The New Specialty Retail Model

You have heard it before: “Margin is Everything”. In these strange economic times, these words have never rung truer.

Take, for instance, the recent solid performance of Aeropostale. When most of the specialty retail world was crying “Uncle” from the recessionary stranglehold on consumer spending, Aeropostale posted positive comps every month this past fall including a 12 comp in December and an 8 comp in January.

How did they do this? Margins.

Their margins have allowed them to become the promotional specialty retailer in a very crowded teen/tween/preppy category. If you look at the recent results among those who occupy this exact space (we are talking the same look, let alone the same demographic), it was an unmitigated disaster. Abercrombie and Fitch (which refused to mark down – which I applaud by the way) posted comps in the negative 20’s for most of their fall and holiday seasons. American Eagle Outfitters (the cheaper knock-off of A & F) also posted negative comps in the teens for most of their fall and holiday seasons including a -22 comp for January.

In these uncertain economic times, where household income is tightening and spending is scrutinized daily, Aeropostale’s promotional stance with the exact same styling, esprit de corp and target market seems to be gaining market share from the other fuller priced preppy twins. Walking through the malls, I used to shake my head at how hard it was to tell the three brands apart. I often asked myself how could all three survive? If the names and store designs were taken away and you were left with an assortment overview without logos, it would be very hard to tell the three apart. That is, until recently. Aeropostale has become highly promotional 365 days a year. They seemed to have found a recipe for success even prior to the new economic realities.

How are they able to be so promotional all the time? It comes down to sourcing. As an example, if you are able to offer a sweatshirt at $50 dollars and it cost you $10 to manufacture, that is an initial gross margin of 80 points. Even if you sell the sweatshirt on promotion at 50% off, you are netting out at 60% gross margins, which is extremely healthy in any retail environment.

And, when you announce that you are turning your inventory 7 times a year, that is a license to print money. Especially in times of lower productivity, margins become the buffer to ensure you can still operate profitably as it provides a cushion when sales decline (which actually isn’t happening for them yet anyway).

They have successfully redesigned their stores, they have increased their media presence, but at the end of the day, they have embraced a full-on promotional model that seems to be a winner.

TheRetailTherapist:)

“Not-So-Crappy” Tire

Remember the old days in Canada? Our parents would purchase our first set of hockey equipment and first hockey stick at what we would call “Crappy Tire” or Canadian Tire, a general merchandise big box retailer unique to Canada.

Walking through one of their newly renovated and expanded stores dispels the notion of it being “Crappy Tire”. The aisles are wide, the place is bright and relatively clean. For the most part (except for the sporting goods / hockey department), the shelves are fully stocked and easy to browse. It struck me though that the company had to go through many iterations to get to the point they are now – basically without direct competition. Their uniqueness is in their eclectic offering.

Start with a large automotive section (parts, tires, accessories), then move onto garden care, then cruise the sporting goods section on your way to the hardware aisles and finally end up in the home section with everything from small appliances to bath towels and area rugs. This is the charm and the mystery of Canadian Tire.

With over 470 stores across the country their other secret to success is that almost every one of them is dealer owned, which means they are run by an entrepreneur who operates it as if it’s his/her own business. This also helps in maximizing sales volumes, minimizing wasted expenses and avoiding bloated inventories. The network is well supported from home office and the machine has been built since 1923 when A.J. Billes and his brother opened their first store in Toronto.

Just to add to their assortment, they bought Mark’s Work Wearhouse in 2002 and entered into the apparel business. They now have a bunch of stores where they are either side by side or where they put a Mark’s shop within the confines of the larger Canadian Tire box. This has been an extremely successful venture mainly because the customer profiles are so closely matched. Selling work wear to their every day customers was a natural fit and they haven’t looked back.

Their old slogan “More Than Just Tires” started getting people to think of them as a general merchandiser and not just a place for automotive parts and gadgets.

So, who do they compete with? That is difficult to say. They compete with all the automotive parts players (although they own and operate one of the biggest automotive parts retailers in the country named PartSource); they compete with Wal Mart because everyone does in general merchandise; they compete with sporting goods chains such as SportChek; they compete with Zellers and Sears in the home business; and they compete with all gas stations and convenience stores based on their own 266 store gas bar business and their 278 convenience stores.

They also compete with the banks as they have become the second largest Master Card franchise in Canada and have established their own bank in order to sell financial services and products.

So, what is the lesson? In this case, it isn’t “stick to your knitting”. It isn’t “stay laser focused on what you do best”. It seems that knowing your customers  intimately (which is virtually all suburban Canadian adults), having a respected and established name brand, evolving your assortment to mirror the evolving lifestyles of your customers and sticking with and supporting an experienced and talented dealer network are paying off in spades. Maybe “Know Thy Customer” is the golden rule in retail after all.

Now, if we could only do something about being able to get some sales floor help, it would make their store experience that much less “Crappy”…

TheRetailTherapist:)