Byline: Alev Aktar

It’s no secret that U.S. department stores have been losing ground to alternative outlets such as bath and body stores, direct sales networks, perfumeries and mass retailers.
But what do the upstarts offer today’s educated consumers that established department stores don’t?
Convenience and entertainment, according to participants in a Summit panel called Off the Reservation.
And why is this new brand of retailer able to adapt faster to the changing market and shoppers’ needs and wants?
First, because of their flexibility. Second, at least in some cases, because of vertical integration. The term refers to manufacturers controlling or owning part or all of the supply chain, which is said to reduce costs, inventory and the time needed to bring a product to the market, while increasing efficiency and profitability.
That’s the case with Gryphon Development, a unit of the Limited whose brands include Bath & Body Works and Victoria’s Secret, and with Origins Natural Resources, which has opened its own freestanding stores.
Additionally, many of the alternative retailers have hit upon a good price/quality ratio. For example, at Bath & Body Works, customers can stuff a basket with six or seven products and spend $30, as opposed to laying out $45 for a single prestige fragrance at a department store.
According to Robert Ruttenberg, president and chief executive officer of Gryphon, customers are flocking to his stores for their entertainment value.
Bath & Body Works and Victoria’s Secret offer a vast and constantly changing product assortment made possible by vertical integration. Bath & Body adds more than 1,100 new stockkeeping units each year and more than 44 percent of the chain’s projected $1 billion in sales come from products that didn’t exist 12 months ago, he noted.
Meanwhile, Victoria’s Secret introduces at least 430 new beauty sku’s every year. That business will rack up sales between $400 million and $500 million this year.
Furthermore, if a product bombs, there are no costly returns — as is the case with vendors who sell to department stores. “We just mark the product down and we get rid of it,” explained Ruttenberg.
Ruttenberg thinks that Gryphon hit on a concept that sells — scented bath and body products — and that other opportunities are waiting. One of them may be the preteen crowd; Limited Too is currently courting girls 8 to 12 with a new color and personal care line. The collection already represents 17 percent of sales in test doors, he noted.
For Ruttenberg, one of the main reasons for Gryphon’s success is that he works in partnership with the stores, and there is no adversarial relationship. Evidence of this success is Gryphon’s high annual compound growth rate — a whopping 50 percent — and its sales per square foot, which average $700.
“Gryphon develops all the products, formulas, and strategies; we do all the filling and manufacturing and assembly and we ship it to our businesses. The [stores] are responsible for the merchandising, display, training, inventory, forecasts. It allows each one of us to do what we do best,” he argued.
“In my experience, a partnership with department stores is really an oxymoron,” he grimaced, referring to his days at Aramis, Revlon and Ralph Lauren Fragrances. “The time I used to spend [at department stores] fighting for space and location, demonstration dollars and advertising dollars was more than 50 percent. I don’t think that we were working together to build the business.”
However, Ruttenberg conceded, sometimes even Gryphon’s partnerships don’t work, and he pointed to one shortlived venture: a private label line for Target.
“I met with the chairman of Target and I said, I think that your departments look really awful. He said, ‘They really are awful.’ I think that they do 2.2 percent of the store total in the cosmetics and toiletries business. We then spent a lot of time, effort and money in developing a private label brand for Target. It was a disaster. They didn’t execute one thing that we agreed upon and there was no partnership. We failed, and we pulled out of it.”
Meanwhile, William Lauder, president of Origins Natural Resources, argued that the key when marketing a brand is to be consistent, and that means maintaining a cohesive image, retail environment and service level across different distribution circuits and countries.
Origins itself has three different types of distribution: counters in department stores, which sell the core products; in-store boutiques in department stores which stock an expanded range, and freestanding stores, which carry the widest variety of products as well as experimental items.
The freestanding stores generate the highest sales-per-square foot, but Lauder cautions that “they are an enormous amount of effort.”
“What we’re trying to do is reinforce the idea that the brand is supreme to the channel and the brand will go where the customer wants you to go. If the customer wants you to be on a street, you will be on a street. If the customer wants you in a department store you will be in a department store. They’ll vote with their feet, they’ll vote with their fingers, and most importantly, they’ll vote with their plastic.”
Lauder noted that a shop-in-shop affords much greater impact and visibility than a counter. He told the story of when a three-year-old Origins counter was converted to a shop-in-shop: “Lo and behold, that same customer who’s been shopping in that store for years comes in and says, “I’m so glad you finally have Origins here.”
The three-pronged distribution also allows Lauder the luxury of testing products and then rolling them out to a wider distribution. “We’ve been able to identify very successful products that didn’t seem like they’d be successful,” noted Lauder.
In the drugstore category, Lorraine Coyle, merchandise director of the beauty group at Eckerd Corp., identified four reasons that department store customers are jumping ship.
The aging of America. Coyle reported that over the next decade, the 40-to-64-year-old population will increase by more than 20 million and that these people will spend more on health care and less on clothing and cosmetics. Coyle suggested that manufacturers be prepared to market their skin care and cosmetics to an older consumer.
Busy lifestyles, which translates to a greater need for convenience-oriented shopping. Coyle stressed that the Internet will be increasingly important, and that in the near future half of all households will have access to the Web. Plus, its users are a perfect target customer: educated professionals with high incomes who often have children.
Consumers are more educated. “They realize that technology is not just for high-priced products, they read consumer magazines, they watch news reports with product comparisons, and they’re not afraid of trial,” said Coyle.
Customers will switch stores if their needs aren’t being met. “Customers have a definite perception of what they want and they know what they’re willing to pay and what they perceive as value. If they can’t find what they want they’ll simply stop buying it.” Coyle underlined that retailers who succeed must listen to their customers.
Eckerd is currently testing a program in conjunction with manufacturers where different product categories are cross-promoted. For example, a customer who is on radiation medication and therefore sun sensitive is informed about sun care products.
“We have multiple opportunities, particularly in turning the needs of pharmacy consumers into something applicable in cosmetics or even in over-the-counter. The program is very successful but it’s also very expensive, and we have not determined the payback yet.”
Tova Borgnine, chief executive officer of The Tova Corporation, not only listens to customers, she speaks right to them. And she’s convinced that her personal touch makes all the difference.
The Tova Corporation markets beauty products on QVC and by mail order, and both are convenient and entertaining for shoppers, she said. But Borgnine always makes sure to establish personal contact with viewers during her QVC appearances. “It’s quite intimate,” she observed.
The Tova company maintains its personal relationship with customers by sending out birthday cards and product information with shipments. There are more than 1 million names and addresses in the database.
And the business is mushrooming: in 1996, there were 80 million phone calls placed to QVC and more than 51 million packages shipped. Also, each new show attracts between 400 and 1,000 new customers.
Borgnine’s segments already air in the U.S. and the U.K., and QVC is opening in Germany soon. She projects that within five years QVC will go global and 10 years down the road the shows will feature virtual reality technology.
Lastly, Robin Bartosh, president and chief executive officer of Cosmetics Plus, claimed his chain of 23 perfumeries in three states offers shoppers a combination of convenience and entertainment.
“We have taken the product to the woman who works, we take it to the woman who stays at home, we take it to the traveler who comes into New York City,” he said, pointing to the concentration of Cosmetics Plus stores in big cities.
“We give customers the choice of being helped or being left alone to peruse and play,” he continued. “Basically, we’re a toy store for adults.”