On Track for Success

Call it the Phoenix syndrome: Out of the ashes of the Great Recession, dynamic and relevant retail concepts are emerging and expanding.

“We’ve had a couple of years to regroup and prepare. Now there is pent-up energy and enthusiasm, so we will likely see a flood of new ideas and concepts,” said Ken Nisch, chairman, JGA, a brand strategy, retail design and architecture firm based in Southfield, Mich. “The churn in the retail industry will make the next few years very exciting.”

Industry experts agree that those retailers with the best potential for future growth share certain attributes and business strategies. The common denominators include a strong engagement with the core customer, an equally strong focus on brand integrity and a unique and compelling shopping experience.

Performance Bicycle, the nation’s largest specialty bike shop, exhibits all of the above. The Chapel Hill, N.C.-based company has positioned itself as a lifestyle brand that empowers fun, fitness and family recreation. CEO Jim Thompson believes that the company, which was purchased in 2007 by North Castle Partners, Greenwich, Conn., a private equity firm that invests in consumer businesses focused on healthful living, is coming of age at an opportune time.

“There is a $6 billion market in the U.S. for cyclists, but it’s not that historical stereotype of guys in Lycra racing down the road,” Thompson explained. “People are looking for affordable ways to exercise, spend time with their family and have a positive influence on the environment—cycling addresses each of those areas.”

After growing under the radar for some time, Performance Bicycle is now taking on a more national profile. Currently, it operates 96 stores in 16 geographically diverse states that line both coasts as well as dot the Midwest, Southeast and Southwest. It plans to add about 12 to 16 locations annually during the next three years.

From its catalog and Internet channels, Performance Bicycle obtains very specific metrics on the best markets for opening stores. The company also relies on key demographics relative to population, income and education levels. For next year’s projected new store openings, the company has already submitted 70 letters of intent.

“In this difficult economy, we have been able to find better real estate economics,” Thompson said.

“The biggest challenge to growth is being patient and conservative so that we manage through the economy and grow to true demand.”

Another specialty retailer on an upward trajectory is New York City-based LittleMissMatched. Launched in 2004 as a direct-to-consumer retailer and wholesaler of eclectic, mismatched girls’ socks, the company has mastered consumer engagement both online and in stores. Its growth strategy is built around its distinctive, clearly articulated brand, multichannel presence and fun-loving spirit.

LittleMissMatched opened its first brick-and-mortar store in 2009 in Manhattan’s Grand Central Terminal and has since opened an additional six stores.

“We’ve been growing despite the recession, nearly doubling our revenues each year,” said Jonah Staw, CEO and co-founder. Although he declined to cite specifics, Staw said the company will “increase its footprint significantly in 2011.

Growth Patterns: Because LittleMissMatched and Performance Bicycle initially built their brands around a strong nationwide direct-to-consumer business, their real estate strategies could effectively deploy in markets unrelated by geography. However, most retailers launch regionally and initially grow across contiguous states.

Paula Rosenblum, managing partner at Retail Systems Research, Miami, said scalability is the key to taking a small or regional retail company national.

“Generally there’s a reason why certain niche retailers, like the pool and spa retailers, have not been able to scale,” she added.

One retailer that Rosenblum feels is doing exceptionally well taking its concept national is Total Wine & More. Based in Potomac, Md., Total Wine has 62 stores in 10 states, from California to Florida to the Mid-Atlantic.

“Of emerging retailers, Total Wine has one of the best chances of surviving and doing very well on a national scale,” Rosenblum said.

Jeff Green, president of Phoenix-based Jeff Green Partners, cited Hibbett Sporting Goods, Birmingham, Ala., for doing an excellent job of expanding from its Southeastern regional roots to a national presence.

With 767 stores in 24 states, Hibbett Sporting Goods has a smaller store footprint than Dick’s Sporting Goods or Sports Authority and usually is located as an inline tenant rather than a freestanding box.

“Regional retailers are often stronger than national chains because they haven’t over-expanded,” Green explained.

For instance, the most successful regional retailer is perhaps Lakeland, Fla.-based Publix Super Markets, which has 1,023 stores in just five states. With revenues exceeding $24.3 billion in its 2009 fiscal year, the preeminent Southeastern grocer is ranked the 15th largest retailer in the United States and continues to expand in its core states, opening 48 new stores in the last fiscal year.

Green identified the Mississippi River as the arbitrary border that defines a national versus a regional retailer.

“Once a company crosses the Mississippi, it’s on the way to becoming a national chain,” he said.

By that rule, Pet Supplies Plus, with 240 stores in 22 states, has become one of the notable national chains.

“Pet Supplies Plus has a much smaller store footprint than PetSmart or Petco—it’s basically the ‘Ace Hardware’ of the pet product industry,” Green explained.

Filling Dark Spaces: Retailers expanding both regionally and nationally have benefited from the opportunity to leverage real estate vacated in the economic crisis.

Among larger-store formats, Anna’s Linens, Costa Mesa, Calif., and Indianapolis-based hhgregg are ones to watch. Although in some respects they are filling the voids left by Linens ‘n Things and Circuit City, both Anna’s Linens, with 264 stores in 18 states, and hhgregg, with 157 stores in 15 states, are more unique, promising concepts.

JGA’s Nisch suggested that one reason Linens ‘n Things and Circuit City failed was because the former was essentially a version of the Bed Bath & Beyond concept and the latter a version of Best Buy. The retailers vied in the same markets for the same customers. Conversely, Anna’s Linens and hhgregg have established their own distinctive niche markets.

“Anna’s Linens’ targeted customer doesn’t connect with the Bed Bath & Beyond experience,” Nisch said. “The Anna’s Linens’ customer, often Hispanic and urban, would choose between shopping Walmart or Target versus Anna’s Linens.”

In its markets, hhgregg is a dominant retailer of appliances. The company plans to open 40 to 45 new stores this fiscal year.

“An hhgregg store typically has the largest assortment of white goods and flat-screen TVs—often 30% to 50% more choices than Best Buy and 70% more choices than Walmart or Target,” Nisch said. “The company has successfully taken the categories where Best Buy doesn’t play as well and firmly established its brand as the appliance retailer that meets customer expectations.”