Retail innovates in hard times

While financial and economic news is bad for both consumers and businesses these days, the retail sector is being hit especially hard.

However, amid the sales drops and predictions for a dismal holi­day season, there are signs that a few retailers haven’t been stopped dead in their tracks by the finan­cial turmoil and are moving ahead with innovative projects.

Some of these new initiatives include the opening of Live X Auto Exchange concept stores inside Wal-Mart Supercenters; FAO Schwarz toy boutiques open­ing inside close to 300 Macy’s stores; and the first bricks-and-mortar retail location of upscale shoe cataloger and Internet retailer SimplySoles.

“Even in the current environ­ment, I’m seeing strong players doing well,” said Stuart Rose, managing director at investment bank Tully & Holland. On the other hand, he noted, “weak retailers are just getting weaker.”

Keeping consumers engaged with something new is essential, said Diane Crispell, executive editor at GfK Roper Consulting. “It’s even more important to have something to talk about [and]to innovate at a time like this,” she explained.

While this is not a time to take a lot of risks financially or with brand perception, retailers should make tactical moves that capitalize on what they do best if they can afford it, Crispell continued.

Retail’s problems started at the beginning of the year, when banks, feeling pinched by the mortgage crisis, suddenly grew wary of extending credit to retail­ers. This move forced several stores into bankruptcy, and left others with less wiggle room in the case of a broader downturn.

Then, as inflation took off and consumer confidence plummeted, many chains cut back on inven­tory and sales declined. The finan­cial crisis that hit in September sent sales down even further.

The Commerce Department reported last week that US retail sales fell 1.2% in September, the largest drop since August 2005 and significantly worse than what economists had predicted. Retail sales have now fallen for three consecutive months, and it looks like they won’t improve anytime soon. The National Retail Federation predicts holiday sales will increase just 2.2% this year — the lowest growth rate since 2002 — while research group NPD predicts flat or declining sales for the season.

Even such well-respected, more upscale brands as Williams-Sonoma are stumbling during these turbulent times.

In a filing last week with the Securities and Exchange Commission, the multichan­nel home furnishings merchant revealed that CEO Howard Lester sold 14% of his shares in the company to cover the drop in its stock value.

When a company borrows from a bro­kerage house to buy stocks on credit and the stock dips below a certain point, bro­kers can demand the investors cover the losses. This is what happened at Williams-Sonoma, whose shares have lost 33% of their value over the past month.

In this environment, it’s fair to say that retailers are proceeding cautiously. One idea they have seized on is the store-within-a-store concept. In an exclusive pilot program with Wal-Mart, LIVE X Auto Exchange will offer electronic auto trading services inside two Wal-Mart Supercenters in Phoenix, while FAO Schwarz, the toy retailer that is in the process of rebuilding the brand after going through a bankruptcy several years ago, will open boutiques in 275 Macy’s locations this fall. It plans to roll out 685 total over the next two years.

The LIVE X concept stores enable shoppers to look for both new and used vehicles, auto-related products and ser­vices by signing up for a free online per­sonal trading account. LIVE X assistants will help customers navigate the trading system. An additional 10 to 15 stores in Phoenix-area Wal-Marts are planned to open by summer 2009.

Because this is a partnership arrange­ment, Wal-Mart’s risk is minimal, Crispell said. There is a question, however, of whether the LIVE X concept stores will help put the focus on the Wal-Mart brand or detract from it, since the pairing would seem “a little bit unconventional” at first glace, she continued.

The FAO Schwarz store-within-a-store shops will range from 200 to 300 square feet up to 1,000 and 3,500 square feet. They will carry an assortment of private label items exclusive to Macy’s and FAO Schwarz stores as well as select brands.

“This is the right strategy for FAO Schwarz,” said Rose. The brand gets to leverage the power of the largest depart­ment store in the country without having to put together 200-plus stores on its own, he explained.

“Store-within-a-store concepts represent a somewhat low-risk way for a retailer to gain another channel favorable to the target demographic,” said John Adams, SVP of strategy at Draftfcb, in reference to the Wal-Mart/Live X and FAO Schwarz/Macy’s deals.

In another move, SimplySoles, a four-year-old catalog and online brand that sells high-end women’s shoes, will open its first bricks-and-mortar store this year.

In November, SimplySoles will move its business to a new location. The 2,300-square-foot space in Washington, DC, will have 700 square feet dedicated as the brand’s first retail outpost. The call center in the back will be visible from the retail floor through a window.

“Customers have been crying out for this and asking for someplace where they could try on the product before they buy,” said Kassie Rempel, SimplySoles’ founder. Still, she said that she is proceeding cautiously with the move, and will open the store only on Saturdays and by appointment.

SimplySoles’ sales are still growing, but at a lower rate than a year ago, she said. The company continues to build its busi­ness through its catalog and therefore will not reduce its circulation rate to cut costs.

In another new move for this year in response to the economy, SimplySoles will offer free shipping. “I think there is going to be a lot of catalog and online shopping this year and we want to be competitive,” she said. “Free shipping is probably going to be the norm, which was hard for me to accept initially, but I think the additional sales will more than offset the additional shipping expense.”

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