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Retail Trends

Hot 100 Retailers 2014

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Right place, right time, right product help the nation’s fastest-growing retailers succeed

This is a good time to be a small-footprint or specialty grocery chain, whether national in scope or one with stores clustered in regional markets. Being a home goods retailer isn’t too bad, either. That, in a nutshell, is the story told by the 2014 STORES Hot 100 Retailers report.

Hot retailers find a way to align with a shopper base that might not be very well organized or had not been effectively addressed previously, says Bryan Gildenberg, chief knowledge officer with Kantar Retail, which provides the data for the Hot 100 report.

“Hot retailers do things better than their competitors. They’ve cleverly carved out a proposition for the consumer,” Gildenberg explains. “Part of that is being at the right place at the right time with the right products.”

The time we spent on the phone with customers ... was how we learned. Our customers taught us how to grow.
Niraj Shah, Wayfair

Growing through mergers, acquisitions
The rise of small and specialty grocery chains is enabled by the squeeze put on traditional supermarkets by discounters, drug stores and online purveyors of food and other consumables. “Contraction” is the word of the day, evidenced by the appearance of Albertsons at the top of the Hot 100 chart and that of SpartanNash — the tie-up of Spartan Stores and Nash-Finch — just a few rungs below. The mergers and acquisitions coursing through the supermarket industry indicate there are plenty of growth opportunities for smaller, regional and specialty grocers.

Albertsons at No. 1 represents a reassemblage of a supermarket empire that stretched from coast to coast in the early part of this century — a remarkable achievement, but one that was not very successful and short-lived the first time around. In 2006, the sprawling network of supermarkets and drug stores encompassing Albertsons, the old Skaggs stores and numerous mid-sized drug and grocery chains was sold off in parts. CVS picked up many of the retail pharmacies, SUPERVALU took the largest share of the supermarkets and a consortium led by Cerberus Capital Management took the less-profitable end of the far-flung Albertsons operation.

The Albertsons stores were reunited last year when SUPERVALU sold most of the chain to the Cerberus-led owners group. The company grew even larger earlier this year with the acquisition of Safeway.

To survive and prosper, retailers have to know their customers — and those customers’ preferences — all the way down to the individual-store level, says Gildenberg. This means localizing store design, the marketing approach and the merchandise itself.

“Stores have to be much more connected to their trade area — know their trade area, know the market better,” he says. “This includes more than geography. It’s knowing lifestyles and homing in on that. This is particularly important in urban markets.”

Meanwhile, Spartan Stores, an aggressively expanding group of traditional supermarkets centered in and around Michigan, moved from gobbling up local grocers to taking over Nash Finch, a Minnesota-based grocery wholesaler and retailer. The acquisition boosted SpartanNash into the No. 5 spot.

Not all acquisitions in the supermarket industry are indicative of struggling retailers trying to survive. In the case of two specialty chains serving largely ethnic customer bases, takeovers are a way to grow into new markets, increase purchasing power and better compete with traditional supermarkets that typically devote an aisle or less to “ethnic” products.

“There is still an enormous opportunity to bring organization in food retailing mostly because the grocery market in this country has been very, very fragmented,” says Gildenberg. “Selling fresh food is hard and the successful supermarkets are those that identify with their shopper base.”

No. 13 H Mart started 32 years ago in New York City’s Queens borough, catering to a Korean customer base while selling pan-Asian products. The chain now extends from New York to Georgia and jumped to the West Coast seven years ago, filling in with locations in Illinois, Texas and Michigan. H Mart also operates an e-commerce site featuring Asian delicacies and specialty products.

Northgate Gonzalez Markets, at No. 30, has been serving Latino customers in California for more than 30 years. Co-president Miguel Gonzalez Reynoso likes to point to the time several years ago when Albertsons was shuttering stores in Southern California, making a location available for him to expand into San Diego County.

“My father used to always say that anything that isn’t growing is dying,” Gonzalez Reynoso says. “We never open a new market until the last one we opened is making a profit.”

Expansion is still on the menu in the form of a joint venture with Cardenas Markets to acquire the Phoenix-based Pro’s Ranch Markets at a bankruptcy court sale. Northgate Gonzalez would then have an interest in seven Arizona stores and two each in New Mexico and Texas.

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Spending on the home
The housing market may not be booming, but retailers selling goods for the home certainly are — particularly Wayfair and Conn’s, which claim the No. 2 and No. 4 spots, respectively.

What’s driving this success, Gildenberg says, is consumers’ “willingness to spend money on their homes. People are comfortable with their income as the national economy slowly improves and the fear of losing jobs lessens.”

Another factor at work, he says, is that “There are retailers out there that used to sell a lot of housewares and they have stopped selling them. There is … a valuable share of market left by J.C. Penney and Sears.”

The turmoil among large general merchandise store chains provides an opportunity for “specialty players to really grow and even dominate,” Gildenberg says. “Don’t be surprised if Amazon comes on strong in the housewares area. Costco is also very good at insinuating itself into these situations.”

It took 12 years for Wayfair to grow from dot-com start-up to the hottest e-commerce retailer in the country, with nearly $1 billion in sales booked last year. Wayfair offers more than 7 million products through a variety of e-commerce sites including Wayfair.com; the flash sale site Joss & Main; AllModern, which offers original modern designs for the home; BirchLane, with classic furnishings and décor; and lifestyle home furnishings site DwellStudio. Last fall Wayfair partnered with Staples to offer the office supply dealer’s e-commerce customers a greater selection of housewares and home furnishings.

Wayfair is benefitting from many of the trends that have emerged in this segment of retailing, as well as the growing strength of e-commerce, says Gildenberg. “What consumers are saying is, ‘If it’s mainstream, I want to find it in a format I’m comfortable with.’ Wayfair is a good example of meeting this challenge.”

Wayfair, which may be headed for an initial public offering of stock in the next 12 to 18 months, is based on “connecting with consumers by giving them what they want,” says Niraj Shah, co-founder and CEO. In the early years, “The time we spent on the phone with customers learning what they want and giving it to them was how we learned. Our customers taught us how to grow.”

No. 4 Conn’s sells consumer electronics, major appliances, furniture and mattresses in 10 states to consumers who often have to finance their purchases. Conn’s extends the credit, too: The retail business has been going great guns, but the finance side of the business has been on shakier ground of late.

Conn’s retail business pushed same-store sales up 15.6 percent, on top of a 16.5 percent comp performance a year ago, as gross retail margins improved to 41.4 percent. While catering to an underserved credit clientele, Conn’s has expanded its merchandise in the three years since Theo Wright took over as chief executive.

So far this year, Conn’s has moved into new markets in Knoxville and Memphis, Tenn., and Denver, Colo., with its larger HomePlus format, while remodeling four locations and closing three; 58 of the chain’s 80 stores are HomePlus units.

“We are encouraged by signals that management is ‘tapping the brakes’ on retail growth and working to bolster its collections infrastructure,” says Brain Nagel, retail analyst at Oppenheimer & Co.

On the consumer credit side, the number of customers 60 or more days behind in payments has declined to 8 percent, says Wright. “Execution in our collections operation improved during the [first] quarter and delinquency declined, as anticipated,” he says. “We expect to see further execution improvement in the coming quarters.”

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Maintaining innovation
No. 3 Ascena Retail Group once again heads the apparel contingent of the Hot 100 Retailers. It has discarded much of the Charming Shoppes portfolio it purchased two years ago, and the remaining businesses are organized into five major brands: tween-oriented Justice; plus-size Lane Bryant; Maurices, catering to fashion-forward 17- to 34-year-olds; Dress Barn for a more mature customer; and Catherines, offering classic apparel and accessories targeted at plus-size women 45 years of age and up. Maurices has been expanding aggressively, adding an average of 50 stores a year for the past five years and growing sales 65 percent over that same period.

No. 6 Michael Kors Holdings, whose common stock price quadrupled in the 30 months following its December 2011 listing on the New York Stock Exchange, shocked investors’ confidence when it allowed that ambitious expansion plans overseas might put pressure on margins and undermine short-term profitability. But the European store-opening binge — a total of 55 new locations by the end of next March — could also be the foundation for a new period of growth, the company suggests.

If Michael Kors does stumble from the upper ranks of Hot 100 Retailers this year, it would not come as a major surprise. “I don’t know how a fashion business can be that good for that many quarters,” says Gildenberg, adding that the company would likely rebound once its international expansion efforts begin to pay off.

The big challenge Gildenberg sees for Michael Kors is avoiding “distribution ubiquity” — controlling supply chain and distribution so merchandise isn’t available everywhere. “Five years down the road, it doesn’t want to become another Coach,” Gildenberg says, referring to the leather goods and accessories manufacturer and retailer whose sales and earnings tumbled in the year ended June 30.

Things have become so unsettled for No. 11 Lululemon Athletica that it was considered good news when Founder Dennis “Chip” Wilson said he was looking for new ideas from a group of financial advisors that includes Goldman Sachs. Wilson has been battling with Lululemon’s board of directors after stepping down as chairman two years ago; things heated up in June when the company cut back on its sales and earnings forecasts for the remainder of this year.

Retailers like Lululemon and No. 7 Under Armour were able to determine consumer bases, identify with them and align merchandising efforts accordingly, developing almost cult-like followings in the process, Gildenberg says. Eventually, however, consumers wanted to purchase more workout clothes — possibly even at big-box stores, he says.

Even with that prospect, things are looking up for Under Armour, which recently announced plans to open a Brand House on Chicago’s Magnificent Mile next March. At 30,000 square feet, it will sport an interactive environment featuring a full line of apparel, footwear and sports equipment.

Under Armour has been on a tear, generating 16 consecutive quarters of 20 percent or better sales gains. “Based on current visibility, we expect 2014 net revenues of $2.88 billion to $2.91 billion, representing growth of 24 percent to 25 percent,” Under Armour CFO Brad Dickerson told analysts and investors on a conference call.

Oppenheimer’s Nagel sees plenty of room for the company to grow, particularly as it moves more deeply into the women’s and youth markets. Under Armour is maintaining “a constant and evolving offering of new product innovations that spurs repeat purchases among existing UA consumers and helps to extend the brand beyond sporting goods and into mainstream fashion,” he says.

Another brand that embodies just about everything Gildenberg says a retailer has to do to succeed in today’s marketplace is No. 9 Five Below, which offers “a broad range of trend-right, high-quality merchandise targeted at the teen and preteen customer.”

Five Below’s model is a good example of what should be successful for the next few years with its “very tightly defined merchandise in a small format,” Gildenberg says. “It’s very disciplined and easy to navigate once you’re inside.”

Hot 100 Power Players

Sustained Sizzlers

The retailers that have stayed hot

The nine companies that have maintained growth rates sufficient to appear on the Hot 100 Retailers list every year since its 2006 inception have taken myriad paths to accomplish the feat.

Ascena Retail Group has used the acquisition model, while Dick’s Sporting Goods has tweaked its merchandising strategy away from sporting goods equipment and gear and toward athletic apparel and active wear, which now account for half its total sales.

Dollar Tree has combined strategic acquisition with a thorough revamp and cleanup of its stores; J.Crew has cultivated budget-conscious consumers without sacrificing its mainline patrons. Urban Outfitters thrived for years by selling clothes to teens, but this past year relied on sales from its Anthropologie and Free People stores, both of which both appeal to an older, more affluent customer.

Tractor Supply has been able to open stores in both existing and new markets while maintaining a breadth and depth of inventory to keep shoppers coming back, and O’Reilly Automotive is finding that its 2008 acquisition of CSK Auto continues to pay dividends, particularly as Americans are more inclined to fix up their older cars than invest in new models. And Ross Stores — really more of an off-price department store in spite of its “Dress for Less” tagline — is maintaining a brisk store-opening pace, growing its store count 6.5 percent last year to 1,276, with plans to add another 95 units in 2014.

List-topper Amazon has used just about every possible tactic an online retailer can employ to grow sales, short of opening bricks-and-mortar stores. Amazon has grown its U.S. retail sales 852 percent — from $4.62 billion to $43.96 billion — since 2005, an average annual growth rate of 107 percent.

Most recently Amazon developed its own smartphone, not just to compete with the likes of Apple and Samsung, but to distribute apps that will keep consumers shopping at Amazon. The Fire phone includes a feature called Firefly, with which consumers can scan pictures of items they might want to purchase. The phone’s visual recognition system relays the image to a database, promptly bringing up the Amazon.com listing for the item.

Amazon tests a lot of its retail innovations and initiatives on its Prime members — those consumers willing to pay $99 a year for the privilege of receiving two-day delivery on most orders. Among Amazon’s recent initiatives is music streaming service Prime Music, which was introduced in June. Designed as an on-demand subscription service which Prime members receive at no cost, millions of songs were streamed during its first week, which Amazon said represented “millions of hours of music” as members added playlists of 20 to 50 songs to their music libraries. The most listened-to playlists were “50 Great Epic Classic Rock Songs,” followed by “Pop [Music] to Make You Feel Better.”

Dining Out is Back In

Improving economy, innovation bring customers back to restaurants

Amid minimum wage battles, the lack of traffic at mall food courts and continued assaults by the food police over calories, sodium and any number of other issues, restaurant owners have been challenged to come up with winning concepts and maintain sales levels. Ignite Restaurant Group has done just that, adding Romano’s Macaroni Grill last year as a counterweight to its Joe’s Crab Shack and gastro pub Brick House Tavern & Tap.

Joe’s Crab Shack enjoyed a 1 percent comparable-store increase last year, while the smaller Brick House chain garnered a 5.3 percent gain in comps. At Macaroni Grill, comparable store sales dropped 6.5 percent.

“We continue to make progress at Macaroni Grill with sequential improvement in top-line trends, menu innovations, food quality and service enhancements,” Ignite CEO Ray Blanchette said earlier this year, “all while driving meaningful improvements to the bottom line.”

Three sandwich shops appear on this year’s hot restaurants list: Jimmy John’s, last year’s chart-topper, at No. 4, No. 5 Jersey Mike’s and No. 7 Firehouse Subs. The success of these chains is a reflection of the slowly improving economic conditions in this country, suggests Bryan Gildenberg, chief knowledge officer for Kantar Retail.

West Coast brewhouse chain BJ’s Restaurants is making its fourth consecutive appearance on the list, yet is still labeled “an intriguing growth story” by Oppenheimer & Co. analysts Brian Bittner and Michael Tamas. Though BJ’s grew 13.1 percent last year to 147 locations, Bittner and Tamas suggest the “unit expansion is in the very early innings.” In addressing investors at June’s annual meeting, President and CEO Greg Trojan said, “We remain very excited about BJ’s future and prospects for sustainable growth. We … believe there is room for at least 425 BJ’s restaurants domestically.”

The two biggest chains on the hot restaurants list — both in terms of annual sales and locations — are Starbucks and Dunkin’ Brands. Earlier this summer Starbucks said it would expand a test of made-to-order Fizzio sodas to 16 states (and eventually nationwide) over the next year, partly to drive lunch sales. The company began testing the sale of alcohol four years ago in its home Seattle market and will be slowly adding the option to post-4 p.m. menus in urban areas and locations near restaurants and theaters.

The Dunkin’ Donuts chain is back on the expansion trail out west. This year the company aims to open 15 to 20 percent of its planned 400 new stores in markets like California, Colorado and Texas.

E-commerce

Retailers’ e-commerce and mobile commerce programs are more important than ever, but don’t expect online selling to eclipse in-store any time soon. Consumers purchase online only 2.2 times a month while spending an average of 38 minutes per website visit; they purchase at shopping centers 7.5 times a month, spending 54 minutes in a bricks-and-mortar store, according to e-commerce software provider ShopVisible.

Even with a flood of start-ups and more retailers going omnichannel, growing market share is such a challenge that only three companies make the hot list for e-commerce this year. Amazon and Apple are pioneers and set the gold standard in their segment. The Home Depot is a horse of a different color, though, operating in hardware and bulk building supply commodities.

With online sales estimated at $2.7 billion, The Home Depot increased web commerce 50 percent from the previous year. That figure should be further boosted in 2014 with the acquisition of Blinds.com, a Houston-based seller of window treatments.

“The acquisition of Blinds.com positions us well for expansion in the quickly growing online window coverings market,” says Frank Blake, Chairman and CEO of The Home Depot. “In addition, their unique sales and service model is one we hope to learn from as we continue to create even better interconnected retail experiences for our customers.”

The Home Depot is emphasizing e-commerce over physical expansion; it opened a direct fulfillment center near Atlanta this year and plans to open two more in the next two years. In contrast, only one new bricks-and-mortar store is slated to open in 2014. The strategy makes sense, Blake says, because “as you add stores to a finite group of households, each store becomes less profitable.”

Food/Drug/Mass

Big-box retailers and mass marketing go together like ham and eggs, so it’s not surprising to see Costco and a whole bunch of grocery stores on the list of retailers gaining the most market share last year in the food/drug/mass with value category. What is surprising is that all three of the country’s major dollar store chains are on the chart, too.

The big reason is the addition of such merchandise as cigarettes and other tobacco products, which some food and drug retailers have abandoned for health reasons. Dollar stores have also added alcoholic beverages and more convenience foods, which draw customers back to the stores more frequently than non-food merchandise.

Dollar stores cut margins even more thinly than big-box supermarkets and discounters like Walmart and Target: Two years ago, Consumer Reports sent mystery shoppers into 100 dollar stores to compare prices on 38 everyday items. The secret shoppers found much cleaner stores and a better shopping experience than they had anticipated, but also prices up to 28 percent less on some name brand items.

Dollar General is the largest of the national chains, where 37 percent of the customers earn $25,000 or less a year, according to Prosper Insights & Analytics. In comparison, 22 percent of Walmart’s customers and 14 percent of Target’s fall into that category. Dollar General is maintaining its dynamic growth with plans to open stores in three new states (Maine, Rhode Island and Oregon) over the next 12 months, which would give it more than 11,000 stores in 43 states.

Hardgoods

The automotive aftermarket has been the beneficiary of trends that may be in the process of changing from tailwinds to headwinds for retailers like O’Reilly Automotive and AutoZone. Since the economic upheaval of a half-dozen years ago, new car sales dropped as owners held on to their vehicles longer, per-household car ownership rose and more consumers chose the do-it-yourself approach to routine maintenance.

The brutal weather last fall and winter helped drive better sales at O’Reilly and AutoZone as consumers were forced to make weather-caused, repair-related expenditures, says Brian Nagel, retail analyst with Oppenheimer & Co.

O’Reilly’s strong performance is no surprise, since it has appeared both on the Hot Hardgoods retail segment chart and the Sustained Sizzle list of companies included on the Hot 100 Retailers chart every year since 2006. AutoZone has not been quite as consistent, but Nagel says it “represents one of the best-run and most-disciplined chains in hardlines retail.” Though there may be some rougher going for the next year or two as consumer car-ownership economics shift, Nagel says, “We remain upbeat upon longer-term prospects for AutoZone” and he sees “attractive growth prospects” for the company both in the United States and Mexico.

Home goods merchants also benefited from consumer attitudes in the post-financial crash period: Rather than moving to new quarters, many have chosen to purchase furnishings and décor to update the look of their current homes. TJX’s Home Goods division made the second-largest gain in the entire hardgoods segment. Surprisingly, neither Home Goods nor Bed Bath & Beyond have made much headway in e-commerce, leaving them vulnerable to competition from Amazon.com.

Softgoods

The fastest-growing softgoods retailers are a diverse group, encompassing a department store, discount department store, off-price specialty stores, fashion-forward shops both domestic and foreign-based, activewear specialists and a few chains that are in a class of their own for the Hot 100 list.

TJX holds the runner-up position on both the softgoods and hardgoods segment lists, a tribute to the apparel and home goods company’s deftness in selling a diverse range of goods.

Neiman Marcus helped make luxury a household word over the last century plus; its department stores, known for outstanding customer service, developed a loyal following both among the truly rich and those upscale shoppers known as “HENRYs” (high earners, not rich yet). Neiman also has a strong e-commerce operation and has been expanding its Last Call closeout chain and the number of Cusp departments catering to a younger clientele.

“Too many companies and brands claim to be in the luxury business, but they aren’t following the strict definition,” says Jim Gold, head of merchandising and planning for Neiman Marcus stores and online. “An important part of what we do every day is educating people about our products. Neiman Marcus merchandise doesn’t cost more because we unilaterally decide to charge more.

“Quantities are in smaller numbers because there’s more craftsmanship and a whole lot of talent behind creating things.”

Neiman, which hopes to open its first New York City store in 2018, may take a bit of a sales hit in softgoods this year after selling its 44 percent interest in Chinese e-commerce site Glamour Sales Holdings. Chinese web shoppers want their luxury discounted and not full price. “Chinese consumers are going online to get a good deal,” says Olivier Chouvet, Glamour Sales’ chief executive. “If there is no motivation on price, you can’t convert them.”

Acknowledgements & Methodology

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Learn more at www.vantiv.com/stores.

About Kantar Retail
Kantar Retail (www.kantarretail.com) is the world’s leading shopper and retail insights and consulting business and is part of the Kantar group of WPP. The company works with leading branded manufacturers and retailers to help transform the purchase behavior of consumers, shoppers and retailers through retail insights, consulting, analytics and organizational development services. Kantar Retail works with over 400 clients and has 20 offices in 15 markets around the globe.

What Makes Them Hot?
The Hot 100 Retailers section is the definitive annual ranking of the nation’s fastest-growing retail companies. Rankings are determined by increases in domestic sales between 2012 and 2013; all retail companies with domestic sales in excess of $300 million were eligible. Hot 100 retailers averaged year-over-year domestic sales growth of 12.4 percent. This year’s growth rate moderated last year’s average of 15.4 percent, largely due to the weaker inflationary environment in 2013. 

This year, the list was compiled for STORES by global research firm Kantar Retail. Kantar Retail estimates privately held companies, franchise sales and domestic sales when the figures are not self-reported. This methodology is particularly important because it removes the impact of companies’ investments in overseas operations from the growth rankings to give a true perspective on the situation in the U.S. retail market.

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