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Value Engineering

Retailers respond to shift in consumer spending by beefing up discounts.

Facing dismal sales results amid a deepening recession and increased competition from discounters, mid-tier and luxury retailers have been trying to fight back by offering more value for their customers' money.

In the most visible example of this strategy, Toys ‘R’ Us recently unveiled “stores-within-stores” in the front of its locations devoted to items priced $3 or less. This sort of value tactic will likely become more common in the retail sector going forward as consumers cut back on spending, say analysts. But retailers may be fighting a losing battle since any gains on the margins might not halt falling sales of core merchandise.

On Apr. 2, Toys ‘R’ Us, which operates 846 of its namesake stores in the U.S., announced its $1-$2-$3 Fun! program. Portions of each Toys ‘R’ Us store are now set aside for 100 bargain basement items including art supplies, dress-up accessories, puzzles and small musical instruments. Toys ‘R’ Us officials say they adopted the measure to stay “competitive.”

Yet industry insiders question whether the move will help the retailer's bottom line in any significant way. “If they can do a solid margin on it, it makes sense,” says Craig Johnson, president of Customer Growth Partners, a New Canaan, Conn.-based consulting firm. “But this is not going to make or break [a retailer's] year. I think it's more of a promotional item, to generate some good will.”

At the same time, Toys ‘R’ Us' new strategy reflects the changing rules of today's retail marketplace, says C. Britt Beemer, founder of America's Research Group, a Charleston, S.C.-based customer research firm. Getting parents to spend an extra $3 might not have been a huge deal in 2006 or 2007, but when same-store sales in the U.S. retail sector have been falling for six straight months, every dollar counts. “It's trying to get the consumer to spend $2 or $3 more than they would otherwise. That's the battleground today,” Beemer notes.

So far, Toys ‘R’ Us appears to be a pioneer among specialty retailers in setting aside front-of-store space for lower-priced items (discounters Wal-Mart and Target have employed the strategy for some time). But it's not alone in trying to tweak its image to suit today's value-conscious consumer. Johnson reports that luxury sellers Saks Fifth Avenue and Nordstrom have been asking their brand-name designers to produce lower-priced fashion lines along with their standard fare. Meanwhile, some specialty apparel retailers — for example, Abercrombie & Fitch — that previously remained resistant to the idea of lower prices have started to rethink their stance in recent months. In March, Abercrombie & Fitch posted a same-store sales decline of 34 percent compared to last year, after a 30 percent drop in February.

The danger, according to Johnson, is that too much of a focus on value could damage a retailer's existing brand and operating model. “You do not want to inadvertently cannibalize the sale of higher margin merchandise,” he notes. “As long as it's done in a limited way, it has some merit. The problem is when the economy comes back the retailers may have difficulty in weaning customers off the lower prices.”

Given the current state of the retail markets, however, that's not likely to become a problem for some time, according to Emanuel Weintraub, president of Emanuel Weintraub Associates, an Englewood Cliffs, N.J.-based consulting firm. The era of what he terms “the new normal” — including a focus on savings and a sharp cutback on discretionary purchases — will likely last for another five years, during which retailers will have to adapt.

“We have about $1 trillion to $1.5 trillion of consumer spending that's no longer available,” Weintraub says. “It will take four or five years to come back to what 2007 was like and it's going to be a very slow ride.”

Westfield Trip

Westfield Group has rolled out a program at Westfield Southcenter in Seattle called fabfinds, which is aimed at helping shoppers at the property save money. Fabfinds continuously researches sales and promotions, some exclusive to Westfield, and delivers the valuable information directly to shoppers, both in-center and on the center's Web site. Each week, shoppers will be able to pick up an updated brochure featuring that week's best retailer offers, specials and promotions from prominent in-center displays and from the Westfield Concierge desk. Offers can be sorted by retailer and category and shoppers can use the Web site to reserve specific items for pickup.

Service Center

About 30 ICSC members volunteered in late March on a community service project working with 60 high school students from Mater Academy Charter High School in Hialeah Gardens, Fla. The volunteers worked to mentor students from the school and also helped build a butterfly park. The event was held in conjunction with ICSC's Fusion Conference. Hands On Miami, a nonprofit group, coordinated the community event sponsored by American Express. Mater Academy Charter School is a “Title 1” school that receives federal, state and county funding due to the high percentage of students that come from low-income families.

Mind the ReStore

As some furniture and home improvement stores go out of business, there has been an unlikely beneficiary — Habitat for Humanity. The nonprofit best known for building affordable homes for the poor also has a concept, ReStore, where quality, used and surplus building materials are sold at a fraction of their normal prices. Proceeds from ReStores help local affiliates fund the construction of Habitat houses within the community. Some of the existing ReStores raise enough funds to build an additional 10 or more houses per year. Materials sold by Habitat ReStores are usually donated from building supply stores, contractors and demolition crews or from individuals who wish to show their support for Habitat. In addition to raising funds, ReStores help the environment by rechanneling old materials into new use. The group currently has ReStore locations in 48 states.

Going Modular

Church's Chicken unveiled the brand's latest store prototype in Lawrenceville, Ga. on Apr. 1 — a modular restaurant prefabricated off site. Flat-bed trucks brought the components to the site where massive cranes put the pieces in place. Company officials estimate building the location this way cut construction costs by between 20 percent and 30 percent. The factory-built concepts can be finished and ready for business in less than three days. Since the modular building is fully manufactured offsite, franchisees eliminate the risks associated with a general contractor, giving them more control over the development process. The new modular unit is also energy efficient. It makes use of the Light Stat energy management system, which will cut the annual utility costs by more than 10 percent.

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