AT THE ROUND
FROM MASS MARKET VENDORS TO DESIGNER LABEL FIRMS, THERE’S A NEW WAY OF SELLING MERCHANDISE.
Infotracs: What are the most compelling business reasons to enter into a strategic alliance?
Ed Jones: For us, one of the most compelling reasons is to grow the business and build the brand. We have a brand that is not universally well known, but to me that’s the object of the game. I either grow the business, but in growing the business that will build the brand. So that’s really the main reasons for developing any kind of coalition or partnership with the retailer.
Bud Konheim: We do have strategic alliances, but they’re different.
We felt we needed to go back to square one and say we’re making a product that we’re really proud of. We’re not going to do business on the basis of who could sell it cheaper. Our attitude is, if you don’t like the product, you don’t have to buy it. We’ll stay our size and we’ll have a bottom line that’s incredible because we’ll only do business with the customers who want to buy our product.
Infotracs: What is the most important element of a strategic alliance?
Jones: Ultimately, it all goes back to the product. If the product is right and the product is consistently strong one season after another, you’ve got a future.
Hal Upbin: With us at Kellwood, it’s more than a license arrangement, and we supply point of sale and so on. We don’t guarantee margins, and we won’t play that game either.
But we do what we have to do because we’re a tertiary label. So we’ve gone about it in a way that the alliances are value-added to maintain our increased market share in a very blah environment.
Mackey McDonald: I think what we’re looking for and what we feel both parties have to find in an alliance is profitable growth. And we see that achieved by adding more value to the consumer.
We also see the real purpose of the alliance is to find ways to do that, other than pricing off, which is something that everyone is doing now that is not leading to profitable growth. So we’re seeking ways to add value. If you’re not truly adding value to the consumer, you’re not going to be growing. And if you’re only doing it through price-off, you’re probably not going to be adding profitability.
Lee Chaden: I don’t know how you all define a strategic alliance, but I think of it as having a continuum of trade and manufacturer relationships. I tend to think of a strategic alliance as when the manufacturer and the retailer pool their knowledge and resources and try to pursue a common vision.
With that thought in mind, I don’t think there are a lot of them out there. There are strong business relationships. I don’t think there are a lot of pure strategic alliances.
The reason they ought to work in theory is that we manufacturers know a lot about how to sell stuff to consumers effectively. The retailers know a lot about how to get stuff to consumers effectively. If we share that information, share those resources and put our best thinking together, we can do a better job of maximizing the sales to the consumer and also do it in a very efficient way.
Paul Charron: I think the principal reason for supporting the concept of strategic alliances is survival. The retailers have access to a consumer, we have access to customers [retailers], and we can’t take it all the way through to the consumer in a world where the consumer is placing so much emphasis on value. We’re all going after market share as opposed to the benefits of living in a world where you have unlimited or upward pressure on primary demand.
Infotracs: Can you give an example of a strategic alliance that has been successful for your company?
Charron: I would say that we have a strategic alliance with the Federated Department Stores. It’s better developed in some divisions than in others, but it begins by and large with an openness and top-to-top commitment. If you’re not open to the contemplation of alternative ways of doing things, then you will not have a successful alliance because you can’t get somebody to see the other fellow’s problems.
We ask Federated, “Tell us what kinds of things we do that cost you money and impair our collective ability to serve the consumer better?” And we say, “Here are the things we see that you do to make it more difficult for us to do our task. How can we break down the barriers?” We’ll also swap strategic plans with Federated.
For us, it begins largely with Federated Merchandising. And in those cases, it relates to our business, which is big enough to get anybody’s attention. And then it’s played out in various ways with people like Macy’s West, where Mike Steinberg will bring his whole group of merchants into our offices probably at least twice a year and spend three hours in the afternoon with our division executives, the presidents and general managers and key people. And we’ll go around the table, and I’ll have an agenda.
Basically, we try to keep it on a higher plane. It’s not so much tactical, although I’m not going to say that we don’t get into tactics and move away from strategies on occasion. But it’s that kind of top-to-top involvement. Mike will be at one end of the table, I’ll be at the other end of the table, and we won’t run the meeting. The meeting will run with the executives who are responsible for the management of the business.
I would say that we’re evolving toward a more meaningful strategic alliance with Federated, and I think as time goes on and you continue to see retail consolidation and you see wholesale consolidation that these strategic alliances are going to become a basic necessity.
Jones: There’s a level of communication that has to exist between us and our retail partners in terms of sell-throughs per week, what’s selling, what’s not selling, so that we can react accordingly. So, to me, communications is the key factor in the fundamental success of any kind of alliance, and it does get complicated. We organize planning meetings and group meetings with the retailers on a fairly regular basis, I think probably at least once a quarter or certainly every season, but the planning and execution is not daily.
Infotracs: What do you think has helped to change the mind-set about the inventory flow and control?
McDonald: Survival. The margins have gone out of it, and therefore, you can’t afford to have nonproductive inventory.
Infotracs: In a vendor/retailer relationship, whose responsibility is it to determine a given product’s target customer and how that product is positioned?
Charron: The marketer and the manufacturer has to position his or her brand in the competitive spectrum, and they pick the target consumer, the relevant collection of benefits, and they build a product in that image and likeness. And then it’s up to the manufacturer to drive that image all the way through the value chain, and you hopefully get congruence with a retailer in terms of how it’s merchandised, how it’s presented, how it’s portrayed in the retailer’s advertising because you want to be consistent with the image.
McDonald: It’s my feeling that it is the manufacturer’s responsibility to collect that information. The same way we replenish commodity and basic products, we’ve got to collect the information about what are the more specialized consumer needs in each one of those outlets. We’ve got to analyze that information and gear our product mix to the profile of that consumer. You target your brand very carefully against a specific consumer target.
Then you have to go through the analysis of where the consumer is shopping, and then you design a mix of products for each retail outlet. The days of being able to put the same products in every outlet are over. You’re going to have to gear your product mix to the consumers that shop in each one of those outlets.
Konheim: You’ve got to know who you’re designing for. But we take another step. First of all, we figure out which stores have a Nicole Miller customer. To the ones that don’t sell it, our answer to them is don’t buy it because you don’t have our customers, plain and simple. We’re not for everybody, and we understand it.
We’re a pipsqueak company, but this is what we do. We don’t sell any discount stores, we have no outlet stores, we have no secondary ways to buy the product and we establish credibility with our customer 100 percent.
Infotracs: Where are the areas of tension or conflict that should be anticipated in any of these alliances, and how do chargebacks affect the relationships.
Konheim: Somebody came in with a typical situation long ago and said, “We didn’t do so well with your goods this season, and so what we want is a chargeback to go forward.” I said, “You didn’t do well with my stuff? You’re saying that your customers don’t want my stuff. Why would you want to buy it again?
He said: “We’re buying it, but we need a markdown to make up, we need a markdown allowance to make our margins.” I said, “No, I’ve got a better answer for you. Buy the guy’s stuff that you’re doing really well with and don’t buy mine, and everybody will be happy. You’ll be happy because you’ll be selling stuff like crazy.”
I had a buyer in 1982 that came in and said,”Your goods didn’t perform.” Everyone who’s a manufacturer knows the words: “It didn’t perform.” They did not perform? I said, “What we do is we sell them to you and you sell them to your customers, or else don’t buy them.”
Chaden: I think there are two things that put stress in a partnership — one micro, one macro. The micro is when a business gets bad because it’s easier to have partnerships and alliances when business is good. But when business gets really tough for both parties, it might cause them to behave in a less partnership fashion and more with the situation.
On a broader scale, I think a partnership is stressed when one of the partners changes strategy. If you have, for example, a market share goal and our partner has a market share goal and we’re going to drive together to do that, that’s terrific. Then over time, the partner decides that what he wants to do now is a margin enhancement at the expense of volume, change of strategy to margin enhancement. If I’m still driving for market share and he’s driving for margin enhancement at the expense of volume, that will cause a short-term rift in the partnership.
McDonald: The objectives of our strategic alliances are somewhat visionary. However, the people who are executing it are very practical and measure it against practical performance standards.
Chargebacks are there for a reason. There’s a problem the retailer incurs that he’s trying to solve, and his way of solving them is to charge it back to you, the manufacturer. Until a strategic alliance addresses that specific issue and it is agreed with top management and then communicated to the people who are going to execute it, there’s always going to be a different way of dealing with excess inventory or left over inventory at the end of the season. And the retailers are going to continue to execute it the way they always have.
So the alliance has to get in and deal with each specific issue and develop a new way of dealing with that problem that’s satisfactory to both sides. And then you’ve got to measure the people who are going to execute it against the new standards. So it’s a very detailed process. It’s not just an agreement.
Upbin: We’re so divisionalized that each unit can run their own business. We’re mostly not in the commodity business. So most of our stuff is part of the fashion businesses, such as Bill Burns. However, the mass of Kellwood is run in a more classic sense of ready-to-wear.
We don’t take anything back; the cost of handling would be absurd. I can’t say that it never happens, because that wouldn’t be the truth, but it rarely occurs except perhaps in the case of a fit problem with a massive order. And in that case, the retailer may think that it didn’t sell, that it became a fit problem, but the reality is that it’s usually not really a fit problem.
But back to the issue. Without guaranteeing, the product goes out. We hope it sells. Again, monthly deliveries vary with all of our companies, whether it’s Melrose or Enchante.
Konheim: We are ready-to-wear. That’s our whole thing. But here’s where it falls apart. In the strategic alliance, it’s not about what the Quick Response is, it’s a money problem right now at the top, and the other stuff they have — the 90 percent of the stock — blocks them from taking advantage of the ability that we have, let’s say, with Bloomingdale’s. We are a Quick Response manufacturer, but sometimes we can’t ship within the next pay period because they’ve got so much stuff that’s absolutely clogging the pipeline.
So it’s not a question of the technology. They have the inability to take in the stuff that’s selling because they’re got strings on their purse about the stuff that’s sitting.
So that’s a real problem. So it’s not about, we’re into EDT and VEM and LDP and every initial that you know. We’ve got them all, and computers that handle them. We track it and we’ve got it set up to make it fast. That’s not the problem.
Infotracs: Have you ever walked away from a strategic alliance? And if so, what made you do it?
Charron: We’ve cut back on occasion, trying to change the dynamic of the relationship using whatever leverage we have. But on balance we’re not interested in doing business with fewer people. The process and the marketplace is giving us fewer people to do business with.
So what I have to do is be creative, and my associates have to be creative in responding to the issues that impair our collective ability to respond to consumer needs. That’s what we have to do. I don’t think you’ll accomplish a whole lot unless you’re in a very special situation, and Bud is in a very special situation, with a high perceived value, very creative, very fashion product, and they’re managing their businesses very effectively.
But for those of us who have some of those properties and do things on a somewhat different scale, unless somebody did something morally reprehensible, we’re not interested in walking away, we’re interested in finding ways to find common ground.
Infotracs: How does a retail partner’s private label program affect your partnership? Does it compete? Do the partners share in strategic positioning and management of the POS?
Chaden: I don’t think private label per se has to get in the way of a strategic alliance. It’s how it is implemented.
I don’t think private label per se means you can’t have a partnership. Where it runs into trouble is when someone wants to take your best stuff, knock it off cheap, and then put it up against you. That really is not consistent with a partnership.
Konheim: For us, it was Ann Taylor and Limited. They bought our stuff, knocked it off, and it was on the rack at half price or whatever, and I said, “OK, look, I can’t do business with them. I’m not a design studio.” We’re in business here to sell product. I said: “Give me a crack at the private label so at least you come back to me and buy two million of these.”
And they did it. They came back to us and threw us a low-ball ridiculous price, and we took it, and we did it.
Jones: In a partnership between a retailer and a manufacturer, they go out of their way to be fair and not to take something that is your idea and not give you the business on it.
We have a relationship with Talbots, in that we develop a lot of products, a lot of concepts, and finish product for them. But also we allow Sigrid Olsen, our designer, to act as somewhat of an outsourced fashion director. We allow her to go into Talbots and make a presentation when she comes back from Europe about what she saw. It has nothing to do with our product or their product.
We allow them to look over our shoulders. We developed a Sigrid Olsen line as a directional point of view, not for them to knock us off. In the partnership, we get a decent amount of business that we’re comfortable with, they’re fair to us, we’re fair to them, so it works. It’s a typical, solid, healthy partnership.
Infotracs: If we viewed strategic alliances on some kind of a time continuum, where do you think we would be on that continuum. What percentage of the way to perfection, or to some textbook idea of perfection?
Upbin: If I was thinking on a scale of one to 10, I would have to give it a three.
McDonald: I would say that the mass market level is ahead of the department store level, at least in our experience, but they’re only about 33 percent of the way there. It’s got a long way to go.
Charron: If you define for a company like ours that a strategy alliance is a firm-wide, institutionalized process to collaborate satisfying consumer needs to the fullest extent possible, we’ve got a long way to go. I think the alliance concept is much better developed in the mass channel distribution with stores like Wal-Mart and the national chains, Sear’s and J.C. Penney, than it is in department stores.
And I would argue that until department stores’ senior management is able to concentrate on this as opposed to concentrating on acquiring other department store chains and groups and capturing synergies back into their operations, and until they are able to invest in technology across the board, that the idea of a strategic partnership is going to be a by-gosh and by-golly thing. You’ll have it with your top five customers to some extent, but it will never be the sort of thing that other people have done with Kohl’s, Wal-Mart, Sears and Penney’s. It’s just not going to happen, and it’s too bad.
It’s not to say that the relationships that we have with our department store partners are bad or not bad. In many cases they’re very good, and they’re better than relationships they have with most people. It’s just that they’re not optimal. We’re not optimizing our collaboration.