KURT SALMON REVIEW
Retail. Consumer Products. Private Equity. Strategy.
IN THIS ISSUE
Five trends driving deals
and strategy in the retail and
consumer products industry. 6
How to get stores to live
up to their part of the
omnichannel equation. 12
Why footwear will be one
of the hottest M&A areas
of 2013. 49
Introduction
Welcome to the first issue of the Kurt Salmon Review. In this bi-annual publication,
we will highlight the most important strategic issues for retailers, consumer products
companies and private equity sponsors. We will provide in-depth examples and
analyses to help sponsors invest wisely and retailers remain on the cutting edge.
When I co-wrote The New Rules of Retail just over two years ago, my co-author
and I laid out three rules for success:
1 Developing products and experiences that fuse connections with
consumers on a deeper level
2 Reaching customers first, fastest, most effectively and most often
3Maintaining value chain control from inception through delivery
to the customer and back again
In the past two years, these rules have become more important as competitive
pressure mounts and consumers grow savvier.
Our belief is that understanding these forces will be fundamental in deals and
strategy development in 2013 and beyond.
In this issue, we discuss deal opportunities in the footwear segment and new
distribution channels, plus new diligence tools that help accurately measure
brand strength. We also explore strategic issues like omnichannel retailing
and the calculus of brand distribution.
These are just a few of the articles you’ll find in this issue. We hope you enjoy
it, and we’re interested in hearing your thoughts on any of the articles within it.
Best,
Michael Dart
Senior Partner and Director, Private Equity and Strategy Practice
TABLE OF CONTENTS issue 01
FEATURES
Assessing Turnaround Opportunities 6
Sixty percent of retailers with at least two
years of negative comps turn them positive.
Here’s how.
The Omnichannel Customer
Experience In-Store 12
How to create a compelling cross-channel
experience and beat pure-play competitors.
Five Trends to Know 18
The most important factors
driving deals in the retail and
consumer products industry.
Hard Bodies Inc.
IN BRIEF
Hard
Bodies Inc.
STRATEGY
Power Brands 38
Striking the right distribution balance is even
more critical when building a power brand today.
Hard Bodies Inc.
Margins or Growth? 47
Dr. Jon
Which is a better
indicator of strong
Vitamin
performance—and a good investment?
DEAL OPPORTUNITIES
Influencer Channels 28
Are doctors’ offices, salons and gyms the next big
retail channels?
Footwear 49
Why the fashion and lifestyle footwear market
will continue its hot streak in 2013.
NEW RULES OF RETAIL REVISITED
Patagonia 32
How the brand makes money by
encouraging consumers not to spend.
Distribution 2.0 34
Why preemptive
distribution is
one of the most
important retail
concepts you’ve
probably never
heard of.
DILIGENCE TOOLS
Fad or Trend? 42
How to spot the difference between the
next Beanie Baby and the next Barbie.
Net Promoter 53
Forever 21 and the problem with
net promoter scores in isolation.
Digital Footprint 58
Assessing a brand’s online presence
in a due diligence.
Assessing Turnaround
Opportunities
Two years of deep same-store sales declines can easily
feel like a death sentence for most retailers. However,
the data suggests it is indeed far from that.
We analyzed all specialty retailers with sufficient public data over the last 20 years—nearly
70 retailers—and found that the majority of
retailers who substantially underperformed
the market ended up turning their comps
positive in relatively short order.
First, sustained poor performance is more
common than many would think. Eighty-eight
percent of the retailers we studied had at least
one year of double-digit negative comps. And
47% of our set followed that bad year with
another negative one.
6
But all hope is not lost for this set. In fact,
we found that 51% of those poor performers
averaged positive comps in the two years
after their slump. And 60% of the set had
turned positive within five years.
This analysis has been adjusted for changes
in personal consumption expenditures by
category, so we were able to distinguish
between retailers struggling from individual
decisions and those struggling as a result of
macroeconomic factors.
We found that 51% of poor performers averaged
positive comps in the two years after their slump. And
60% of the set had turned positive within five years.
EXHIBIT 1: Percentage of Companies by Worst Year of Adjusted Comps
100%
Percentage of Companies with Worst-Year
Comps below Threshold
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
–30%
–25%
–20%
–15%
–10%
–5%
0%
Worst Year of Adjusted Comps, 1990–2011 (%)
7
EXHIBIT 2: Charting the Progress of Poor Performers
100%
Companies that did
not experience at least
two consecutive years
of negative comps
Companies with one
year of double-digit
declines, followed by
another negative year
8
100%
100%
34%
28%
Higher
than 5%
18%
32%
0% to 5%
16%
-5% to 0%
24%
24%
Lower
than –5%
Next 2 Years
Average Growth
Next 5 Years
Average Growth
53%
24%
47%
Case Studies
Great Turnarounds
We found that overcoming such a significant slump is made more challenging by
four factors:
1. Tarnished brand. Once-desired brands
can lose advocacy or cachet as a result of
changing trends or a loss of quality control.
TGI Friday’s is one example.
2003–2007: J. CREW
ISSUE: J. Crew experienced -16% comps in
2001 and -11% in 2002. These results were
symptomatic of significant internal strife
and turnover, including three CEOs in five
years, and poor merchandising and real estate
2. Rapidly increasing market competitiveness.
The popularity of a given category encourages a sea change in the number of brands
and retailers playing in it, as well as e-commerce influences like Amazon keeping prices
relatively low.
decisions. At the same time, its competitive
3. Secular shifts or a changing industry.
An obvious example is the shift from physical
to digital books—Barnes & Noble is an interesting investment opportunity in this space.
design-driven focus throughout the organiza-
4. Operational missteps. Risky management
decisions with lasting consequences can do
as much damage as any macro trend. Sears
and JC Penney are both currently experiencing headwinds created by past decisions.
None of these challenges alone means that
a brand is beyond hope. They simply mean
that reinvigorating the brand will require
major strategic changes and time.
The following case studies help illustrate
some of these strategic changes.
landscape only intensified.
SOLUTION: Starting with significant man-
agement changes, including hiring Mickey
Drexler as CEO, J. Crew sought to instill a
tion. It also revamped its products to include
more color and added new higher-end pieces,
categories and a bridal collection. J. Crew
also upped its product flow and improved
the store experience.
RESULTS: J. Crew turned in 16% same-store
sales growth (SSSG) in 2004 and 13% in 2005,
plus a 17% increase in total revenues to $804
million and a gross margin increase of 15%.
It was taken public in 2006 with a market
capitalization of $1.1 billion and has since
spawned several successful new businesses,
including Madewell and crewcuts.
9
2006–2011: KATE SPADE
2007–2012: EXPRESS
ISSUE: Kate Spade faced double-digit comp
ISSUE: Express had experienced many ups
declines as a result of suffering retailer relationships, internal strife and real estate
in poor locations.
and downs in SSSG over the past decade as a
result of misaligned products, assortments
and store execution. It also suffered from a
lack of focus and too many strategic changes,
which left it unable to withstand the pressures
of increased competition.
SOLUTION: When it was purchased by Liz
Claiborne, Kate Spade underwent significant management changes. New leadership
redeveloped its core products, making its
traditional designs more contemporary
through bold colors, and entered new categories—jewelry, apparel and denim. Kate Spade
also launched a new advertising campaign to
promote these products, as well as a best-inclass social media strategy. Finally, the brand
focused on improving its distribution, both
by strengthening relationships with retailers
like Nordstrom and Bloomingdales and by
revamping its e-commerce site.
RESULTS: Kate Spade’s SSSG increased
24% in Q2 2012, and total sales were up 86%
to $313 million. The brand’s e-commerce sales
are growing at over 30%, and it is carried by
over 300 premier department stores, plus
50 full-price and 30 Kate Spade outlet stores.
10
SOLUTION: Golden Gate Capital acquired
Express in 2007 and started by hiring a new
CEO. Management then implemented a
new merchandising strategy that was more
responsive to consumer preferences and
launched an e-commerce site in 2008. Finally,
Express rationalized its store fleet, combining
men’s and women’s stores to use fewer square
feet but growing their overall store base.
RESULTS: SSSG was at 10% in
2010 and 6% in 2011, total sales
increased 11% to $2.1 billion and
gross margin increased from 26%
to 36%. It was taken public in 2010
with a market capitalization of $1.3
billion—60% more than when it was
originally purchased. Express was
also able to reduce markdowns
from 20 million items in 2007 to
14 million in 2009, resulting in a 4%
increase in merchandise margins.
Many of these strategic decisions are best conducted
away from the intense glare of the market. For private
equity sponsors, the lesson is clear: Brands that have a
strong heritage but are suffering from several years of
bad performance may not be forever doomed. In fact,
some may be hidden investment gems. v
AUTHOR
Drew Klein has significant strategy and due
diligence experience, specializing in the apparel,
footwear and sporting goods industries. He
can be reached at drew.klein@kurtsalmon.com.
11
Some industry analysts and investors say
it’s nearly impossible for retailers with stores
to win against their online-only competitors,
saddled with a massive store fleet and losing
on price. We believe the opposite.
In fact, omnichannel retailers should be in a
better position than their online-only competitors to win in this hypercompetitive world.
True, the U.S. is overstored, foot traffic is
declining and traditional brick-and-mortar
retailers face increased pressure from online
competitors. As one client put it, although
their in-store conversion rate of about 18% is
on par with the industry average, that figure
will need to double in the very near future so
stores can remain competitive.
But omnichannel retailers are well positioned
to achieve such a significant increase. Why?
For starters, it’s well known that cross-channel shoppers are more profitable.
For example, one department store retailer
found that customers who shopped only on
its website browsed it an average of three
times a year. Customers who shopped exclusively in-store, on the other hand, shopped an
average of 7.5 times a year. But customers who
shopped both channels shopped an average
of 1.7 times a year online and 7.3 times a year
in the store, to get a total of nine times a year.
This number demonstrates that online shopping was not cannibalizing in-store shopping;
online was purely additive.
3 TIMES A YEAR
shopped only on its website
7.5 TIMES A YEAR
shopped exclusively in-store
9 TIMES A YEAR
+
shopped both channels—shopped an average
of 1.7 times a year online and 7.3 times
a year in the store
13
The retailer found that these omnichannel
customers not only shopped more, they
purchased more often. Generally, about 23%
of the retailer’s purchases are returned. So
DIRECT DELIVERY & RETURNS
sales
retailer nets about 77% of its sales. But if the
net
23%
when direct delivery and direct-to-DC returns
are the only options for online purchases, the
returns
100%
77%
retailer offered in-store returns, it found that
customers spent an extra 18% on top of their
original order when they were in the store
returning the original product, which boosted
the retailer’s net sales back up to 95%. And if
IN-STORE RETURNS
sales
the retailer offered in-store pickup, it found
So if the retailer offers both in-store pickup
net
23%
that customers purchased 12% more when
they were in the store picking up their order.
returns
100%
and returns, it will recoup 107% of its sales.
18%
purchases
during
in-store
returns
95%
This means that this retailer’s cross-channel
customers purchase nearly 40% more than
IN-STORE PICKUP & RETURNS
its single-channel counterparts.
Stores also have other advantages, including
sales
their ability to be a powerful distribution asset. As customer expectations around delivery
speed continue to increase—especially after
Amazon, eBay and Walmart’s recent forays
into same-day delivery—stores can be the
ideal vehicle for fulfilling these orders.
14
100%
net
returns
12%
purchases
during
pickup
23%
18%
purchases
during
107%
in-store
returns
And the true advantage of omnichannel retailers is the
ability to combine online, in-store, mobile and other
channels to create an unbeatable customer experience.
But stores’ true advantage comes with their
and which products they’re interacting
ability to act as an effective piece of an over-
with. Retailers can already push person-
arching, compelling omnichannel customer
alized offers to customers when they’re
experience. New technology is now enabling
near or entering the store, but this idea
retailers to bring the personalized customer
can extend to any given display or
experience once found only online to life in
fitting room.
their stores, creating one-to-one retailing
3. Product awareness.
experiences. Doing this will help increase
Not only can retailers know who is in the
conversion rate and basket size by improving
store and where they are, they can know
customer engagement, making a retailer’s
exactly what products they’re handling.
store fleet more profitable.
For example, a consumer in a bookstore
What will these one-to-one retailing experiences look like from a customer’s perspective?
They will include four key building blocks:
1. Connected marketing.
In the very near future, the store will
become one more distribution point for
the kind of personalized marketing now
found online and on mobile devices. For
example, a customer looking at a certain
pair of jeans on a retailer’s website would
be shown those jeans on interactive displays when she entered the store later.
2. Presence awareness.
picks up a novel and a nearby screen
displays product reviews pulled from
the customer’s social media networks.
4. Personalized recommendations.
The in-store experience can be tailored
and targeted at the individual level by
combining presence and product awareness with location and personal data
and using predictive analytics. For
example, a consumer can be shown
shoe recommendations based on the
pairs she already has in her closet and
the styles she has been exploring online
and in the store that day.
Similar to the cookie concept online,
technology is now enabling retailers to
know which customers are in the store
15
The Technology behind 1:1 Retailing
Geofencing. Geofencing, or creating a
virtual “fence” around a set physical space
to monitor movement near and within it,
helps retailers track customers’ movements
around and within the store’s four walls.
Combine that power with a loyalty app or
smart card and you’ve got the ingredients
for a truly personalized interaction with your
customer. By knowing who is in their store,
retailers can use individual purchase histories
or customer profiles to dynamically change
recommendations, visual merchandising
presentations or promotions.
RFID. RFID allows retailers to see exactly
which products each customer is handling
or trying on at a given moment. Beyond that,
RFID allows a retailer to know exactly what
items, sizes and styles they have in stock in
the store or backroom. Combine this with
the geofenced loyalty app or smart card and
retailers have the power to make personalized, real-time shopping recommendations
and offers.
Interactive displays. Only a year or two ago,
installing and communicating interactively
with immersive video displays in a retail
environment was prohibitively expensive.
But now, the cost of display technology is
dropping rapidly. More importantly, personalized in-store experiences enable significant
sales and margin improvements, creating
attractive returns on the investments required
to deliver them.
16
Implementing these technologies will help
improve customer engagement, which in
turn drives increases in traffic, conversion
rate and basket size, completely changing
store financial performance and making the
omnichannel retailer even more profitable
versus its online-only competitors.
Traffic. Successful one-to-one retailers will
use integrated channel communication to
bring customers to stores with targeted events
and promotions. The immersive experience
will begin right at the store threshold, drawing
in higher traffic from customers looking for
a new experience as well as increased loyalty
revisit rates.
Conversion rate. The more time a customer
spends in a store engaging with the retailer,
the more likely they are to make a purchase.
For example, we studied the behavior of
several specialty retailers’ customers and
found that 45% of customers walked into the
store and left within two minutes without ever
engaging with the products or sales associates.
But when customers were engaged by an associate or started interacting with the products,
they were nine times as likely to try something
on. And once they tried on a product, they had
a 52% chance of buying it. So we determined
that by engaging with just 30% more customers, retailers could increase their conversion
rates by 50%.
Implementing these technologies will completely change store
financial performance and make the omnichannel retailer even
more profitable versus its online-only competitors.
Basket size. While retailers can guarantee
100% of shoppers see companion products on
their websites, only 8% to 15% of shoppers in
the stores of the specialty retailers mentioned
above were upsold. Yet when the retailers
could find the staffing and time to do it, 75%
of customers who were offered additional
items converted, and their average basket
size increased by 25%. Imagine the benefit of
upselling to more than that 8% to 15%.
Of course, enabling this level of omnichannel
experience will not only require new technology but also significant organizational change.
Saks Fifth Avenue, Gap and Macy’s are leading
the charge to make their organizations more
channel agnostic, increasing coordination
and improving the customer experience at the
same time.
We believe there are five key factors that
should inform any discussion about omnichannel organizational design:
3. Brand
» Level of exclusivity
» Competitive set
4. Business maturity
» Absolute size
» Growth rate
5. Marketing and selling
» Role of store—more for service or for selling?
With all the benefits of a well-executed
omnichannel experience, not to mention
stores’ tremendous distribution advantages,
it’s no wonder Amazon CEO Jeff Bezos said
in a recent interview that even he would love
to open Amazon stores. If the world’s biggest
online retailer is thinking about opening
a physical store, retailers who are already
blessed with hundreds of stores should be celebrating their good fortune, not wringing their
hands about the demise of bricks and mortar. v
1. Consumers
AUTHORS
» Target customer profile
Michael Dart has extensive expertise in both
strategy and due diligence. He specializes
in retail, consumer products, footwear and
sporting goods. He can be reached at
michael.dart@kurtsalmon.com.
» Main purchase drivers
» Shopping habits in each channel and across them
2. Offering
» Assortment overlap between channels
» Primarily core or quick turn and high fashion
» Level of commoditization of products
» Price elasticity
Al Sambar specializes in supply chain and
store operation strategies for specialty
apparel retailers and wholesalers and
department stores. He can be reached
at al.sambar@kurtsalmon.com.
17
Five Trends to Know
The most important factors driving
deals in the retail and consumer
products industry—and four compelling
investment opportunities.
It’s a great time to be a part of the retail and consumer products industry.
U.S. retail deals shot up 124% to $19.7 billion in the first three quarters of 2012, while overall
U.S. PE-backed M&A fell 20% in the same time period, according to Dealogic. Globally, there
was $324.6 billion in consumer and retail M&A activity in 2012, up 33% from the prior year,
making it the busiest year since 2007.
These deals represent a wide range of sectors
and segments, from Savers to Party City to Cole
Haan. Looking forward to the rest of 2013,
retail and consumer M&A shows no signs of
slowing down, with the $23 billion acquisition
of Heinz kicking off the year in a big way.
These deals come in the midst of dramatic
industry-wide changes. Retailers are taking
innovative steps to respond to these changes,
from JC Penney’s ongoing reinvention to
Etsy’s recent purchase of collage maker Mixel
for its mobile talents to Target’s online pricematching offer.
Driving these changes are five key factors that
all investors and retail strategists should use
in determining value: macro demographic
changes, lifestyle shifts, technological trends,
new business models and intensified competitive dynamics.
18
1. Macro Demographic Changes
Growing income gap. The income gap
between top earners and lower-income
consumers is now the highest it has been
since the Great Depression, according to
a 2012 study by UC Berkeley economists.
On one end of that gap, luxury is booming.
For example, Michael Kors recently reported
fourth-quarter comps of 45%. And Neiman
Marcus and Saks Fifth Avenue have averaged
8.1% comps in 2011 and 2012, well above the
mid-range department store average of 1.8%.
At the same time, lower-income consumers
will be increasingly pressed. The median
household income dropped 1.5% in 2011 to
the lowest level since 1995 when adjusted for
inflation. This has led to the success of dollar
stores and discount chains like Ollie’s, plus
growth of private label to make up roughly
25% of most grocery store shelves.
Urban migration. Nearly 80% of the U.S.
population lives in major metropolitan areas
and, according to the Census Bureau, cities
are now growing faster than their suburbs
for the first time in a century. This trend will
drive several important changes. First, concepts like The Container Store that help people make the most of small spaces will thrive.
Secondly, traditional big-box retailers are
figuring out how to reach this growing market.
This has led to a rise in small-format stores
like Walmart Express, City Target and Best
Buy Mobile, but will also fuel the continued
popularity of dollar stores and c-stores, both
of which will expand their assortments to
more closely resemble their mass and grocery
competitors.
A population shift. Currently, 13% of Amer-
icans are 65 or older; that will grow to 18% by
2030. As baby boomers age, there will be new
demand for leisure activities and convenience
because of limited mobility, including delivery services for basic needs like groceries and
drugs. This trend will also drive closer integration between traditional retail settings and
health care services—like CVS’ MinuteClinic.
On the other hand, millennials are growing
rapidly—30% of all retail sales will come from
this group by 2020.
Racial and ethnic diversification. The U.S.
is becoming increasingly racially and ethnically
diverse, with the non-Hispanic white population projected to shrink 23% by 2050,
according to the U.S. Census Bureau. At the
same time, the African American population
is expected to increase by 11%, the Asian population by 74% and the Hispanic population
by 57%. This demographic shift will lead to
the continued diversification of store shelves
to meet changing tastes.
U.S. Population Changes by 2050
Non-Hispanic
White
African
American
Asian
Hispanic
–23%
11%
74%
57%
2. Lifestyle Shifts
Personalization. From news to music to
advertisements to credit card rewards, companies of all kinds are using consumer data
to craft personalized recommendations and
experiences. So it’s no surprise that consum19
“The days of trying to get a consumer to come to you
are over. You really have to be in the consumer’s world,
wherever, whenever and however.” —Mindy Grossman, CEO, HSN
ers are beginning to expect the same level
of individualized treatment from retailers. Of
course, we’ve all heard about Target sending
promotional offers to pregnant women, but
other retailers are using less controversial—
but equally effective—methods. For example,
Walmart’s Shopycat Facebook app provides
recommendations based on customers’ social
media habits. In one promotion, Walmart
saw a 42% conversion rate for users allowing
the app and 50% of users shared it with their
friends. Retailers are also seeing incredible
success when it comes to personalized products. For example, Nike has built NIKEiD,
which lets customers design their own shoes,
clothes and gear bags, into a $100 million
business.
Percentage of Households with
at Least One Cell Phone
92%
Highest quintile
86%
INCOME
Fourth quintile
Second quintile
Lowest quintile
20
76%
Third quintile
59%
43%
Technology is no longer a luxury. Even
lower-income consumers are allocating
large shares of their incomes to purchasing
technology. In fact, 43% and 59% of lowest
and second quintile households by income
had cell phones in 2005, the last year for
which data is available. And these numbers
have likely only grown since then. This has
led to the success of companies with products
accessible at a variety of price points, like
Apple. EBay is another beneficiary, as mobile
transactions through its app doubled in 2012
to $13 billion. From point-of-sale technology
to mobile apps, every consumer expects better
technology solutions.
Renewed emphasis on health. Sedentary
lifestyles and growing waistbands have led
consumers to seek healthier options, from
wellness products like vitamin supplements
and organic food to services like yoga classes.
Whole Foods has benefitted from this trend,
averaging 8.3% comps from 2001 to 2011
versus 2% for the rest of the grocery industry.
Juice cleanses, gyms and active apparel are
all growing.
3. Technological Trends
Moore’s Law continues. Moore’s Law—which
dictates that the number of transistors on a
computer chip will double every two years—is
widely applicable to technological change in
general, in that the pace of change accelerates
Time to 50% Consumer Adoption
Television
Social Media
28 years
3.5 years
Analytics. Technological advances are
enabling retailers to collect and analyze data
quickly and cost-effectively and use it to
drive better decision-making. For example,
Walmart scans the prices of competitors’
websites every 20 minutes and uses the data
to adjust its own prices accordingly.
Rise of smart products. Smart products—
over time. Consider that it took 28 years for
the TV to be adopted by 50% of consumers,
but it took social media only three and a half
years to reach the same level of adoption.
From RFIDto mobile POS, technological
changes will continue to shape the future of
retail. For example, Tesco has installed virtual
store walls in South Korean subway stations.
Consumers scan QR codes next to each product, check out on their mobile phones and the
products are delivered by the time they
get home.
The push for omnichannel. Creating a
consistent experience—and delivering products—across channels is the industry’s biggest
mandate and challenge. HSN was an early
leader in developing an integrated experience
across channels. As CEO Mindy Grossman
puts it, “The days of trying to get a consumer
to come to you are over. You really have to be
in the consumer’s world, wherever, whenever
and however.”
like Under Armour’s shirt that can monitor
the wearer’s heart rate and Nike’s shoes that
track movement—will grow in popularity as
consumers increasingly value personalized
products and experiences.
4. New Business Models
New and now. Product development
cycles continue to shrink as the demand
for super-current products increases, led
by retailers like Zara and Forever 21. This
push also translates into distribution, with
Amazon, eBay and Walmart all venturing
into same-day delivery.
Near-shoring. Bringing manufacturing
closer to home can help reduce cycle times,
save money on transportation and labor
costs, and engender goodwill. Retailers from
Target to The Children’s Place to Zara are
near-shoring. Some brands, like Nine West,
choose to near-shore only a small portion
of a given assortment, handing the full order
to China if the initial sample sells well.
21
Blurring the lines between retail and
wholesale. Retailers are becoming more
vertically integrated to save money and
boost efficiency—like Party City, which
manufactures its own balloons. Similarly,
the percentage of manufacturers selling
directly to consumers is expected to grow
71% over the next year, according to an
Economist Intelligence Unit Survey.
Department stores become mini-malls.
Excess capacity inside big-box retailers and
department stores will fuel the growth of
“stores within stores,” such as Apple’s stores
in Best Buy, Sephora’s branded boutiques
within JC Penney and Home Depot’s partnership with The Container Store.
5. Intensified Competitive Dynamics
Increased pricing pressure. The rise of
Amazon and the ubiquity of smartphones
have led to increased pricing pressure on
commoditized products. To combat showrooming, leading retailers are creating unique
products or experiences that cannot be
replicated online, like Abercrombie & Fitch’s
perfume-heavy nightclub feel or Costco’s free
samples and treasure hunt vibe.
Excess industry capacity. The U.S. is over-
stored and inundated with websites. In fact,
the U.S. has 20 square feet of retail space per
capita, versus three in the U.K. and two
in France and Brazil. The same is true online,
22
where 9,675 daily deal sites have sprung up.
This means that large chains will shrink, while
smaller formats like dollar stores will grow.
There will be a similar shakeout on the Web.
Retail Space per Capita (square feet)
20
U.S.
U.K.
3
France
2
Brazil
2
Four Promising Investment Opportunities
We believe that all attractive investment
opportunities in 2013 and beyond will lie
at the intersection of the above trends.
Those who are able to capitalize on multiple
trends will see the highest economic returns.
Here are a few possible scenarios:
Reimagining the convenience store.
C-stores are uniquely positioned to exploit
new demands for convenience and increasing
urbanization. They’re already closer to consumers than any other type of physical store,
but there are still opportunities to improve
the experience and assortment.
Those who are able to capitalize on multiple trends will
see the highest economic returns.
First, margins and consumer loyalty can be
improved by growing private-label offerings
beyond packaged goods. C-stores are already
starting to more closely resemble quick-serve
restaurants in their offerings. For example,
Casey’s General Stores recently started offering fresh pizza.
But there is still tremendous opportunity to
expand c-store private-label offerings to include more general merchandise, transforming c-stores into one-stop shops for modern
urban consumers. For example, 7-Select at
7-Eleven in the U.S. includes more than 250
food items from donuts to frozen pizza. But in
Taiwan, 7-Select also includes a much wider
assortment of general merchandise, including
clothing, laundry detergent and light bulbs.
And the strategy is paying off, with 7-Eleven’s
operator in Taiwan reporting a 27% increase
in net income in the third quarter.
And new technologies can also help make
the c-store shopping experience easier and
faster. For example, retailers could deploy
RFID tags to let consumers check themselves out. Or U.S. c-stores could take a page
from Tesco’s book and build virtual stores.
Finally, online ordering and in-store pickup
would help make the experience even easier
and give first adopters an incredible competitive advantage.
Retailers to watch: 7-Eleven, Alimentation
Couche-Tard, Pantry, Casey’s General Stores
and Wawa
Customizing and localizing the high-end
supermarket. Perfectly positioned at the in-
tersection of luxury, health and convenience,
high-end supermarkets have tremendous
growth potential.
Gourmet supermarkets offer both wealthy
and aspirational consumers a valued escape
from their everyday stresses into a luxurious world, which will become increasingly
important as consumers work longer hours
and become increasingly urban. In addition,
they typically offer higher-quality and higher-priced products, meaning they can easily
cater to the demand for more organic and
healthy products.
For example, Wegmans, a $6.2 billion, 72store chain, sends hundreds of its employees
on trips around the globe so that they will
become experts in their products.
And cashiers can’t start work until they have
completed 40 hours of training. The result is
a highly specialized, differentiated experience.
Larger chains also have much to gain from
offering localized assortments. For example,
one $20 billion national grocery chain saw
comps increase 2% to 7% across stores with
23
But a retailer who can bring everything a healthconscious consumer needs under one roof could
gain significant competitive advantage.
localized assortments, and that was with only
10% to 15% of each store’s assortment differentiated from the core.
Retailers to watch: Sprouts, Wagshal’s,
Wegmans and Balducci’s
Creating an integrated wellness onestop shop. Consumers leading a sedentary
lifestyle are searching for ways to maintain
their health into old age, a trend that is also
supported by growing incomes and an aging
population.
Athletic product sales, especially apparel and
footwear, have been fueled by smart products.
And the demand for knowledgeable sales
associates to inform customers about the
benefits of these products has kept pace. Companies have emerged to cater to health-conscious consumers at both ends of the economic spectrum. At the higher end, sports clubs
like Equinox and retailers like lululemon and
Athleta provide a luxurious experience and
fashion-forward products. At the lower end,
gyms like Blink create a supportive feel, while
Champion provides high value through its C9
line at Target.
But a retailer who can bring everything a
health-conscious consumer needs under
one roof could gain significant competitive
24
advantage. Offering apparel, sporting goods,
healthy pre-prepared food and nutritional
supplements at a gym or exercise facility
would appeal to busy, urban consumers
and combine cross-functional expertise
in one location.
Retailers to watch: Life Time Fitness, Town
Sports International and Equinox
Accelerating the diffusion of luxury.
Combining luxury with experiential, dealbased shopping experiences that create a
sense of urgency is helping to fuel significant
top-line growth for luxury brands and introduce them to new customers.
For example, high-end menswear seller
Bonobos has had incredible success creating
comfortable, good-fitting men’s clothing in
dozens of colors, encouraging shoppers to find
their fit and stock up. The model has helped
Bonobos become the largest U.S. apparel
brand ever built online. In 2011, the company
expanded into the brick-and-mortar space,
creating showrooms called Guideshops that
help customers select the right fit before
buying. And Nordstrom recently invested $16
million in Bonobos to sell its merchandise
on Nordstrom.com and inside 20 Nordstrom
stores. Bonobos has Web sales of $15 million,
according to Internet Retailer estimates.
Custom suit maker Indochino has taken a
similar approach, recently opening limited-time pop-up stores in cities around the
globe. In 15 minutes, customers are measured,
pick out their fabric and pay—roughly $500—
and in three weeks, the suit arrives from
China. Indochino has 40,000 customers in 60
countries and its revenue has doubled year
over year since it was founded in 2007.
Clearly, there is significant room to grow luxury concepts by diffusing them to aspirational
customers across a range of more accessible
price points and formats. But it’s important to
separate the experience and quality of these
diffusion concepts from the core luxury brand
to avoid alienating high-end consumers. For
example, Vera Wang at Kohl’s couldn’t be
further from Vera Wang’s high-end wedding
dresses, and Missoni was so popular at Target
that it shut down the mass retailer’s website,
but this has not tarnished Missoni’s reputation in luxury circles.
Retailers to watch: St. John Knits, Christian
Louboutin, Burberry and Intermix v
AUTHOR
Michael Dart has extensive expertise in both
strategy and due diligence. He specializes
in retail, consumer products, footwear and
sporting goods. He can be reached at
michael.dart@kurtsalmon.com.
25
In Brief
Quick looks at key strategic issues, hot deal
opportunities and new ways to evaluate success
Hard
Bodies Inc.
Dr. Jon
Vitamin
DEAL OPPORTUNITIES
Influencer Channels 28
Are doctors’ offices, salons and gyms the
next big retail channels?
Footwear 49
Why the fashion and lifestyle footwear
market will continue its hot streak in 2013.
NEW RULES OF RETAIL REVISITED
Patagonia 32
How the brand makes money by
encouraging consumers not to spend.
Distribution 2.0 34
STRATEGY
Why preemptive distribution is one of
the most important retail concepts you’ve
probably never heard of.
Power Brands 38
DILIGENCE TOOLS
Striking the right distribution balance is
even more critical when building a power
brand today.
Margins or Growth? 47
Which is a better indicator of strong
performance—and a good investment?
Fad or Trend? 42
How to spot the difference between the
next Beanie Baby and the next Barbie.
Net Promoter 53
Forever 21 and the problem with
net promoter scores in isolation.
Digital Footprint 58
Assessing a brand’s online presence
in a due diligence.
Bodies Inc.
Har
Hard Bodies Inc.
Are Doctors’ Offices,
Salons and Gyms the
Next Big Retail Channels?
Hard Bodies Inc.
Why? First, there’s the difficulty of investing
in product brands that are battling it out in
traditional channels. In traditional channels,
such as grocery, mass and department stores,
power brands owned by strategics dominate
many categories and benefit from the scale
of their parent business. Private label plays
a big role, turning a brand’s retail customers into direct competitors. And most retail
channels are overstored, with the resulting
margin pressures transferred from retailers
to brands.
28
Hard Bodies Inc.
Hard
Bodies Inc.
As a result, private equity opportunities in
traditional channels are often limited to
Dr. Jon
secondary brands struggling for share, few of
which have the heritage to mount a comeback.
Hard Bodies Inc.
One of the biggest mandates in the retail industry right now is reaching consumers wherever they are and through whichever formats
they prefer. Take that to its logical conclusion
and the importance of “influencer” channels
—like doctors’ offices and salons—isn’t so farfetched. As more and more consumers come
to expect customized products and experiences tailored to their wants and needs, channels
that service a specific community of highly
involved consumers may be the next big investment opportunity for private equity firms.
Hard
Bodies Inc.
Dr. Jon
Vitamin
Vitamin
In contrast, brands flowing through influencer
channels offer distinctive investment opportunities and a potential new angle for private
equity sponsors to consider when assessing
potential deals. Example channels include:
Dr. Jon
Vitamin
> Specialty sporting goods (including golf/
tennis clubhouses, specialty running shops
and gun clubs)
>H
ealth and wellness (GNC, Vitamin Shoppe
and thousands of independents)
>P
et care (PetSmart, Petco and thousands
of independents)
>H
air salons (chains and independents selling
hair treatment products and accessories)
>D
ermatologists’ offices (for skin care products)
>P
hysical therapists’/chiropractors’ offices (for
pain relief products and exercise equipment)
> Dance studios (for costumes, footwear and
practice apparel)
> Recreational sports teams (for uniforms and
equipment)
Unlike traditional channels, which offer
mainstream assortments to a broad audience,
influencer channels appeal to a niche group
of consumers and are known for their innate
expertise and distinctive assortments. Consider the respect people have for their trusted
doctor, golf pro and hair stylist and how
that respect can reflect positively on brands
they recommended.
The dynamics for brands in influencer channels are quite attractive. The channels are
surprisingly large and growing. (See Exhibit 1.)
Competition is fragmented, supporting strong
brand margins. And for channels like doctors’
offices and recreational groups whose reason
for being is not retailing, this incremental
profit stream is often underdeveloped. Helping these new influencer retailers to succeed
creates incredibly sticky relationships.
From an investment standpoint, attractive
brands operating in influencer channels will
demonstrate four characteristics.
EXHIBIT 1:
Industry
Influencer Channels
Sales ($Bn)
CAGR
Durable Medical Equipment
Specialty service providers (via doctor’s prescription)
$29.7
3%–5%
Pet Care Products
Pet stores
$14.2
2%–4%
Nutritional Supplements
Health food stores, health practitioners
$11.2
5%–8%
Athletic Footwear
Specialty running stores
$3.7
2%–3%
Hair Care Products
Hair salons, specialty hair care retail
$1.9
-1%–1%
Skin Care Products
Dermatologists’ offices, specialty skin care retail
$1.9
11%–15%
Guns & Ammunition
Specialty gun stores, gun ranges/clubs
$1.8
20%–24%
Tennis Apparel and Equipment
Tennis pro shops, specialty tennis stores
$0.4+
6%–8%
29
Credibility is often the very foundation of
brands operating in influencer channels.
Credibility. Credibility is often the very
foundation of brands operating in influencer
channels: These brands thrive because their
customers trust their expertise and in turn
recommend the brand to other consumers.
The credibility of Clean Bottle, a manufacturer of water bottles targeted to cyclists, is
certainly central to the company’s success.
The founder is an avid cyclist who designed a
better water bottle that has been adopted by
many professional racers. The brand markets
at many bike races and 10% of profits go to
charities favored by cyclists. These factors
bolster the brand in the eyes of independent
bike shops and devoted cyclists.
Quality. Consumers in influencer channels are passionate about their purchases
and expect very high-quality products. This
demand for quality helps drive higher price
points, which is a critical factor in influencer channels given their cost structures. The
importance of quality can be seen in Merrick
Pet Care food products. The high-end brand
touts its all-natural ingredients and boasts
of ingredients derived from superfoods, with
de-boned meat as its main ingredient, and
is made in the U.S. with no ingredients from
China. As a result, Merrick is well positioned
to tap into the super-premium and natural
pet food segments, which are already at $6.2
billion and are growing faster than the rest
of the pet food category.
30
Differentiation. Consumers in influencer
channels also expect the latest, most innovative products. Influencer channels embrace
offerings with limited distribution—they
want brands consumers can’t get anywhere
else. For example, Inov-8 minimalist running
shoes realized dramatic growth by tapping
into the rapidly growing CrossFit training
trend. This footwear was hard to find in traditional channels but took off through specialty
running stores. In fact, a Kurt Salmon survey
of these specialty running stores found that
Inov-8 was recommended for CrossFit more
often than any other competitive brand, including much larger brands like Brooks, Nike,
Asics and New Balance. This observation,
among others, led Kurt Salmon to conclude
that Inov-8 can achieve 100% to 150% unit
growth over the next five years.
Go-to-market capabilities. Influencer
channels are often highly fragmented and
distributors hold significant sway. So, to be
successful, brands typically need two distinct
go-to-market capabilities. One involves developing effective relationships with key distributors. The other requires creating deep bonds
with the influencer retailers themselves. This
includes product training, business support
(teaching influencer “retailers” like doctors
and dance studio owners how to run a retail
business) and cultivating relationships with
influencers (such as educators of physical
therapists or hair stylists) so that eventual
advocates are introduced to the brand
preemptively.
In nutritional supplements,
for example, educating store
associates on the value of
a brand is critical since consumers often rely on store
associates’ advice. Sales associates at independent nutritional retailers are more likely
to recommend a brand like New Chapter
because it deployed more sales reps than its
competitors to train store associates on their
products’ benefits.
Brands possessing these traits will likely grow
readily as their influencer channels expand,
but private equity sponsors can drive even
stronger returns several ways:
Drive for share. Private equity firms can
fund key growth drivers. First, they can
enhance go-to-market capabilities by investing to create a telemarketing capability or
funding sponsorships at prominent teaching
or training institutions. They can also fund
new product development. And private equity
investors can leverage their experience to
reduce sourcing costs and plow the resulting
savings back into shared growth initiatives.
Channel transition. Some brands will grow
so much that they or their derivatives can
enter larger traditional channels (directly
or via licensing). But traditional channels
are very different from influencer channels
and are often difficult to navigate. Private
equity firms, especially those with traditional
channel experience, can help capture this
new revenue stream in ways that manage
the risk of alienating existing influencer
channel customers.
Management transition. As these brands
grow, they may surpass the experience of their
entrepreneurial management teams. Private
equity sponsors can again draw on their experience and network of executives to ensure
proper guidance and smooth transition to
new managers as needed.
Operating outside the confines of traditional
channels can be lucrative for certain brands
and their private equity sponsors. As more
consumers demand personalized, high-quality niche products, the importance and allure
of influencer channels will only continue
to grow. v
AUTHOR
Todd Hooper has more than 25 years
of consulting experience, focused in
retail, consumer products, food and
restaurants. He can be reached at
todd.hooper@kurtsalmon.com.
31
Patagonia’s
Trailblazing Approach to Growing Sales
How the brand makes money by encouraging consumers not to spend
Every year around the holiday season, it’s easy
to feel awed by the U.S. retail industry. This
past year was one for the record books, with
consumers spending $59 billion on Thanksgiving and the three days following it, according to NRF, and another $1.5 billion spent on
Cyber Monday, according to comScore. To
put that into perspective, that’s more than the
GDP of Luxembourg, and all spent in five days.
DON’T BUY
THIS JACKET
Retailers went to all kinds of lengths to drive
these sales—staying open 24/7, offering profitability-sucking promotions, spending millions
on advertising. But one retailer, Patagonia,
took a different approach.
Patagonia is an exceptionally profitable retailer and wholesaler, generating $400 million
in revenue annually and maintaining a larger
gross margin than its competitors. And it has
done this in part by encouraging consumers
not to buy its products.
For example, last year, Patagonia ran a fullpage ad in The New York Times on Black
Friday with the headline “Don’t Buy This
Jacket.” It was an advertisement for its
Common Threads Initiative, which trumpets
environmental sustainability, high-quality
products made to last and, of all things, not
buying products you don’t need.
32
COMMON THREADS INITIATIVE
Together we can reduce our environmental footprint
TAKE THE PLEDGE
Patagonia also has a tool on its website that
allows users to trace the environmental impact
of its supply chain. In an age when several
retailers didn’t even know their products were
being produced at the Bangladesh factory that
recently burned to the ground, it’s refreshing
to be able to see each and every textile mill
and factory Patagonia uses arrayed on a map.
One of the best ways to achieve this neurological connectivity
is by aligning a retailer’s values with those of its customers.
How does this anti-consumption approach
pay off for Patagonia? Of course, some of
Patagonia’s environmental initiatives actually
save money directly—reduced packaging,
for example. But beyond that, Patagonia has
found a way to make money without explicitly
trying to while staying true to its brand
promise at the same time.
In The New Rules of Retail, Robin Lewis and
I detail the concept of neurological connectivity—how leading brands and retailers are
connecting with consumers on a far deeper,
almost subconscious, level and how these
consumers are then much more loyal to
that retailer.
One of the best ways to achieve this neurological connectivity is by aligning a retailer’s
values with those of its customers. Great
products or an exceptional customer experience is no longer enough—consumers have
too much information, too many choices and
precious little to spend. But they will be much
more likely to spend on brands with values
that mirror their own.
There’s a lesson here for all retailers. Developing deep connections with consumers based
on shared values is perhaps more important—
and a better sales driver—than all the advertising, promoting and midnight openings in
the world. v
AUTHOR
Michael Dart has extensive expertise in both
strategy and due diligence. He specializes
in retail, consumer products, footwear and
sporting goods. He can be reached at
michael.dart@kurtsalmon.com.
33
Preemptive Distribution:
One of the Most Important Retail Concepts You’ve Probably Never Heard Of
Preemptive distribution, or reaching customers first, fastest, most effectively and most
often, may not be at the top of most retailers’
minds. But it should be.
Dollar stores are well positioned to win that
convenience battle and steal more share away
from the big boxes than is stolen from them,
in part because dollar stores are everywhere.
Why? The world’s biggest retailer was outmaneuvered by a bunch of smaller competitors who were able to harness the power of
preemptive distribution.
The average round trip to a dollar store is six
miles versus 30 miles for a typical Walmart
trip. This means the cost of gas represents
11.4% of the cost of a dollar store transaction
and 15.1% of a Walmart transaction. Our
research shows that about 30% of customers
across all dollar stores shop them at least
twice a month—so the cost of gas can add
up quickly.
By losing the convenience battle to dollar
stores—and failing to compensate on price or
assortment—Walmart has made itself vulnerable to competitors who seek to steal share.
Walmart’s struggle is evidenced by the retail
giant’s comps, which have averaged 0.5%
from Q1 2009 to Q3 2012.
Convenience
Because many of their
products are often
undifferentiated and
prices are generally low,
there is a very high level
of cross-shopping across
dollar stores and big-box
competitors, often driven by
convenience. During a recent
due diligence, we found that 87%
of one dollar store’s current customers
had shopped at Target in the past six
months, while 95% of them had shopped at
Walmart. And these cross-shoppers primarily
chose a competitor due to convenience.
34
And dollar stores are only getting
closer to home. Dollar General
plans to open more stores in
the next 24 months than any
other retailer, according to
a survey by RBC Capital
Markets. With
over 9,600
locations
But it’s not only that dollar stores are physically closer, they are also more
convenient to get into and out of, and their smaller formats make it easier
for them to penetrate an increasingly urban and suburban society.
already, the retailer plans to open another
1,200 in the next 24 months. Second only to
Dollar General is Family Dollar, which plans
to open 1,000 new stores on top of its current
7,000. Sixth on the list is Dollar Tree, which
plans to add 600 stores to its 4,000-store
fleet. In contrast, Walmart plans to add only
300 stores to its 3,981 existing locations in
the U.S.
But it’s not only that dollar stores are physically closer, they are also more convenient to
get into and out of, and their smaller formats
make it easier for them to penetrate an
increasingly urban and suburban society.
In response, Walmart has stepped up openings of its smaller-format express stores,
generally about 15,000 square feet, or roughly a tenth of the average store’s footprint.
Although it initially planned for a launch of
only 30 to 40 locations, President Bill Simon
now says the retailer is planning to roll out
hundreds in the coming years.
Price
Price could be a way for Walmart to fight back
against dollar stores, except our research
shows that dollar stores are generally able
to beat Walmart on price.
Our research found that a basket of more than
40 food, health and beauty, cleaning, and
household products in three regions was 22%
more expensive at Walmart than it was at
an average of four large dollar store chains—
Family Dollar, Dollar General, Dollar Tree
and 99¢ Only Stores. The same basket at
Target was 6% more expensive than at
the dollar stores.
Assortment
Walmart’s massive assortment could also be
a potential reason for consumers to choose it
over dollar stores. But dollar stores are fighting
hard to keep up, especially in grocery and
health and beauty.
99¢ Only Stores sees 79% of its sales from
consumables, while Dollar General has expanded its consumable mix to 72% of its total
assortment and has doubled the number of its
stores with frozen and refrigerated sections.
Family Dollar has doubled the size of its food
section over the last five years and recently
reported 16% growth in consumable sales,
helping to temper continued weakness in
discretionary categories.
35
Competitive Basket Price Comparison—Actual Retail Price
$104—22% More
$85
$10
$9
$25
$15
$28
$18
$14
Dollar store average
n Home/Hardware
n Seasonal/Party/Toy/Other
n Non-Food Consumables
n Non-Perishable Food
n Perishable Food
36
$32
$18
$20
Walmart
$90—6% More
$7
$15
$35
$22
$11
Target
The story is similar in health and beauty.
Dollar General recently expanded its health
and beauty assortment by more than 350
SKUs, and Family Dollar expanded its health
and beauty assortment by 25% last year and
gave it a more prominent space in stores.
and rest on its laurels. It will only
be a matter of time before its competitors are encroaching on its
territory—literally. v
In contrast, Walmart cut its grocery offerings
dramatically to create sparser, tidier shelves
to attract wealthier consumers during the
recession. But Walmart has reintroduced
these items post-recession and is fighting for
its core consumer base with renewed strength
as a result.
The importance of preemptive distribution
holds true regardless of segment. For example, in the apparel space, this has manifested
itself in the rise of fast fashion and Kohl’s
success at stealing share from JC Penney by
moving in closer to JC Penney’s core customers. Recent same-day delivery offers from
Amazon, eBay and Walmart are its latest
manifestation.
Walmart’s story, and other cases of
preemptive distribution, show us
that it is no longer sufficient for a
retailer to conquer one area—say,
a great assortment or low prices—
AUTHOR
Michael Dart has extensive expertise
in both strategy and due diligence. He
specializes in retail, consumer products,
footwear and sporting goods. He can be
reached at michael.dart@kurtsalmon.com.
37
Your Distribution Defines You:
The Power Brand Balancing Act
One of every growing brand’s critical goals is developing a distribution strategy that supports its long-term growth. But this is often
easier said than done, especially as retailers increasingly demand
exclusive products that set them apart.
THANK YOU
HAVE A NICE DAY
38
For brands, distribution segmentation is
reaching a diverse group of consumers
through multiple distribution channels and
price points. Often, this requires creating
distinct products and experiences at each
price point, diffusion label and distribution
channel to avoid overexposing the core brand.
The road to building a successful power brand
is littered with brands that have not managed
their segmentation effectively. Recently,
brands like Quiksilver, Billabong, RVCA,
Ed Hardy and Liz Claiborne have all been
criticized because they have become too
ubiquitous and have not managed their
channel strategy well or differentiated
themselves across channels and have lost
appeal as a result. The challenge exists even
for fast-growing Michael Kors (which has
recently enjoyed 45% same-store sales
growth) to avoid the risk of growing too
quickly and becoming overextended and
too readily available in the wrong channels.
But there are also incredible segmentation
success stories. Brands like Nike, Hugo
Boss and Marc Jacobs have successfully
maintained their premium positioning
while reaching a larger audience at lower
price points.
In fact, two of the biggest success stories
today—Polo Ralph Lauren and Converse—
had ventured dangerously close to overexposure but took action to correct it.
Polo Ralph Lauren
When the company went public in 1997, its
brand name and logo were overextended,
appearing on too much low-end product
and damaging the company’s cachet. Ralph
Lauren later described the time as the
company “resting on its Laurens.”
As its stock price dropped, the
company pulled out of some
of its lower-price channels
39
and instead focused on building luxurious
flagship stores, penetrating high-end department stores and expanding abroad.
Today, Polo Ralph Lauren has mastered walking the line between luxury and mass. Consumers can buy into Ralph Lauren’s vision
of aspirational American luxury via a $19.75
Chaps polo at Kohl’s or a $22,500 crocodile
handbag. The company has segmented the
market by using its “label” strategy, with its
Polo Ralph Lauren label at Macy’s and upscale
purple-and-black labels at luxury department
stores. And the company is well insulated
against a tough economy thanks to its outlet
stores. They were the company’s fastest-growing division over the past four years, with revenues increasing an average of 18% annually.
Polo Ralph Lauren has also continued to
build its global brand, taking advantage of the
zeal many international consumers have for
American luxury brands. Its chief strategy
in doing this is regaining control to ensure
that quality and brand experience are high.
In 2010, Ralph Lauren acquired its licensed
apparel business in China and Southeast Asia
and closed 60% of its distribution network,
including stores run by local partners, with the
plan to replace them with its own stores. In the
40
next decade, the company hopes to see a third
of its business come from Asia and another
third from Europe, double its current sales.
Converse (Nike)
Converse enjoyed a near monopoly before
the 1970s, but lost significant market share as
a wave of new competitors, including Puma,
Adidas, Nike and Reebok, entered the market.
This led them to file for bankruptcy in 2001.
Nike bought the company for $305 million
in 2003 and applied its very successful segmentation strategy to Converse, helping to
position Converse as a lifestyle brand instead
of an athletic brand.
This repositioning paid off, and Nike’s decision
to leave the shoe’s basic design intact helped
give it a retro cred. Converse also benefits
from a move toward greater personalization,
with over 100 different colors of shoes available, plus a popular “design your own” feature.
Today, Converse is effectively segmented
across price points—a core playbook utilized
by Nike across its businesses—with leather
Converse by John Varvatos at Neiman Marcus
and Saks Fifth Avenue for $170 and Converse
One Star at Target for $35. And this segmentation strategy is paying off. In a recent earnings
call, Converse was celebrated as one of Nike’s
top performers, with revenues up 17% in 2012
on especially strong performance in China
and the U.K.
These cases illustrate how critical the right
distribution strategy is to success and that
all is not necessarily lost for an overextended
brand. In fact, some suffering brands could
be attractive investment opportunities
if a solid segmentation strategy is
put into place to save them. v
AUTHOR
Jay Agarwal specializes in strategy, corporate
development and advisory work in the apparel,
footwear and sporting goods industries. He can
be reached at jay.agarwal@kurtsalmon.com.
41
Beanie Baby or Barbie?
How to spot the difference between fads and trends
How can potential investors tell if a product
is more Atkins or organic, classic Oreo cookie
or three-dollar cupcake? The investment
can be profitable either way, but knowing the
difference upfront will help determine the
correct multiple and drive favorable postdeal economics.
In general, there are three key differentiating
factors between a fad and a trend.
Fad vs. Trend Framework
Reason for rise. Trends generally have
identifiable and explainable rises, driven
by consumers’ functional needs and consistent with other consumer lifestyle trends.
In contrast, fads are driven by an emotional
need to purchase, based on hype and idealistic
product perceptions. The benefits are ethereal or ill-conceived and don’t turn out well
for consumers.
Incubation period and life span. Trends
rise slowly, whereas fads spike—and die out—
quickly. For example, demand for multiple
fashionable handbags and accessories for each
occasion has grown slowly and steadily over
42
the years, fueling Coach’s decadelong growth and healthy 11-year
compound annual growth rate
(CAGR) of 19%. Beanie Babies, on the other
hand, went from $400 million in sales in
1997 to $1.3 billion in 1999, a CAGR of 77%,
before dropping to $850 million the next year.
(See Exhibit 1.)
Scope. A trend usually encompasses sever-
al brands or products that are applicable to
many different consumer segments, while a
fad typically includes only a single brand or
product and has limited appeal outside of one
narrow consumer segment. A trend possesses
some agility and consumers have granted it
permission to expand beyond its current
platform while maintaining authenticity.
The Atkins Diet is the perfect illustration of
the difference between fad and trend. Healthy
eating has been important to a certain part
of the population for a long time, but Atkins
was a fad within that trend. Atkins’ emphasis
on fat and protein went counter to the larger
trends at the time—ones that mandated lean
protein, whole grains, and plenty of fruits
A trend usually encompasses several brands or products that
are applicable to many different consumer segments, while a
fad typically includes only a single brand or product and has
limited appeal outside of one narrow consumer segment.
and vegetables. Millions of consumers tried
the diet—15 million alone purchased Dr.
Atkins’ books—but the fad soon burned out
as those consumers realized that the diet was
hard to sustain. In this way, a fad experiences
rapid adoption among consumers with a weak
level of commitment to the concept (or high
dropout rate), as many consumers hop onto
the bandwagon only to find the product or
experience more difficult or less useful or
beneficial than they thought it would be.
We used our fad-trend framework to evaluate two recent retail and consumer product
opportunities—the handbags and accessories
and gluten-free market segments.
EXHIBIT 1: FAD GROWTH
(licensed sales)
2-year
CAGR:
772%
(wholesale sales)
$1,900
$1,200
’89
$200 $150
$90
$25
’90
’91
’92
’93
$1,250
$1,000
$850
$750
$550 $580
$500
$500
2-year CAGR:
77%
2-year CAGR:
154%
’83
’84
’85
’86
’87
$400
$250
$25
’95 ’96 ’97 ’98 ’99 ’00 ’01
43
Trend: Casual fashion handbags
for multiple occasions
In 2006, we were asked to evaluate whether
Vera Bradley, the maker of women’s handbags,
purses and backpacks, often made out of colorful, quilted fabric, would be a good investment. Using our framework, we determined
that Vera Bradley bags were a lasting trend,
not a fad.
Why? First, Vera Bradley had a compelling
reason for its rise. It was in line with the larger
trend of women wanting different handbags
for each occasion and it also filled a niche in
the market among classic consumers at midrange price points.
Secondly, Vera Bradley exhibited the attractive, steady growth of a trend in the years
leading up to 2006 and had a five-year CAGR
of 27%. (See Exhibit 2.)
Beyond that, Vera Bradley has grown its
scope, expanding distribution channels to
include 48 full-price and eight outlet stores,
an international presence, and a growing
e-commerce site. Vera Bradley’s wholesale
future also looks bright, with distribution in
3,300 independent specialty retailers and a
further penetration into department stores,
like Dillard’s.
Vera Bradley is also expanding its reach,
adding new products and lines to help it meet
different price points and target more age
groups—from teenagers to their grandparents
44
(one recent addition is an all-black cross-body
bag called “The Hipster”).
Because of these factors, Vera Bradley has
continued its steady growth. Its sales were
approximately $460 million in 2012, for a
CAGR of 13% since 2006.
Trend: Gluten-free delivering benefits
Most gluten-free products were originally
designed for sufferers of celiac disease, which
afflicts about 1.8 million Americans. Even
with such a small portion of the population
diagnosed with the disease, the gluten-free
business is booming. Sales have been rising
steadily since 2006 and are expected to surpass $5 billion by 2015.
And gluten-free products are becoming more
widely available. Mintel data shows that
product launches with a gluten-free claim
nearly tripled in 2011, to roughly 1,700
products. Walmart has dedicated gluten-free
displays in approximately half of its U.S.
stores, and gluten-free menu items have also
increased 280% from Q3 2008 to Q3 2011.
This proliferation of products and channels
is a good sign that the gluten-free trend has
staying power. Gluten free is also consistent
with the healthy eating trend mentioned
previously, and many consumers purchase
gluten-free products as healthier alternatives,
not because of any medical condition. In fact,
in a survey of consumers who regularly buy
quinoa (a gluten-free pasta), more than half
EXHIBIT 2: VERA BRADLEY SALES
($ millions)
$460
$197
5-year CAGR: 27%
$123
$94
$59
$69
2002
2003
2004
said they ate it for its nutritional benefits,
not because of a medical condition. But it
is important to note that any one glutenfree product could be vulnerable to fad-like
run-ups. That the success of gluten-free
products does not hinge on one small part
of the population or a single product cements
its trend classification.
2005
2006
2012
Making the Most of a Fad
Of course, even if something is a fad, it can
still be a good long-term investment if it has
uses outside of its narrow original purpose.
Take scrapbooking. Scrapbooking itself seems
to have been a fad in retrospect. Sales peaked
in 2004–2005 at $2.5 billion and have since
declined to $1.4 billion. But scrapbooking
companies and retailers can still be viable
45
investments if they are able to position
themselves to cater to the needs of new fads
and trends—such as paper crafting and mixed
media—as they arise. In these cases, the key to
success is using the brand for the long-term
consumer-serving capability it has created,
not for one category-specific product.
Crocs is another interesting case study. For
many, the iconic rubber clog was clearly a
fad as consumers rushed to buy them and
the market value of the company soared,
peaking in late 2007 at nearly $70 a share.
But once sales started to decline, the value
of the company fell dramatically, plummeting
to just over $1 a share by early 2009, when
the company nearly went bankrupt. The fad
was over and many assumed Crocs would
continue to shrink.
But that has not happened. Instead, Crocs has
successfully expanded beyond just clogs and
kids’ shoes—clogs make up 40% of sales now,
down from more than 75% in past years, and
the proportion of adult sales has doubled. As
a result, the brand has broadened its reach
and made itself less susceptible to big swings
in the popularity of one product. It now has a
market capitalization of $1.37 billion, which
speaks to the possibility of finding great value
in transforming fad-like businesses.
46
But, in any case, it pays to understand
whether a product is destined to be a steady,
burning success or rise and fall quickly in a
blaze of glory before you make any deal.
2013 promises to include many hot products
and brands that could go either way. From
Kombucha to juice cleanses, TOMS to J Brand,
knowing what to look for can help private
equity sponsors invest with confidence. v
AUTHOR
Bruce Cohen has more than 20 years of consulting experience, including deep experience
in food and beverage, consumer products
and specialty retail. He can be reached at
bruce.cohen@kurtsalmon.com.
Which Is Better,
Margins or Growth?
One common question both operators and
investors find themselves asking is, “Which
is more important, high same-store sales
growth (SSSG) or high margins?” Obviously,
it’s nice to have both, but that’s an increasingly difficult objective as retailers decide when
to promote, how deeply to discount and what
their target margin structure should be.
To shed light on this issue, we analyzed five
years (2008–2012) of SSSG, margin and
valuation data for 89 retailers across a variety
of segments.
We found that the top 20% of retailers by
SSSG saw comps grow by an average of 9.8%
per year, while companies in the middle 50%
saw average comp growth of 2.9% per year.
As a result, the top 20% of retailers by SSSG
were rewarded by the market for their per-
formance to a greater extent than the middle
50%—with annual market cap growth of 13%
and 8%, respectively.
However, the performance of the top 20%
of retailers by SSSG ultimately came at the
expense of profits, as these companies saw flat
margin growth (-0.3%) from 2008 to 2012. In
contrast, the middle 50% of retailers by SSSG
saw margins grow by 10% in the same period.
For example, in the department store space,
Kohl’s averaged -0.5% comps from 2008 to
2012 but grew margins 5%. Still, its market
cap grew at an average annual rate of only
4% from 2008 to 2012. Macy’s, on the other
hand, averaged 5% comp growth during the
same period while its margins stayed flat,
and it was rewarded with an average annual
market cap growth of 59%.
AVERAGE MARGINS AND COMPS FROM 2008 TO 2012
VS.
59%
5%
5%
0%
-0.5%
Comps
Margins
4%
Market Cap Growth
47
Based on this analysis, investors and retailers looking
to drive market value should focus on sales growth
over margin growth.
In the hard lines space, Walgreens and Family
Dollar are two other good examples. Family
Dollar averaged 4.8% comps from 2009 to
2012 but its margin stayed flat. In that time,
its annual average market cap growth was
86%. Walgreens, on the other hand, averaged
0.8% comps during the same time period, and
despite its ability to grow margins 2% in a
highly commoditized segment, its market cap
dropped an average of 21% from 2009 to 2012.
However, companies with moderate SSSG
that have grown their margins may be good
investment opportunities for private equity
sponsors who can then begin to grow sales
more aggressively and reap the market’s
rewards. v
And perhaps the best example of this trend
is Amazon, which has razor-thin margins,
especially on many of its media products.
Yet its stock price shot up in the days after
it announced its profits fell 45% in Q4 2012.
Of course, many factors influence margins,
but we believe the biggest driver of increased
margins for the middle 50% was an attempt
to raise their average unit retail numbers and
avoid responding to aggressive promotional
activity. While they did just fine, those who
were prepared to either hold margin levels
or allow them to fall slightly while sales grew
were rewarded with the most value.
Based on this analysis, investors and retailers
looking to drive market value should focus
on sales growth over margin growth. Flat
margins and high same-store sales growth
are better rewarded by the market today.
48
AUTHOR
Matt Allessio specializes in sporting goods,
apparel, specialty retail and food. He can be
reached at matthew.allessio@kurtsalmon.com.
Fashion and Lifestyle Footwear
The fashion and lifestyle footwear industry will continue to be
an attractive M&A market in the next few years, owing to strong
category growth and a highly fragmented landscape.
Footwear sales in general have outpaced
apparel sales in recent years, growing at a
combined annual growth rate (CAGR) of
2.3% from 2010 to 2012 versus apparel’s
CAGR of 1.4%.
And within the footwear category, premium
footwear has grown faster than more moderately priced and value-priced footwear in
the past three years, with premium footwear
growing at a CAGR of 6.9% in 2012 versus
0.3% for value footwear. (See Exhibit 1.)
Plus, the footwear market is highly fragmented,
with many brands and retail chains ripe for
private investment. And we’ve seen plenty
of activity in the sector recently, including:
EXHIBIT 1: U.S. Footwear Retail Sales
$47.4
$50.1
CAGR
3.7%
Premium Footwear
($60+)
$16.7
$18.5
6.9%
Moderate Footwear
($30–$60)
$17.0
$17.9
3.3%
$13.7
$13.7
LTM September 2010 ($ billions)
LTM March 2012 ($ billions)
Value Footwear
(Under $30)
0.3%
49
Even Amazon recognizes the importance of footwear
with its purchase of Zappos.
>N
ike’s sale of Cole Haan to Apax Partners
for $570 million
> Deckers Outdoor Corp.’s acquisition of Sanuk
>S
teve Madden’s recent acquisitions of Cejon
and Topline
>G
olden Gate Capital and Wolverine Worldwide’s purchase of Collective Brands
> Goode Partners’ purchase of Sneaker Villa
>S
outh Korean firm E-Land World’s
acquisition of K-Swiss
Even Amazon recognizes the importance
of footwear with its purchase of Zappos.
Within the fashion footwear space, we see
two particular areas that deserve a second
look from investors:
High-growth brands and concepts
These brands may be small now, but they are
growing quickly—and can grow even faster
with private equity sponsorship.
There are two particularly attractive highgrowth categories: youth lifestyle and
outdoor. For a youth lifestyle example, take
TOMS Shoes, which has an estimated $100
million in sales and has recently expanded
into eyewear and apparel and has plans to
start selling footwear priced from $100 to
$140, a far cry from their typical near-$50
50
prices. The retailer also plans to open its first
flagship store in Venice, California.
Or consider OluKai, the makers of high-end,
environmentally conscious, comfort-focused
outdoor footwear like sandals and boots. The
brand has recently had success selling $200
to $300 shoes at Neiman Marcus while still
seeing explosive growth in its shoes closer
to the $100 price point.
Another bright spot is Shiekh Shoes, which
serves the rapidly growing—but underserved—urban footwear sector. Shiekh benefits from its license to distribute limited-edition Nike and Air Jordan products and has
136 stores across the U.S.
Shoe Palace also caters to the urban footwear and street sector and benefits from its
position as a core account for premium street
and skate brands. With a growing e-commerce
business and 34 stores in California, Texas
and Nevada—plus plans to open five more—
this retailer could be an attractive target to
take nationally.
Road Runner Sports, the self-proclaimed
world’s largest specialty running store, is also
another attractive potential target. The retailer is well positioned to benefit from a running
resurgence—running participation grew 18%
from 2009 to 2012 versus declines in more
traditional team sports—thanks to its deep
inventory and technology that helps customers find the right fit. The running shoe market
is massive—running shoe sales are about $7
billion and make up 27% of total footwear
sales—and Road Runner Sports could continue to grow to serve this market. The retailer
currently has 22 stores, mostly located on the
West Coast, but could benefit from greater
national reach.
Larger established companies
There are also plenty of brands with strong
equity like Crocs and Deckers Outdoor that
are currently undervalued by the market
and have significant growth potential. For
example, Deckers is currently trading at 5.9x
EBITDA. But its brands—Teva, Ugg and four
others—still have incredible equity and global
growth opportunities.
Another brand cashing in on the tremendous growth in the comfort footwear sector,
privately owned ECCO claims to be the only
major shoe manufacturer in the world that
owns every step of the shoe-making process
and has about 4,000 branded doors in over
90 countries, including the U.S.
Forbes estimates the brand
is worth about
$1.5 billion.
Crocs nearly went bankrupt in 2009 and is
now trading at 4.9x EBITDA. It is in the midst
of being remade into a lifestyle and casual
footwear brand and is expanding internationally. These efforts are beginning to pay
off—American sales made up 59% of its total
sales in 2007 and now comprise only 45%. Direct-to-consumer now makes up 30% of their
sales versus 9% in 2007. And perhaps most
significantly, clogs make up 40% of sales now,
down from more than 75% in past years, and
the proportion of kids’ sales has been halved.
(See Exhibit 2.) There is still tremendous
opportunity for Crocs if they can continue
this trend and break out of the clog and kids’
spaces and continue to expand internationally.
EXHIBIT 2: The Future of Crocs
American
Sales
Direct-toConsumer
59%
9%
45%
30%
Clogs
75%
40%
2007
2012
51
These brands could be reinvigorated through
aggressive expansion in a private setting. Take
a page from Steve Madden’s book. The retailer
went on an acquisition spree last year, buying
accessories company Cejon, footwear company
Topline and becoming the exclusive licensee
for the athletic-shoe brand Superga, which it
then tapped the Olsen twins to design.
The footwear sector promises to be a high-interest M&A area in 2013 and beyond, and
investors who explore these opportunities
now will be well positioned to benefit as the
industry continues to grow. v
Steve Madden is also enlarging its retail
footprint. After purchasing its privately held
Canadian licensee earlier this year for $29
million, the company expects to add 20
Canadian stores to its current seven within
the next five years. A U.K. expansion is also
in the works, through retail partners House
of Fraser and Topshop. Steve Madden is also
growing its off-price outlet division and began
selling at Nordstrom in 2012.
Another interesting opportunity is Shoe
Carnival, which operates over 400 stores
that carry leading brands and cater to a mass
audience. After a strong performance in 2012,
averaging 5.5% comps in the first three quarters, the retailer plans to open 30 to 35 new
stores in 2013. But owing to the hypercompetitive and promotional nature of the space,
Shoe Carnival is currently trading at 5.2x
EBITDA—likely understating its true growth
potential.
52
AUTHOR
Jay Agarwal specializes in strategy, corporate
development and advisory work in the apparel,
footwear and sporting goods industries. He can
be reached at jay.agarwal@kurtsalmon.com.
Net Promoter Scores
and the Problem of Forever 21
Since it was created, the net promoter score
(NPS), which measures how likely a consumer
is to recommend a given retailer or brand to a
friend, has been a cornerstone of measuring
brand strength.
But despite its popularity, NPS is not without its detractors. Academics and market
researchers have questioned whether it is a
good predictor of growth and whether it really
captures a brand’s relative trajectory when
taken in isolation. Some have also challenged
the basic math behind net promoter because
different sample sizes of positive, neutral and
negative consumer sentiment can all generate
the same score even though the underlying
dynamics may be dramatically different.
Forever 21 presents an interesting case
example on why it is potentially misleading
to put too much weight on just one metric,
even when that metric is NPS. In several
recent studies, Forever 21 had fallen to
near the bottom of the range of net
promoter scores for women’s apparel
retailers.
of 2%. Its brick-and-mortar sales grew 29%
during the same time period and its e-commerce sales increased at a CAGR of 21%. Plus,
during our ethnographic studies—one-on-one
detailed interviews with consumers—many
consumers gushed about the brand, shopping
experience and value. How then is it possible
that the net promoter scores have frequently
shown up near the bottom of recent surveys?
Problem 1: Sampling and getting the right
mix of consumers in the survey
Classic net promoter methodology would
suggest that by taking a sample of the broad
population aware of the brand, you can get a
reasonable and reflective score. Obviously,
this creates major sampling problems because
the score will be driven by the size of different
This is, quite frankly, a stunning result,
given that Forever 21 is obviously a wildly
successful retailer. It has grown its store base
by a combined annual growth rate (CAGR) of
7% from 2007 to 2012, far above the average
53
We have used NPS for years and believe that it is valuable,
but have always advocated looking at brand strength and
consumer sentiment through many different lenses.
cohorts within the survey. We have consistently
seen that those who have interacted with
any brand more recently will score it higher
than those who have not. The recent election
showed the problem of polls with the wrong
mix of likely voters—as Nate Silver will attest.
Even when the survey focuses just on “ever”
or “current” purchasers, this problem still
exists if the comparative brands have different
sample sizes of recent or more distant shoppers. One obvious rule is to never trust surveys
unless the sampling is in the thousands.
Problem 2: Cult followings
In many studies, we have found brands with
a “love it” or “hate it” following. In a broad
net promoter score approach, the brand may
well score poorly, but within that score there
is a cult following that adores it. Historically,
brands like Juicy Couture and Abercrombie &
Fitch have experienced this, even during their
boom times. Getting the right segmentation is
critical, as we discuss below.
Problem 3: “I buy it, but I would never
recommend it.”
This problem has shown up for multiple
retailers including Walmart and Forever 21.
Here consumers find incredible value, but
when asked if they would recommend the
store to friends, they often give it a mid54
dling score because there are aspects of the
shopping experience that they don’t want to
recommend to their friends. For example,
in one-on-one discussions with shoppers at
Forever 21, we often heard comments like,
“I love them, but I would not recommend
them strongly to my friends because sometimes it’s hard to find the right fit or get any
help and they might not like that.” In this case,
the very nature of the question triggers a consumer score that is lower than how they really
behave—in part because of the distinct and
highly differentiated nature of the retailer.
So what are the solutions to these problems?
We have used NPS for years and believe that it
is valuable, but have always advocated looking
at brand strength and consumer sentiment
through many different lenses and using
segmented NPS scores in conjunction with
several other evaluation metrics to get a truly
accurate picture.
Clearly, the way a survey is written as well as
how the data is analyzed can have significant
impact on the value of the NPS. There are four
key dimensions to consider when deciding
how much weight to place on a brand’s NPS.
1. Competitive set. Whether they realize it or
not, consumers’ answers often change relative
to the set of retailers they are asked to rate.
For example, in a set that included mostly
higher-end women’s apparel brands like
Coach, 7 For All Mankind and Ralph Lauren,
Forever 21 ranked second to last with 35%
NPS. But in a set that included mostly teen
and discount retailers like H&M, American
Eagle and TJ Maxx, Forever 21 ranked first
with NPS of 45%. (See Exhibit 1.)
EXHIBIT 1: Forever 21’s Varying NPS Scores
NPS Among Higher-End Apparel Brands
63%
52%
Coach
45%
Levi’s
48%
45%
43%
42%
7 For All Ralph
Juicy
Mankind Lauren Couture
Lucky
40%
39%
38%
37%
37%
36%
H&M
J. Crew
BCBG
Calvin
Klein
Gap
Bebe
35%
35%
35%
Tommy Forever Express
Hilfiger
21
NPS Among Teen and Discount Retailers
35% 35% 34% 32%
28% 25%
23%
18% 16%
12% 11% 10%
9%
–9% –13%
Aéropostale Wet
Forever American H&M Charlotte
Russe Hollister
Seal
21
Eagle
Kohl’s
TJ
Maxx
Gap
Old Maurices Target Justice
Navy
Dress Walmart
Barn
55
Focusing on current purchasers and, specifically, frequent
purchasers will provide a more accurate picture of how the
brand’s most important and profitable customers see it.
2. Brand interaction. Measuring NPS for
everyone aware of the brand doesn’t get you
much because it includes many people who
have never truly interacted with the brand,
but examining NPS among “ever-purchasers”
(current and lapsed consumers) can give a
broad snapshot of sentiment among those
who have actually experienced the brand.
Focusing on current purchasers and, specifically, frequent purchasers will provide a more
accurate picture of how the brand’s most
important and profitable customers see it.
Of course, it’s critical to have a large enough
sample to ensure that the different cohorts
reflect the general population mix.
3. Demographic and psychographic segmentation. Forever 21’s core customers tend to
skew younger and to be female and lower
to middle income. So it follows that these
segments report higher NPS for the retailer.
For example, in one survey, Forever 21 scored
41% NPS among those earning under $50,000
annually, but only 16% among those earning
over $100,000, highlighting the importance
of testing NPS against the brand’s target
consumers. Adding psychographics into the
mix helps clarify the results even further. For
example, women we identified as “fashionistas” and “price-conscious” rated Forever
21 twice as high as those who said they were
“basic shoppers.”
56
4. Usage occasions and product categories.
Layering on product and occasion details
can shed light on a brand’s strengths and
weaknesses when it comes to assortment. For
example, Forever 21 is more highly ranked for
accessories (51%) than shirts (32%), owing to
its massive, prominently displayed accessory
section. And, as would be expected, Forever 21’s
NPS was lower for work (22%) and casual
(26%) occasions than for going out (34%).
While these four filters help ensure NPS is
focused and a more accurate reflection of a
brand, we like to think more holistically about
measuring brand strength through a mix
of consumer surveys, digital chatter assessments, ethnographic studies, shop-alongs and
trade interviews. Together, these tools can
help uncover a more complete picture of a
brand’s strength.
» Overall awareness of the brand
» Overall conversion rate and by occasion
and category
» Psychographics such as whether the
brand is favored by fashion-lovers or
frugal consumers
» Focused NPS
»H
ead-to-head comparisons between
a brand and its primary competitors
»W
hether consumers identify a brand
as “for them”
»L
ikelihood that a consumer would
repurchase from that brand
»L
evel of positive buzz about the brand
in the market
»S
trength in certain key attributes like
fit and quality
»S
ocial media chatter about the brand
The brand strength gauge (see Exhibit 2)
shows that Forever 21 is clearly a hot brand,
which is much more on par with its historical
performance and growth trajectory.
So, when evaluating a retailer or brand, go
beyond a basic NPS or risk missing out on
the next Forever 21. v
EXHIBIT 2
Brand Strength Gauge—Forever 21
(Women)
Not
<25th%
In the Middle
25th%–75th%
Hot
>75th%
Awareness
Conversion
Net Promoter Score
OVERALL
AGE 23+
Age
AGE 13–22
Psychographics
Products
FASHIONISTAS
BASIC
SHOPPERS
TOPS
ACCESSORIES
Head-to-Head
Comparisons
AUTHOR
Brand for Me
Repurchase Intent
“Buzz” Rating
STORE LAYOUT
Attribute Strength
Digital Chatter
STYLISH
Dan Goldman has expertise in due diligence
and sell-side support, growth and turnaround
strategy development, brand and category
management, marketing, and new product
development, as well as marketing mix and
trade promotion optimization. He can be
reached at daniel.goldman@kurtsalmon.com.
57
Measuring
the Immeasurable
Using a company’s digital footprint to measure
brand strength
58
Companies are becoming increasingly
skilled at using online data to guide their marketing efforts, but online metrics can prove
exceptionally important for private equity
funds in the due diligence process as well.
Social media is consumers’ own space for
talking peer to peer, while search is a shared
space and the website belongs to the brand.
Taken together, they can constitute a holistic
picture of brand power.
Examining a brand’s digital footprint is a
valuable way to evaluate it above and beyond
traditional consumer-based research. A digital diligence captures consumers in a more
organic environment than consumer surveys,
one-on-one interviews or focus groups. Plus,
analysis of online data can lend insight into
changes in consumer sentiment and intent
over an extended period of time, whereas
surveys represent a snapshot of a moment
in time. Finally, a digital diligence can help
uncover potential brand issues and consumer
concerns that may not be on a private equity
firm’s radar.
Social media.
But for all its benefits, assessing a brand’s
digital footprint can also be challenging.
First, there is the sheer number of metrics
available—deciding which are important can
be daunting. And beyond that, decoding the
link between any given metric and overall
brand health can be difficult.
To solve that, we recommend evaluating
a brand’s reach and strength across social
media, search and its website. Each of these
three online spaces provides a different perspective on consumer interest and sentiment.
Social media can provide a treasure trove of
key insights about consumer sentiment in
an organic environment. But it is also one of
the most difficult digital elements to judge,
as there is a massive amount of consumer
chatter spread across a wide array of sites,
from Twitter and Facebook to Tumblr and
Pinterest. However, social media has proven
to be an accurate leading indicator of a brand’s
sales. For example, consider JC Penney. Many
customers complained about the department
store’s new pricing structure on Facebook and
Twitter before the company’s performance
took a serious hit.
To measure reach, start with a basic analysis
of the number of fans or followers a company has. But beyond that, we have found that
measuring fan engagement—creating compelling, emotionally engaging content that drives
likes, comments and retweets—is a better
indicator of a strong social media platform.
To that end, measure the number of Facebook
interactions per fan and Twitter mentions
per follower relative to a brand’s competitors.
59
Search.
Measuring strength should start with a look at
how the brand is perceived on social media via
an analysis of the most often used words and
phrases, which provides a picture of consumers’ perceptions of brand equity. Next, look
at sentiment and whether a particular brand
has more positive versus negative social
media mentions now as well as sentiment
momentum over time. For example, Forever
21 has a very high ratio of positive to negative
social media mentions and has been able to
sustain this solid performance over time.
(See Exhibit 1.) Also examine which themes
are driving the negative sentiment to identify
potential strategic issues and brand concerns.
Search is an important online space to analyze
because it can provide key insights on how
consumers think of a brand relative to its
competitors in key product categories. To
understand reach, analyze search volume
relative to competitors, plus the number
of searches for a given brand over time, as
illustrated in Exhibit 2. To measure strength,
one of the most important metrics is organic
search. A brand with a low percentage of its
searches from organic search versus paid likely means it has low top-of-mind awareness.
Key search terms can also reveal how a particular brand fares in certain product categories.
For example, the most popular search terms
for Forever 21 include “sale,” “bargain” and
“fashion,” which is consistent with its reputation as a low-cost, trendy retailer.
EXHIBIT 1: Positive Twitter Sentiment
Percentage of Tweets Mentioning Forever 21 in a Positive Context
95%
85%
75%
65%
55%
45%
Oct. 2010 Jan. 2011
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Apr. 2011
Jul. 2011
Oct. 2011 Jan. 2012 Apr. 2012 Jul. 2012 Oct. 2012
Website.
A website is a company’s only truly “owned”
space online and is an invaluable tool for
bringing the brand to life. To understand
reach, measure how a site’s unique traffic
compares with its competitors’ in terms
of current volume and change over time.
(See Exhibit 3.) Assessing strength involves
looking at repeat traffic to measure loyalty,
consumer engagement (in terms of page
views and time on the site) and online
cross-shopping overlap.
three spaces—social media, search and a
brand’s website. Then, index key reach and
strength metrics to a brand’s competitive set.
Translating the Data into
Actionable Insights
So although determining a brand’s digital
power may seem murky, it’s actually quite
measurable in a due diligence and is well
worth taking a closer look.
This provides a full picture of the brand’s power relative to its competitors’, as illustrated in
Exhibit 4, and can help reveal brand momentum and drivers of negative sentiment. Taken
together, these metrics arm private equity
sponsors with a holistic digital perspective
of a diligence target that complements offline
analysis.
To get a complete view of digital brand power,
analyze reach and strength metrics across all
EXHIBIT 2: Forever 21 Search Interest Over Time
90
80
70
60
50
2004–2012
CAGR 29.7%
40
30
20
10
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
61
EXHIBIT 3: Forever 21 Unique Website Traffic Growth
90
80
70
60
50
2004–2012
CAGR 22%
40
30
20
10
0
2004
2005
2006
2007
These online metrics not only paint an
accurate picture of a brand’s health and
2008
2009
High
istic experiences across channels, just
as important as measuring online brand
strength itself is determining how that
strength links to and supports the com-
DIGITAL STRENGTH
tasked with providing compelling, hol-
2011
2012
EXHIBIT 4: Digital Brand Power
momentum, they also have omnichannel
implications. As retailers are increasingly
2010
Potential Rising Stars
Market Leaders
Challenged Brands
Market Laggers
pany’s omnichannel brand by enabling
cross-channel customer experience,
pricing, merchandising and marketing.
62
Low
Low
DIGITAL REACH
High
E-Commerce Best Practices
E-commerce capabilities are an incredibly important aspect of a brand’s growth potential,
especially as online sales increase (Forrester
Research predicts they will swell 62% by 2016).
Evaluate these eight key attributes to determine whether a brand has the opportunity to
disproportionately grow its e-commerce sales
by leveraging best practices.
1Website navigation. The best sites have clear
website navigation, plus constant search and
cart visibility.
2Product descriptions. Look for sites that
include in-depth descriptions of product
features plus customer reviews.
7
Social media. Best-in-class sites include
social media apps that allow consumers to
share potential—or recent—purchases with
their social media networks, generating
additional traffic and buzz for the brand.
8Shipping. When assessing shipping, be sure
to analyze charges and speeds—and their
restrictions and limitations—relative to the
competitive set. And measure the effectiveness of a company’s customer support,
including online assistance, live chat capabilities and customer support center effectiveness (call abandonment rate, average hold
time and average email response time). v
3Usage inspiration. Leading sites feature
content about how to use the product, such
as how-to videos, expert commentary, or
even lists of everything needed for one particular project or look.
4Transaction optimization. Suggesting related
items, matching looks or other products
necessary to finish a common project can increase the likelihood of purchasing multiple
items by 36%.
5
Customer loyalty. Look for sites that recognize customers when they return and let
them stay logged into their account for easy
access to past orders and quick ordering.
The best sites also offer a loyalty rewards
program that integrates across channels.
6 Mobile. Leading retailers have both a dedicated mobile site and a mobile app. Location-based functionality allows retailers to
push personalized offers to customers near
a store and can also generate maps that help
customers navigate through stores.
AUTHORS
Matt Allessio specializes in sporting goods, apparel,
specialty retail and food. He can be reached at
matthew.allessio@kurtsalmon.com.
Dan Goldman has expertise in growth and turnaround strategy, private equity due diligence
and sell-side support, brand management, marketing strategy, and new product development, as
well as marketing mix optimization, category
management and trade promotion. He can be
reached at daniel.goldman@kurtsalmon.com.
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Authors
JAY AGARWAL
Jay Agarwal has more than 14 years of strategy, corporate
development and advisory work in the retail and consumer
products industry. He has led and directed teams in developing
and executing growth strategies, strategic planning, mergers
and acquisitions, due diligence, licensing, and new ventures.
Prior to joining Kurt Salmon, Jay was a senior investment banker
with the Demeter Group, and prior to that he was head of M&A
at Nike and a senior director of corporate strategy at Gap, Inc.
He can be reached at jay.agarwal@kurtsalmon.com.
MATT ALLESSIO
Matt Allessio has more than a decade of experience in
consulting, private equity and investment banking. During
his time at Kurt Salmon, Matt has worked on a variety of
due diligence and strategy projects in a range of consumerrelated categories, including sporting goods, apparel,
specialty retail and food. He has conducted due diligence
on e-commerce operations on behalf of private equity clients
and worked with corporate clients to help develop their
e-commerce business strategy. Prior to Kurt Salmon, Matt
was an associate with Weston Presidio. He can be reached
at matthew.allessio@kurtsalmon.com.
BRUCE COHEN
Bruce Cohen is a partner in Kurt Salmon’s Private Equity and
Strategy Practice and a North American practice director. With
more than 20 years of consulting experience in the consumer
products industry, Bruce has worked with executives and boards
focused on mergers and acquisitions, due diligence, and developing and implementing strategies to drive profitable growth.
He is regularly quoted on retail and consumer topics in the Wall
Street Journal, Bloomberg and The New York Times, among
others. He can be reached at bruce.cohen@kurtsalmon.com.
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MICHAEL DART
Michael Dart is a senior partner and leads the firm’s Private
Equity and Strategy Practice. In his more than twenty years
of consulting, Michael has worked with many leading retailers,
consumer products companies and private equity firms.
He is also the co-author of the industry-acclaimed The New
Rules of Retail. He is frequently quoted in the Wall Street
Journal, Financial Times, global and national media, and
trade journals. Consulting magazine recognized Michael as
one of its Top 25 Consultants of 2010. He can be reached at
michael.dart@kurtsalmon.com.
DAN GOLDMAN
Dan Goldman has expertise in private equity due diligence
and sell-side support, growth and turnaround strategy
development, brand and category management, marketing,
and new product development, as well as marketing mix and
trade promotion optimization. In addition to his experience
at Kurt Salmon, Dan’s broad background includes brand
marketing experience with Procter & Gamble as well as prior
consulting experience with Cannondale Associates (now
Kantar Retail) and Hudson River Group. He can be reached
at daniel.goldman@kurtsalmon.com.
TODD HOOPER
Todd Hooper is a partner in Kurt Salmon’s Private Equity
and Strategy Practice. Todd has more than 25 years of
experience working with leading retail and consumer
products companies and private equity investors. He
has also authored dozens of articles for business and
trade publications and spoken at numerous industry
events in North America and Europe. He can be reached
at todd.hooper@kurtsalmon.com.
65
Authors
DREW KLEIN
Drew Klein has conducted dozens of strategy and due diligence
projects in the retail and consumer products space, many in
apparel and footwear. Prior to Kurt Salmon, he worked at UBS
Investment Bank in the retail group, where he specialized in
apparel and the sporting goods and health club industries. He
can be reached at drew.klein@kurtsalmon.com.
AL SAMBAR
Al Sambar is a partner and director of the firm’s Soft Lines
Practice. He has more than 25 years of experience advising
the world’s leading retail and consumer products companies.
Al specializes in supply chain and store operation strategies
for specialty apparel retailers and wholesalers and department stores. He is frequently quoted in leading publications
and speaks at top industry conferences. He can be reached
at al.sambar@kurtsalmon.com.
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