O.T. - interesting article about what really goes on in retailing (at "low end").
January 11, 1999
Discounter Rebounds by Targeting
A Clientele Below the Wal-Mart Set
By WILLIAM M. BULKELEY
Staff Reporter of THE WALL STREET JOURNAL
ROCKY HILL, Conn. -- To Joseph R. Ettore, chief executive of Ames
Department Stores Inc., the fate of a rival discount retailer in the Northeast
was sealed as soon as it hired a new CEO who started stocking classier goods.
"I knew he didn't understand his customers," Mr. Ettore says.
It isn't a mistake that he makes. Ames offers $8.99 acrylic sweaters and $5.99
sweatpants, along with lots of "husky" offerings for kids and few if any petite
sizes for model-thin women. It makes stores handy for elderly people to shop
in. And while the rival chain has fallen on hard times, Ames is ringing up some
of the best sales gains in retailing.
Mr. Ettore has engineered a striking comeback at Ames. After 37 years in the
business, he has seen plenty of regional discount chains fall before the advance
of Wal-Mart Stores Inc. There were Jamesway and Stuart's, both of which he
once ran, and Rich's and The Fair. And there was Zayre's, which Ames
disastrously acquired in 1988, leading to its own bankruptcy filing two years
later.
Mr. Ettore, who is 59 years old, says the big mistake most made was losing
touch with their clientele. "I look for underserved customers," he says. Most
of his peers, he adds, "are looking to push up" in prices or in prestige. "We
haven't done that."
Of course, giants like Wal-Mart also appeal to customers of modest means.
But Mr. Ettore aims a little lower. Although Wal-Mart won't discuss such
numbers, Mr. Ettore reckons its core customer base is made up of households
with $30,000 to $45,000 in annual income. The Ames chief aims at a cohort
between $25,000 and $35,000 -- waitresses, clerks, laborers, retirees. He
works overtime to divine their tastes and buying habits.
Bargain Sneakers
Let Gap Inc. stock a deep selection of tops in a few styles and muted colors;
Ames goes in for a wide variety and distinctive patterns. Let other discount
chains move up to huge, 100,000-square-foot stores; Ames makes a point of
staying down around 60,000 feet. Seniors get tired in giant stores, he figures,
and working mothers want to be able to get in and out quickly.
"I come here all the time," says Veronica Wilmoth, a 48-year-old liquor-store
bookkeeper and mother, as she leaves an Ames in a Medford, Mass., strip
mall. "The prices are great." In her bag tonight: $12.99 sneakers, a small
picture frame and imitation ivy garlands that are on special at two for $5. Total
bill: $26.
Ames's Christmas-season sales were up 10%, exceeding other discounters,
including even Wal-Mart, which had a 9.4% gain. Ames's sales are about to get
bigger, because last week, Ames completed the takeover of Hills Stores Inc. of
Canton, Mass. After digesting Hills, Ames will have $4 billion in sales and 450
stores in 15 states, from Indiana to Maine and south to Virginia. The price of
Ames stock is up more than 100% in a year and more than 700% since Mr.
Ettore arrived in 1994.
Its recent growth has some observers believing that the epitaph for regional
discounters was written prematurely. Ames is "not going to out-Wal-Mart
Wal-Mart," says Thomas A. Ferguson, president of Newell Cos., a Freeport,
Ill., maker of plastic goods and cookware that sells to both retailers. But Ames
is viable, he adds -- "large enough to be important" and "small enough to be
nimble."
Worsted Case
Founded in Southbridge, Mass., in 1958 in an old worsted mill, Ames adopted
its name to save money on signs. Thriving in the early 1980s, it took a shot at
the big time, acquiring the Zayre's chain, then in distress but twice Ames's
size. Many of the stores in urban areas were losing more than Ames had
realized, and their 100,000-square-foot formats proved daunting.
"It was probably the worst deal ever made in terms of synergies," Mr. Ettore
says. In 1990, Ames filed for bankruptcy-court protection. By the time it
emerged in 1992, its sales were down to $2 billion from $5 billion, more than
half its stores were closed, and 37,000 of 60,000 employees were gone. Two
years later, it was still floundering, so with the stock price at $3, the Ames
board recruited Mr. Ettore from smaller rival Jamesway Corp., where he was
leading another bankruptcy reorganization.
When he arrived at Ames's central-Connecticut headquarters, he found
promotion costs that were higher than the industry's average; high levels of
inventory "shrinkage," which usually means a shoplifting problem; and a
me-too merchandising strategy that, like Wal-Mart's, stressed "everyday low
prices."
He closed 28 unprofitable stores and cut the 1,000-person headquarters staff to
850. Eventually, he bought new point-of-sale and security systems to curb
shrinkage.
He also changed the marketing tack to what he calls a high-low strategy --
deeper discounts on selected goods offered through weekly circulars, and
higher prices on the other items. He also sought to expand unadvertised apparel
specials so that customers could encounter surprise bargains. To acquire such
goods, he hired merchandiser Denis Lemire from Marshall's, a subsidiary of
TJX Cos. in Framingham, Mass., that specializes in finding brand-name
close-outs and overruns.
Last May, when order postponements by retailer Toys 'R' Us Inc. suddenly
stuck toy makers with a glut, Ames offered to take its normal Christmas order
then rather than in August if it could get extended payment terms and steep
discounts. Industry officials say Mattel Inc. and Hasbro Inc. agreed, although
they won't comment. Ames rented a warehouse to hold the toys.
Mr. Ettore told Mr. Lemire to replace most apparel buyers and start reshaping
the inventory. The new buyers stopped stocking petite sizes. "The glamour
thing is to go after the thin customer," Mr. Lemire says. "But there's a
correlation between lower income and heavier weight. In our stores, you see,
we have a big customer." A quarter of the women's clothes Ames sells, or
about double the industry average, are size 12 or larger.
In 1997, Ames added a department for heavyset men called "One for the Big
Guy." Now it is ordering "chubby" and "husky" sizes for overweight girls and
boys. "A lot of the time," Mr. Lemire explains, customers' "children are big
kids."
Just in Time
Merchandising to lower-income people has other quirks. While the more
affluent buy seasonal items long before they need them, "our customers will
buy, literally, right after the need," Mr. Lemire says. Winter coats at Ames
don't sell until the weekend after a cold snap. And Ames keeps stocking
bathing suits well into August.
Ames customers tend to like clothes with bold patterns "where a lot is
happening," says Mr. Lemire. So women's racks are full of textured acrylic
sweaters, sweatshirts dubbed "fashion fleece" with flowers or snowmen on the
front and "satin look" and "velvet look" holiday tops and dresses. The stores
also carry lots of ready-to-assemble furniture and a broad selection of crafts, a
legacy of their experience with frugal women who sewed and made their own
holiday decorations long before anyone heard of Martha Stewart.
Mr. Ettore set out to woo seniors. Other discounters were also offering senior
discounts, but Mr. Ettore cut the qualifying age to 55 from 65 to attract people
who still work and thus have more income.
In focus groups, he discovered that many older shoppers were embarrassed to
show their driver's licenses each time they wanted a discount. The older the
customer, the higher the resentment. So in 1996, Ames launched the "55-plus
gold card" -- requiring proof of age only once. It confers 10% discounts on
everything every Tuesday, and check-out clerks don't learn exactly how old
the customer is. The cards also help Ames gather demographic information on
its customers.
Eleanor Brown, an elderly shopper from Freeport, Maine, turns up at the Ames
in Brunswick one Tuesday before the holidays and picks up two $14.99 shirts
and some Christmas lights. She says she shops often on 55-plus day, when
cookies are served and music oldies are piped in. She finds the store "neat and
clean," Ms. Brown says, and easy to get around in because of its size. Ames
has given some stores a "racetrack" aisle circling the central apparel area,
making it easy for seniors or hurried shoppers to get the merchandise they
want.
Stores open at 8 instead of 9 on Tuesdays, since many elderly customers are
early risers. "They're concerned about security and driving at night. You have
to understand those kinds of issues," Mr. Lemire says. Tuesdays have become
Ames's highest-sales day after Saturday, with a spike in sales of prune juice
and of toys purchased by doting grandmothers. Further accommodating
elderly customers, some Ames stores sent buses to old-age homes during the
recent holidays.
Model Trains
To bring down ad costs that were well over the industry average of 3% of
sales, Mr. Ettore reduced circulation of weekly fliers by 10% after identifying
unproductive zip codes. He cut the size of some circulars to save on paper.
And he chopped $1 million in production costs by building a photo studio at
headquarters, eliminating use of expensive New York photographers. Once a
week, Ames sends a car to New Haven to pick up the models, who take the
train up from New York.
The circular items account for half the chain's sales, so Mr. Ettore meets with
merchandising staff every Tuesday to fine-tune them. At one meeting, he eyes
a $199 price planned for a vacuum cleaner that Ames normally sells for $229.
"Can you go sharper on the vacuum?" he asks a staffer.
No, "that's the MAP," she replies, meaning the minimum advertised price at
which the manufacturer will share ad costs. Mr. Ettore does succeed in nixing
a sale on wireless intercoms (low customer appeal). He is pleased with
satin-sheet sets and dish sets, both 33% off at $19.99. The "killer item" of the
week, he proclaims: a mission-style kitchen set -- a table with two tall stools --
at $47.99, down from $119.99. A depreciated currency in Malaysia, where it
comes from, makes the low price profitable.
Mr. Ettore is keeping an eye out for acquisitions in the South and Midwest. He
plans to add 20 to 30 stores a year, beyond the recently acquired Hills outlets.
His marketing plan for those: Hills "going out of business" sales in all of the
stores in coming months -- followed by Ames "grand openings."
With Hills, Ames will add $1.6 billion in annual sales for a cash outlay of $117
million, although assumed leases and remodeling will boost that to $330 million.
Hills was burdened by debt and in danger of bankruptcy, and its stock was
badly depressed. In other words, it was a perfect opportunity for Ames: a
close-out bargain on distressed merchandise.
Copyright © 1999 Dow Jones & Company, Inc. All Rights Reserved. |
