New Concepts are Schools of Hard Knocks

By Joel Groover/Shopping Centers Today

The tombstones in the graveYARD for spin-off concepts from established retailers are many. These offshoot brands, usually launched to great fanfare and backed by the deep pockets of their parent companies, occasionally flop and meet an untimely end. Thus it was for Abercrombie & Fitch’s Ruehl No. 925, American Eagle Outfitters’ Martin + Osa, and Gap’s Forth & Towne. Other spin-offs do manage to survive, but struggle to measure up to the sales and store-count hopes of the parents.

The latest offshoot disappointment was American Eagle’s 77kids, which lost about $24 million in fiscal 2011 (ended Jan. 29) and which the teen-clothing retailer nixed in late May. American Eagle’s decision to shut those stores — 22 in all — points to the risks of trying to build a brand from scratch. And yet the company’s Aerie lingerie spin-off just as clearly shows the upside: Since its 2006 debut, Aerie has scored a hit with girls and women from 15 to 35 and grown to 158 stores in the U.S. and Canada.

Offshoot brands can yield dividends in other ways as well. Though Neiman Marcus’ lower-price Cusp boutique has hardly blanketed the country since its own 2006 debut — there are only six freestanding Cusp stores so far — the company seems to be optimistic about the merchandise mix and in-store experience of this new brand. Neiman Marcus announced in May that it plans to create Cusp shop-in-shop units within its 42 Neiman Marcus stores. “Our goal is to give our contemporary customer a fun, unique, modern and unexpected shopping experience,” said Jim Gold, the company’s president of specialty retail, in a prepared statement.

Of course, not every retail operator has the expertise and capital necessary to successfully launch an offshoot. But for those that do, the benefits tend to outweigh the risks, including any embarrassment over a brand that goes belly up, says Michael McGrail, a Boston-based managing director at Tiger Capital Group. “If you’re a successful retailer, you should always be testing these,” said McGrail. “You may have more failures than successes, but trying new things and seeing what sticks is important, because eventually your customer will age.”

Chains like Gap and Talbots are well aware of this ever-present challenge, McGrail says. Naturally, they worry about losing touch with younger shoppers, but if they try too hard to win them back — perhaps by switching to edgier designers and louder in-store environments — they risk pushing their older customers away. “This is one of the biggest obstacles that established retailers face,” McGrail said. “If you reinvent yourself in your core business, you can alienate your core customer.” At the other end of the spectrum, chains that cater to tweens struggle to stay current with the fast-changing tastes of their shoppers. “Trying to hold the attention of that audience for long periods of time is like trying to hold water in your hand,” McGrail said.

Offshoots, by contrast, can help chains tap new niches without sowing confusion about the existing brand. When Abercrombie & Fitch, known for its classic, Ivy League aura, launched its Hollister spin-off in 2000, the goal was to give high-school-age boys and girls a lower-price alternative with a laid-back, Southern California surf-shop vibe. The company predicted that Hollister would be a growth vehicle, and the prediction was spot on. As of the end of January Hollister had grown to 571 stores internationally, nearly double the parent’s 294. Abercrombie & Fitch says it plans to open nearly 40 Hollister stores around the globe this year alone. “Hollister is actually overtaking some of the glamour of the old Abercrombie,” said Walter Loeb, president of retail consulting firm Loeb Associates.

Part of what makes spin-offs attractive is that they help big-name retail companies get around today’s barriers to growth, Loeb says. There was a time when a chain could try to push the store count of a single brand to 1,100 or 1,200. But with some malls closing, others performing poorly and no new construction to speak of, such strategies are no longer viable, at least not for mall-based tenants. But by operating offshoots, a company like Abercrombie & Fitch can open as many as three stores in one mall.

There is always the chance a retailer will lose touch with its roots, if these forays range too far from what initially made the chain successful, says consultant Steven K. Platt, who heads the Hinsdale, Ill.–based Platt Retail Institute. The classic example, according to Platt, is Sears, which tried its hand at running a long list of spin-offs and acquisitions: insurance companies, rental-car businesses and stock brokerage houses included. “When Sears bought Dean Witter, they tried the slogan ‘Stocks and Socks,’ ” Platt said. “Sears, if it had really concentrated on its core business, might have been akin to The Home Depot. Today people don’t know if Sears is a department store or a big-box retailer.”

The challenges associated with establishing a brand from scratch are formidable, says Green. Retailers tend to find it easier to grow through acquisition, and deals like Chico’s 2003 acquisition of The White House (then-owner of White House Black Market) illustrate the wisdom of this, says retail consultant Jeff Green, who heads an eponymous firm in Phoenix. “That is one of the things that helped carry Chico’s through this downturn,” he said. “Chico’s acquired a very well-accepted brand with which to grow. To develop a brand takes a long time.”

Can retailers do anything to boost their odds of success? For now, Loeb says, focusing on value makes a lot of sense. “The popularity of outlets like [Saks] Off Fifth and [Neiman Marcus] Last Call is indicative of the mood of today,” he said. “We’re looking for off-price.”

Indeed, this shift has made life harder for upscale offshoots like Pottery Barn Kids, says Green. When Williams-Sonoma launched the brand in 2000, the company hoped it would grow to about 225 stores. Today there are roughly 80. “Pottery Barn Kids has been successful, but is a much smaller chain than the company had hoped it would be,” Green said. “It is too high-end, too large-format, with not a broad enough appeal.”

Smart retailers should also maintain a sharp focus on the customer experience, McGrail says. This is precisely how Abercrombie & Fitch has maintained the interest of fickle teens, he says. “They have created an environment that is exciting for a teen-ager going in there for the first time.”

When the likes of Lululemon perfect cutting-edge approaches to customer loyalty, they can apply these lessons to spin-offs to good effect, says McGrail. “Lululemon is a phenomenon,” he said. “They have incredible-quality clothing compared to everybody else, and they are playing a clever psychological game with their customers: They do short merchandise runs, and they actually want you to go in and not find that merchandise, so that you’re yearning for more of it. It is creating a want and a need.”

This formula has enabled the yoga-themed sportswear chain to achieve sales at some stores of up to $1,200 per square foot, McGrail says. “That is nirvana when it comes to retailing,” he said. “It is more than just selling. It is creating a community. To me, that is the next wave in retailing.”