Article 7 of 200
RESURRECTING THE CATALOG SHOWROOM Company profile
11/01/97
Chain Store Age Executive with Shopping Center Age
Page 64
COPYRIGHT 1997 Lebhar-Friedman Inc. Copyright 1997 Information
Access Company. All rights reserved.
Conventional wisdom says that the catalog showroom format is dead. The
retail graveyard is littered with once-proud chains - Best Products, Wilson's,
L. Luria & Sons - that have faltered in recent years.
Gary M. Witkin, president and ceo of Nashville, Tenn.-based Service
Merchandise agrees.
'About two years ago, I told the rating agencies that there was no future for
the catalog showroom. We needed to reinvent ourselves,' Witkin says.
He is busy remaking his chain so that it will survive and thrive. He has closed
underperforming stores, eliminated some products from the mix and
reorganized the others around what research says customers want. He has
eliminated the clipboard method of ordering goods in-store and begun a
massive marketing and advertising campaign.
The moves are dramatic, and have just been rolled out chainwide. But will
they be enough? Analysts believe it's too soon to tell, but that if anything can
save Service Merchandise , these new strategies can.
Remodeling: Witkin, a former vice chairman of Saks Fifth Avenue, joined
Service Merchandise as its president and coo in late 1994, specifically to
reinvigorate the company. While still profitable, the chain's earnings had
declined steadily for several years. Comp-store sales, which had risen 5.2%
in 1992, rose only 0.3% in 1993 and 1.3% in 1994.
'The purpose was to transition over a two to two-and-a-half year period the
senior role from [chairman] Raymond Zimmerman. He was to mentor me
through the transitional period,' Witkin relates.
The Zimmerman family founded Service Merchandise in 1960 after
having been in the variety store business since the 1930s.
Changes that had been made prior to Witkin's hiring had been largely
cosmetic, says Arnold Brief, senior vp of Southeast Research Partners, Boca
Raton, Fla.
'Mr. Zimmerman has given Mr. Witkin real authority to change the way this
company does business,' he added. 'They now are making a substantive
change.'
Much work needed to be done, and a two-year program to remake Service
Merchandise was launched.
'We first started with rudimentary retail, the visual presence on the floor.
We enhanced the catalogs. The basics helped boost us,' Witkin says.
A new management team was put together. Store management positions were
realigned or eliminated to put more sales assistance on the floor. Some 60
stores and a Las Vegas distribution center were closed.
After improving the look of the stores and catalogs, the chain began
reassessing its merchandise mix by examining competitors, including
discounters Wal-Mart, Kmart and Target; big-box specialty chains such as
Best Buy and Circuit City; and department stores such as Macy's. Then came
the all-important customer survey.
'We studied 4,000 customers, both existing and potential to determine where
we had authority in their minds. The economic, the competitive and the
customer factors all had to mesh,' Witkin says.
Every product category was judged by the three factors to determine
whether it would remain in the mix. Personal computers were found to be an
unprofitable item in a heavily competitive market, and one for which
customers did not consider Service Merchandise a strong source; PCs
were eliminated. 'It was a trifecta,' Witkin laughs.
On the opposite end was jewelry, a highly profitable segment in which the
chain is strongly competitive and where it has a strong identity with
consumers.
Other items were more difficult. Toys were not a strong contributor to the
bottom line, Witkin says.
'Regarding competition, we were better than most, though certainly not a
Toys 'R' Us. But the customer relevance was enormous. At the holidays,
people come to us for toys. So one element went the other way, but we
stayed with it,' he says.
The surviving skus have now been focused into eight 'worlds,' providing
dominant assortments: Fine Jewelry; Kitchen & Dining; Home Accents and
Furniture; Electronics; Kid Essentials; Looking Healthy/Staying Healthy;
Season to Season; and Travel Shop. The stores' layout also has been changed
to create logical adjacencies. Kitchen and Dining sits next to Home Accents
and Furniture, which flows into Electronics (see diagram).
The items themselves also have been 'upscaled' a bit.
'The customer will find our product more trend-forward than in the past,'
Witkin notes. Jewelry items are more contemporary, with a few much higher
price tags than in the past.
'Witkin has done a great job of deciding what [products] he wants to be in:
Food items are now in the store, the usual Christmas items, and even some
bath and beauty - while de-emphasizing items you'd never go there for, such
as golf clubs,' says Gary Dennis, partner of Nashville, Tenn.-based
investment firm J.C. Bradford.
Pull tags: In an effort to and customer frustration and improve service, the
shopping experience has been changed.
'The single biggest problem we found in the customer survey was the speed
of checkout and the way people shop,' Witkin noted. Customers had to pick
up a clipboard and pencil, write down item numbers in the showroom,
submit an order and hope the item was in stock.
No longer. In September, the chain eliminated the clipboards and launched a
pull-tag system. Pull tickets are attached to all display items, except for
jewelry. Tickets are brought to a cashier, where they are scanned, the
customer is checked out and the item(s) delivered. The new system eliminates
customer disappointments, as out-of-stocks are displayed on the item. It also
eliminates errors made if a wrong item number is entered.
The system was rolled out nationwide after a 30-store test in March.
Marketing: In one respect, Service Merchandise remains very close to its
roots. The chain had been created to fill a void between the higher-priced
brand name department stores and the discounters. Witkin is still aiming to
fill that niche, using a somewhat different format.
'We're a trade-up for people who shop discounters, and a better price value
for the department store shopper,' he says.
In another respect, Service Merchandise is adhering to conventional retail
wisdom: That in a fairly static pool of customers, the key to success is to try
and steal market share from unserved customers.
At the same time, the chain is dedicating major advertising dollars to find
new customers and bring back long-lost ones.
'We had been spending 80% of our time on the catalog to [existing]
customers. We stopped prospecting. Now every week we will have an insert,
as well as television ads, all of which are integrated,' and designed to bring
new customers to the store, Witkin says.
Unlike discount stores, which are shopped on a regular basis about two times
a month, customers visit Service Merchandise stores mainly for special
occasions, usually around the holidays, family birthdays or a seasonal event.
'It's always more efficient to talk to the people you know. Because of the
product we sell, our average customer shops here 2.5 times per year. Our
goal had been to get them in an extra time. That hasn't happened,' Witkin
admits.
The company hasn't totally abandoned its existing customers. Witkin also
hopes to find new ways to utilize its 22 million-customer database. Some 5%
of Service Merchandise 's customers account for 45% of its sales.
'We'll still be spending the preponderance of our dollars on our existing
customers. I've just hired a new vp of marketing and am very anxious to do
more segmentation,' Witkin says.
Other experimentation is on the way. The chain will test a smaller 'Best of
Service Merchandise ' store in Atlanta, opening around Thanksgiving. A
private-label credit card program will be launched in 1998.
Service Merchandise recently expanded its World Wide Web shopping
offerings to its entire catalog. But cyberspace hasn't proven a huge boon.
'Probably 98% to 99% of our business is still done in the store,' Witkin
reports.
Financials: Service Merchandise could remake itself because it was the
largest of the chains, notes Gary Dennis of J.C. Bradford. It retains a solid
cash flow, he says, and a loyal customer. The chain remains strong in some
core areas, such as jewelry.
'The problem is they've lost their way in other areas. Witkin is facing this
problem. He knows that if he can get the customers to shop more, or get new
customers, he doesn't have to make it the greatest store. A marginal
improvement would help,' Dennis says.
Sales of $3.96 billion in 1996 were a 1.6% decline from 1995, while
comp-store sales dropped 1.9%. The chain had 400 stores at yearend 1996,
vs. 409 stores in 1995. Earnings totaled $39.3 million, down 21.8% from the
previous year.
For the first nine months of 1997, the chain posted sales of $2.22 billion,
down 4.1% from the previous year. Comp-store sales declined 2.8%. Net
losses (including a restructuring change) total $149.8 million compared with
a loss of $38 million the previous year. Despite the numbers, Witken is
optimistic.
'We've shown great improvement from a year ago. I don't anticipate a
dramatic turnaround. The third quarter will be tough. We'll be overspending
our marketing dollars, and the customers have not gotten it yet,' Witkin
warns. The chain historically has lost money through the first three quarters.
Fourth-quarter numbers should prove fairly strong, both Dennis and Brief
say. A substantial amount of advertising funds has been shifted from the
fourth quarter to the third, lessening expenses. The chain also has a relatively
easy comparison with the fourth quarter of 1996, which was adversely
affected by allocation of shrink losses.
But most important to the chain's hope for survival is Service
Merchandise 's willingness to change.
'Raymond recognized the need for change in the business. My coming here
has been a spark for that change. ... There are times when it is very draining.
But I came here wanting to be a part of rewriting history,' Witkin says.
Zimmerman ceded his ceo post to Witkin in April.
Many of the changes are still too new to judge their effectiveness. But the
analysts believe that if anyone can save Service Merchandise , it's Witkin.
'I think it is as good a strategy as you can have. Whether it works remains to
be seen,' Dennis says.
- Debra Hazel |
