are chains or the mass merchandisers. For instance, Kings’ shopstocked with products that are sourced “opportunistically” to pers will find delectable fruits such as mangosteens imported from Thailand that traditional grocers would not carry. Key to the success is giving customers what they want, such A Sweet Taste for Growth as a gourmet selection of prepared foods as well as a wide assortment of imported spices and exotic condiments. From Robert Gordman, president of The Gordman Group, this respect, supplier relationships are as integral to Kings’ Breckenridge, Colo., and author of “Secrets of the $uper operations as to the Grocery Outlet strategy. $weet $pot: Building Sustained, Profitable Growth,” preIn one respect, Grocery Outlet is more similar to King’s sented the luncheon keynote address at Main & Wall. high-end neighborhood markets than a typical deep disFinancial growth can not be achieved solely through counter because it also relies on sales of made-to-order foods, expense reductions, he cautioned, and competing is which represent 30% of total sales, and perishable products. “unproductive.” The goal, according to Gordman, should “Fifty percent of what we sell is in a climate-controlled be to “build a super sweet spot in the market.” environment and 72 of our stores carry fresh meat,” said One way to accomplish this is to focus on the cusRead. “The typical transaction size almost doubles when tomer not the competition, or as he said,“Don’t go after meat is in the basket.” your competitors, serve your customers.” Gordman, “We’ll probably stock 200,000 unique SKUs over the who also authored “The Must-Have Customer,” excourse of a year,” continued Read, “and it’s a little like the plained the differences in a loyal, core customer, an movie industry—out of those we’ll have three or four blockopportunistic customer and the must-have customer. busters a year, but we aren’t sure which those will be when Additional information, as well as his books, can be we’re buying [inventory].” found at www.gordmangroup.com. The increasing popularity of organic or “natural” foods has I 18A www.chainstoreage.com CHAIN STORE AGE, APRIL 2008 Attendees at the second annual Main & Wall conference paid rapt attention and recorded copious notes during the informative panel discussions and educational sessions. proved to be a blockbuster hit for all food retailers and Grocery Outlet has jumped on the organic bandwagon, finding that value-oriented shoppers are just as eager as affluent shoppers to purchase products that promote a healthier lifestyle. “Whole Foods and Trader Joe’s have created opportunities for us in terms of expanding our product mix,” noted Read. “Organic products just flow off our shelves.” Although Grocery Outlet shoppers appreciate an organic product mix, retailers such as Whole Foods Market and Trader Joe’s aren’t direct competitors. The toughest competitor Grocery Outlet has encountered, according to Read, is another regional discount chain: WinCo Foods based in Boise, Idaho. With 60 stores in five states and roots dating to the 1940s, there is considerable overlap in the markets, products, pricing and shoppers of both brands. Additionally, Read noted, “Super Wal-Mart has taken market share away from us, but in many cases it becomes a real-estate game [for positioning].” Asked if his stores had felt an impact from the arrival of Tesco’s Fresh & Easy markets in California, Read replied, “It’s premature to comment, but there has certainly been a lot of noise and I would not underestimate Tesco’s abilities. I have been surprised, however, that Tesco does not appear to have a more unique product mix. CHAIN STORE AGE, APRIL 2008 “What we are hearing about,” he continued, “is Tesco’s unique approach to real estate deals. They’re taking larger spaces than needed, to get the location, then sub-leasing the part of the space they don’t need, and they are paying higher rates than Walgreens to get prime positions in the marketplace.” Regardless of the competitive landscape, regional grocers, like mid-size retailers across all sectors, are focused on continuous improvements in operations and comp-store sales. A general rule of thumb for the grocery sector, according to Demme, is that “whatever amount comp-store sales go down, EBITDA [earnings before interest, taxes, depreciation and amortization] is down double—when comp sales are down 4%, EBITDA goes down 8% to 9%.” The five key components to a successful strategy in food retailing that Demme outlined were fundamentally simple: clean stores, fresh selection, friendly service, well-stocked shelves and good prices. However, he predicted that the biggest change in the food-retailing model for the future will be that CEOs will increasingly take on the role of corporate visionary, while their management teams run the day-to-day business operations. Noting there had been surprisingly little consolidation among food-outlet retailers, Read predicted the outlet niche will avail itself of mergers-and-acquisitions opportunities. ■ www.chainstoreage.com 19A