Taking Stock of Successes and Stumbles

The Keys to Winning at Retail: Spend, Target and Emphasize Value

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With the recession taking a big bite out of consumer spending, Ad Age takes a look at who is fighting back and doing so effectively.
NEW YORK (AdAge.com) -- With the economy in a tailspin, the retailers that are flourishing -- and floundering -- may surprise you. Everyone knows low-price leader Walmart is the recessionary darling, but what other marketers are seeing their strategies pay off, and which ones are not? Ad Age decided to look at varied categories for common threads and found a few that point to higher sales: Keep spending, target your marketing and look for ways to offer value.

American Apparel
The company known for its provocative -- some call it unseemly -- ads posted a 3% increase at stores open at least a year in December, followed by a 2% increase in January, and it did so without discounting.

"American Apparel is driving the industry's best sales performance at full price," said Todd Slater, an analyst with Lazard Capital Markets. "We see American Apparel as one of the top-growth retail brands." Marketing spending is also up, even as major retailers cut. Last year American Apparel spent $16 million on measured media, quadrupling the $4 million it spent in 2007, according to TNS Media Intelligence.

Its young, hip, urban target could care less about whose feathers are ruffled by a few nude photos. "American Apparel's family is young adults who live in cities," said a spokesman. "Their rents are going down; if they're looking for a car it's cheaper than ever; and they didn't have a stock portfolio to begin with. There's a lot of retailers out there saying that the sky is falling, but this emerging class of young adult urbanites that make up the bulk of our target audience is still buying."

Kroger managed a 6% increase in stores open at least a year during the third quarter, and analysts said the grocer has narrowed the pricing gap with Walmart to less than 10%. Last year Kroger offered consumers 10% off if they spent their tax rebates at the chain, and it offered gas discounts and free groceries in exchange for points earned through its loyalty-card program.

The retailer is also using a lot of direct marketing. For example, data from its loyalty-card program are being used to send unique coupon offerings to specific households. "We understand and appreciate that no two customers are alike," said David Dillon, Kroger's chairman-CEO. "Some may live in the same city, some in the same neighborhood and even on the same street, but we know that they don't have the same shopping habits. This level of personalization is a direct link to our customers [that] no other U.S. grocery retailer can replicate."

Consumers still splurge on must-have games and game systems, even as they cut back on discretionary purchases, and GameStop has been a primary beneficiary: Sales at stores open at least a year jumped 10% between Nov. 2 and Jan. 3.

The retailer has a built-in value proposition: Old games can be traded in for credit toward new games. "Game Advisors" are employed at each location, and the pointed tagline "Power to the Players" helps GameStop stand apart from competitors such as Best Buy, Walmart and Target. "Because we're the only specialty retailer within the space, the look and feel of our advertising, overall, leverages that," said Ashley Fick, divisional VP-brand marketing. GameStop spent $18 million on measured media in 2008, up 5% from 2007, according to TNS Media Intelligence. "The industry is well-poised for a strong 2009," said NPD analyst Anita Frazier. "There were a lot of new hardware systems sold last year and during the holidays, and folks will need games to play on those systems in 2009."

Unlike much of the retail category, the chain posted a 2% rise in revenue during the third quarter, and sales at stores open at least a year have handily beat competitors'. In November and December, same-store sales rose about 6%.

Still, CVS has lowered its marketing spending. Measured media spending declined 10% to $140 million in 2008, according to TNS Media Intelligence.

Rob Price, the chain's senior VP-marketing and advertising, pointed out that not all of the retailer's programs are captured in measured-media data. Its massive ExtraCare loyalty program, for example, is not tracked. That program, which counts more than 50 million cardholders, has spawned more targeted marketing efforts, with promotional offers at the register, coupons, e-mail and direct mail.

"We have one-to-one marketing to millions of customers, where we can have a very personalized conversation," Mr. Price said. "In our media selection, we've been very careful to pick not only the right demographics but also the right programming environment, so that our message resonates. ... We're not just advertising for awareness but for activation."

Like American Apparel, Abercrombie also uses sexy advertising, and it too held the line on pricing. But the latter backfired for Abercrombie, whose sales dropped at an alarming rate. In June, sales at stores open at least a year declined a relatively modest 3%; by December, sales at the teen retailer plummeted 28%, followed by a 20% decline in January.

Abercrombie & Fitch's performance, which has been described alternately as "tragic" and "grim" by analysts, is notable as the retailer failed to adjust to the current promotional environment. Much is due to its target -- largely suburban teens with less disposable income than American Apparel's primary customer. But analysts said promoting is just not a part of its DNA. Abercrombie built its reputation as an aspirational teen hot spot for $30 T-shirts and $90 jeans, and delivered positive results to Wall Street, but it is now facing a new recessionary reality. "We do not anticipate management to waver from its strategy of protecting Abercrombie & Fitch's brand equity," said Richard Jaffe, an analyst with Stifel Nicolaus. "We believe this will result in greatly reduced earnings and sales in 2009 and 2010."

Whole Foods
Whole Foods is a victim of its own success. The company built a brand on being a highbrow haven for urban elites, attributes that have lost their sheen in the light of an economic collapse. In the first quarter, Whole Foods'same-store sales fell 4%, down from recent years when the company boasted double-digit increases. Last year, the chain sold a 17% stake in the company to Leonard Green & Partners for $425 million.

The chain is trying to bite back by way of its "Real Deal" newsletter, with coupons and recipes to feed four people for less than $10. It's also experimenting with TV advertising, at least in the Chicago market. Overall, however, the chain seems to have cut its already meager advertising budget. According to TNS Media Intelligence, Whole Foods spent $5.5 million in measured media in 2007 and only $4 million in 2008.

Whole Foods spokeswoman Libba Letton disputed the notion that it is among the worst-positioned brands in retail and said Whole Foods is benefiting from the trend toward more meals at home.

Pottery Barn
The posh home-goods store saw sales at stores open at least a year fall 28% during the third quarter. Marketing spending has also plummeted 63% to $2 million in 2008 from $5 million in 2007.

While overall demand for home goods has deteriorated, Pottery Barn, which is owned by Williams-Sonoma, seems particularly hard hit. "Though the housing market certainly has had an unfavorable impact, merchandising missteps and knockoff products in the mass-merchant channel may have impaired consumers' desire to pay premium prices for Pottery Barn," said R.J. Hottovy, Morningstar analyst. "Refinements to the brand's assortment, in-store presentation and catalog circulation strategy have had mixed results so far."

Pottery Barn seems determined to turn the tide with heavy promotional activity. Its website now prominently displays sales and free-shipping promotions. It's rolling out a more lucrative private-label credit-card loyalty program and a one-year same-as-cash financing offer. The chain is also relying on increased digital marketing, outreach programs and decorating classes.

Rite Aid
It was so busy getting bigger by purchasing Brooks and Eckerd stores that Rite Aid let competitors pick off customers. "Our competitors were pretty active in going after our customers during the conversion activities. And so we need to really get these customers back into our stores so that they can see the experience is very positive," said Rite Aid CEO Mary Sammons.

Ms. Sammons said additional marketing is slated for certain stores to help that process along. According to TNS Media Intelligence, Rite Aid increased its measured media outlays 15% to $50 million in 2008. Even though it's now the third-largest drugstore in the U.S., Rite Aid's budget is a fraction of the $140 million CVS spent last year.

The chain reported its sixth straight quarterly loss in December. "Rite Aid and Brooks and Eckerd have been industry laggards with tepid top-line growth during the last few years," said Mitchell Corwin, senior stock analyst at Morningstar. The combination of two struggling chains, he said, has not yet created a compelling whole.

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Contributing: Emily Bryson York, Jack Neff

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