Retail Traffic

Q&A -- Big Lots CEO Mike Potter talks value

Operating some 1,350 stores nationally, Big Lots Inc., the Columbus, Ohio-based broadline closeout retailer, is seeking growth while positioning itself as the “world's best bargain place.” Big Lots sells a wide variety of goods that it buys from 3,000 manufacturers at prices from 20% to 40% lower than discounters, supermarkets and mass merchants.

The $3 billion retailer is in the midst of converting its four nameplates — Odd Lots, Big Lots, Pic ‘N Save and Mac Frugal's — to a single Big Lots brand. A $26 million national advertising campaign and an aggressive plan of store renewals is aimed at taking the retailer to new markets and to new customers.

Michael Potter, chairman and CEO of the retailer, formerly known as Consolidated Stores, is bullish on his company's ambitious plans to operate 2,500 stores, and with good reason: consider the glut of second-generation real estate as supermarkets and mass merchants relocate to enlarge their operations to include general merchandise or food, as well as the volatility of new product introductions — annually some 31,000 products are canceled, changed or discontinued.

With nearly 20 years in retail, Potter's career includes stints at Limited and May Co. before joining Big Lots in 1991. He was named to his current position in 2000.

Big Lots is working with Retail Planning Associates of Columbus in designing its “store of the future” which will include new store layouts, improved lighting, signage and flooring. It is slated to debut in suburban Columbus.

Janet Groeber is a Cincinnati-based writer.

Q: You've said Big Lots has the potential to operate 2,500 stores nationally in its current format. Is the strategy to open in new markets only, or use a fill-in approach?

A: We'll be opening in both new and existing markets and have been for a number of years. We're probably doing about 60% to 70% market fill-in and from 20% to 40% new markets. It depends on what we find available. We're in 46 states, so a lot of markets just need fill-in, but there are places we don't have stores yet. Our growth areas are the Northeast, Southeast and Northwest. We're strong in the Midwest and California. We've been on a path for the last few years of relatively conservative growth, anywhere from 80 to 100 new stores a year. We may ramp up our growth after we get two or three years into our long-range plan. Our size criteria include 25,000- to 35,000-sq.-ft. stores. We've done smaller and larger stores where the rent arrangements make sense. We'll go into either high or low populations depending upon rent cost structure. We can go into modest or moderate income areas, but not necessarily high income. We've found this model works in many different demographics and we've done quite a mix.

Q: You've said Big Lots is opportunistic in its real estate deals — can you explain?

A: We work very hard to find sites that give us the right combination of price, good location and good traffic. We aren't in the business of owning stores. We're in the business of leasing from either other retailers or from landlords. We look for locations that meet all of our criteria, which is striking a balance in terms of the cost of the real estate as well as the size, location and the kind of demographics we're looking for. The strategy has not really changed over the years. Sometimes we'll negotiate on a specific site for a couple of years. While we negotiate hard and we do opportunistic deals, obviously we get the real estate we do because we're also providing a good deal for landlords. We're leasing spaces that might otherwise go unleased.

Oftentimes we're breathing new life into an old center by bringing traffic and making the rest of the stores stronger, and by providing jobs. We're really filling a need as most grocery chains or discounters are abandoning their smaller stores and building supercenters.

We look at every location based upon what does that location give us and what it costs us to be in there. We've got a very scientific approach developed over more than a decade that allows us to understand what can we afford to pay for it to work. If we can work out that arrangement with the landlord, then we do it. If we can't, then we go someplace else.

Q: What's being done to improve customer flow, enhance focal or promotional areas as well as the overall physical appeal?

A: What's changed in the last 18 months is recognizing that price is one thing, but the quality of what we're putting in front of the customer is also important. It's certainly not across all stores yet, but we have higher standards now in terms of lighting, flooring, cleanliness and fixturing just in terms of respectable, clean, painted and uniform.

We have much more consistent layouts across the chain, it makes it easier for our stores to follow presentation guidelines and easier for customers to shop. We've definitely upgraded our communication within the stores, but we still have a long way we think we can go. We've always bought great merchandise at great prices and delivered incredible values, but in today's retail climate it is not enough to just do that.

Q: You've been working on a “store of the future.” What does that involve?

A: We took a clean sheet of paper and asked how can we design the world's best bargain place to be exciting, easy-to-shop and encourage customers to walk the store and build a basket. How do we make this exciting merchandise present itself at its very best to help customers find those incredible deals rather than just filling shelves and having them find it. I don't want to reveal too much about what we're doing, but there's going to be more presentation geared around the excitement of closeout merchandise.

Q: Does Big Lots have the cash to execute such an aggressive program of store renewal and expansion?

A: This is one of the best cashflow models that exists in retailing, We have very low investment in a store. We have very low construction costs, because we're not building from scratch. We're putting a relatively small amount of investment into an existing facility and opening it up under relatively low cost.

Also, we have such high gross margins and these stores are so predictably profitable in their first year that they generate positive cash within the first 12 months. When we laid out a five-year plan under very realistic assumptions for comp stores and the number of new stores and all the parameters, in a five-year period we could potentially generate three-quarters of a billion dollars in excess cash.


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