August 5, 2008
Stores Diversify into New Categories
Retailers faced with the knowledge that only so many consumers are going to walk through the door to buy the products in their stores are now adding new items with the hope of driving additional traffic. Best Buy is adding musical instruments, Menards is selling food and Walgreens has gotten into the clothing business.
The strategy of expanding the types of products sold in retail stores known for particular types of items, the Chicago Tribune points out, has had mixed results.
Barnes & Noble was successful adding coffee shops to its book operations. On the other hand, Jewel’s venture into selling lumber; not so good.
“Best Buy and a number of other large retail chains realize they’re running out of space to open new stores,” said Mary Brett Whitfield, analyst at TNS Retail Forward. “If you look at the run rate of the major retailers for the past 10 to 15 years, it’s just going to be physically impossible to keep that up in perpetuity. A lot of retailers are looking at ‘How can I sell more things to the people already in my store.’”?
Abt Electronics is a retailer that has expanded its offerings from consumer electronics to include upscale timepieces. The company opened a 900-square-foot watch boutique called Time inside its 65,000-square-foot store in Glenview, Illinois last November.
“The limits of what these big boxes are lead retailers to continue to want to find a way to experiment,” Neil Stern, senior partner at McMillan Doolittle LLP told the Trib. “The question from the consumer is, what do you accept from the brand and what feels foreign.”
Best Buy is hoping that consumers will not see musical instruments in its stores as being a foreign experience. The retailer, which has been successful selling recorded music and movies to consumers, believes musical instruments are a logical next step.
“Consumers have looked to us as a resource for music for quite a while,” said Justin Barber, a spokesperson for Best Buy.
Burt Flickinger, managing director of Strategic Resource Group, thinks Best Buy may be on the right track. “There is so little competition, beyond Guitar Center and local independent stores, it should be a real destination category for Best Buy,” he told the Trib.
Discussion Questions: What are your thoughts of retailers branching off into new categories of business? What are the criteria for merchants to be successful pursuing this path? Which retailers do you see as examples of the good and bad of pursuing new categories within established stores?
BrainTrust
Recent Discussions
Discussion Questions
Poll
Expansion to new products organic to the store’s current wares is a good move. Most Best Buy customers will feel musical instruments to be a logical offering.
Understanding the consumer’s purchasing behavior will be critical, however, tough economic times do make consumers adapt new behavior, so any format change offering a solution to a tight household budget has the potential to work.
I think the key to success here is twofold: Start with a thorough profile of your best customer, then add a category that customer already spends heavily on.
In my view, that best customer is probably your most profitable one–if you’re going to take a risk on a new line, you might as well fund it with the margins these folks are already bringing in. And you probably want to expand into a high-margin category as well.
Then profile that customer as completely as you possibly can–especially lifestyle interests and buying patterns in categories that make a halfway logical fit with your current offerings–and I would probably favor early-adopter behavior. Without seeing data (but I’m always willing to be swayed by facts) it just makes sense to me that an early adopter of new products is likely to be a higher-margin customer overall.
At this point, a really good customer profile should have a couple of product extensions fairly leaping off the screen at you–things your highest-margin customer is an enthusiastic early-adopting consumer of in other environments. Presumably, they’re also things that have some relationship to your core business, so you have some credibility going to market in those categories.
Next: test customer acceptance in the online channel before doing a bricks-and-mortar test, then start in a few markets and taking a little time to learn the business before committing to a national rollout.
Since long-standing customer preferences are driving the whole exercise, it’s probably not as urgent to roll out instantly as it would be in a fad-driven enterprise. Of course, you still want to get to market fast enough to leverage the investment, and it probably makes sense to turn this whole exercise into an ongoing process–that can also call out, just as regularly, when it’s time to drop a line that’s on its way to less-than-stellar performance.
Branching out needs to be carefully examined before any moves are made. Best Buy selling musical instruments is a given and I’m not sure why they weren’t selling them years ago.
Some expansions are just plain bizarre! Years ago, a major video rental chain tried to install milk coolers in a few test stores. Corporate figured since they were open until midnight, adding staples such as bread and milk would ‘enhance’ the convenience factor for the customer. The result: a lot of moldy bread and spoiled milk!
Expanding into different categories is a great way to enhance the bottom line but it must be done with the proper research and analysis.
Experiences and categories that complement and enhance the shopper’s mission will work beautifully: Starbucks at Barnes & Noble, instruments at Best Buy. What won’t (ultimately) work so well is the annexing of extra categories in a scattershot manner. Eventually, channel blurring will create a “sea of sameness” among big box outlets…ushering in less retail loyalty and commoditization as retailers overlap offerings.
Adhere to trip mission and mindset.
I agree with Richard Seesel’s comments. A thoughtful and purposeful approach to expanding a store’s assortment is critical as a first step towards success.
If the new product or category complements both your customer base and core competency then it passes an important first test; will the product sell to existing customers?
A good example of this is Best Buy adding musical instruments, a category that is certainly analogous to its core offer and would likely have customers who might take immediate advantage of the new offer.
Now, Starbucks offering protein drinks won’t likely be tapping an existing customer base…when was the last time you saw a muscle-head in a java shop? Seriously, in this case it doesn’t appear that it is a natural extension to what has been a customer base more likely to lounge around reading the New York Times for hours and sipping on a latte than running, riding or lifting.
That said, it is important for retailers to continue to find new ways to impress and excite their customer base. An annual review of their categories and product trends would be a good first start.
Shopping experiences can turn boring really quickly if there is never anything to surprise or delight the shopper. Some of the “experiments” seem a little far-fetched, but we should, as an industry, support all innovation. I am not in the market for musical instruments, but plan to go see how Best Buy will do this in stores. I’m guessing they will do it quite well.
From a logistics standpoint, it makes total sense for retailers to “logically” expand assortments to entice greater basket rings with their loyal shoppers and expand their shopper base. Opening new “perimeter” locations and/or “filling in” market areas is expensive and may cannibalize your existing stores to some extent. It costs big up front dollars to build new stores and to stock and staff them.
That said, understanding the marketplace and being strategic in how you expand assortments and offerings is the key to success or failure. Starbucks is expanding into protein drinks (early results do not look too promising) to try to win new health focused shoppers into Starbucks. We’ll see how that expansion plays out, but the key is understanding your marketplace and shoppers interests location by location.
Before a retailer expands into new categories, it needs to answer a few questions:
1. Is the new business relevant to my core business? Or does it distract from and detract from my brand?
2. Do I have the space to make it meaningful?
3. Does the category enhance my productivity measures?
I think you can make a case that musical instruments are an under-retailed category nationwide, that they have some bearing on Best Buy’s concept as an entertainment headquarters, and that it has room to spare. Over the long haul, Best Buy should shrink the size of its DVD and CD offerings as more customers opt for digital delivery…so this gives it a challenge to fill the space with new businesses.
As I’ve noted before on RetailWire, I think you have a harder time justifying an expanded clothing assortment at Walgreens. Outside of a very limited selection of basics, Walgreens needs to focus on opportunities that relate to its core business of health and HBA…and apparel just becomes “a bunch of stuff” if Walgreens isn’t careful.
Branching off into new categories could be a bad experience or a good experience. It depends how much analysis was done on selecting the product, developing the logistical plan and executing. If the retailer has traditional products with high margins and they add very thin margin groceries, it could reduce their profit margins dramatically. If they only add essentials to become a quick one stop, milk and bread, it might be successful.
This is not something you just do quickly. It is something that should be studied and planned carefully. Best Buy adding musical instruments to their already musical entree makes sense. Walgreens adding apparel, on the other hand, doesn’t make so much sense.
Retailers should look at companion high margin products to add. Not low margin items that current customers would not relate too.
Amazon adding music to their books is an example of companion. Adding jewelry, not so much!
Expanding categories is usually an add-on sale opportunity, not a traffic driver. Richard Seesel makes a great point about making sure the category fits your core positioning. Most retailers stretch that point much too far in our opinion. As for musical instruments and Best Buy, they have a logical entry to electronics–but I doubt many guitarists will venture there for their next Segovia….
Retailers provide shopping solutions for consumers. Shoppers will permit them to add categories that build on their basic solutions with related items. In addition, some impulse items, such as candy and beverages, are conveniences related to almost any shopping trip.
The problem arises when retailers add categories that stress their business models or extend beyond their position as a shopping solution. Would Best Buy try to sell fresh fruit? No, it is outside their business model. Should a drug store sell clothing? Only to the extent that it supports its emerging role as a convenience store for women.
Many industry observers think that grocery stores got into trouble when they started selling lawn chairs and luggage. As they evolved into supercenters, many lost their valued position as the primary shopping solution for fresh, quality food.
This is a good play as long as the retailer stays true to their core and the add-ons appeal to their target customer. I know a grocery chain who does well selling light bulbs. Not something they advertise but it is profitable and the consumers appreciate it.
This strategy has never worked and based on all of the research we have done for retailers, it never will. The number one reason customers shop at a store is selection of merchandise, which actually means “having what I want.” While it is possible for these retailers to sell a few pieces of product on impulse, they will never do enough business to turn the inventory and be profitable.
A far more profitable strategy is to learn from your Core Customers what you can do better to get a larger share of wallet in the categories of business you are already in. I have never seen a retailer have 100% share of business from the customers they already have.
I echo that the factor here that will distinguish a successful diversification strategy from one likely to fail: The goal is to drive greater customer spend per trip, by offering unique yet appropriate merchandise to the target/core customer, rather than attempting to drive increased store traffic. The Best Buy expansion into musical instruments fits the winning formula. Walgreens’ diversifying into apparel offerings seems awkward.
Most musical instruments are bought by–wait for it–musicians or aspiring musicians. The turnover and current wage scale of the sales people at Best Buy do not strike me as a good match for selling musical instruments which requires a fairly specific and skilled knowledge base that I doubt Best Buy management will be willing to pay for.
ABT, on the other hand is a multi generation family owned business with a great reputation in the Chicago area. They have a good website and a national following. Adding a small exclusive “timepiece” section with known brands seems to be something ABT could carry off with the same clientele who purchase home theaters and other luxury electronics.
It is interesting to read all of the opinions from all of the experts and if you look at the number of replies to this posting, this is something everyone seems to have an opinion on.
Over the last 10 years, the question of how to survive in the retail world has been one of not only how to find more customers but more importantly how do you sell more to the customers you have?
Everywhere you look, the channels keep blurring. Everywhere you look, you see products in places you never saw them before. Coffee is everywhere, water is everywhere, toys at Christmas are everywhere, furniture is everywhere. Costco has built a business on the idea you will never figure out what they are going to be selling next.
At minimum, today’s business climate necessitates testing and learning about whether an alternate product mix drives profitable incremental business. Criteria for success include:
1. Relevance to the shopping list: Target selling food is a good example of a new category that adds to the convenience of a shopping list that already has items like personal products, for example, on the list. Food is a great category to drive repeat weekly visits driving additional cross shopping. It is also not a stretch to grab some snacks on the way out of Best Buy as I may be headed home for an evening of movie watching. On the other hand, it is not likely that I will go out for a gallon of milk and decide to pick up a truckload of 2x4s.
2. Proximity to competitors for that new category: I may buy from you if it means not having to make a further drive for that new product.
3. Ability to be price competitive: are you buying in bulk similar to competitors and are you competitive?
4. Brand Relevance: JCPenney made the successful transition to a softlines retailer from a mass merchandiser because it saw where its strengths were and what customers were giving them credit for being.
The best part about retail is that you gain immediate feedback from your customers about what is and is not working so test, test, test.
Innovation and testing are great ways of taking on risk in hopes for greater returns. But when innovation and expansion are not relevant to customers, and are not properly tested, failure results.
Working at Macy’s (after their Executive Training Program, pre-LBO and pre-FDS) we learned first hand that best sellers fueled the business, as they drove volume and margin. It fit with Macy’s narrow and deep approach to merchandising and “telling stories.” Reflecting on this and thinking about Walgreens selling clothing, I find it somewhat difficult to imagine a best seller coming out of this strategy.
There’s an interesting article from Al Ries in Ad Age today about focus that presents a good counterpoint to this type of strategy for business growth.
The real issue is that without true expansion into new products and categories, there will continue to be only greater splitting of the pie, between retailers and channels of trades.
As an independent retail pet store, it would seem logical that adding gift items for pet lovers would be a logical extension to our product mix. Over the past 7 years, I have not found this successful–even when we try a separate area within the store for the gift items, and even when we keep the gift item price point at an impulse level.
I was a little concerned about the direction of this discussion when I saw at the beginning: “the hope of driving additional traffic.” But then, I saw many comments with this tenor, “A lot of retailers are looking at ‘How can I sell more things to the people already in my store.’” (Mary Brett Whitfield)
I know it is important to get people into your store (drive traffic,) but it is far more important to “sell more things to the people already in [the] store.” Why should you get more traffic if you are doing a substandard job serving the traffic you already have?
The discussions of whether this or that chain should expand into this or that, are quite properly focused on whether the shoppers they already have will be better served with the addition. It is a HUGE mindset difference: how to get more shoppers vs. how to serve those we have better. The first is a selfish, losing competitive mindset; the second is a shopper centric, winning competitive mindset.
I think the Best Buy/instrument pairing really makes sense. It seems like the core demographics would overlap quite a bit–as long as they limit it to electronics like guitars and keyboards and drum sets.
I hadn’t heard about the Walgreens initiative before but I think that has good synergy too. I don’t know what Menard’s was thinking, though.
Best Buy’s entry into the musical instrument business seems like a great move. They took a highly fragmented category, and with just under 100 stores in the test, they become the #2 musical instrument retailer in the country. This is a perfect example of smart strategic thinking, and great use of floor space. Sometimes, on the other hand, these ideas make no sense.
Let’s use Best Buy as an example of when the strategy does not work. About 10 years ago, Best Buy decided that they should be in the book business, and should compete against Borders and Barnes & Noble. The market was not fragmented, the average music listener was not necessarily a reader, and of course the strategy never worked. So it can’t be simply fill the floor space with product, and hope that the foot traffic will allow the product to sell itself. There has to be considerable strategic thinking behind the move.
Other ideas that never worked or won’t work:
Borders selling gift baskets and bath goods.
Bed Bath & Beyond is testing Natural Foods in their stores.
Starbucks selling books.
Sears selling financial services and real estate in their stores.
Just my opinion.
The expansion into other “related” categories makes perfect sense as long as the concepts are implemented and executed without losing focus or, without changing focus from the consumer who built their business.
In the case of Best Buy, the musical instruments plan may be a way for them to attract a wider audience into their stores who would be interested in also buying the sound systems, etc, for their home or apartment.
Menards sold a small assortment of candy, beef jerky, mixes & sauces, sodas, etc, ever since I walked into their stores the first time in the early 90s. Their expansion into limited assortment foods won’t hurt them at all. It is simply another venue for a little broader appeal to the consumers who they are attracting.
For these reasons I believe it is just good business. However, no retailer should ever stop their differentiation process. This is why so many grocers have developed into the bland “me too” imitations of each other. And, why it seems that so many categories appear to have been transformed into so many commodities for consumers to pick over and then move onto the next one down the street to pick over.
Walgreen’s isn’t a drug store, it’s a variety store with HBA and prescriptions. So easy-to-pick-up clothing items wouldn’t be unusual (and many variety stores and supermarkets have sold socks, underwear, tee-shirts, etc. for decades.)
Best Buy is an electronics, entertainment and appliances store. Most musical instruments today are electronic, and the customers are often the same demographic as the most enthusiastic electronics and entertainment shoppers.
Barnes & Noble wasn’t the first bookstore with a cafe. There were hundreds of bookstores with cafes before B&N. B&N was the first national chain to do it.
IKEA realized that family furniture shopping can take hours and that they could use inexpensive restaurants to keep the folks comfortable and shopping longer. Besides, shoppers in a festive mood are more likely to buy and return again.
Any retailer with a tape measure knows the comparable margin dollars per square foot for each category in each location. If the new widget department doesn’t pull its share of gross margin dollars, it should be gone.
Is that why my haircutter doesn’t sell carrots?
I’d like to expand on Richard Seesal’s comment. I agree that any expansion has to be consistent with a retailers core competency, but the key is that it has to be consistent with the core competency as defined by the customer. Walgreens’ venture into apparel is questionable because their customers look to them for convenience, and even basic apparel is a fashion purchase. Best Buy’s venture into instruments makes far more sense because their customers see them as the retailer of choice for consumer electronics.
More Discussions
As Boomers ‘Age Out of Peak Purchasing,’ How Can National Brands Retain Interest With Gen Z?
According to a recent First Insight study titled “Is Gen Z Still Choosing Your Brand,” while…Is Supply Chain Volatility Here To Stay?
Can we expect an ongoing volatility to remain in terms of retail supply chain?Has Same-Day Delivery Become an Expectation Across Retail?
Are expectations around retail delivery speed in flux?
Expansion to new products organic to the store’s current wares is a good move. Most Best Buy customers will feel musical instruments to be a logical offering.
Understanding the consumer’s purchasing behavior will be critical, however, tough economic times do make consumers adapt new behavior, so any format change offering a solution to a tight household budget has the potential to work.
I think the key to success here is twofold: Start with a thorough profile of your best customer, then add a category that customer already spends heavily on.
In my view, that best customer is probably your most profitable one–if you’re going to take a risk on a new line, you might as well fund it with the margins these folks are already bringing in. And you probably want to expand into a high-margin category as well.
Then profile that customer as completely as you possibly can–especially lifestyle interests and buying patterns in categories that make a halfway logical fit with your current offerings–and I would probably favor early-adopter behavior. Without seeing data (but I’m always willing to be swayed by facts) it just makes sense to me that an early adopter of new products is likely to be a higher-margin customer overall.
At this point, a really good customer profile should have a couple of product extensions fairly leaping off the screen at you–things your highest-margin customer is an enthusiastic early-adopting consumer of in other environments. Presumably, they’re also things that have some relationship to your core business, so you have some credibility going to market in those categories.
Next: test customer acceptance in the online channel before doing a bricks-and-mortar test, then start in a few markets and taking a little time to learn the business before committing to a national rollout.
Since long-standing customer preferences are driving the whole exercise, it’s probably not as urgent to roll out instantly as it would be in a fad-driven enterprise. Of course, you still want to get to market fast enough to leverage the investment, and it probably makes sense to turn this whole exercise into an ongoing process–that can also call out, just as regularly, when it’s time to drop a line that’s on its way to less-than-stellar performance.
Branching out needs to be carefully examined before any moves are made. Best Buy selling musical instruments is a given and I’m not sure why they weren’t selling them years ago.
Some expansions are just plain bizarre! Years ago, a major video rental chain tried to install milk coolers in a few test stores. Corporate figured since they were open until midnight, adding staples such as bread and milk would ‘enhance’ the convenience factor for the customer. The result: a lot of moldy bread and spoiled milk!
Expanding into different categories is a great way to enhance the bottom line but it must be done with the proper research and analysis.
Experiences and categories that complement and enhance the shopper’s mission will work beautifully: Starbucks at Barnes & Noble, instruments at Best Buy. What won’t (ultimately) work so well is the annexing of extra categories in a scattershot manner. Eventually, channel blurring will create a “sea of sameness” among big box outlets…ushering in less retail loyalty and commoditization as retailers overlap offerings.
Adhere to trip mission and mindset.
I agree with Richard Seesel’s comments. A thoughtful and purposeful approach to expanding a store’s assortment is critical as a first step towards success.
If the new product or category complements both your customer base and core competency then it passes an important first test; will the product sell to existing customers?
A good example of this is Best Buy adding musical instruments, a category that is certainly analogous to its core offer and would likely have customers who might take immediate advantage of the new offer.
Now, Starbucks offering protein drinks won’t likely be tapping an existing customer base…when was the last time you saw a muscle-head in a java shop? Seriously, in this case it doesn’t appear that it is a natural extension to what has been a customer base more likely to lounge around reading the New York Times for hours and sipping on a latte than running, riding or lifting.
That said, it is important for retailers to continue to find new ways to impress and excite their customer base. An annual review of their categories and product trends would be a good first start.
Shopping experiences can turn boring really quickly if there is never anything to surprise or delight the shopper. Some of the “experiments” seem a little far-fetched, but we should, as an industry, support all innovation. I am not in the market for musical instruments, but plan to go see how Best Buy will do this in stores. I’m guessing they will do it quite well.
From a logistics standpoint, it makes total sense for retailers to “logically” expand assortments to entice greater basket rings with their loyal shoppers and expand their shopper base. Opening new “perimeter” locations and/or “filling in” market areas is expensive and may cannibalize your existing stores to some extent. It costs big up front dollars to build new stores and to stock and staff them.
That said, understanding the marketplace and being strategic in how you expand assortments and offerings is the key to success or failure. Starbucks is expanding into protein drinks (early results do not look too promising) to try to win new health focused shoppers into Starbucks. We’ll see how that expansion plays out, but the key is understanding your marketplace and shoppers interests location by location.
Before a retailer expands into new categories, it needs to answer a few questions:
1. Is the new business relevant to my core business? Or does it distract from and detract from my brand?
2. Do I have the space to make it meaningful?
3. Does the category enhance my productivity measures?
I think you can make a case that musical instruments are an under-retailed category nationwide, that they have some bearing on Best Buy’s concept as an entertainment headquarters, and that it has room to spare. Over the long haul, Best Buy should shrink the size of its DVD and CD offerings as more customers opt for digital delivery…so this gives it a challenge to fill the space with new businesses.
As I’ve noted before on RetailWire, I think you have a harder time justifying an expanded clothing assortment at Walgreens. Outside of a very limited selection of basics, Walgreens needs to focus on opportunities that relate to its core business of health and HBA…and apparel just becomes “a bunch of stuff” if Walgreens isn’t careful.
Branching off into new categories could be a bad experience or a good experience. It depends how much analysis was done on selecting the product, developing the logistical plan and executing. If the retailer has traditional products with high margins and they add very thin margin groceries, it could reduce their profit margins dramatically. If they only add essentials to become a quick one stop, milk and bread, it might be successful.
This is not something you just do quickly. It is something that should be studied and planned carefully. Best Buy adding musical instruments to their already musical entree makes sense. Walgreens adding apparel, on the other hand, doesn’t make so much sense.
Retailers should look at companion high margin products to add. Not low margin items that current customers would not relate too.
Amazon adding music to their books is an example of companion. Adding jewelry, not so much!
Expanding categories is usually an add-on sale opportunity, not a traffic driver. Richard Seesel makes a great point about making sure the category fits your core positioning. Most retailers stretch that point much too far in our opinion. As for musical instruments and Best Buy, they have a logical entry to electronics–but I doubt many guitarists will venture there for their next Segovia….
Retailers provide shopping solutions for consumers. Shoppers will permit them to add categories that build on their basic solutions with related items. In addition, some impulse items, such as candy and beverages, are conveniences related to almost any shopping trip.
The problem arises when retailers add categories that stress their business models or extend beyond their position as a shopping solution. Would Best Buy try to sell fresh fruit? No, it is outside their business model. Should a drug store sell clothing? Only to the extent that it supports its emerging role as a convenience store for women.
Many industry observers think that grocery stores got into trouble when they started selling lawn chairs and luggage. As they evolved into supercenters, many lost their valued position as the primary shopping solution for fresh, quality food.
This is a good play as long as the retailer stays true to their core and the add-ons appeal to their target customer. I know a grocery chain who does well selling light bulbs. Not something they advertise but it is profitable and the consumers appreciate it.
This strategy has never worked and based on all of the research we have done for retailers, it never will. The number one reason customers shop at a store is selection of merchandise, which actually means “having what I want.” While it is possible for these retailers to sell a few pieces of product on impulse, they will never do enough business to turn the inventory and be profitable.
A far more profitable strategy is to learn from your Core Customers what you can do better to get a larger share of wallet in the categories of business you are already in. I have never seen a retailer have 100% share of business from the customers they already have.
I echo that the factor here that will distinguish a successful diversification strategy from one likely to fail: The goal is to drive greater customer spend per trip, by offering unique yet appropriate merchandise to the target/core customer, rather than attempting to drive increased store traffic. The Best Buy expansion into musical instruments fits the winning formula. Walgreens’ diversifying into apparel offerings seems awkward.
Most musical instruments are bought by–wait for it–musicians or aspiring musicians. The turnover and current wage scale of the sales people at Best Buy do not strike me as a good match for selling musical instruments which requires a fairly specific and skilled knowledge base that I doubt Best Buy management will be willing to pay for.
ABT, on the other hand is a multi generation family owned business with a great reputation in the Chicago area. They have a good website and a national following. Adding a small exclusive “timepiece” section with known brands seems to be something ABT could carry off with the same clientele who purchase home theaters and other luxury electronics.
It is interesting to read all of the opinions from all of the experts and if you look at the number of replies to this posting, this is something everyone seems to have an opinion on.
Over the last 10 years, the question of how to survive in the retail world has been one of not only how to find more customers but more importantly how do you sell more to the customers you have?
Everywhere you look, the channels keep blurring. Everywhere you look, you see products in places you never saw them before. Coffee is everywhere, water is everywhere, toys at Christmas are everywhere, furniture is everywhere. Costco has built a business on the idea you will never figure out what they are going to be selling next.
At minimum, today’s business climate necessitates testing and learning about whether an alternate product mix drives profitable incremental business. Criteria for success include:
1. Relevance to the shopping list: Target selling food is a good example of a new category that adds to the convenience of a shopping list that already has items like personal products, for example, on the list. Food is a great category to drive repeat weekly visits driving additional cross shopping. It is also not a stretch to grab some snacks on the way out of Best Buy as I may be headed home for an evening of movie watching. On the other hand, it is not likely that I will go out for a gallon of milk and decide to pick up a truckload of 2x4s.
2. Proximity to competitors for that new category: I may buy from you if it means not having to make a further drive for that new product.
3. Ability to be price competitive: are you buying in bulk similar to competitors and are you competitive?
4. Brand Relevance: JCPenney made the successful transition to a softlines retailer from a mass merchandiser because it saw where its strengths were and what customers were giving them credit for being.
The best part about retail is that you gain immediate feedback from your customers about what is and is not working so test, test, test.
Innovation and testing are great ways of taking on risk in hopes for greater returns. But when innovation and expansion are not relevant to customers, and are not properly tested, failure results.
Working at Macy’s (after their Executive Training Program, pre-LBO and pre-FDS) we learned first hand that best sellers fueled the business, as they drove volume and margin. It fit with Macy’s narrow and deep approach to merchandising and “telling stories.” Reflecting on this and thinking about Walgreens selling clothing, I find it somewhat difficult to imagine a best seller coming out of this strategy.
There’s an interesting article from Al Ries in Ad Age today about focus that presents a good counterpoint to this type of strategy for business growth.
The real issue is that without true expansion into new products and categories, there will continue to be only greater splitting of the pie, between retailers and channels of trades.
As an independent retail pet store, it would seem logical that adding gift items for pet lovers would be a logical extension to our product mix. Over the past 7 years, I have not found this successful–even when we try a separate area within the store for the gift items, and even when we keep the gift item price point at an impulse level.
I was a little concerned about the direction of this discussion when I saw at the beginning: “the hope of driving additional traffic.” But then, I saw many comments with this tenor, “A lot of retailers are looking at ‘How can I sell more things to the people already in my store.’” (Mary Brett Whitfield)
I know it is important to get people into your store (drive traffic,) but it is far more important to “sell more things to the people already in [the] store.” Why should you get more traffic if you are doing a substandard job serving the traffic you already have?
The discussions of whether this or that chain should expand into this or that, are quite properly focused on whether the shoppers they already have will be better served with the addition. It is a HUGE mindset difference: how to get more shoppers vs. how to serve those we have better. The first is a selfish, losing competitive mindset; the second is a shopper centric, winning competitive mindset.
I think the Best Buy/instrument pairing really makes sense. It seems like the core demographics would overlap quite a bit–as long as they limit it to electronics like guitars and keyboards and drum sets.
I hadn’t heard about the Walgreens initiative before but I think that has good synergy too. I don’t know what Menard’s was thinking, though.
Best Buy’s entry into the musical instrument business seems like a great move. They took a highly fragmented category, and with just under 100 stores in the test, they become the #2 musical instrument retailer in the country. This is a perfect example of smart strategic thinking, and great use of floor space. Sometimes, on the other hand, these ideas make no sense.
Let’s use Best Buy as an example of when the strategy does not work. About 10 years ago, Best Buy decided that they should be in the book business, and should compete against Borders and Barnes & Noble. The market was not fragmented, the average music listener was not necessarily a reader, and of course the strategy never worked. So it can’t be simply fill the floor space with product, and hope that the foot traffic will allow the product to sell itself. There has to be considerable strategic thinking behind the move.
Other ideas that never worked or won’t work:
Borders selling gift baskets and bath goods.
Bed Bath & Beyond is testing Natural Foods in their stores.
Starbucks selling books.
Sears selling financial services and real estate in their stores.
Just my opinion.
The expansion into other “related” categories makes perfect sense as long as the concepts are implemented and executed without losing focus or, without changing focus from the consumer who built their business.
In the case of Best Buy, the musical instruments plan may be a way for them to attract a wider audience into their stores who would be interested in also buying the sound systems, etc, for their home or apartment.
Menards sold a small assortment of candy, beef jerky, mixes & sauces, sodas, etc, ever since I walked into their stores the first time in the early 90s. Their expansion into limited assortment foods won’t hurt them at all. It is simply another venue for a little broader appeal to the consumers who they are attracting.
For these reasons I believe it is just good business. However, no retailer should ever stop their differentiation process. This is why so many grocers have developed into the bland “me too” imitations of each other. And, why it seems that so many categories appear to have been transformed into so many commodities for consumers to pick over and then move onto the next one down the street to pick over.
Walgreen’s isn’t a drug store, it’s a variety store with HBA and prescriptions. So easy-to-pick-up clothing items wouldn’t be unusual (and many variety stores and supermarkets have sold socks, underwear, tee-shirts, etc. for decades.)
Best Buy is an electronics, entertainment and appliances store. Most musical instruments today are electronic, and the customers are often the same demographic as the most enthusiastic electronics and entertainment shoppers.
Barnes & Noble wasn’t the first bookstore with a cafe. There were hundreds of bookstores with cafes before B&N. B&N was the first national chain to do it.
IKEA realized that family furniture shopping can take hours and that they could use inexpensive restaurants to keep the folks comfortable and shopping longer. Besides, shoppers in a festive mood are more likely to buy and return again.
Any retailer with a tape measure knows the comparable margin dollars per square foot for each category in each location. If the new widget department doesn’t pull its share of gross margin dollars, it should be gone.
Is that why my haircutter doesn’t sell carrots?
I’d like to expand on Richard Seesal’s comment. I agree that any expansion has to be consistent with a retailers core competency, but the key is that it has to be consistent with the core competency as defined by the customer. Walgreens’ venture into apparel is questionable because their customers look to them for convenience, and even basic apparel is a fashion purchase. Best Buy’s venture into instruments makes far more sense because their customers see them as the retailer of choice for consumer electronics.