Category — Companies

Macy’s is turning some of its backrooms into warehouses to compete more effectively against Amazon and other online retailers, reports Dana Mattioli in the Wall Street Journal (5/15/12). “We’ve spent the last 153 years building warehouses,” says Peter Sachse, Macy’s chief stores officer. “We just called them stores.” Macy’s plan is to “convert 292 of its 800-plus stores for the task, with expanded storerooms and new technology that dynamically updates the status of every item in every store.” The idea is that excess inventory in stores can readily be sold online, and vice versa. It will also save “time and money on shipping” because items ordered online can be shipped from the store closest to the shopper.

The challenge is that, unlike Amazon, which uses barcode-reading robots to pick and pack orders, Macy’s is relying on human beings foraging through stores to find items and then packing and shipping them to online customers. Finding an item can be especially difficult when its color has a trendy but vague name like “magical” or “journey.” Macy’s actually is far from the first retailer to integrate its online and instore distribution and fulfillment operations. Retailers have been working at this “since the late 1990s,” although the technology required for success is now “finally in place.”

Nordstrom has been filling “online orders with goods shipped from its stores” since 2009 “and now ships from all 117 of its full-line stores.” But “omnichannel” distribution, as it is known, can be complicated and expensive, in that it can require shipping “from, say, seven separate stores” versus “one online warehouse.” Whether the store or the website gets credit for the sale is another tricky issue. However, Jamie Nordstrom, who heads up Nordstrom’s online operations, says the approach “has cut the level of markdowns and improved margins.” Macy’s profits, meanwhile, have “jumped 38 percent,” and its online sales 34 percent, in its most recent quarter.

Cosmetics companies are turning to e-commerce as a channel to sell certain discontinued items, reports Tatiana Boncompagni in the New York Times (5/3/12). The insight is that the first thing some shoppers do when a favorite perfume, shampoo or shade of lipstick is discontinued is to try to find it online. The beauty companies, meanwhile, can get a good idea which of their de-listed products are in demand by monitoring social-media sites as well as comments on their own websites. Charles Denton of Erno Laszlo actually found himself personally responding to some 200 emails a day from customers complaining about discontinued items, prompting him to reinstate a couple of them.

Bobbi Brown recently launched “Facebook campaigns … asking fans in various countries to vote on their favorite shades of discontinued products.” The winning choices will be available only via a Facebook link or on the Bobbi Brown website. Guillaume Jesel, svp global marketing for MAC, compares contests in which consumers vote on their favorite discontinued items to Dancing With the Stars. “It’s the same revolution you see in other industries,” he says. “You let the consumer take the steering wheel for a while.”

Hilary Jones of Lush, a UK beauty products company, says bringing back old items is mostly about fostering good will. “It’s not a hugely commercial thing for us,” she says. Others find the online line extensions to be welcome relief from the traditional “one in, one out policy” employed by brands and retailers alike. “At the shelf, you have to think about turnover,” says David Lonczak, a vp of ecommerce and digital marketing for Drugstore.com, Beauty.com and Walgreens.com. “That doesn’t make it possible to carry these tertiary products, but there is still a reasonable amount of business there,” he says.

Numero Group is thriving “despite breaking almost every record-business rule in the book,” reports Duff McDonald in Businessweek (5/7/12). The tiny Chicago-based label starts with an unlikely premise: It specializes in re-issues of “lost musical treasures — primarily in the realms of soul funk and gospel.” Its three founders — Ken Shipley, Rob Sevier and Tom Lunt — share a passion for finding what had been lost and their idea is to make it easier for others to do so, as well. “We wanted to make records that were collectible but also accessible to a normal record buyer,” says Ken. “You didn’t have to have deep pockets or knowledge of some obscure record store. You could create your own library of obscure records through us.”

Numero’s success begins with embracing failure — the label actively looks for acts that never made it. “Success stories are nice, but they’re not as interesting,” says Ken. Rather than selling each album as a one-off, Numero has adopted a subscription model, where, for “$150 a year, ‘super-fans’ receive every Numero album, a release model more akin to a magazine publisher’s than a music label’s.” They avoid internet sales: “Numero’s typical release is now 61% CD, 34% LP and 5% digital. Sales on iTunes account for just 6.2% of sales. Over 10% of Numero’s sales are via mail order.”

Numero also invests heavily in its packaging, and with special attention to liner notes. “They want to talk to the people who made the music, the people in the engineer’s booth that day. They want the full picture: how it’s made, who makes it, where it’s made,” says Oliver Wang, a college professor and music blogger. They also stake out a strong brand identity. “We wanted to be a library,” says Tom Lunt. “All our releases look the same, and because of that they look more important than the other things on your shelf.” And they spend “almost nil” on marketing, relying on word of mouth. Launched in 2003 with just $23,000 in seed money, Numero last year saw profits of $1.1 million.

“Lego is both a metaphor and a case study for the argument” that “simplify and repeat” is the secret of business growth and success (The Economist, 4/28/12). It also goes to the heart of Repeatability, by Chris Zook and James Allen, who “argue that the most successful companies share three virtues. They have a high distinctive core business. They make great efforts to keep their business model as simple as possible. And they apply it relentlessly to new opportunities.” Examples include “Ikea with its flat packs, McDonald’s with its burgers” and of course Apple, which “has cut through the buzzing confusion of its industry by applying the same formula to a succession of iProducts.”

As for Lego, what began as an enterprise built on (or out of) interlocking plastic brick careened in the 1990s into “theme parks, television programs, clothes, watches and learning labs. The firm hit a wall made of bricks, not plastic. After years of dismal results, a new boss in 2004 took Lego back to its roots … you can now design a house or a castle online and order the bricks you need to build it. But Lego’s focus is firmly back where it was in its heyday — on little interlocking blocks that turn children of all ages into master builders … today there are 75 bits of Lego for every person on the planet.”

Chris and James, both Bain & Company consultants, identify three ways to apply the “simplify and repeat” model: “Some companies, such as American Express, target ever more precise groups of customers. Some apply the model to new markets: Nike brought its ‘swoosh’ to one sport after another. Some apply the same management system to lots of different businesses,” such as Danahar, a holding company that has applied the same “lean” management system to 85 companies. Of course, simplicity can be difficult to maintain in the face of disruptive innovation (see Kodak, Xerox, Nokia, Kmart and Blockbuster). But Chris and James “argue that successful companies can survive dramatic change by deciding which bits of their business models to preserve and which to dump.”

Nike thinks it has changed the footwear game with a shoe that is constructed like a sock, reports Matt Townsend in Bloomberg Businessweek (3/16/12). Nike is introducing its concept with “a 5.6-ounce running shoe called the Flyknit, made from synthetic yarn ingeniously woven together by a knitting machine.” The entire upper — except for the tongue — is knitted in a single piece. This promises both comfort and perhaps fewer injuries to runners because it is lightweight, as well as greater profits to Nike. The process is so efficient that Nike can contemplate making the Flyknit in the US, and not depend as much on cheaper labor in Asia.

Indeed, the new approach requires 35 fewer pieces than does a conventional shoe, dramatically reducing production costs. It’s not that the shoes would be less expensive to make in the US (they will still cost more) “but the cost difference could be made up by spending less on shipping and being faster at filling demand or jumping on a hot trend … The Flyknit process also fits into Nike’s sustainability push because the amount of material wasted manufacturing each pair weighs only as much as a sheet of paper … Nike says the Flyknit produces 66 percent less waste than the Air Pegasus+28.”

Less shipping is greener too, of course. The flexibility of the more automated production process “also could lead to a day when a person can visit a Nike store and have their foot scanned for a customized fit … far more customized than allowed by NikeID,” which allows only customization by color or fabrics. Running is Nike’s “biggest category, generating $2.8 billion in annual global sales, about 50 percent more than basketball and soccer … Lightweight shoes accounted for 30 percent of the $6.5 billion US running shoe market last year and were responsible for all of its 14 percent growth, according to SportsOneSource. The Flyknit will hit stores in July and cost $150.

Lou D’Ambrosio hopes that data mining will turn things around for Sears, reports Miguel Bustillo in the Wall Street Journal (3/13/12). Lou has no background in retail — before he became chief executive at Sears he ran Avaya, the telecom company. But he saw what happened to Borders and Blockbuster, and he wants to make sure Sears doesn’t suffer a similar fate. “You don’t change, you die,” he says. At the center of his strategy is “a loyalty program called Shop Your Way Rewards, which promises customers generous freebies as long as they agree to share personal shopping data.”

The way it works is, shoppers “check in” via their smartphones when they arrive at Sears. A store employee then locates the shopper via GPS and perhaps guides “them to the flat-screen televisions and Kardashian Kollection jeans they ogled earlier online.” So far, Sears says “tens of millions” of shoppers have signed up for the program. Michael Archer of Kurt Salmon Associates likes the data-driven approach. “It is the equivalent of walking into a coffee shop and not having to say anything as someone prepares your coffee with just the right amount of cream and sugar,” he says.

The retailer is also using the data to glean merchandising ideas: “For instance, after noticing that many jewelry customers were men who bought tools, Sears created a Valentine’s Day special that dangled $100 in credit for $400 spent on jewelry.” Morningstar’s Paul Swinand remains skeptical: “This stuff about hounding everyone for their email address, it’s never going to move the needle quickly enough,” he says. Some — including Lou D’Ambrosio — admit that many stores still look shabby. But Lou thinks the technology is more important. “How do you value that versus the extra coat of lemon-white paint?” he says, adding, “That’s not to say we should have paint that’s, you know, falling off.”

“Improvement merely lets you hit your numbers … Creativity is what transforms,” says JC Penney ceo Ron Johnson in a Fortune profile by Jennifer Reingold (3/19/12). That was the main lesson Ron says he learned while he was at Target, after gambling on introducing Michael Graves designer products in a big way. “The math was simple,” says Ron. “If I didn’t sell one piece but people looked differently at the other 96% of products we’d win. It’s always about mind share, not market share.” Ron is now bringing a similar sensibility — which of course he also brought to Apple stores — to JC Penney.

The essential vision, once again, is to create “a place where the experience (is) as important as the products themselves.” This apparently was more Ron’s vision at Apple stores than it was Steve Jobs’s. “He said it’d be a store for creative professionals,” says Ron. “I said, ‘Well, then I’m not coming. If you want it to be a store for all Americans, sign me up.” Ron also “persuaded Jobs to nix commissions for salespeople, arguing that they should give customers the best advice, not the advice that earns them the most.” Says Ron: “You can motivate by a mission or motivate by money … The mission will work.”

It certainly worked at Apple stores, where sales per square foot average $6,000. But will it work at Penney’s, where sales per square foot are currently $146, and the shopping experience is a safe distance from either Apple or Target? Fitch, the ratings agency, has “downgraded the company’s debt to junk level,” based on Ron’s strategy (link), the core of which is a “return to the company’s original values,” espoused by founder James Cash Penney as a “morally upright place.” Ron Johnson, eternally an optimist, says his plan will work. “What you can’t do is chicken out,” he says. “If you had looked at the data on the Genius Bar after a year and a half, we should have taken it out of the store … There’s no reason to sell an idea short. The only risk would be to not fulfill the dream.”

The sons and daughters of McDonald’s franchisees are bringing different ideas to the table, reports Julie Jargon in the Wall Street Journal (3/9/12). So far, changes brought by the a new generation of franchisees include thicker burgers, free wi-fi, a picture-based ordering system, nighttime hours and credit-card payment. These might not sound all that radical, but there’s a major limiting factor in that "new ideas need to be appropriate for all 14,000 restaurants in the US." So, one whippersnapper’s proposal for "composting and installing rooftop gardens" didn’t fly. Even less controversial concepts are subject to a lengthy approval process.

However, individual franchisees do have the latitude to initiate their own, local promotional programs. For example, Travis Heriaud decided to invest $40,000 on the grand opening of a new McDonald’s in Arizona. His plan took an educational bent, including book and backpack giveaways, and readings by Ronald McDonald. His father, an owner of 12 McDonald’s, warned Travis that the expense risked wiping out cash flow for a year. But Travis, 30, argued that they had already spent $1.7 million to build the restaurant and it was important "to demonstrate that their restaurant aimed to be a part of the community."

Travis was right, and the restaurant generated $3 million in sales during its first year, "far higher than the $2 million the company projected the store to ring up and higher than the $2.5 million McDonald’s restaurants around the country average annually." It was so successful that 220 other Arizona McDonald’s are now engaging in similar, community-based programs. Offspring of existing franchisees currently compose 30% of the total franchisee base — a figure that’s expected to reach 37% in five years. They can’t, however, simply inherit a restaurant, and must "undergo a one- to five-year process of proving themselves capable of running strong restaurants before they can become franchisees."

A small, rubber teething toy from France has become an unlikely luxury item among young moms around the world, reports Christina Passariello in the Wall Street Journal (3/7/12). Sophie la Giraffe “has been part of French life since 1961″ and for a long time its makers, Vulli, thought its appeal was purely local. But six years ago, its CEO, Serge Jacquemier, became “convinced Sophie could travel.” He “hired a psychotherapist, who concluded the rubber chew toy tapped into all five senses: sight with its strongly contrasting colors; hearing with its easy squeak; taste because it is easy to chomp on; and the touch and smell of the natural rubber. The toy’s petite size made it easy for babies to grip.”

As Serge observes: “What difference could there be between a Chinese, American or Russian baby?” Sophie was re-packaged in biodegradable boxes emblazoned with the Eiffel Tower, and sales have since “more than quadrupled” to $29 million. In the United States, the retail price of $25 is more than double the typical French tag of $12. In France, Sophie is sold in local supermarkets, in a blister package, and does quite well without the upscale trappings: “In 2010, Vulli sold 816,000 giraffes in France, and 828,000 babies were born, meaning that nearly every French newborn got one.”

Unlike most other toys for children, Sophie is made of rubber, not plastic, which also gives Vulli an advantage. “What saved us is that producing in rubber is more difficult than plastic,” says Serge. After being poured into molds and baked, the Sophies are allowed to dry for two months, before being polished, fitted with a whistle, sprayed “with food-grade paints” and marked with tracking numbers. Some naturally occurring toxins were detected recently by advanced technology, but Serge insists Sophie is safe. The company, which originally made “rubber balloons” to spy on German lines during World War I, has also line-extended into Sophie blankets and rattles.

Nike’s shift "into the digital realm … marks the biggest change in Beaverton since the creation of Just Do It, reports Scott Cendrowski in Fortune (2/27/12). "There’s barely any media advertising these days for Nike," says brand consultant Brian Collins. Indeed, Nike’s spending on print and television advertising "dropped by 40% in just three years, even as its total marketing budget has steadily climbed upward to hit a record $2.4 billion last year." Nike has also reduced its "reliance on top-down campaigns" featuring mega-stars or signature shoes.

Instead, Nike’s focus is on "a whole new repertoire of interactive elements that let Nike communicate directly with its consumers." Leading the way is Nike Digital Sport, a new division launched in 2010 that "aims to develop devices and technologies that allow users to track their personal statistics in any sport in which they participate." Most prominent is the Nike+ running sensor, developed with Apple, that not only lets users track their performance but also provides Nike with data that helps it "forge a tighter relationship with them than ever before."

Users upload their data to nikeplus where they can "store and analyze the data, get training tips and share workouts with friends." This also allows Nike to "study its customers’ behaviors and patterns." Nike Digital Sport is now working across all divisions to bring its brand of "chip-enabled customer loyalty" to "all of Nike’s major sports." As a followup, Nike is introducing FuelBand, a wristband that "calculates its user’s exertion levels" throughout the day. David Carter of USC’s Sports Business Institute is a fan of Nike’s digital ventures, saying the company has its "finger on the pulse of what its customer is looking for."