Strategic Growth Plans

Under the Main & Wall heading “Red Light or Green Light on Growth,” two retail CEOs and a corporate-turnaround advisor shared their experiences for growing companies. For the c-level executives attending the conference, hearing case studies of what has worked and what has not worked provided valuable insights.

Session moderator Cheryl Carner, managing director, retail finance of Boston-based CapitalSource Finance, noted that the examples would help retailers discern if it would be better to “hunker down and wait out the current economic challenges or take advantage of some of the emerging opportunities.”

Capitalize on your core: The message from Crunch Fitness CEO Tim Miller was one of energized carpe diem. With 32 gyms in six major metropolitan markets, the New York City-based fitness retailer is poised for expansion into new markets.

Founded in the 1980s, Crunch’s approach to exercise as entertainment has resonated with a loyal following of fitness enthusiasts. “We have an opportunity to capitalize on our brand equity and leverage our core differentiators, which is really about the psychographics of our community and the distinct, edgy urban feel of our gyms,” said Miller.

The media, which is fueling consumers’ worst-case fears over economic uncertainties, has proved to be Crunch’s best ally, with frequent reports extolling the virtues of an exercise- and fitness-based lifestyle. What distinguishes Crunch from similar offerings is its commitment to building a fun community.

“The idea that a fitness center is there just to collect money from members and that it doesn’t care if people use the facility or not is a total misnomer. It’s worse for us if people don’t come, because it creates a sense of disengagement,” explained Miller.

To help perpetuate involvement, Crunch recently ran a promotion that members who visited seven times in a month would receive the next month free. Miller also recognizes that, for most consumers, a fitness membership floats in a gray area between a luxury and a necessity spend. Again, the key is to appeal to a psychographic rather than a demographic audience.

For instance, in the past a personal trainer was perceived to be a luxury, but Crunch has recognized this service is an augmentation of what its customer needs and wants.

“Growth is dependent on understanding who your customer is and what they like. Our membership defies a specific demographic; you’ll see a 26-year-old and a 66-year-old working out side by side, and it really is all about a commonality of thought,” continued Miller.

Ultimately, human capital is the most critical resource needed to support growth. “What will get us where we need to be is having the people who understand our brand—its service, experience and culture—and who can be ambassadors of what we do.”

With locations currently in New York City, Atlanta, Chicago, Los Angeles, Miami and San Francisco, Crunch is exploring opportunities in Washington, D.C.; Austin, Texas; New Orleans; Philadelphia; Portland, Ore.; San Diego and Seattle.

Build, buy and franchise: Celebrating its 25th anniversary, Burlington, Vt.-based Bruegger’s Bagels, located in 22 states, has 273 units, of which 165 are company-owned and 108 are franchises. The quick-casual restaurant continues to expand through a combination of organic growth, acquisitions and franchises.

Bruegger’s CEO James J. Greco told attendees that just prior to Main & Wall, his company closed on the acquisition of a five-unit chain in Philadelphia and, for 2008, Bruegger’s plans to build 15 company-owned and 25 franchise units. There are several reasons for choosing this three-tiered expansion strategy.

“This approach helps with risk management because we spread the risk associated with new construction,” explained Greco. “Also, it allows us to maintain [more favorable] debt levels because we would have to borrow more to grow faster organically. Additionally, there is only so much we can manage in terms of site selection, new construction and store openings, and through franchisees we can shift some of those responsibilities. Finally, acquisitions present a strategic opportunity to obtain prime sites or enter a new market in one fell swoop.”

There are pros and cons with each strategy. For instance, the ROI is good on franchise units because they require little capital investment but company-owned units, which are capital-as well as management-intensive, return all of the income to the company.

“Competition for sites can limit growth, and in our case it is very important that every unit is successful,” continued Greco. “Subway goes into sites we would never consider because they are less concerned with how each individual unit performs. With 28,000 units, they can get by with that approach, but we could not.”

In recent months Greco has seen a shift in the balance of power with landlords in certain markets, noting that negotiations have become more flexible in Southern California, Southern Florida and Phoenix, areas where the economic downturn has had a significant impact on the business climate.

When asked if there is an optimum ratio for company-owned to franchise stores in a retail portfolio, Greco admitted there is little agreement among franchisors on this topic. However, he said, “You should not become a franchisee unless the franchisor also operates a large number of company-owned stores. Those that do the best [job] for their franchisees tend to own one-third or more of the units in the portfolio.”

Cautionary signals: For most middle-market CEOs, the growth traffic light is shining bright yellow. The risk of missing an opportunity for expansion would be disappointing, but the threat of making the wrong moves could be devastating.

Michael C. Appel, managing director, Quest Turnaround Advisors, Purchase, N.Y., leads the firm’s retail and consumer-product-goods division and has served as CEO for a number of merchants undergoing a turnaround process including MacKenzie-Childs and Laura Ashley.

“When growth goes awry for a well-established company, there are usually over-arching themes that we see in the turnaround process,” he explained. “Often, companies have funded growth at the expense of supporting their core business, or they have failed to respond to macro changes in the market. In some cases, the company has changed its strategy without adequate testing and validation of the new direction.”

In the case of Portrait Corp. of America (PCA), which leased portrait studios in Wal-Mart stores throughout the country, Appel said the “perfect storm” was created when the company’s private-equity owners focused on accelerated growth rather than the core business.

PCA failed to evolve with the tidal wave of change that cascaded across the industry when consumers embraced digital photography. Additionally, markets that could easily support Wal-Mart stores within five miles of one another were not necessarily candidates for multiple PCA locations in such close proximity. However, PCA owners pumped money into continued store expansion rather than updating equipment in the existing stores or offering incentives to store managers, who were critical to the success of each location. Even Wal-Mart’s mandate that PCA close 500 stores was too little too late, and the company folded into bankruptcy.

The demise of Laura Ashley, Appel noted, was a classic case of a retail CEO who embarked on a growth strategy without doing her homework or staying focused on the core customer and drivers of the business.

“Laura Ashley brought in a new CEO whose growth strategy for the U.S. was based on the success of its High Street stores in the U.K., which were large two- and three-level stores that sold home furnishings,” explained Appel. “In the U.S., Laura Ashley replaced its successful portfolio of small street shops and mall shops with large, 10,000-sq.-ft. stores in ‘A’ malls. These were high-rent stores with low-turnover, low-margin product.”

“Within a couple of years, Laura Ashley had opened 32 of these big stores and it was a disaster,” Appel concluded. Today, the majority of Laura Ashley’s North American locations have closed and the company has converted to a licensing model.