KURT SALMON REVIEW Retail. Consumer. Private Equity. Strategy.
IN THIS ISSUE Why full- and off-price stores make good neighbors 4
How to pick best-of- the-bunch organic brands 24
Bringing store performance into focus with new KPIs 32
Small fitness studios, big opportunities 42
Issue 05 Retail and Consumer Edition
i ii From the Editor
We all know that the retail and consumer industry has changed significantly—and that the pace of change will only continue to accelerate.
But many players in this constantly evolving industry have continued with business as usual or have made only small adjustments.
When faced with an industry—and a consumer—in the midst of revolution, the only prop- er response is dramatic transformation, change that will impact the entire organization.
In this issue, we explore innovative new ways of doing business across many categories and parts of the organization.
In “Close Encounters,” we detail why retailers’ historical fear of letting their outlet doors creep too close to their full-price counterparts is misguided and, using Nordstrom as an example, show why retailers need to totally revamp their off-price real estate strategy.
Meanwhile, “Unchained” explores why and how large chain retailers must take a totally new, big-picture approach to their products and customer experience by thinking small.
This David vs. Goliath concept carries over into “Sweating Small,” which recounts how boutique fitness studios are shaking up the industry—and how investors can get a piece of this hot market.
As always, I hope you find this issue insightful and look forward to hearing from you.
Best regards,
Bruce Cohen Senior Partner and Head of the Private Equity and Strategy Practice
1 TABLE OF CONTENTS issue 05
FEATURES
Close Encounters 4 Moving full- and off-price stores closer together creates sales opportunities for both.
Unchained 14 Big retailers need to think small.
Green Field 24 How to pick best-of-the-bunch organic brands with room to grow.
Bringing Store Performance into Focus 32 In an omnichannel world, new KPIs add perspective on consumer behavior.
2 IN BRIEF
Sweating Small 42 Deal Ideas at a Glance Boutique fitness studios are creating Ideas for investing in spa and wellness big investment opportunities. services 54, active nutrition 56, and better chicken chains. 58 Making Consumers Feel Good, One Way or Another 48 Take 2: Some Situations Inside three hot emerging CPG categories: Require a Second Look 60 probiotics, cold-brew coffee and cannabis. A real-world example that challenges assumptions on store rationalization.
3 4 CLOSE ENCOUNTERS MOVING FULL- AND OFF-PRICE STORES CLOSER TOGETHER CREATES SALES OPPORTUNITIES FOR BOTH Conventional wisdom says that a brand’s off-price, or outlet, stores cannibalize its full-price counterparts and drain brand equity. This thinking has led retailers to try to put significant distance between their full-price and outlet doors—pushing outlets far from most major cities.
5 Full- and off-price doors can coexist in urban markets and may even have a mutually beneficial relationship.
But full- and off-price doors can coexist in Hansen and The Limited, with Rag & Bone, urban markets and may even have a mutually Alex and Ani, and Alice + Olivia among likely beneficial relationship. Only some of the fresh faces for this year.3 same shoppers frequent both, helping a Now, the weed part. Despite the channel’s retailer expand its consumer base, and when growth and profitability, many retailers try to they do shop both, the retailer is not only contain their outlet channel, making sure it able to capture a higher share of wallet, but doesn’t creep too close to their full-price the off-price door can serve as a way for new doors to reduce the risk of cannibalized sales consumers to try the brand, leading to and diluted brand equity. increased sales in full-price stores. This channel separation often also extends A Fertile Market for Outlets to the online world. In a recent audit, Kurt The $40 billion, high-margin outlet channel Salmon found that only 28% of 67 retailers is growing like a weed. with physical off-price doors had an outlet First, the growth part. Forty new centers e-commerce presence. have opened between 2006 and 2014, and But with the outlet channel reaching a year-over-year sales growth is consistently in greater state of maturity, outlet stores are the double digits.1 In many cases, margins are inevitably beginning to encroach on full- consistently as good or better than full-price price stores. doors because rents are lower, unplanned For example, Tanger recently began con- markdowns are typically rarer and products struction on a new outlet center 15 minutes are sourced specifically for the outlet from Memphis,4 while Simon is building channel, driving costs down. centers 25 minutes from Tampa and 30 The market shows no signs of turning fallow. minutes from Tucson.5 And a Kurt Salmon Forty-eight new centers are expected to open analysis found that 75% of the 7 million by the end of 20172 as established outlet people in the San Francisco Bay Area live brands expand their doors and new retailers within a 30-minute drive of an outlet mall. enter in search of green. Recent entrants This trend holds true on an individual include Chaps, Diane von Furstenberg, Helly retailer level as well. Take Coach. Back in
6 2004, its outlets were usually located 50 to In fact, a whopping 64% of Rack stores are 100 miles from major cities. But by 2012, that within five miles of a full-price Nordstrom distance had shrunk to just 30 miles.6 and 42% are within one mile.7 This encroachment into historically full- Clearly, the company would not risk this priced urban areas, coupled with the level of channel overlap if the strategy was temptation for brands to continue growing not paying off. In fact, the company says, their outlet sales, is making it challenging to “Many of our best Rack stores are across maintain the historic level of separation and the street from our best full-line stores. forcing many retailers to rethink their We know our customers like the conven- off-price channel strategy altogether. ience of shopping both.”8 But perhaps no retailer has exemplified Why does this work so well? It starts with and embraced this urban transition more differentiated consumer positioning and than Nordstrom. experiences as well as differentiated prod- ucts. Rack is a mecca for treasure hunters Nordstrom Racks Up Growth that features distinct products. Indeed, only Early on in the development of its Nordstrom 20% of Rack’s products are clearance items Rack concept, Nordstrom recognized the from Nordstrom’s stores and website; the rest value of placing its off-price doors close to its are bought specifically for Rack, often from full-price stores within major metropolitan vendors looking to clean house.9 areas to capture a wider range of consumers and a greater share of their wallets by This differentiated positioning and offering diversifying its retail offering. allow the company to pull in a wider overall mix of consumers. The stores have somewhat Today, that idea is manifested in places like different, yet complementary, audiences, Seattle, where Nordstrom and Rack are with Rack drawing younger, aspirational located in the same shopping center, or in Nordstrom consumers that hope to—and do, Cerritos, Calif., where a new Rack is opening in some cases—transition to the full-price across the street from a full-price Nordstrom brand. This strategy extends to the online this fall. world, with Nordstrom’s purchase of
7 While serving primarily two different consumer groups, roughly 30% cross-shop between Nordstrom and Rack.
HauteLook in 2011. Courting this younger ecosystem. … I’m not sure this is quite so audience makes long-term sense, as Baby much an off-price strategy as it is kind of a Boomer spending power will peak in a few customer strategy and a way for us to attract years and brands will hunger for younger, customers at perhaps an earlier point in their loyal consumers to take their place. lifecycle … about a third of our Rack custom- While serving primarily two different ers shop our regular-price business.” consumer groups, roughly 30% cross-shop Rack now accounts for nearly 25% of between Nordstrom and Rack. Having both Nordstrom’s sales. And while Rack has a banners in close proximity not only allows the lower gross margin than full-price Nord- company to capture a larger share of wallet strom stores, Rack is more profitable, with among these cross-shopping consumers, but its operating profit margin estimated to be also drives trial of new products. This is the around 15% to 16%, compared 10% to 11% case because, for some consumers, Rack for full-price stores11 because real estate and functions as a kind of introduction to the labor are less expensive. Rack’s sales per Nordstrom brand and the bridge and luxury square foot are also higher—$552 vs. $371 brands carried by both retailers. In fact, the for full-price stores.12 company says Rack is Nordstrom’s biggest Given these impressive results, it’s no source of new customers, pulling in almost 4 surprise that Nordstrom is aggressively 10 million. These customers get to try new expanding its Rack stores. After opening a luxury brands at Rack and fall in love with combined 49 Racks in 2013 and 2014 vs. them, eventually driving them to Nordstrom three full-price stores in the same time for a fuller assortment of the latest full-price period, Nordstrom now has 118 full-price and offerings from the same brands. 177 Rack stores. Going forward, the company Nordstrom CFO Michael Koppel explains: is planning to open 27 Racks and two “One of the things we’ve learned is that, full-price stores in 2015, with the goal of when we do have some of these off-price hitting 230 Racks in 2016.13 events in brands, the sales in that brand Other department stores have also started to accelerate in the regular price because we’re pay attention to this transition, with Neiman creating higher brand awareness across the
8 Marcus, Saks Fifth Avenue and Blooming- from off-price. For example, Tommy Hilfiger dale’s all pursuing similar strategies. is making it easy for consumers to cross-shop A few specialty apparel retailers are also both full- and off-price by integrating its two getting in on the action and pushing the websites and shopping carts, both Gap and historic boundaries that separated full- Banana Republic Factory Stores are advertis-
EXHIBIT 1: Rack stores help drive Nordstrom traffic.
AMOUNT OF CROSS-SHOPPING BY OFF-PRICE CONSUMERS VS. STORE MIX
SHARE OF OFF-PRICE CONSUMERS SHOPPING FULL PRICE 35% Nordstrom
Old Navy 30% Gap Banana Republic
American Eagle 25% J.Crew
Polo Ralph Lauren 20% Michael Kors Calvin Klein Saks 5th Avenue Ann Taylor BCBG 15% Neiman Marcus Hugo Boss Brooks Brothers Coach
10% Tommy Hilfiger Burberry
5%
0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
SHARE OF FULL-PRICE STORES IN TOTAL STORE BASE
Source: Kurt Salmon research, AggData, Chain Store Guide, company annual reports, company websites, Planet Retail, Value Retail News
9 Rack stores help pull sales into full-price Nordstrom stores and … other retailers may also benefit from following a similar strategy.
ing in People magazine, where they would strom stores and that other retailers may historically advertise their full-price also benefit from following a similar strategy. channels, and Tommy Bahama launched a But does close proximity of off-price stores flash sale site to reward existing customers also draw sales away from full-price stores? and acquire new ones. The site is open for The answer is mostly no—proximity doesn’t only a few days at a time. After the first sale, appear to change that. As illustrated in year-over-year sales continued to grow on Exhibit 2, even though Nordstrom and Rack Tommy Bahama’s full-price site, with the doors are generally much closer together flash sale site serving as the highest referrer than the full- and off-price doors of Banana 14 of new visitors to their full-price site. Republic, J.Crew and Gap, the percentage of Making the Case for Proximity full-price consumers who cross-shop But the question is whether the channel off-price stores is relatively similar, despite dynamics Nordstrom is experiencing are an Nordstrom having a significantly higher mix aberration or applicable to a wider array of of off-price stores. retailers. A recent Kurt Salmon survey of Additionally, as illustrated in Exhibit 3, the 1,000 consumers showed that many other average full-price and off-price consumers’ brands could benefit from a more symbiotic cross-channel share of wallet is approximately approach to their outlet and full-price real the same for Nordstrom as for other retailers. estate strategy. This is because off-price and full-price As illustrated in Exhibit 1, Nordstrom Rack shoppers are generally looking for different has a higher percentage of outlet shoppers products and experiences. Not surprisingly, who cross-shop at the full-price Nordstrom 55% of consumers said they were mainly than do J.Crew, Gap, Banana Republic, drawn to outlet stores in search of a good deal, American Eagle, Old Navy and many more while they ventured to full-price stores for retailers, despite these consumers having product quality (28%) and selection (19%). much easier access to off-price stores. Consumers who prefer outlets and full-price This data supports the notion that Rack stores are actually similar in terms of stores help pull sales into full-price Nord- demographics, including income and zip
10 EXHIBIT 2: Full-price shoppers don’t trade down more when it’s convenient.
CROSS-SHOPPING BY BRAND
# # PERCENTAGE OF FULL-PRICE CONSUMERS OFF-PRICE FULL-PRICE WHO CROSS-SHOP AT OFF-PRICE STORES STORES
J.Crew 27% 138 265
Nordstrom 26% 173 117
Gap 23% 152 697
Polo Ralph Lauren 23% 153 50
Banana Republic 22% 128 421
Coach 21% 200 332
American Eagle 19% 133 656
Ann Taylor 19% 116 245
BCBG 18% 85 122
Calvin Klein 17% 104 12
Michael Kors 16% 97 200
Old Navy 16% 84 852
Brooks Brothers 15% 125 148
Tommy Hilfiger 15% 165 66
Saks Fifth Avenue 14% 83 39
Hugo Boss 12% 35 56
Neiman Marcus 11% 44 41
Burberry 7% 19 63
Source: Kurt Salmon research
11 EXHIBIT 3: Nordstrom’s cross-channel share of wallet is similar to specialty retailers.
SHARE OF WALLET BY SHOPPER TYPE
NORDSTROM BANANA REPUBLIC
100% 100% 100% 100%
16% 16%
88% 91% 84% 84%
12% 9%
Full-price O-price Full-price O-price shoppers shoppers shoppers shoppers
J.CREW COACH 100% 100% 100% 100% 9% 5%
84% 88% 91% 95%
16% 12%
Full-price O-price Full-price O-price shoppers shoppers shoppers shoppers
Full-Price O-price
Source: Kurt Salmon research
12 Not only are outlets profitable on their own, in some cases they can help retailers grow their full-price sales.
code, but tend to differ on the importance of AUTHOR quality and having the latest product, with Dan Goldman, Senior Manager [email protected] quality seekers 14% more likely to have shopped at a full-price vs. an off-price store. Additionally, 47% of consumers who shop both full- and off-price stores said they primarily turn to outlets for a treasure-hunt experience, while full-price options rule for shopping trips where consumers want a specific item or brand or need a new outfit for a special event. Collectively, these findings, coupled with Nordstrom Rack’s success, suggest that the off-price channel’s ever-increasing encroachment on urban areas can offer a sizeable growth opportunity. In fact, not only are outlets profitable on their own, in some cases they can help retailers grow their full-price sales. As Nordstrom Rack proves, it’s fine for a subset of consumers to shop 1 Value Retail News, 2014 both channels, as long as each channel’s role 2 Value Retail News, 2014 is clearly defined and captures consumers 3 RBC, 2015 Analyst Report 4 Tanger Outlets, News, 2015 across different occasions or serves as a 5 Simon Property Group, 2015 point of entry to new products or brands. v 6 The Wall Street Journal, 2014 7 Institutional Investor, Real Estate Finance and Investment, 2013 8 Nordstrom, press release, 2015 9 Racked.com, 2014 10 SeekingAlpha.com, 2015 11 William Blair Initiating Coverage, 2012 12 Securities and Exchange Commission, 2015 13 SeekingAlpha.com, 2014 14 Retail TouchPoints, 2014
13
14 UNCHAINED BIG RETAILERS NEED TO THINK SMALL Local, independent, mom-and-pops—whatever you call them—these retailers are back in style, while you don’t have to look hard to find an example of a struggling national chain.
Consumers value mom-and-pops’ tailored product assort- ments, unique store designs and personalized customer experiences. In fact, 29% of consumers say they are shopping more at neighborhood stores now than they were three years ago, and roughly half said local stores account for at least 50% of their shopping trips.1
15 67% of consumers in a recent 1,000-person Kurt Salmon survey thought large national chains should do more to act like the little guys.
Meanwhile, many national chains’ approaches “unique” floated to the top. But, in reality, still feel far too big box, leaving little doubt consumers tend to have a very comprehensive national chain retailers can do a better job definition of local—and what national chain of emulating their smaller counterparts in retailers can do to measure up to it. First, winning the hearts and minds of their when it comes to products, when consumers consumers while still leveraging the incred- think “local,” they really want to understand ible competitive advantages of scale. the story behind a product, as they are nearly By unchaining three key elements of as likely to accept something made in their traditional chain retailing—product, store city, state or even just in the United States— design and customer experiences—even with roughly 60% thinking each met their the biggest retailer can drive deeper brand definition of local. Second, they also think connections and stronger loyalty. localized store design means that the store has an intriguing personality instead of a What Consumers Mean When sterile feel and is built to blend into the They Think Local neighborhood. Third, 60% of consumers also Consumers appreciate some of the scale rewarded brands that create experiences that advantages of large national chains, namely help build and foster their community. their wide product selection and good value. When defined in this holistic way, localizing But they faulted these same retailers for a a store not only helps a retailer differentiate lack of unique or locally sourced products itself, but also provides consumers a more and an impersonal store look and feel. compelling reason to visit the store and When it came down to it, 67% of consumers develop a deeper brand connection, which in a recent 1,000-person Kurt Salmon survey encourages more purchases across all thought large national chains should do channels. more to act like the little guys. In fact, consumers said they would shop more What does this really mean? When consum- at national chains if they took certain steps to ers were asked what three words came to feel smaller. (See Exhibit 1.) Leading the pack mind when they thought about local stores, are localized products and a personalized overwhelmingly, “friendly,” “convenient” and store look and feel.
16 EXHIBIT 1: Consumers say they’d shop more at big chains if they would act smaller.
LIKELIHOOD OF SHOPPING MORE AT NATIONAL CHAINS (PERCENTAGE OF CONSUMERS AGREEING OR STRONGLY AGREEING)
Locally sourced products 60%
Store look and feel 57% with personality
Warm and inviting interiors 56%
Background on where and 51% how products were made
Involvement in community events and local nonprofits 51%
Products exclusive to my neighborhood store 50%
Store look and feel with local flavor 49%
Events that allow me to experience new places in my community 43%
Fun and rewarding in-store events 42%
Educational events 41%
Store design conducive to customers mingling and socializing 37%
Ability to meet a community of like-minded people 37%
Events that allow me to try new experiences 35%
Source: Kurt Salmon research
17 Consumers have a deep desire to not only try new products, but also to understand the story behind a product to help establish its authenticity.
Localized Products Many retailers think they have highly region. Each region has a different definition effective product localization strategies. of “local”—in the Northeast, local foods However, the vast majority are typically come from in-state or a contiguous state, merchandising strategies that focus on while larger states are divided into zones products that perform well at a regional level within 200 square miles of a store. and account for differences in climate. Foragers are also a resource for small local While these tactics are essential, they do not businesses that have never worked in a go far enough to meet many consumers’ major format before, helping with every- needs or wants. thing from packaging to branding, labeling, supply chain and even financing through the Consumers have a deep desire to not only try Local Producer Loan Program. The program new products, but also to understand the provides low-interest loans to help scale story behind a product to help establish its small producers and has funneled over $14 authenticity. Retailers can address this by million to more than 155 local producers effectively telling consumers where a given since 2007. product came from, how it was made or grown, and by whom. The grocer also hosts local suppliers’ summits in advance of new store openings Whole Foods is a prime example of a retailer in previously untapped areas as a way to that creates an independent feel in each of connect with local brands. its 411 stores with a localized assortment. In fact, 15% to 30% of the goods in any given As Whole Foods offers more local products, Whole Foods are locally sourced.2 consumers expect and value more of them as well, creating a virtuous cycle of sales growth To accomplish this, Whole Foods employs a for the retailer. In fact, sales of Whole Foods’ team of “foragers” who source from more organic and non-GMO products, responsibly than 6,500 local vendors across the country. farmed seafood, grass-fed beef, and exclusive The program has grown to 12 foragers—up products all continue to grow faster than the from just one in 2010—each responsible for a store average.3
18 Localized Store Design Several other chain retailers have success- been updated to some extent and 90% of the fully cultivated a local feel by changing not 3,000 new stores it’s added in the past few what’s on their shelves, but what surrounds years are localized in some way.5 them, helping to add personality that Many stores use locally sourced wood and facilitates consumer connection. reclaimed materials. For example, a store in Starbucks has always tried to have some Portland, Ore., features artwork made of degree of personalized customer interaction salvaged bike tubes—a nod to the city’s large by writing customers’ names on their cups, cycling community. A location in London but more recently, it has focused on localiz- features artwork made of old tea boxes found ing store design through remodels and new in a nearby town and saved from a landfill. build-outs. Some of the stores’ buildings are the attraction This approach is helping Starbucks rejuve- —from a New Orleans store housed in an nate itself in the highly saturated and highly early 20th-century apothecary to a train-car competitive U.S. market and adapt to a set of store in Switzerland that actually rolls, and diverse new markets that represent its large from a drive-through location in an old opportunities for growth. shipping container to a store inside a former bank vault in Amsterdam. How did this mega chain start moving from what was a template style to a more custom- These localization efforts have been paying ized approach? Starbucks has a 350-person- off. Since Starbucks started increasing its strong store design group with studios in 18 capital expenditures in 2012, gross profit cities around the globe focused on designing margin has risen as well—from 55.8% to stores to reflect the unique characteristics of 57.9% in Q2 2014 following $247.5 million the neighborhoods they serve.4 in expenditures.6 Location and traffic dictate how much Remodeling entire stores isn’t the only path customization a given store gets, but the to localization. Trader Joe’s takes a more majority of Starbucks’ 20,000 stores have intermediate step by decorating their stores
19 This Starbucks in Tokyo also served as a celebration of the 1,000th store in the country. The store design drew inspiration from Japanese architecture and gardens, while the central art piece was created in collaboration with a local artist.
20 REI doesn’t just sell products; it sells the passion, education and adventure behind them.
with local art that celebrates each neighbor- aged to get outdoors during their breaks from hood while still maintaining the chain’s work and use firsthand the products they sell. consistent standardized island theme. Each But like any successful brand, REI’s custom- sign or mural in every one of Trader Joe’s ers are its biggest ambassadors. REI engages 400-plus stores is unique and painted by them through local activities that show local artists, which helps cultivate the feel of consumers how to use their favorite products a local market. in the real world. With more than 50 activities Localized Brand Experiences and classes per city per year, these classes Developing local brand experiences tailored have drawn in more than 1 million customers 8 to a community’s population gives the retail since the program launched in 2005. chain a chance to authentically connect with While stores across the country host consumers beyond the register and ulti- standard classes like GPS Navigation 101 and mately foster long-term advocacy. how to ride a bike, REI’s real genius comes REI is perhaps one of the best big boxes at from tapping into local activities and extending its brand beyond products and destinations, often partnering with local into brand experiences. In fact, brand nonprofits to increase community connec- experience is a crucial element of REI’s value tion and credibility. proposition. REI doesn’t just sell products; it For example, take the Seattle store’s Mount sells the passion, education and adventure Rainier snowshoeing event, which also behind them. Employees live and breathe includes lunch from a local bakery. Or the the brand and are often true enthusiasts Knoxville, Tenn., store’s events on hikes in with their own experiences, tips and tricks the nearby Smoky Mountains or the best up their REI-branded sleeves. local fly-fishing. This often begins at the corporate level. REI’s These events bring fellow enthusiasts employee bonus program, which encourages together, helping REI step aside and let its inter-store competition, helps ensure consumers connect over shared experiences, employees are invested in their store’s interests and products. performance.7 Employees are also encour-
21 Brand stewards and marketers will have to let go of certain elements of brand consistency to ultimately deepen brand connection and loyalty.
REI also helps support the local community 1917 downtown Los Angeles theater that —and these efforts are directed locally. In preserves the original doors and marquee. 2014, REI awarded over $4 million in grants Urban is also piloting new initiatives to to more than 300 nonprofits working on support local artists and designers. For restoration and preservation projects in 650 example, a Los Angeles concept format hosts 9 locales across the United States. a rotating group of local musicians, artists These grants can also turn into community and designers, creating an area where the events as well. For example, one grant-fund- community gathers for more than just ed project involved more than 2,000 shopping, and a Brooklyn concept format volunteers removing 60-plus tons of trash includes a rotating space for local retailers from a San Diego park. The volunteers were and Local Made, a continuously evolving also treated to a guided tour of the park from shop-within-a-shop that features a collec- an REI guide. tion of artisanal objects from lesser-known Combining localized assortment, store local artists and designers. design and experiences is especially power- How to Act Like a Little Guy ful, as Urban Outfitters demonstrates. Thinking small requires an attitude adjust- Urban’s assortment strategy has a strong ment. Brand stewards and marketers will focus on what works in each region. For have to let go of certain elements of brand example, Esperanza ATL, a popular South- consistency to ultimately deepen brand ern apparel brand, is available only in select connection and loyalty. Southern stores. This may feel counterintuitive and uncom- The company’s real estate strategy is also fortable, at least at first, but improved sales critical to supporting its small-feel ambi- and consumer advocacy will go a long way tions. For starters, it opens new stores in to making the case for being a bit more historic buildings that are special to the local hands off. community. For example, Urban has a store To accomplish this, retailers likely need to in a New Jersey bank building from 1922 that empower their regional- and store-level uses the original basement vault and one in a employees to make a wider set of decisions.
22 This may mean hiring employees with AUTHOR different capabilities and more of an entre- Dan Goldman, Senior Manager [email protected] preneurial mindset. Regardless of how operations are set up, the corporate level has to set clear parameters and build in checks and balances to ensure individual regions and stores don’t compromise any of the core brand DNA.
That isn’t to say that every retail chain needs the same level of localization across all three dimensions. The degree of localization required depends on the chain’s brand positioning and competitive set. And, even then, it’s critical to really know the brand’s core DNA in order to understand which key brand elements to hold onto while enabling the other elements to live naturally in each local environment. Ultimately, it’s about finding the right way to deepen the emotional connection—local consumers have to feel that the brand reflects their personal identity and values.v
1 Kurt Salmon consumer survey, 2014 2 Bloomberg, 2013 3 Whole Foods Market, 2014 4 Seattle Times, 2013 5 Ibid. 6 TheStreet.com, 2014 7 Bloomberg, 2005 8 REI press release, 2014 9 REI website
23
24 GREEN
FIELDPICKING BEST-OF-THE-BUNCH ORGANIC BRANDS The organic market is one of the most fertile in today’s food industry. In fact, sales of organic products are expected to grow 14% annually from 2013 to 2018.1
So it’s no surprise that food and beverage industry insiders are looking to harvest the next crop of mega organic brands. General Mills wants to grow its organics business to $1 billion by 2020.2 Walmart is introducing a massive line of organic SKUs under the brand name Wild Oats. Van’s Natural Foods was just acquired by Hillshire Brands for roughly three times its annual revenues.3
25 But, for all the excitement, only some category, casual users are motivated by the organic categories have the potential to aspirational benefits of the organic category achieve substantial scale and growth. How —health, freshness and feel-good factors— can would-be investors tell which organic for only some products and occasions. categories and brands are ready to go Organic brands with the most growth mainstream? potential address the needs of the casual The answer starts with dividing organics organics consumer to appeal to the broadest consumers into two groups: core and casual possible consumer base across three key consumers, as illustrated in Exhibit 1. While drivers: category dynamics, price premium core consumers are committed to the organic and brand equity.
EXHIBIT 1: Big opportunity: targeting casual organic consumers.
ORGANIC FOOD PENETRATION
CORE ORGANIC PURCHASERS 10% 3% I never buy organic food I almost exclusively buy organic food 16% I often buy organic food 30% I rarely buy organic food CASUAL ORGANIC PURCHASERS 41% I sometimes buy organic food
Source: Kurt Salmon research
26 The most attractive organic growth categories will be those that have built the capacity to serve mainstream demand, narrowing the cost penalty for organic producers.
Category Dynamics 19% of households, according to a Kurt Consumer interest in organics varies by Salmon survey. category, as illustrated in Exhibit 2. In The much larger pool of casual consumers, certain categories, organic penetration is on the other hand, is often dissuaded from high even when the price premium is high— choosing organic because of price. In fact, a the organic growth sweet spot. Categories Kurt Salmon survey shows that 65% of heavily used by children have high organic consumers cite high prices as the primary penetration, since families will spend to barrier to purchasing more organic food. protect their children and pets. In fact, 43% Casual core consumers are willing to pay just of respondents to a recent Kurt Salmon 10% more for organic vs. the 23% premium consumer survey said they plan to increase core consumers are willing to fork over. spending on organic pet food. As illustrated in Exhibit 3, the lower the Consumers are also more concerned about price premium, the more organics gain organics in categories that are eaten raw in share, primarily from increased utilization large volumes, like fruits and vegetables. In from casual users. contrast, organics are less important when taste trumps health—think categories like That being said, it is unwise to bet on ice cream and beverages—or when organics’ narrowing price premiums over time in an benefits are perceived to be less meaningful, industry highly dependent on supply costs such as in canned foods and condiments. and constraints. The most attractive organic growth categories will be those that have Price Premium built the capacity to serve mainstream Bringing organics into mainstream distribu- demand, narrowing the cost penalty for tion works best at a reasonable price organic producers. premium. Core users are committed to Brand Equity using organics wherever possible and are comparatively insensitive to price premi- Many organic brands have surprisingly ums in most organic categories, but they are little brand equity when compared to their only a minority of the population—about non-organic competitors, despite high
27 EXHIBIT 2: Consumers reach for organic more often in raw, kid-focused categories.
PERCENTAGE OF CORE ORGANIC SHOPPERS BY CATEGORY
Fruits and Vegetables 33%
Dairy 21%
Baby Foods 19%
Meat, Poultry, Seafood 18%
Nutritional Supplements 16%
Breads and Grains 15%
Cereals and Breakfast Foods 12%
Pet Foods 11%
Snack Foods 11%
Frozen Foods 11%
Prepared Foods 8%
Canned Goods 8%
Beverages 8%
Condiments 8%
Source: Kurt Salmon research
28 sell-through. This happens most often when unique positioning compared to lower- a brand has managed to establish itself as priced private-label organic offerings like the market leader, perhaps through first- Safeway’s “O” brand or the leading non- mover advantages in sourcing, but has failed organic competitor. Despite being an organic to establish much of a brand meaning offering, consumers had higher net advocacy beyond “organic.” for the leading non-organic brand. (See For example, Earthbound Farm has a Exhibit 4.) healthy market share in the packaged On the other hand, Stonyfield Farm, an produce category, but its brand affinity organic yogurt brand, has established a suffers, as it has not truly established a brand meaning far beyond the benefits of
EXHIBIT 3: Lower price premium, higher organic adoption.
ORGANIC PENETRATION VS. PRICE PREMIUM
ORGANIC PENETRATION 20%
FRUITS & VEGETABLES
15%
PREPARED FOODS DAIRY
BREADS & GRAINS 10%
SNACK FOODS BEVERAGES
5% CONDIMENTS
MEAT/POULTRY
0% 20% 30% 40% 50%
ORGANIC PRICE PREMIUM
Source: Kurt Salmon analysis, Supermarket News, Organic Trade Association
29 EXHIBIT 4: Without a bigger story to tell, organic brands lose net advocacy battle.
NET ADVOCACY
YOGURT Stonyfield Farm 21%
Dannon 9%
POTATO CHIPS ORGANIC Kettle 17% WINS
Lay’s 8%
MAC & CHEESE Annie’s 5%
Kraft -3%
BREAD Rudi’s 15%
Nature’s Own 19%
TEA Honest 3%
Arizona 13%
KETCHUP Organicville 5% CONVENTIONAL WINS Heinz 16%
DELI MEATS Applegate Farms -3%
Hillshire Farm 9%
LETTUCE Earthbound Farm -9% Organic
Dole 5% Conventional
Source: Kurt Salmon research
30 organics, with a differentiated brand story above mainstream market leaders such as and a strong and successful innovation Stouffer’s. Amy’s makes this possible through pipeline, including its new answer to Greek slightly lighter pack sizes and less frequent yogurt, a creamy, high-protein organic promotion. Plus, ingredients are only a small cheese snack with a striking black label. The portion of the cost of goods sold, so the brand has established clear differentiation organic premium is minimal. from the leading non-organic competitor Most importantly, organic is an important across a variety of “healthy” attributes while part of Amy’s brand name, but hardly the only remaining competitive in required core brand message. Consumers give the brand attributes like quality and taste. high advocacy ratings because of its unique A Recipe for Success in Organics: recipes, fun backstory and on-trend ethnic Amy’s Kitchen flavors. Amy’s has also made vegetarian Amy’s Kitchen shows how an organics brand compatible with tasty, which is no minor feat. can continually grow beyond its roots. As a result, Amy’s has been able to expand Amy’s started as one of many small organic into every section of the freezer case and is brands that were attempting to bring the about to enter the fast-food business. Amy’s convenience of frozen entrées to the natural pulls in more than $300 million in annual food space. Frozen entrées are also a revenue, with strong prospects for continued favorable category for organics, especially growth.4 v since many of Amy’s recipes are fairly indulgent—from burritos to ethnic entrées —and the organic and vegetarian formula- AUTHOR Peter Hsia, Partner tion helps consumers feel they are offsetting [email protected] the guilt associated with indulgent products and convenience cooking. Amy’s has also been smart about managing its price premium vs. conventional products. 1 FoodNavigator-USA.com, 2014 Everyday shelf prices of its mac-and-cheese 2 Advertising Age, 2015 3 The Wall Street Journal, 2014 and lasagna entrées range from 10% to 25% 4 StartupWin
31
BRINGING STORE PERFORMANCE INTO FOCUS IN AN OMNICHANNEL WORLD, NEW KPIs ADD PERSPECTIVE ON CONSUMER BEHAVIOR Think back to an old analog TV. It may be hard to remember, and that’s of course because today’s digital HD, Internet-enabled, slim TVs provide a much clearer, sharper and better picture.
32 33 Omnichannel shopping behavior now makes it difficult to accurately measure net store sales because retailers are often unable to account for cross-channel sales and returns.
The same can be said of the old-school, omnichannel world and the increasingly sales-based metrics many retailers currently complex interplay between physical and use to make the majority of their store digital channels. decisions. Historic transactional measures Stores are the hub of the new omnichannel fail to reveal how stores are measuring up ecosystem. In addition to acting as a point of to their new role in today’s interactive sale, they help consumers build emotional omnichannel retail environments. Simplistic connections with a brand, act as a product traffic counting and sales-per-door transac- showroom, handle exchanges and returns tion metrics add little clarity to the picture of from online purchases, manage product what draws consumers to stores, how they picking and packing for online sales and engage while they’re inside and whether serve as a valuable medium for consumer those engagements help fuel conversion. feedback, among many other critical roles. While traditional metrics are still an As a result, it is not surprising that “Anytime essential piece of every retailer’s strategy, you open a new store in a new geographic new metrics can lend a much-needed area, e-commerce sales increase in that area sharpness to the currently fuzzy vista of the because of the visibility of the brand,” omnichannel landscape. These additional according to one specialty apparel retail SVP. KPIs can help demonstrate the value of the But it’s impossible to account for this value store and provide a richer, more precise view by looking only at traditional traffic and into omnichannel consumer behavior. transaction-based KPIs. The Problem with Transaction- Omnichannel shopping behavior now makes Based Metrics it difficult to accurately measure net store While traffic and transaction-based metrics sales because retailers are often unable to such as net sales, same-store sales growth, account for cross-channel sales and returns. sales per square foot, conversion, basket size, For example, stores accept returns from sales average retail price and labor as a percentage made in other channels, but those returns get of sales are all important, they fail to capture subtracted from a store’s gross sales, which the full value of physical stores because of hurts them on paper. And, in actuality, stores the evolved role stores now play in an are effectively doubly penalized for handling
34 Internet returns. Their sales numbers ingly. For example, a few years ago, the become saddled with the cost of the return, industry thought mobile’s biggest potential and processing the return takes precious was as a transaction vehicle but, in reality, it time away from proactive customer engage- has proven to be far more effective at ment and selling activities. delivering promotions and loyalty rewards Traffic, sales conversion, basket size and and enabling dynamic, in-store engagement. AUR metrics can be equally flawed. Consum- In a similar manner, by measuring only a ers no longer complete their entire path to consumer’s basket size, retailers are poten- purchase or even fill their shopping cart in tially discounting the true overall value of a only one channel, but rather seamlessly flow consumer’s visit, as more and more consum- between them. By measuring only the ers complement in-store purchases with transaction, retailers are giving all the credit digital ones that pull from extended online to the channel that captures the point of assortments. The challenge with relying on purchase, even if other channels did all the only these transaction-based metrics is that heavy lifting in motivating the consumer to they not only often reward the wrong make that purchase by driving awareness, channel, they also reward outputs rather engagement, trial and loyalty. than inputs. They focus on the end result As one specialty retail executive puts it, rather than incentivizing employees to focus “Conversion needs to be seriously re- on driving customer lifetime value through thought. We were hearing our executives customer activation, engagement and talk about mobile conversion being really product trial. low and how they wanted to improve it. But Relying on store sales as the only measure of smartphone conversion should be low; associate workload and productivity can also consumers are using their phones to look up lead to suboptimal store staffing decisions. the nearest store or a store phone number— That’s because store associates are now not to make purchases.” responsible for a host of activities that As roles for these new channels become generate benefits beyond their four-wall better understood, retailers will need to sales. Whether educating consumers on evolve their performance measures accord- product benefits, assisting during the trial
35 Instead of focusing solely on channel-centric transaction metrics, retailers need to elevate KPIs to drive overall cross-channel brand performance.
process or finding alternative products that The New KPIs might be available online, store associates Instead of focusing solely on channel-centric are spending an increasing amount of their transaction metrics, retailers need to elevate time engaging with consumers who will KPIs to drive overall cross-channel brand ultimately purchase in another channel. performance by consolidating their store and digital P&Ls, expanding key performance Additionally, a sizeable amount of associate metrics to measure all of the levers that drive time is now dedicated to supporting digital customer behavior across the full customer transactions from an operational perspec- journey and recalibrating labor metrics to tive—handling exchanges and returns and account for the full set of activities store fulfilling online orders. Despite all these new associates perform. activities, many retailers continue to cut back on store labor as sales shift online, Developing new, better KPIs starts with which only serves to further strain customer three key steps: engagement and weaken the brand experi- 1. Move to one true omnichannel P&L ence. But who can blame them? If retailers and organization. KPIs haven’t kept up can’t measure the positive impact of a great with the omnichannel retail business store experience on the customer’s revisit model. To start, the notion of having and conversion rate in other channels, they separate P&Ls by channel contradicts will continue to make ill-informed decisions the very core of the omnichannel based simply on labor spend per traffic rate. concept and perpetuates siloed behavior. “Compensation and reward philosophies are Consumers engage and buy from a brand hugely important issues,” according to one when and how they see fit, so they expect luxury retailer’s SVP of global operations. “If the brand experience to be holistic you don’t figure out who gets credit for the across all channels. As such, there can no sale, you can end up with bad customer expe- longer be an internal separation of riences, because the people in the field doing physical, Web and mobile stores. all the work aren’t excited about it and aren’t In a true omnichannel organization, all doing it that well.” channels are required to work harmoni- ously as one, with consumers flowing
36 seamlessly between them. Separate product recommendations per visit and P&Ls disrupt this harmony by creating the conversion rate on these product real and perceived barriers that prevent recommendations, as illustrated in seamless integration because existing Exhibit 2. measurement and incentive structures Not only will these new metrics allow often penalize one channel for support- a retailer to assign a value to all brand- ing another. building activities, they also help create Left as separate P&Ls, each channel is incentives for the entire organization typically incentivized to optimize its to push consumers down the path to own performance, which often produc- purchase regardless of the channel. es suboptimal results for the overall It’s about measuring and rewarding the brand. The first step is to consolidate activities that drive positive brand- channels into a single P&L to account building behavior and maximize for the deep channel interdependencies consumers’ full lifetime value, not just across the new consumer path to rewarding for a one-time, channel- purchase. (See Exhibit 1.) specific sales transaction. 2. Measure and reward levers that drive 3. Reengineer store engagement and consumers down the path to purchase, staffing metrics.Retailers also need to rather than just the outputs of a determine how to accurately staff and transaction. The next step is moving outfit stores to maximize store engage- beyond tracking and rewarding only ment while also accounting for all the single-channel transaction metrics (such new business-building activities their as traffic, conversion, basket size and sales associates are now being asked to average sales price) by also measuring all conduct—whether it’s an answered levers that move consumers down the question, a processed online return, a path to purchase—awareness, engage- fitting room assist, picking a ship-from- ment, trial, conversion and loyalty. store order or an online endless aisle For example, a more holistic set of retail product recommendation. metrics should include the number of
37 EXHIBIT 1: Consumers flow through channels, so your metrics should reflect that.
CHANNEL ISOLATION Traditional Approach to Evaluating Channel Silos
ES CO L ST A S S
Open Open
CO CO ES S ES S L T L T A S A S S S
$2,000
$2,000
38 CHANNEL INTERDEPENDENCE New Approach to Evaluating Channel Ecosystem
ES CO L ST A S S
Open Open
CO CO ES S ES S L T L T A S A S S S
$2,000
$2,000
39 In fact, stores will be asked to do even As a result of this channel evolution, more as retailers continue to integrate store staffing and engagement metrics the advantages of online shopping into will need to go way beyond today’s their physical stores. For example, store labor-as-a-percentage-of-sales metric associates, with assistance from smart to measure both staffing levels and how fixtures and customer devices, will be effectively store associates and smart expected to serve up personalized devices are creating personalized recommendations and offers 10 times engagements. more frequently than they do today All retailers will have to change their KPIs. as location-aware recommendation The question is where to focus, how to engines move from digital to brick-and- measure and incentivize, and which organi- mortar channels. zational changes are needed.
EXHIBIT 2: New KPIs should hit five key drivers.
AWARENESS ENGAGEMENT TRIAL CONVERSION LOYALTY
Tra c generation Product Products tried per Cross-channel Advocacy Activation or visit recommendations visit conversion rate Lifetime customer rate and o ers per visit Conversion rate on Cross-channel value Conversion rate product trial basket size Revisit rate on product Cross-channel Revisit frequency recommendations AUR Conversion rate on product o ers Length of visit
40 Leading retailers are already providing AUTHORS useful test cases. At one leading apparel Al Sambar, Managing Partner Retail and Consumer Group retailer, “a number of our brands have [email protected] experimented with giving the store credit for Dan Goldman, Senior Manager all sales in their market area, no matter what [email protected] channel they come from,” said the company’s Jessica Scrimale, Senior Consultant SVP of operational transformation. “So if someone living a mile from a store places an e-commerce order, the credit for the sale goes to that store.” Meanwhile, one luxury retailer recently equipped associates with tablets for ‘‘save- the-sale” kind of activity and they are now getting credit for those sales, according to an executive there. Retailers must start shedding some light on the unmeasured aspects of the omnichannel consumer journey. Because as these leading retailers will quickly demonstrate, the store is only becoming more and more pivotal to success in today’s retail environment, and retailers must find a way to accurately measure and reward its role in an omni- channel world. v
41 SWEATING42 BOUTIQUE STUDIOS ARE CREATING BIG INVESTMENT OPPORTUNITIES
SMALL 43 Just like consumers in other consumer sectors, counterparts, with median chain net mem- fitness consumers are looking for customiza- bership growing 16.7% and 0.9%, respectively, tion, variety and a unique experience. and revenue growing 8.6% vs. 1.9%.1 As a result, treadmills are giving way to This growth is driven by an influx of young, trapeze classes, and barbells, to ballet bars. wealthy and enthusiastic consumers. In fact, small-box fitness studios are driving Kurt Salmon consumer research shows that the majority of growth in the $22 billion fitness studio members are 26% more likely fitness club and studio market. From 2012 to to be women vs. traditional gym members, 2013, small-box formats with less than are roughly four years younger and have 20,000 square feet outpaced their larger higher household incomes.
EXHIBIT 1: Small-studio buffs spend more—on exercise in general.
AVERAGE SPEND PER ACTIVITY PER MONTH
$105
ALL OTHER EXERCISE SPEND $67 $69
$40 $45
SPEND ON ACTIVITY $39 LISTED BELOW $38 $29
$6 FITNESS STUDIO CLASS TRADITIONAL GYM INDEPENDENT EXERCISE
Source: Kurt Salmon research
44 EXHIBIT 2: Consumers flock to smaller studios for experience, unique and personalized classes.
REASONS WHY PEOPLE CONSIDER FITNESS STUDIOS (TOP TWO REASONS SELECTED)
50%
44%
34%
21% 17% 14%
UNIQUE CLASS & FITNESS SOCIAL QUALITY OF REWARDING FLEXIBILITY TO OFFERINGS PERSONALIZATION EXPERIENCE INSTRUCTOR EXPERIENCE PAY AS YOU GO
Source: Kurt Salmon research
These exercise enthusiasts also spend 17% fitness workouts, while 22% are visiting more time working out and, most important- studios as a way to start or increase their ly, spend 51% more—on monthly member- level of exercise. ships, classes and other exercise activities. Why are small studios winning with these (See Exhibit 1.) consumers? The short answer is that many These consumers are using studios as a consumers—43%, in fact—feel traditional workout substitute for a variety of different gyms don’t meet their workout needs. fitness activities. For example, 35% of Specifically, these small-box converts are consumers are switching to small studios seeking three key elements: unique offerings, from non-gym-based workouts (like run- a personalized workout and a social experi- ning, biking and team sports), 30% from ence.(See Exhibit 2.) larger gyms and 13% from non-traditional
45 35% of traditional gym members said they planned to try a small-studio class in the next year.
This small-studio momentum shows no Brands to Watch signs of throwing in the towel anytime soon. The Bar Method. Like other barre classes, this chain of studios caters to fitness con- In fact, 35% of traditional gym members said sumers who aspire to be long, lean and they planned to try a small-studio class in graceful like a ballerina. The class, which the next year, while 14% said they planned to comprises a series of muscle-shaping and cancel their traditional health club member- muscle-toning controlled micro-movements, ship during the same time period. is hosted in a carpeted ballet studio. Since In response, many traditional health clubs opening their first studio in 2001 in San are beginning to adapt their strategies to Francisco, The Bar Method has doubled its cater to changing consumer fitness needs. footprint over the last 12 months to over 75 Some are opening their own studios, like studios in the United States and Canada, and Town Sports International’s new BFX Studio in 2012 it reported revenues of $35 million. line, which opened in 2014 and is adding Koko FitClub. Koko is a studio-format gym three new doors in 2015. Others are offering that leverages technology to provide custom- their proprietary classes in existing studios, ized, efficient and appropriate exercises for like Equinox, which launched its popular everyone. Before using a machine, members 30/60/90 high-intensity interval training input a digital key containing detailed user class at BeFitNYC studios in spring 2015. data, which lets the machine record activity Other larger gyms are incorporating and give custom recommendations—think specialized equipment and classes into their working out with a personal instructor at a traditional format. For example, Gold’s Gym fraction of the cost. Founded in 2004, Koko is adding CrossFit-style equipment, like FitClub now has over 130 locations across ropes, cables and bands, while Crunch has the United States. started offering boutique classes, including Orangetheory Fitness. Established in 2010, barre, TRX and bootcamps. this tech-friendly studio chain offers Still, there are plenty of opportunities for trainer-led, small-format classes that rely investors to take advantage of the growing on a variety of exercises to build strength, fitness studio space. energy and cardiovascular fitness. Partici-
46 pants use treadmills, rowing machines, banner studios, but the brand sells equip- TRX bands and free weights while wearing ment directly to all locations. Initially gaining a heart-rate monitor, which displays each traction on Shark Tank in 2012, Mark Cuban person’s maximum heart rate and training currently holds a 30% equity share. Surfset zone on screens in the studio. The brand has generated an estimated $5 million in 2013 more than 200 studios, most through a revenues and has greatly increased distribu- franchise model, in the United States, Canada, tion within the last 18 months, partially due England and Australia. Orangetheory has to partnerships with major players such as nearly doubled its footprint in the past 16 Anytime Fitness, Crunch and ClassPass. months and is on track to open an additional ClassPass. This online-driven service is 100 stores in 2015. shaking up the industry. ClassPass offers Flywheel. This indoor cycling class lets unlimited classes at local studios and select spinners tap into their competitive natures, health clubs across the nation for a monthly giving them the option to compete under a $99 membership, letting consumers try a screen name with fellow class members. A wide variety of small-studio classes ranging large-screen display, called the Torqboard, from yoga to trapeze. Founded in New York in occasionally flashes their performance on a 2013, it has since expanded to 32 cities in the leaderboard, which motivates in-class United States, Canada and the United performance and tracks progress over time. Kingdom and will grow even bigger thanks to Flywheel has grown to 35 locations in the its recent acquisition of competitor Fitmob. United States and Dubai since it was founded ClassPass has a reported $60 million revenue in 2010, and it received a strategic invest- run rate based on February 2015 sales and was ment from Catterton Partners in April 2014. valued at over $200 million in its January v Surfset Fitness. This innovative concept lets 2015 Series B financing. consumers ride the waves without getting AUTHORS wet, offering group classes on proprietary Dan Goldman, Senior Manager [email protected] indoor surfboard-trainers. Surfset has rapidly John Buccheri, Senior Consultant grown since its inception in 2011 and is Stephanie Hu, Senior Consultant offered in over 200 studios—15 are “Surfset” 1 IHRSA Profiles of Success 2014
47
48 MAKING CONSUMERS FEEL GOOD, ONE WAY OR ANOTHER INSIDE THREE HOT EMERGING CPG CATEGORIES: PROBIOTICS, COLD-BREW COFFEE AND CANNABIS Innovation is the lifeblood of CPG, but large CPG companies rarely create entirely new product categories from nothing. Instead, recent innovation has come mostly from small companies, which have created new categories and market segments that have larger CPG companies playing catch-up, from Greek yogurt (Chobani) to coconut water (Vita Coco).
49 This trend is looking to hold true with three Brands to Watch new categories shaking up the CPG world: Attune. Post-owned Attune also focuses probiotics, cold-brew coffee and cannabis. on making probiotics taste good, with its probiotic chocolate bars in flavors like mint, Probiotic Foods dark chocolate and one with crunchy cereal Today’s probiotic foods go way pieces. The Oregon-based beyond yogurt and supple- company also makes granola, ments, taking probiotic’s cereal and other snacks and is benefits in a more versatile working toward 100% organic and flavorful direction, thanks and non-GMO products by to rising consumer awareness the end of 2016, which will of gut health. help it tap into a growing Sales of probiotic supplements, which are group of consumers increasingly concerned marketed to benefit digestion, energy and with their food’s origins. Attune’s products immunity, are growing at 18% per year in the are sold in natural food stores and specialty United States.1 The overall probiotic market grocers nationwide. is projected to grow by 6% annually and Health-Ade. Among reach $39 billion globally by 2019. However, a growing group of nearly 80% of this market is dairy-based, kombucha tea brands, meaning significant opportunity is being Health-Ade stands out left on the table.2 because it is fermented In fact, sales of niche probiotic foods such in small batches, lead- as chocolates, ice cream and baked goods are ing to a lower sugar content than many expected to grow faster than the traditional larger brands. Its seasonal offerings like dairy segment.3 pink lady apple and plum are also especially This growth is fueled by a larger public popular and use fresh, local, cold-pressed appreciation of the once-lowly gut, along fruit. Health-Ade is on shelves at over 150 with a growing general health consciousness markets nationwide and is also sold at and an aging Baby Boomer population. CrossFit gyms—a key influencer channel.
50 The ready-to-drink coffee category will hit $2.4 billion by 2018, and much of that growth will be driven by cold-brew.
Cultured and Saucy. This brand claims to In fact, 67% of Millennials and post-Millen- be the first probiotic condiment, and with nials turn to coffee over energy drinks when everything from herbs de Provence, citrus looking for a jolt, with 43% choosing cold- ginger curry and lemon garlic brew coffee.6 The ready-to-drink coffee dill mustard, it’s likely the category will hit $2.4 billion by 2018, and most diverse. Less than six much of that growth will be driven by months after premiering their cold-brew.7 product at their hometown So it’s no surprise that even Starbucks is Santa Barbara Fermentation getting in on the cold-brew game. The mega Festival, it was already on coffee brand launched cold-brew this spring many local store shelves, at 2,800 stores in the Northeast, Mid-Atlantic including Whole Foods. and Midwest following successful tests in Even mega tortilla manufacturer Mission is Boston and San Francisco.8 getting in on the action with its digestive Brands to Watch health tortillas. Secret Squirrel Cold Brew Coffee. Cold-Brew Coffee Secret Squirrel is actually no secret due Cold-brew coffee hits several popular trends to its impressive distribution— at once: It’s convenient yet feels homemade via Whole Foods and some and customizable, making it a hit among independent grocers in 12 Millennials looking for more sophisticated, Western, Mountain and South- easy, customized coffee options. ern states9—and plans to grow to The drink is smoother—thanks to brewing 1,000 stores by the end of 2015, methods that keep acid in check—and is including additional Whole more caffeinated than traditional coffee.4 Foods distribution as well as Vons/Safeway, Fresh & Easy and Plus, it’s multifunctional: Cold-brew coffee Sheetz.10 But Secret Squirrel’s concentrate can be used as a cocktail mixer, distribution isn’t the only thing in baked goods and even as a meat marinade.5 expanding—it recently announced the rollout
51 of three new dairy-based cold-brew coffee thanks in part to its organic and fair- beverages: caffe latte, Vietnamese latte and trade cred and custom glass dark chocolate mocha. Future cold-brew bottles that keep its unique offerings include a vegan latte and carbonat- taste intact.15 11 ed coffee drink. Grady’s Cold Brew. Grady’s Califia Farms. Califia is the appeals to DIY consumers fastest-growing natural beverage who still crave convenience. company,12 and its growth shows The brand offers cold-brew no signs of calming down, concentrate as well as “bean especially with the recent bags”—like tea bags for unveiling of its concentrated cold-brew coffee. Its unique cold-brew coffee, which is bean bags have landed on shelves at 300– expected to hit Whole Foods 400 traditional grocery and retail channels and Safeway shelves across the country this (including Anthropologie, Bed Bath & year.13 But Califia is also pushing the enve- Beyond and Urban Outfitters), while its lope with innovative flavors like iced coffee concentrate has found a home at Whole with almond milk, Mexican chocolate mocha Foods stores in the Southwest.16 and dirty chai. Cannabis Stumptown Coffee Roasters. The brand The cannabis market is large and growing, started selling cold-brew coffee in its 10 but remains mostly primitive, ripe for a cafés, taking advantage of a key consumer sophisticated, CPG-like experience far touchpoint missed by many of its competi- beyond consumers’ current expectations. tors, and it quickly became so popular that Legislative trends suggest that cannabis has the company started to bottle it.14 Its bottles the potential to develop into a huge consum- are now available at regional Whole Foods er product category as legalization contin- locations and independent grocers. ues. Already generating $2.3 billion in direct Chameleon Cold-Brew Coffee. Chame- and indirect legal sales,17 it’s projected to leon has already managed to make itself reach $20 to $30 billion by 2020.18 appear in roughly 1,500 stores in 30 states,
52 Smelling opportunity, through education and by delivering a dedicated non-bank consistent, quality product. financing providers, Companies must establish a clear go-to- like Privateer Hold- market niche by knowing their consumers ings, are flooding into and their needs and targeting messaging the industry. accordingly. These investors have the ability to make Finally, winning companies will let consum- a significant impact using basic retail ers drive product innovation, helping them and CPG tactics. In consumer product move beyond raw-leaf and minimally terms, the cannabis market today is primi- processed derivatives and into marketable tive at best, creating a large market opportu- consumer products like pre-rolled and nity for sophisticated consumer marketing, smokeless products, creams and lotions, and not to mention product innovation. at-home baking mixes. v Consumer cannabis products are still largely AUTHOR raw-plant based, or minimally processed, Bruce Cohen, Leader such as edibles, appealing to an existing Private Equity and Strategy Practice [email protected] enthusiast consumer base but not to a larger pool of potential casual consumers. 1 NutraIngredients.com, 2014 Additionally, there are currently no recog- 2 MarketsandMarkets.com, 2014 nized standards or trusted brands of scale 3 FoodProductDesign.com, 2013 4 PRWeb, 2015 within the industry to communicate and 5 FoodNavigator-USA.com, 2015 educate would-be consumers. 6 PRWeb, 2015 7 Ibid. Cannabis companies that will create a 8 Starbucks.com, 2015 9 Twitter.com/squirrelbrew sustainable long-term advantage are the 10 BevNET.com, 2015 ones that will engage in sophisticated 11 Ibid. 12 CalifiaFarms.com, 2015 brand building by directly addressing 13 Ibid. consumer needs. 14 StumptownCoffee.com 15 FoodNavigator-USA.com, 2015 16 BevNET.com, 2015 Strong brands will be influencers in the 17 PRNewswire.com, 2014 category and must gain consumer trust 18 Ibid.
53 SPA AND WELLNESS SERVICES
Overarching Thesis Demand for health and spa services is growing due to the increasing appeal of therapeutic and preventive care and growing professionalism in the channel. Opportunity Drivers The population is becoming increasingly aware of the benefits of health and spa services (e.g., pain management, relaxation)
Consumers are seeking preventive care to save money and increase health, as personal health care expenditures in the United States have grown at a 4.0% CAGR since 2010
The entry of national chains introduces consistency, professionalism and better pricing through specialization (e.g., just massages)
As a result, certain markets are seeing significant growth: Massage industry revenue has grown at an 8.4% CAGR since 2010
Massage Industry Locations and Revenue (Revenue in $ Billions)
CAGR 2010–2014E 23,930 4.7%
Locations 19,900
$17.7 8.4%
Revenue $12.8
2010 2014E
54 SEE MORE AT DEAL IDEAS AT A GLANCE WWW.KURTSALMON.COM/DEALIDEAS DEAL IDEAS
$100 million chain of massage $100 million chain of massage Nation’s largest chiropractic therapy franchises, providing franchises, offering massage and chain, offering physical therapy custom therapeutic massage to facial services with a specialty in and chiropractic services meet clients’ individual needs deep tissue and hot massages together as a comprehensive
Currently 206 locations, with 11 Currently 131 locations with four solution more announced for 2015 more coming soon Currently 360 franchised
Privately owned by WellBiz Founder owned locations nationwide DESCRIPTION Brands Privately owned
Opportunity to expand footprint Opportunity to expand footprint Opportunity to expand footprint nationally and internationally nationally and internationally nationally and internationally
Growing rapidly; opened over 20 beyond current 21 states and Potential to expand into other units in past year Alberta, Canada health and spa services (e.g.,
Potential to expand into other Growing rapidly; young age of facials or nails) health and spa services (e.g., concept suggests significant
RATIONALE facials or nails) white space opportunity may exist
55 ACTIVE NUTRITION
Overarching Thesis The increasing popularity of healthy living, desire for convenience and improved consumer education are fueling growth in the mainstream sports nutrition segment as products become more accessible to everyday athletes. Opportunity Drivers The sports nutrition market is seeing double-digit growth as consumer demand for nutritious sources of energy rises
Casual users are driving growth in the category as they seek out sports nutritional products as an initial building block toward a healthier lifestyle
New technologies have spurred innovation in the sector, particularly in delivery formats (e.g., gels, pastas) and taste
Increased variety of usage occasions can drive future growth (e.g., Clif Kid Zbar Protein for kids’ snacks; Gatorade’s G Series for energy, hydration and recovery)
U.S. Sales of Sports/Nutrition Protein Bars and Drinks (Revenue in USD Millions) $950
$720
$600 $500
$300 $250
2008 2013 2018E
PROTEIN BARS PROTEIN DRINKS Source: Euromonitor
56 SEE MORE AT DEAL IDEAS AT A GLANCE WWW.KURTSALMON.COM/DEALIDEAS DEAL IDEAS
Founded in 2000 with two Leading brand of protein Natural, gluten-free, low-carb chocolate protein bar flavors shakes, natural probiotics and protein bars that cater to
Sells tens of millions of bars body cleansers with ~$100 weight-conscious consumers annually million in sales seeking active lifestyles
Products include a variety of Shifting toward high-protein Expanded product line with high-protein and health bars, weight management products Protein & Fiber Hot Oatmeal with organic, gluten-free, Privately owned by Swander in 2015 high-fiber and sugar-free Pace Capital since 2008 Over $70 million in sales (2012)
DESCRIPTION varieties Owned by TSG Consumer Acquired Gnu Foods’ Fiber Love, Partners a high-fiber bar, in Jan. 2015
Founder owned
Recent national Whole Foods Leverage existing following Strong performance in existing distribution suggests the brand among natural nutritional channels means expansion into is achieving high velocities supplements shoppers to new doors and channels likely
Use of real milk and dark expand protein-based nutrition Highest net advocacy among chocolate—and lack of offerings effectively weight-conscious consumers hydrogenated oils, trans fats indicates significant opportunity and high-fructose corn syrup— to expand consumer base makes product attractive to RATIONALE all-natural and “free from” shoppers
Could expand to protein drinks and other “on-the-go” products
57 BETTER CHICKEN CHAINS
Overarching Thesis With healthy dining on the rise, fast-casual chicken restaurants with regional popularity have an opportunity to expand nationally. Opportunity Drivers Chicken has recently become the most popular meat in America
Chicken chains outgrew the overall limited-service restaurant market in 2013 (5.1% growth vs. 3.9%)
Smaller chains are typically regional and have high net advocacy with the potential to compete well against national players
Regional retailers have geographic expansion opportunity with new capital infusion from private equity
U.S. Meat Consumption—Pounds per Person
90
80 CHICKEN
70
60
50 BEEF
40 PORK
30
20
10 TURKEY
0 1900 1920 1940 1960 1980 2000 2014
Source: USDA
58 SEE MORE AT DEAL IDEAS AT A GLANCE WWW.KURTSALMON.COM/DEALIDEAS DEAL IDEAS
Franchised chain offering $350 million Caribbean- Chicken chain restaurant known cooked-to-order chicken- influenced chicken chain for its simple menu
based options 130 company-owned locations 200+ locations across 17 states
Revenue of $1.3B in 2014; in the Southeast, with 37 Estimated $360 million in sales $2.02M average unit volume international franchised locations Founder owned 678 locations across South- Owned by Fiesta Restaurant eastern United States Group (NASDAQ: FRGI) DESCRIPTION Founder owned
Currently executing on Industry-leading AUV and recent Chipotle-style offering (simple, expansion plans with intent traffic and sales growth efficient menu), specialized for
to grow nationally Potential to expand beyond the chicken products Food prepared in-house, which Southeast Year-over-year continued store appeals to consumer demand rollout with strong customer for fresh ingredients reception RATIONALE
59 TAKE 2 STORE A STORE B
$2 -5% $3 10% MILLION MILLION
REVENUE EBITDA REVENUE EBITDA
MARKET RECAPTURE MARKET RECAPTURE DYNAMICS RATE DYNAMICS RATE • This store is located • You have 2 additional on the outskirts of stores located within town. 3 miles of this store. • Your prime competitor • There are no prime is located down the competitors in the road. 5% area. 40% • You have 4 total • You have 8 total stores in this MSA. stores within this 60 MSA. You are a national retailer with an established brand, loyal customer base and product margin of 40%. Over the last three years, you have increased your store base by 30%. But a recent market downturn sent sales diving nearly 30% in the last quarter, halving your four-wall profit. Your team is tasked with increasing overall profitability. Preliminary research indicates that many customers live relatively close to more than one store and stores with the lowest sales are, not surprisingly, in areas with the greatest concentration of doors. Closing which of these two stores will have a larger positive impact on profitability?
STORE A STORE B
$2 -5% $3 10% MILLION MILLION
REVENUE EBITDA REVENUE EBITDA
MARKET RECAPTURE MARKET RECAPTURE DYNAMICS RATE DYNAMICS RATE • This store is located • You have 2 additional on the outskirts of stores located within town. 3 miles of this store. • Your prime competitor • There are no prime is located down the competitors in the road. 5% area. 40% • You have 4 total • You have 8 total stores in this MSA. stores within this ANSWER ON THE NEXT PAGE61 MSA. THE ANSWER
Even though it’s profitable, closing Store B will have a bigger positive impact on profitability. That’s right, closing a store with a positive EBITDA and higher profits can actually generate more incremental profit thanks to recapture. Here’s how the math breaks down: AVOIDED LOSS FROM CLOSING THE STORE = REVENUE X EBITDA MARGIN »»Store A: $2 million x (5%) = a gain of $100,000 from closing the store »»Store B: $3 million x 10% = a loss of ($300,000) from closing the store
RECAPTURE MARGIN FROM CLOSING THE STORE = REVENUE X RECAPTURE RATE X PRODUCT MARGIN »»Store A: $2 million x 5% x 40% = a gain of $40,000 from closing the store »»Store B: $3 million x 40% x 40% = a gain of $480,000 from closing the store
TOTAL PROFIT IMPACT = ADDITION OF TWO NUMBERS ABOVE »»Store A: $100,000 + $40,000 = a gain of $140,000 from closing the store »»Store B: ($300,000) + $480,000 = a gain of $180,000 from closing the store
As this example demonstrates, deciding whether to close a store isn’t as simple as whether or not it’s making money. Instead, store rationalization requires a bird’s-eye view of an area’s entire store portfolio, including recapture rate and competitor locations, to help make the most informed decision.
62 Authors
GREG ELLIS Greg Ellis is a director in the firm’s Private Equity and Strategy Practice. In his more than 14 years of consulting, Greg has worked with many leading retailers, consumer products companies and private equity firms. [email protected]
PETER HSIA Peter Hsia is a partner in Kurt Salmon’s Private Equity and Strategy Practice. In his 25 years of consulting, Peter has worked with many of the leading consumer packaged goods companies, retailers and private equity firms. Prior to joining Kurt Salmon, Peter was a consultant with McKinsey & Company. [email protected]
AL SAMBAR Al Sambar leads Kurt Salmon’s North American Retail and Consumer Group. For more than 20 years, he has been providing retailers and consumer companies with strategic planning, organizational design, consumer insights and operating performance improvement services, with deep specialization in omnichannel retailing and global brand management. He writes frequently about innovation in retailing and apparel brand management and is regularly cited in leading publications including Harvard Business Review, The Wall Street Journal and The New York Times. [email protected]
63 Editors
BRUCE COHEN Bruce Cohen is a senior partner and head of Kurt Salmon’s Private Equity and Strategy Practice and is a North American practice director. With more than 20 years of consulting experience in the consumer products and retail industry, Bruce has worked with executives and boards focused on mergers and acquisitions, due diligence, and developing and implementing strategies to drive profitable growth. He is regularly quoted on retail and consumer topics in The Wall Street Journal, Bloomberg BusinessWeek and The New York Times, among others. [email protected]
DANIEL GOLDMAN Dan Goldman is a senior manager in Kurt Salmon’s Private Equity and Strategy Practice. As a consumer and retail brand strategist, Dan has expertise in private equity due diligence and sell-side support, growth and turnaround strategy, brand management and marketing, customer journey design, consumer research, and innovation. Prior to Kurt Salmon, Dan worked in brand marketing at Procter & Gamble and in consulting with Cannondale Associates (now Kantar Retail) and Hudson River Group. [email protected]
The authors and editors thank John Buccheri, Skyler Dougherty, Stephanie Hu and Jessica Scrimale for their contributions to this edition of the Kurt Salmon Review.
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