1. shopping
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CHAIN STORE AGE
®
THE NEWSMAGAZINE FOR RETAIL EXECUTIVES
APRIL 2008
How to Succeed
When Dollars Are
Stretched
Thin
A Comprehensive Repor t on the
Second Annual Main & Wall Conference
WHERE MAIN STREET MEETS WALL STREET
Rising to the Challenges Ahead
Financing, while not abundant, is still available for middle-market companies
By Connie Robbins Gentry
-level executives
from retail, consumer-product,
David N. Deutsch,
food and restauconference chair,
co-host and president
rant companies joined proof investment-banking
fessionals from the finanfirm David N. Deutsch
cial-services sector at the
& Co., welcomed
second annual Main &
attendees to the
second annual
Wall conference, hosted
Main & Wall
by David N. Deutsch &
conference.
Co. and Chain Store Age.
Held Feb. 11-13 at
Miami’s exclusive Mayfair
Hotel and Spa, attendees
exchanged insights and experiences during a number
of educational forums and
relaxed social gatherings.
The overarching theme
of the conference—that
2008 will be a year of
challenges—was underscored with a tone of cautious optimism for growthoriented middle-market
retailers and consumer-product companies.
David N. Deutsch, conference chair and founder and president of the distinguished New York City-based investmentbanking firm that bears his name, opened the conference with
a short summation of current economic conditions and an
overview of capital markets.
“Public-equity markets saw huge gains over the last five
years, but the last six months have been scary. IPO markets
set records in 2007; but in January of this year, 17 planned
IPOs were pulled. M&A (mergers and acquisitions) activity is flattening. For most companies, acquisition/sale values
expressed as multiples of EBITDA (earnings before interest,
Contents
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taxes, depreciation and
amortization) peaked in
2007; they’re probably at
the highest levels we’ll
see for awhile. Debt-capital markets are on shaky
ground and it’s hard to
say if they are starting to
recover or the worst is yet
to come. There are many
smart Wall Streeters on
both sides of that fence.”
“The good news,” he
continued, “is that financing for middle-market
retail and consumer companies is still available.
Financial leverage among
retail and consumer companies, expressed as a
company’s total debt to
EBITDA, was at the
highest level we’ve seen in
years. No one is sure what
will happen in 2008, but
asset-based lenders, those that lend on the basis of collateral values as well as cash flow, are licking their chops as cashflow lenders begin backing down.”
This year’s “View from Main & Wall” presented a
sharp contrast to the 2007 theme of financial markets flush
with opportunity. If not completely dry, markets that were
described last year as “dripping with liquidity” are now
struggling to stay afloat. Turning to his fellow panelists in
the opening Main & Wall session, Deutsch asked for their
views of the general economic environment.
Cheryl Carner, managing director, retail finance of
Boston-based CapitalSource Finance, a lending, investment
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Rising to the Challenges Ahead
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Investing Capital for the Highest Return
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Money Hunt
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Leveraging the Internet
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Strategic Growth Plans
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Competing in a Consolidated World
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Exiting With Style
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A Sweet Taste for Growth
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CHAIN STORE AGE, APRIL 2008
WHERE MAIN STREET MEETS WALL STREET
and asset-management business and sponsor of the Main &
Wall conference, stated, “Whether the economy meets the
technical definition of a recession or not, we all see what has
been happening and companies across all sectors are being
challenged.”
Citing the decline in housing values and the volatility of
the stock market, Jeffrey Bloomberg, principal and managing director, office of the chairman of Gordon Bros. Group,
Boston, agreed. He characterized the prevailing economic
mentality as a psychological recession that has impacted
consumers at every income level, even the wealthy feel reservations about spending, and this psychological phenomenon
is contributing to increased uncertainties throughout the
financial sector.
Gordon Bros., a platinum sponsor of Main & Wall, along
with its real estate company, DJM Realty, provides advisory,
financial and operating services to companies that are expe-
grow; they need to focus on growing their multichannel presence with direct marketing and e-commerce,” she suggested.
Growth through mergers and acquisitions may also prove
trickier this year, Cherrick advised, “because it is difficult to
get a board of directors to adopt more children when the
children at home need so much attention—they are reluctant to bring more [stores] into the fold.”
However, tough times for some will certainly create
opportunity for others. In the same vein that prime real
estate may come available, companies may go on the selling
block that normally would not be offered.
“Acquisition opportunities will be more prevalent and
varied than before,” suggested Deutsch, “and retail and consumer companies, with ‘slow’ prospects for organic-growth
in a tougher economy, may be wise to consider them.”
Arguably, the issue is not whether or not there are good
deals for the taking but rather whether there is financing
Seated left to right are
Main & Wall panelists
Cheryl Carner,
CapitalSource Finance;
Jeffrey Bloomberg,
Gordon Bros. Group;
Michelle Cherrick,
Thomas Weisel Partners;
and Todd L. Hooper,
Kurt Salmon Associates.
riencing growth or restructuring.
Echoing Bloomberg, San Francisco-based Michelle
Cherrick, partner and co-director of consumer investment
banking, Thomas Weisel Partners, said, “There is an
unprecedented psychological factor affecting consumer
spending, and I don’t think we’ll have any real data to tell us
if this is changing until the back-to-school season.”
What’s next? Defining the current state of affairs set the
stage for addressing the more pressing questions that were
on everyone’s minds.
Asked “Where are we going over the next 12 to 24
months and how should companies adjust their strategies?,”
Bloomberg responded, “Retailers should use this period to
take their foot off the pedal and correct mistakes. Since
December, there have been more than 900 announced store
closings and there is a lot of pressure on malls.”
The silver lining in this perfect storm, he predicted,
would be opportunities to “cherry pick locations at better
rates,” and retailers might find they are able to negotiate for
more concessions with landlords.
Cherrick agreed this might be a good time for retailers to
be opportunistic with real estate deals. However, she noted
that even retailers committed to growth have cut their
expansion plans—in some cases by 50% or more.
“Opening stores is the most expensive way for retailers to
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available to support these transactions. Carner said there is
money for retail growth—provided you know where to look,
you’re shopping for the right amount, you have a proven
track record of success and realistic goals for expansion.
“In general, financial leverage is less available, but not to
the degree that transactions cannot be done; there is debt
capital available,” she advised. “If you are trying to raise
$150 million, that would be really challenging, but smaller
amounts—$40 million, $60 million or even $75 million in
debt—that just takes a few institutions and we can get a
transaction done.”
“What people are looking to invest in,” she continued, “are
stable performers, retailers that are successful at getting consumers to part with their money. Growth is fine; it’s the magnitude [of expansion] that makes the difference. How many
units are you adding and how much capital do you need?”
Although it is possible to finance growth, Cherrick cautioned retailers to beware the fate of recent success stories
that have faltered. “Many people are surprised at where
Chico’s, PacSun and Hot Topic are now, but I would argue
they are victims of their own success and of the fact that we
are over-stored in America,” she stated.
In a faltering economy with consumer spending down
significantly, markets that could once support multiple store
locations are more susceptible to being overstored. When
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CHAIN STORE AGE, APRIL 2008
WHERE MAIN STREET MEETS WALL STREET
they can’t maintain or grow comp-store sales, retailers resort identified environmental sustainability as another key trend
to expense reductions, but that rarely compensates for slug- impacting consumer spending.
gish performance.
“We’ve reached the tipping point on environmental
As Bloomberg explained, “Unless a retailer can grow its [awareness] and it is now part of the consumer mind-set
top line, cutting expenses will take you only so far. The way and a reality in a much bigger way,” he said. “Businesses
a retailer can grow its top line is not by expanding its store with a constituency for whom this is important will thrive.
count but by expanding the productivity of each store.”
In general, this is the [mind-set] of a younger consumer,
Panelists agreed that mall-based department stores are who has longer purchasing power.”
among the hardest hit, and as an overall sector, perhaps have
Challenging times are like flush economies in one respect:
the grimmest prospects for recovery. The domino impact on Retailers that engender customer loyalty are the ones that
other retailers in B and C malls is likely inevitable.
also attract the most interest from investors. “Specialty retail
“When one department
done right can always grow,”
store anchor leaves a mall, the
stated Deutsch.
Unless a retailer can grow its top line,
landlord brings in a Home
However, 2008 may be the
cutting expenses will take you only so far.
Depot or Target,” observed
year
to postpone dramatic
The way a retailer can grow its top line
Bloomberg. “When a second
shifts in financial structure.
is not by expanding its store count but
anchor pulls out, they bring in
Retailers that watched stocks
by expanding the productivity of each store.
restaurant pads. But when a
soar over recent years, only
Jeffrey Bloomberg, principal and managing director,
third anchor goes, the developto plummet in recent weeks,
office of the chairman,
er has a really difficult time getmight consider delaying corGordon Bros. Group
ting someone to take that
porate sales and equity financspot.”
ings—although such transDeutsch lauded Steve & Barry’s University Sportswear, actions, particularly private-equity financings, remain viable
which often moves into defunct mall anchors, for its oppor- in the middle market if handled carefully.
tunistic growth strategy. However, Bloomberg countered
Main & Wall panelists agreed the financial pendulum
that retailers such as Steve & Barry’s had better be “careful swings too far in both good times and downturns. As busiwhat they wish for.”
nesses that were over-valued struggle to accept the new real“Steve & Barry’s has found they don’t have the human ity, Deutsch said we have entered “a period of adjustment.”
capital or the financial controls to support their growth,”
Sellers who don’t want to lower their prices or expectations
Bloomberg said.
will have to wait it out and private companies considering an
Growth potential: If one of the fastest-growing, hottest IPO should do the same. Cherrick predicted, “The IPO class
retail concepts in the industry is potentially at risk, what of 2008 is looking instead to debut in 2009, although a few
retail sectors have the most viable growth potential?
stellar performers may go public after Labor Day.”
Carner answered the question with a barbell analogy.
Having set the stage with an overview of the current finan“Opportunities exist on the luxury end and the true-value cial markets and the challenges ahead, the conference proend,” she said.
gressed with detailed discussions of growth management, exit
Retailers and sectors that continue to perform well strategies and opportunities to leverage untapped resources. ■
despite economic downturns are those that are responsive to
[email protected]
their consumer base and to prevailing trends. For instance,
restaurants historically suffered because consumers would
Sponsor Recognition
eat out less when money was tight.
“Unlike prior economic downturns, this is not true in the
Chain Store Age and David N. Deutsch & Co., procurrent climate,” noted Cherrick. “We have a generation of
ducers of the second annual Main & Wall conference,
consumers who don’t know how to cook and the quick-service
extend grateful recognition to the companies that
restaurants (QSRs) have responded well to consumer interests,
helped to underwrite this event.
like McDonald’s addition of salads and yogurt to its menu.”
Gordon Bros. Group, based in Boston, as well as its
It is premature to predict how well popular but slightly
real estate consulting and advisory firm, DJM Realty,
pricier quick-casual restaurants (QCRs) such as Chili’s will
provided platinum-level support.
weather economic fluctuations, but consumer preferences
Additional sponsors include Boston-based Capboth for eating out and for convenience bode well for QSRs
italSource as well as Dewey & LeBoeuf, Duff & Phelps,
as well as QCRs.
Kairos Capital Partners and Morgan Stanley, all headTodd L. Hooper, principal, private-equity services of
quartered in New York City.
Kurt Salmon Associates and also based in San Francisco,
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CHAIN STORE AGE, APRIL 2008
WHERE MAIN STREET MEETS WALL STREET
Money Hunt
Buyers and sellers of retail companies remain selectively active
oderating a panel discussion
Burns added, “We look for one to
on the last day of the Main
three people who we can build a good
& Wall conference, Gary
team around. They need to be strong
Prager, managing director of
entrepreneurs who have had successconference sponsor GB Merchant
ful experiences building companies.
Partners, Boston, posed the question:
Diversity of experience is also impor“What will private-equity companies
tant; it needs to be a well-rounded
be looking for in the months ahead and
CEO.”
what should you look for in a privateOn the flip side of the equation,
equity firm?”
Steven Silverstein, CEO of Spencer
David Heidecorn, partner, GreenGifts, Egg Harbor Township, N.J.,
wich, Conn.-based Catterton Partners,
responded to the question “What should
answered, “We are being patient and
an entrepreneur look for in an investthoughtful. We look carefully at the
ment firm?”
demographics and the psychographics
“It’s not just about capital,” he said.
It’s not just about capital.
served by a company, and we are look“You
want to know what kind of partYou want to know what kind of
ing for companies that fit with our
ner they will be, how they react in
partner an [investment firm] will
overall investment thesis.”
good times vs. bad times, can they add
be—how they react in
With more than $2 billion of equity
value, and do they support aspects of
good times vs. bad times.
capital under active management, Catthe business such as operational upSteven Silverstein, CEO,
terton Partners is one of the largest
grades.”
Spencer Gifts
retail- and consumer-focused privateSilverstein was recruited to Spencer
equity firms in the United States, and its focus is on growing Gifts in 2003 when the retailer was purchased by GB Palladin,
middle-market consumer companies in North America.
a joint venture between Boston-based Gordon Bros. Group
Describing his company as a “growth investor,” John Burns, and New York City-based Palladin Capital Group. Having
general partner, Highland Consumer Fund, a division of Boston- spent 11 years at Linens ’n Things culminating in his role as
based Highland Capital that focuses on consumer goods and president of the company and having grown company sales
services, responded to the question by saying, “We look for from $180 million to $2.1 billion, Silverstein was precisely the
companies with a steep growth projection; we are working hard- kind of “well-rounded, experienced” CEO that investment
er to find these [candidates] and we are being more selective.”
firms seek.
“The great thing about America,” Burns continued, “is that
Another critical point made by the Main & Wall panelists is
there are always pockets of growth, so we are still finding oppor- that investors and executives need to enter new ventures with an
tunities.”
exit plan. In some instances, investment firms will not consider
To Prager’s next question, “What should a seller look for purchasing a company unless they perceive that it has the potenother than price?,” Steven Liff, managing director of Sun tial to become a public company or, as a plan B, that there is a
Capital Partners’ Los Angeles office, advised to look closely at list of potential future acquirers.
the company’s management team.
Heidecorn noted that Catterton spends time researching
“Especially in challenging times, you want to be with a group the category before investing in a retail company. “We
that is decisive and not afraid to support growth,” noted Liff. expect to see continued consolidation in the industry and we
“You want a group who understands how retail and consumer want to evaluate who will be the winners and losers in a catcycles [evolve] through good times and bad times—and who egory.”
isn’t afraid of the tough times.”
While everyone agreed it is imperative to enter deals with
Since joining Sun Capital in 2000, Liff has led more than 25 “eyes wide open,” Silverstein cautioned, “Management cannot
buyout transactions. His fellow panelists agreed that the man- appear to be mercenary and looking for the door. It’s a doubleagement team is one of the most important aspects to any cor- edged sword, there has to be an exit strategy but management
porate sale or turnaround.
also has to be committed to running the company.” ■
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Strategic Growth Plans
Crunch Fitness and Bruegger’s Bagels shared expansion philosophies
nder the Main & Wall heading “Red Light or Green for most consumers, a fitness membership floats in a gray area
Light on Growth,” two retail CEOs and a corporate- between a luxury and a necessity spend. Again, the key is to
turnaround advisor shared their experiences for appeal to a psychographic rather than a demographic audigrowing companies. For the c-level executives ence.
attending the conference, hearing case studies of what has
For instance, in the past a personal trainer was perceived to
worked and what has not worked provided valuable insights.
be a luxury, but Crunch has recognized this service is an augSession moderator Cheryl Carner, managing director, retail mentation of what its customer needs and wants.
finance of Boston-based CapitalSource Finance, noted that
“Growth is dependent on understanding who your custhe examples would help retailers discern if it would be better tomer is and what they like. Our membership defies a specifto “hunker down and wait out the current economic challenges ic demographic; you’ll see a 26-year-old and a 66-year-old
or take advantage of some of the emerging opportunities.”
working out side by side, and it really is all about a commonCapitalize on your core:
ality of thought,” continued
The message from Crunch
Miller.
Fitness CEO Tim Miller
Ultimately, human capital
was one of energized carpe
is the most critical resource
diem. With 32 gyms in six
needed to support growth.
major metropolitan markets,
“What will get us where we
the New York City-based
need to be is having the peofitness retailer is poised for
ple who understand our
expansion into new markets.
brand—its service, experiFounded in the 1980s,
ence and culture—and who
Crunch’s approach to exercan be ambassadors of what
cise as entertainment has
we do.”
resonated with a loyal folWith locations currently
lowing of fitness enthusiasts.
in New York City, Atlanta,
“We have an opportunity to
Ch icago, Los An ge le s ,
capitalize on our brand equity and
Miami
and
San Francisco, Crunch is
Growth is dependent on
leverage our core differentiators, which
exploring
opportunities
in Washunderstanding who your customers are
is really about the psychographics of
ington,
D.C.;
Austin,
Texas;
New
and what they like. Our membership
our community and the distinct, edgy
Orleans; Philadelphia; Portland, Ore.;
defies a specific demographic … it is all
urban feel of our gyms,” said Miller.
San Diego and Seattle.
about a commonality of thought.
The media, which is fueling conBuild, buy and franchise: CeleTim
Miller,
CEO,
sumers’ worst-case fears over economic
brating its 25th anniversary, BurCrunch FItness
uncertainties, has proved to be Crunch’s
lington, Vt.-based Bruegger’s Bagels,
best ally, with frequent reports extolling
located in 22 states, has 273 units, of
the virtues of an exercise- and fitness-based lifestyle. What dis- which 165 are company-owned and 108 are franchises. The
tinguishes Crunch from similar offerings is its commitment to quick-casual restaurant continues to expand through a combibuilding a fun community.
nation of organic growth, acquisitions and franchises.
“The idea that a fitness center is there just to collect money
Bruegger’s CEO James J. Greco told attendees that just
from members and that it doesn’t care if people use the facili- prior to Main & Wall, his company closed on the acquisition
ty or not is a total misnomer. It’s worse for us if people don’t of a five-unit chain in Philadelphia and, for 2008, Bruegger’s
come, because it creates a sense of disengagement,” explained plans to build 15 company-owned and 25 franchise units.
Miller.
There are several reasons for choosing this three-tiered expanTo help perpetuate involvement, Crunch recently ran a pro- sion strategy.
motion that members who visited seven times in a month
“This approach helps with risk management because we
would receive the next month free. Miller also recognizes that, spread the risk associated with new construction,” explained
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Greco. “Also, it allows us to maintain [more favorable] debt
levels because we would have to borrow more to grow faster
organically. Additionally, there is only so much we can manage in terms of site selection, new construction and store
openings, and through franchisees we can shift some of those
responsibilities. Finally, acquisitions present a strategic opportunity to obtain prime sites or enter a new market in one fell
swoop.”
There are pros and cons with each strategy. For instance, the
ROI is good on franchise units because they require little capital investment but company-owned units, which are capitalas well as management-intensive, return all of the income to
the company.
“Competition for sites can limit growth, and in our case it
is very important that every unit is successful,” continued
Greco. “Subway goes into sites we would never consider
because they are less concerned with how each individual unit
performs. With 28,000 units, they can get by with that
“When growth goes awry for a well-established company,
there are usually over-arching themes that we see in the
turnaround process,” he explained. “Often, companies have
funded growth at the expense of supporting their core business, or they have failed to respond to macro changes in the
market. In some cases, the company has changed its strategy
without adequate testing and validation of the new direction.”
In the case of Portrait Corp. of America (PCA), which
leased portrait studios in Wal-Mart stores throughout the
country, Appel said the “perfect storm” was created when the
company’s private-equity owners focused on accelerated
growth rather than the core business.
PCA failed to evolve with the tidal wave of change that
cascaded across the industry when consumers embraced
digital photography. Additionally, markets that could easily
support Wal-Mart stores within five miles of one another
were not necessarily candidates for multiple PCA locations
Seated left to right are
panelists Cheryl Carner,
managing director, retail
finance, CapitalSource
Finance;Tim Miller, CEO,
Crunch Fitness; and
James J. Greco, CEO,
Bruegger’s Bagels.
approach, but we could not.”
In recent months Greco has seen a shift in the balance of
power with landlords in certain markets, noting that negotiations have become more flexible in Southern California,
Southern Florida and Phoenix, areas where the economic
downturn has had a significant impact on the business climate.
When asked if there is an optimum ratio for companyowned to franchise stores in a retail portfolio, Greco admitted
there is little agreement among franchisors on this topic.
However, he said, “You should not become a franchisee unless
the franchisor also operates a large number of companyowned stores. Those that do the best [job] for their franchisees tend to own one-third or more of the units in the
portfolio.”
Cautionary signals: For most middle-market CEOs, the
growth traffic light is shining bright yellow. The risk of missing an opportunity for expansion would be disappointing, but
the threat of making the wrong moves could be devastating.
Michael C. Appel, managing director, Quest Turnaround
Advisors, Purchase, N.Y., leads the firm’s retail and consumerproduct-goods division and has served as CEO for a number
of merchants undergoing a turnaround process including
MacKenzie-Childs and Laura Ashley.
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in such close proximity. However, PCA owners pumped
money into continued store expansion rather than updating
equipment in the existing stores or offering incentives to
store managers, who were critical to the success of each
location. Even Wal-Mart’s mandate that PCA close 500
stores was too little too late, and the company folded into
bankruptcy.
The demise of Laura Ashley, Appel noted, was a classic case
of a retail CEO who embarked on a growth strategy without
doing her homework or staying focused on the core customer
and drivers of the business.
“Laura Ashley brought in a new CEO whose growth strategy for the U.S. was based on the success of its High Street
stores in the U.K., which were large two- and three-level stores
that sold home furnishings,” explained Appel. “In the U.S.,
Laura Ashley replaced its successful portfolio of small street
shops and mall shops with large, 10,000-sq.-ft. stores in ‘A’
malls. These were high-rent stores with low-turnover, lowmargin product.”
“Within a couple of years, Laura Ashley had opened 32 of
these big stores and it was a disaster,” Appel concluded.
Today, the majority of Laura Ashley’s North American locations have closed and the company has converted to a licensing model. ■
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CHAIN STORE AGE, APRIL 2008
WHERE MAIN STREET MEETS WALL STREET
Exiting With Style
Position the business to succeed before you try to sell
uite poss ibly the
most popular person
at the second annual
Main & Wall conference was Marla Schaefer, former co-chairman and co-CEO
of Claire’s Stores, Inc., and now
a member of David N. Deutch
& Co.’s Presidents Council.
Certainly she was the person
that other retailers appeared
most eager to speak with during
the informal networking breaks.
CEOs wanted to hear how
Marla and her sister, Bonnie,
took command of the successful fashion-accessories company
built by their father, Rowland.
Q
To transition the company
forward, Schaefer had to identify and fortify opportunities for
improvement within the corporate structure and she had to
convince her father of the value
of succession planning. The former was much easier than the
latter.
“No one wants to buy a business that doesn’t have the appropriate infrastructure and succession plans in place,” Schaefer
noted. “We had a wonderful
technology department, but we
needed another platform. We
actually purchased and implemented a new POS system
because the business had to keep
going as usual. Also, we
had great [expansion]
No one wants to buy a
opportunities in the
business that doesn’t have the
Middle East, Russia
appropriate infrastructure and
and Poland, and our
succession plans in place.
joint venture in Japan
needed attention.”
Marla Schaefer,
former co-chairman and co-CEO,
Continuing to inClaire’s Stores, Inc.
vest in the company,
grow the business and
plan for the future were necessary steps in the overall exit
strategy. As Schaefer explained, “The things we were putting in place to make the business better were positioning us
to sell.”
However, the hardest sale was convincing her father it was
time for a succession plan. The way she managed to sway him
was by appealing to what mattered most to him about the
business—the welfare of his employees.
“He was fiercely loyal to his employees,” Schaefer continued, “and helping him to understand that the employees needed the company to have a succession plan was what finally got
his attention.”`
Her parting advice to CEOs contemplating a sale was to
communicate with employees as early as possible about their
intent to sell the company. “If you are mindful of the loyal people in your company and you keep them informed at every
juncture along the way, it will hold you in good stead,” she
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But even more, Main & Wall attendees wanted to know the
exit strategy that enabled the Schaefers to walk away from
the company with no regrets and a reputation for professionalism that made the $3.1 billion sale of Claire’s the quintessential model of how to exit a company with style. Privateequity firm Apollo Management purchased Claire’s in 2003.
In a panel discussion moderated by David N. Deutsch, conference chair and president of David N. Deutsch & Co., New
York City, Schaefer told highlights of their story.
“Our father was a classic one-man-show entrepreneur. He
opened stores all over the world through acquisitions and franchise deals, but he didn’t [appreciate] the need for succession
planning,” she said. “Six months after Bonnie and I took over,
we were saying, ‘Where did he get the energy for all this?’”
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CHAIN STORE AGE, APRIL 2008
advised.
Rutta also recommended that
The devil in the details: Not
business owners should review
every corporate sale goes as
all contracts prior to negotiating
smoothly or as successfully as
a sale. In particular, review the
the Claire’s deal. Main & Wall
assignment or non-assignment
panelists discussed other aspects
clauses in third-party contracts,
of exit deals that merit considersuch as real estate leases. “You
ation.
need to tidy all your records and
For instance, Matthew R.
make sure the financial stateKahn, managing director of GB
ments are understandable; idealMerchant Partners, an affiliate
ly they should be prepared by an
of Main & Wall’s platinum
outside auditor,” she advised.
sponsor Gordon Bros. Group,
One of the most critical aspointed out that retail portfolios
pects of a potential sale is the letthat are part company-owned and part
ter of intent (LOI), which is created
You need to tidy all your
franchisee-owned have unique considwhen a serious buyer has been identirecords and make sure the financial
erations.
fied and essentially puts into writing a
records are understandable;
“We exited a company that was halfspecific outline of what is to be sold and
ideally they should be prepared
owned and half-franchised and, behow the deal-making process should
by an outside auditor.
cause the company was bought by its
evolve.
Michelle Rutta, partner,
largest competitor,” he explained, “there
In addition to the basic terms of a
Dewey & LeBoeuf
was franchisee overlap in several martypical LOI, such as the sale price and
kets that had to be addressed. It’s best to address that kind of form of transaction, Rutta suggested including confidentiality
situation early.”
provisions and specific guidelines for access to records and how
Similarly, it is important for any existing legal obligations to due diligence should be performed.
be reviewed as early in the deal-making process as possible.
“If you want to add bite to the LOI, you might include an
Michelle Rutta, partner, Dewey & LeBoeuf, an international expense-reimbursement clause,” she noted.
law firm headquartered in New York City and a Main & Wall
Finally, the LOI should establish a short period of time dursponsor, said, “One of the first things a potential buyer will ask ing which the parties agree to negotiate exclusively with one
is, ‘Are you suing anyone or being sued by anyone?’ It is best another, or as Kahn defined it, “The LOI gives clarity of comto address these disputes ahead of time.”
mitment to the process.” ■
‘
’
Investing Capital for the Highest Return
The night before he delivered a
moving keynote speech at a Main &
Wall dinner, Randy Lewis, senior VP
of distribution and logistics at
Walgreens, was featured on “ABC
World News.”
It’s hard to say which seems more
unlikely, that a distribution and logistics VP would make primetime
news—or that he would be the
keynote speaker to an elite group of
CEOs, CFOs, financial analysts and
investment brokers. However, the
story Lewis shared is in itself one of
unlikely, yet unparalleled, successes.
At the Walgreens’ distribution
center in Anderson, S.C., more than
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one-third of the work force has
severe physical or cognitive disabilities.The employment model is even
more unique because it is one of
total inclusiveness. People with a
wide range of skill levels, and limitations, perform the same jobs—with
the same performance requirements and compensations for all.
“This DC is not just as good as
our other DCs,” explained Lewis,
“it’s better than the others.”
In fact, Walgreens is building
another DC in Hartford, Conn., that
will follow the same model, and by
2010 Walgreens expects to employ
more than 1,000 disabled workers.
www.chainstoreage.com
Walgreens invested more than
$100 million in automation, technology and process accommodations at
the Anderson DC, but the returns
are measured in dollars, productivity and, more importantly, changed
lives.
“This is the most meaningful thing
we have ever done,” Lewis said.
His parting message to Main &
Wall executives: “People with a lot
less authority and power than you
have, did a lot of good—and you
have an opportunity to make a difference also.”
For detailed information, visit
www.walgreensoutreach.com.
CHAIN STORE AGE, APRIL 2008
Leveraging the Internet
E-commerce enabled Smithsonian museums to test more products
lthough not every e-commerce
retailer publishes a catalog or opens
bricks-and-mortar stores, it has
become virtually imperative for all
retailers to operate online. At the very least,
single- or dual-channel retailers are finding
that Web sites are mandatory for relaying
information to consumers, even if they do
not sell merchandise via the e-commerce
channel. However, customers spend more
with a retail brand when they can shop
across multiple channels, and multichannel
shoppers are much more likely to be loyal to
For Smithsonian Business Ventures,
the brand for an extended time.
selling online was a natural, and
D uring the Main & Wall session profitable, extension of its catalogs.
Fellow Main & Wall panelist Don
“Leveraging the Internet,” moderated by
Steiner, managing partner of Webster
Tom Cagnina, managing director, David N. Deutsch & Co., Capital, Waltham, Mass., discussed how to understand profattendees learned how retailers utilized e-commerce to increase itability and ROI relative to different channels.
performance. For instance, Gary Beer, who served eight years,
Prior to founding Webster Capital, Steiner spent eight years
until August 2007, as the CEO of Smithsonian Business as founder and CEO of Cornerstone Brands, which included
Ventures, explained how the Washington, D.C.-based mu- popular catalog and Internet retailers such as Ballard Designs,
seum complex grew revenues by expanding its multichannel Frontgate, Garnet Hill, Smith and Noble, The Territory Ahead
presence.
and TravelSmith Outfitters.
Smithsonian generates more than $200 million in annual
“There is a tradeoff between the capital expenditures necesrevenue through magazine publishing and retail operations that sary for a physical store and the higher advertising costs associinclude catalog and e-commerce sales, as well as museum stores ated with attracting Internet customers,” explained Steiner.
and off-site stores.
Transitioning from a capital-expenditure mentality to an
“The dot.com store is a traditional extension of our catalog. online-investment mentality has proved difficult for some
Although it only grew revenue 10% over a five-year period, we retailers, who might not blink at spending $1 million to open a
would have lost sales without it,” explained Beer.
new store but would have strong reservations about investing $1
E-commerce also enabled the museum operator to test more million to purchase a keyword search.
products than traditional store inventories could accommodate,
Advertising for one channel will benefit other channels as
and in some departments this had a dramatic impact.
well, but the total impact of cross-channel marketing will be
“Over a five-year period we grew top-line revenues 20% in difficult to completely quantify. Steiner cautioned, “If you mail
travel and books [merchandise],” he continued. “Sixty percent of catalogs, and send e-mails, and buy a keyword, you have to ask:
that 20% was facilitated by the Internet’s ability to [support] an ‘Are you overspending to reach your customer?’ It comes back to
expanded merchandise offering.”
identifying the cost of attracting a sale.”
Additionally, Smithsonian augmented its portfolio with air“Marketing costs on the Internet can be 30%, 40% or even
port-based stores. “Only 50% of D.C. conventioneers visit the 50% of sales, but marketing costs for catalogs are typically 15%
museums,” noted Beer, so the airport stores penetrated an to 25% of sales and even less for stores,” he continued.
unserved but viable market.
His advice was to err on a “small scale,” test campaigns and
Although multiple channels provide synergistic benefits, all analyze results before deploying on a large, pervasive scale. His
channels cannot be measured by the same performance stan- approach clearly worked at Cornerstone, which grew from revdards. For instance, Beer noted that the average price point for enues of $150 million in 1998 to $750 million by the time he
a bricks-and-mortar sale was $17, but the average catalog order sold the company in 2005—and Steiner attributed much of that
totaled $100.
growth to the Internet. ■
A
CHAIN STORE AGE, APRIL 2008
www.chainstoreage.com
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WHERE MAIN STREET MEETS WALL STREET
Competing in a Consolidated World
Success stories from Kings Supermarkets and Grocery Outlet
ndependent food retailers are facing
provide shoppers a variety of products at
unprecedented challenges from concloseout prices.
solidation within the industry, shrinkSpeaking on a Main & Wall panel, coing margins and the proliferation of
CEO MacGregor Read, grandson of Jim
supercenters, such as Wal-Mart and
Read who founded Grocery Outlet in
Target, which have achieved almost ubiq1946, described his stores as a treasure
uitous penetration into the grocery sector.
hunt for groceries. His family-owned
Attendees at the Main & Wall conferbusiness has established long-term relaence heard successful strategies from two
tionships with a number of consumermid-size grocery retailers that serve
product-goods manufacturers, which
opposite ends of the economic scale and
provide the infrastructure for sourcing
operate on opposite coasts.
products at deep discounts. As much as
Kings Supermarkets, headquartered in
70% of the inventory in Grocery Outlet
Parsippany, N.J., has 26 stores serving
stores is purchased from close-out deals.
Mid-size regional grocers find
high-end markets in New Jersey and
For the more affluent shoppers in
successful niches.
New York with gourmet foods and the
Kings’ upscale markets, fellow panelist
freshest possible selection. On any given
James Demme, chairman of the board at
day, shoppers may find delicacies such as yak, rattlesnake and Kings Supermarkets, described a more pragmatic than opporbuffalo fresh from the range, as well as a vast assortment of tunistic approach to merchandising. “You have to buy what
produce from around the world.
you sell,” he advised, “because you don’t always sell what you
On the West Coast, Berkeley, Calif.-based Grocery Outlet, buy.”
with annual sales topping $600 million, has 130 stores locatThat said, he suggested independent grocers are typically
ed in six Western states and Hawaii. The Grocery Outlet stronger with their perishable areas than the large consolidated
stores occupy an average of 20,000 sq. ft. or less and are chains or the mass merchandisers. For instance, Kings’ shopstocked with products that are sourced “opportunistically” to pers will find delectable fruits such as mangosteens imported
from Thailand that traditional grocers would not carry.
Key to the success is giving customers what they want, such
A Sweet Taste for Growth
as a gourmet selection of prepared foods as well as a wide
assortment of imported spices and exotic condiments. From
Robert Gordman, president of The Gordman Group,
this respect, supplier relationships are as integral to Kings’
Breckenridge, Colo., and author of “Secrets of the $uper
operations as to the Grocery Outlet strategy.
$weet $pot: Building Sustained, Profitable Growth,” preIn one respect, Grocery Outlet is more similar to King’s
sented the luncheon keynote address at Main & Wall.
high-end neighborhood markets than a typical deep disFinancial growth can not be achieved solely through
counter because it also relies on sales of made-to-order foods,
expense reductions, he cautioned, and competing is
which represent 30% of total sales, and perishable products.
“unproductive.” The goal, according to Gordman, should
“Fifty percent of what we sell is in a climate-controlled
be to “build a super sweet spot in the market.”
environment
and 72 of our stores carry fresh meat,” said
One way to accomplish this is to focus on the cusRead.
“The
typical
transaction size almost doubles when
tomer not the competition, or as he said,“Don’t go after
meat
is
in
the
basket.”
your competitors, serve your customers.” Gordman,
“We’ll probably stock 200,000 unique SKUs over the
who also authored “The Must-Have Customer,” excourse of a year,” continued Read, “and it’s a little like the
plained the differences in a loyal, core customer, an
movie industry—out of those we’ll have three or four blockopportunistic customer and the must-have customer.
busters a year, but we aren’t sure which those will be when
Additional information, as well as his books, can be
we’re buying [inventory].”
found at www.gordmangroup.com.
The increasing popularity of organic or “natural” foods has
I
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www.chainstoreage.com
CHAIN STORE AGE, APRIL 2008
Attendees at the second annual
Main & Wall conference paid
rapt attention and recorded
copious notes during the
informative panel discussions
and educational sessions.
proved to be a blockbuster hit for all food
retailers and Grocery Outlet has jumped on
the organic bandwagon, finding that value-oriented shoppers
are just as eager as affluent shoppers to purchase products that
promote a healthier lifestyle.
“Whole Foods and Trader Joe’s have created opportunities
for us in terms of expanding our product mix,” noted Read.
“Organic products just flow off our shelves.”
Although Grocery Outlet shoppers appreciate an organic
product mix, retailers such as Whole Foods Market and
Trader Joe’s aren’t direct competitors. The toughest competitor Grocery Outlet has encountered, according to Read,
is another regional discount chain: WinCo Foods based in
Boise, Idaho. With 60 stores in five states and roots dating
to the 1940s, there is considerable overlap in the markets,
products, pricing and shoppers of both brands.
Additionally, Read noted, “Super Wal-Mart has taken
market share away from us, but in many cases it becomes a
real-estate game [for positioning].”
Asked if his stores had felt an impact from the arrival of
Tesco’s Fresh & Easy markets in California, Read replied, “It’s
premature to comment, but there has certainly been a lot of
noise and I would not underestimate Tesco’s abilities. I have
been surprised, however, that Tesco does not appear to have a
more unique product mix.
CHAIN STORE AGE, APRIL 2008
“What we are hearing about,” he continued, “is Tesco’s unique approach to real
estate deals. They’re taking larger spaces than needed, to get
the location, then sub-leasing the part of the space they don’t
need, and they are paying higher rates than Walgreens to get
prime positions in the marketplace.”
Regardless of the competitive landscape, regional grocers,
like mid-size retailers across all sectors, are focused on continuous improvements in operations and comp-store sales. A general rule of thumb for the grocery sector, according to Demme,
is that “whatever amount comp-store sales go down, EBITDA
[earnings before interest, taxes, depreciation and amortization]
is down double—when comp sales are down 4%, EBITDA
goes down 8% to 9%.”
The five key components to a successful strategy in food
retailing that Demme outlined were fundamentally simple:
clean stores, fresh selection, friendly service, well-stocked
shelves and good prices. However, he predicted that the
biggest change in the food-retailing model for the future will
be that CEOs will increasingly take on the role of corporate
visionary, while their management teams run the day-to-day
business operations.
Noting there had been surprisingly little consolidation
among food-outlet retailers, Read predicted the outlet niche
will avail itself of mergers-and-acquisitions opportunities. ■
www.chainstoreage.com
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