Appeared In
Special Issue
WWD/DNR CEO Summit issue 11/17/2009

There’s a new tone to retail and it’s all about operating with less inventory, getting more goods out the door at regular price and living with the possibility of stock outs.

This story first appeared in the November 17, 2009 issue of WWD. Subscribe Today.

 

And, come Christmas, the biggest part of the year for retailers in terms of revenues and profits, those in charge are promising to keep their cool. “No,” said Karen Katz, president and chief executive officer of Neiman Marcus Stores, when asked if there would be another blitz of markdowns around Thanksgiving of the scale seen last year.

 

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“We don’t have enough inventory to start marking down early,” she said. “At Neiman Marcus, we have put together a very compelling gift assortment for our customers. We are working closely [with vendors] to mark down our designer goods at the appropriate time,” Katz added. “We have got to get back to selling at regular price. The world has changed, and yet in our business model, the only way we can do business is by getting a full season of regular-price selling. We’ve got to stop these markdown cycles, and we’ve got to start weaning the customer off the deal of the day. We’ll hope that this holiday season the customer is back and that she wants great service, that she wants great gift items. We can’t go back to the way it was. It was just craziness.”

 

Ron Frasch, Saks Fifth Avenue’s president and chief merchandising officer, had a similar take on the markdown situation. “We have taken a number of steps this year to reduce the number of brands included in events,” he said. “Our goal over the next couple of years is to really push it off our plate. It’s a drug. We want our sellers to sell full price. I don’t think anyone has to be concerned, at least from us, about any abnormal events in the fourth quarter.”

 

Could Saks be going in the opposite direction and perhaps cutting back inventory too far? “There’s a risk that we’re going to walk some business, and we actually are walking some business in certain areas, but it’s a good walk,” Frasch said. “We’ve all tried to readjust the supply-demand relationship. In some cases, we’ve overreacted and cut too much, and we’re being hurt by it. In some cases, we’re just about right. We are seeing improved sell-throughs, which we haven’t seen in a long time. We’re seeing customers respond to product because they know it won’t be there in a few months.

 

“We have spent an interesting 15 months because it’s gone in waves,” continued Frasch. “The first was rebalancing supply and demand. Hence last year’s fourth-quarter markdowns and then deciding who we can afford to do business with. We reduced a lot of points of distribution with brands [that] really never performed in a store….We looked at 24 to 36 months of performance of the brands, and realized, for the most part, what we sold was not the balance of the offer that was given to us. We have worked with brands to build classifications and categories to service the customer better.”

 

And, as Frasch sees it, there is another element in the offering designers and brands must consider. “Where is your gift? Where is your thank-you offer for a customer?” Frasch asked, hypothetically suggesting a designer provide a $200 espadrille as a ‘gift,’ compared with his or her normal footwear price point of $600.

 

More moderate chains also have been sucked into the markdown mentality, as Bonnie Brooks, president and ceo of The Bay, said. “It’s an absolute goal. We’ve got to get off that promotional cadence because there has to be other reasons [to shop] other than a discount. That’s my mandate for the team.”

 

Another task for Brooks is “reinventing a new service model for department stores. We are well on our way to doing that already. It’s changing the department store so the customer has a reason to come in. I love a recession because it’s a great catalyst for change.”

 

 

The difficult economy has created opportunities to reinvent and reexamine existing models. Katz said Neiman’s was encouraged to learn more about its customers and how their shopping habits have changed. “As I look back on this last year, all the turmoil that happened, both in the economy and industry, brought out some really terrific nuggets of information as we had to dig deep into our business,” she said. For example, the retailer is looking at how to better market to its customers, how to market differently to the next generation of consumers and how to be a better editor of assortments.

 

“[Customers] are being extremely selective about what they’re buying,” Katz said. “She’s buying fashion and also buying great luxury items. I think that’s probably going to be the norm for awhile — very selective purchasing on her part. As a result, as retailers and good merchants, we have to be extremely good at editing our assortments. The biggest challenge for all of us at Neiman’s is getting traffic into the stores.”

 

Mall traffic is the main challenge for Betsy McLaughlin, ceo of Hot Topic. “It’s no secret that mall traffic is down,” she said. “We decided to go for the experiential component. Because we’re in the rock [’n’ roll] and licensing business, we do a lot of fan-based types of events and in-store experiences. We started to do local concerts in stores about a year ago. We did 10,000 of them this year. All store managers find local music. It’s been great. It drives traffic in. Malls hated it in the beginning because they didn’t want those kids in the mall. Now they’re paying for security because, oddly enough, those kids buy stuff in the food court and shop at the retailers. The challenge is monetizing it so it affects the P&L.”

 

“We’re still trying to figure out where [consumers] are going to come out of this recession and what luxury will be in the future,” said Frasch. On a positive note, vendors have become better partners to Saks. “There’s an openness to try to understand what the consumer is looking for and how to put away some of the old business models, from the timing of deliveries; the good, better, best price ranges; lifestyle mix of product, and the development of exclusives for stores, which I think is a huge opportunity for all of us to distinguish our products and brands,” Frasch said.

 

“At Aéropostale, we think our biggest opportunity is to build on the successful value proposition,” said Mindy Meads, the retailer’s president and chief merchandising officer. “We kind of say that we sit on the intersection between fashion and value, and that really has been our sweet spot. But we know we have to continue to bring exciting new products and evolve the products to our consumers. We need to be relevant today and probably more importantly, our designers and merchants have to figure out what our teen customer wants next.”

 

Meads said Aéropostale hopes to continue its 12-month streak of positive comps, but the biggest challenge it faces is preserving its corporate culture, which she called “our secret sauce.”

 

Brooks outlined the challenges she faces in turning around The Bay. On the merchandising front, “we’ve ousted 800 of the company’s 1,200 brands in the major departments, brought in 150 new brands for fall and a lot of them that would not participate in the markdown cadence that the department store traditionally had. It was a very big challenge in changing the culture and DNA of the company. We had to learn to be brand stewards in that process, in all aspects of the company.…We took a huge hit in markdowns last year in the fourth quarter — terrible. We were selling things for really low price points, but we did learn from those what will drive customers in, in terms of the price. We have engineered items into great-selling price points that we would actually still make margin on. That’s kind of up our sleeve for the fourth quarter, but it also teaches people to buy at regular price points because those things will not be discounted. They will just be at everyday low prices. We also worked with brands to ‘key value items,’” which she characterized as regular-price items getting huge sell-throughs because they represent value. “They are not all at the lowest prices. Some of them are at better and, for us, best prices,” she said.

 

However, Brooks cited one big void in the offering: “When you look at the matrix, there really isn’t any opening-price contemporary product” that would enable The Bay to better compete against the H&Ms and Zaras of the world. “We definitely need more product in that contemporary affordable range” that turns fast.

 

Brooks said lessons learned from her specialty store experiences are being applied to The Bay, and cited changes on the sales floor. “We have put together 10 new behaviors that we want every single salesperson to demonstrate to customers.…We are measuring and monitoring relentlessly all those activities of every single person on the selling floor…unbuttoning buttons, putting an extra hanger for the fitting rooms, just analyzing every single touch point.”

 

 

Saks in the past few months has sent employees to Europe to factories and showrooms to learn about brands in depth through immersion training. “Do they understand the culture of the brands they’re selling, or are they just selling sleeves?” Frasch said. “When we sell today, it’s a different kind of selling. Service is paramount. You have to understand the DNA of the brand.”

 

After all the prolonged austerity, there is the question of pent-up demand — whether it exists, and if it does, when it will burst. “I think the world has changed,” Frasch said. “There is the pent-up demand, but not what it used to be. People have changed their value systems, and their lifestyles have changed. Women, in particular, have looked at their lives and are looking for products that do more things for them. They’re not looking for singular-use products, perhaps other than cocktail clothes and evening. They’re looking for products that get them through the day and to the weekend. Luxury has taken on a new value set. Luxury used to be something a man or woman would buy and wear for a season and throw out. I think those days are behind us.”

 

Brooks, who lived in Asia during that region’s 1997 stock market collapse, said the recovery time was 10 years. “Pent-up demand in a place like Asia is what drives them,” she said. “You can’t hold the customers back for longer than a year. At that point people need to spend, people want to spend. After any major recession, [the economy] does come back. People might reach a new equilibrium of spending, but it doesn’t take longer than a year, I would think.”

 

At Hot Topic, pop culture drives the inventory. The retailer has identified pent-up demand for anything and everything vampire. “Our sweet-spot customer is 12 to 22, so we’re talking about really fast-moving teenagers,” said McLaughlin. “Between ‘New Moon’ and ‘V’ and ‘Vampire Diaries,’ they’re kind of the cool thing right now. It just so happens that for the fourth quarter, there’s a lot of good things on the horizon in relation to vampires.”

 

The retailers also are getting immersed in social media. “We are fairly evolved,” said McLaughlin. “You can never quite keep up with our customers, so it is a constant push. You have to go where they go.…We have found you can get hundreds of thousands of followers very quickly if you do it well [by] presenting something to those people that is different from what is presented in the store. That way you can measure it.” McLaughlin said with a two-hour promotion offering $10 savings off a $25 item, “you can shut your servers down. The first time, we thought this was brilliant. The issue is they read it and then they retweet it, or they send it via e-mail to all their friends — and soon enough, in about 10 minutes, we actually did not have the server power to handle that much traffic at one time.” However, she said, “it is very measurable if you can figure out how to have a call to action within it.”

 

It also creates anticipation among customers — an event the customer doesn’t want to miss — drives traffic to the stores and “gets the brand in front of your customer much better.” “We do have a young customer,” said Mindy Meads, president and chief merchandising officer of Aéropostale. “We are in our early stages of growing the Internet business. We only started four or five years ago, and many competitors might have 10 years ago. We are growing rapidly.…We just started this summer in Facebook and Twitter, and I am amazed at how many followers we have already.”

 

“We are just getting started in terms of social media,” said Neiman’s Katz. “There is a future to it. There are lots of middle-age customers that are doing all kinds of social media. It is our core customers, whether we like it or not. We have to figure out a strategy. We have started a few things at Bergdorf Goodman. We will learn from that and go forward. I am learning that the advertising component is much less important than sharing ideas, sharing likes and dislikes, critiquing merchandise, critiquing service and being able to communicate with customers through this kind of forum.…We are going to quickly get ramped up in terms of social media. It’s an important way to get our messages out and as important to hear back from the consumer.”

 

At Saks: “We are studying it,” Frasch said. “We are going to set up an office to begin to delve into it. We have a Facebook page. The challenge is you can’t really control this. It’s kind of like throwing us out to the open sea and hopefully [we] have the right paddle. There is a lot of debate about this being a business opportunity or not. Ira Neimark [a former Bergdorf’s chairman] said something interesting. He said, ‘Ron, young man — never be first. Let Barneys buy it. Let them mark it down, and you come in after they have learned from their mistakes.”

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