Is specialty still special?

January 19, 2010  |  by Chris Marshall

Have you seen recent quarterly sales from the top specialty retailers?

For the past couple of years, all we’ve heard about is an economic Armageddon. Research companies started using terms such as “value-conscious,” “staycation” and “conscientious cost cutters” to help segment changed shopping behavior and rationalize declining sales. Reports began as early as 4Q07 that consumers had started cost cutting and/or trading down to mass, grocery and discount channels as the economy began to go south, leaving manufacturers and retailers to believe that the specialty channel would take the brunt of the economic meltdown.

This comes as no surprise – lower prices and convenience are clear differentiators for the grocery, mass and discount channels, and these retailers traditionally thrive when the economy takes a turn for the worse. The question is not whether consumers changed their spending habits; instead, it’s how did specialty retailers adapt?

Recession shopping indicators suggest that people stick to the “needs,” and leave the “wants” for when the economy rebounds. In fact, a recent article1 outlined the top actions taken by consumers during a recession to decrease spending:

1. Using coupons
2. Shopping at discount and outlet stores
3. Consolidating shopping/errands to get everything done in one trip
4. Sticking to a budget and controlling impulse shopping
5. Using shopping comparison tools and search engines to find the best available price

If shoppers truly followed that logic, then why would they buy groceries, beauty products, electronics or other items at specialty stores when they could get the same products and, in some cases, the same brands, without making an extra trip? Why are the above specialty retailers performing better than competitive grocery, mass or department stores?

There is no simple answer. There is clearly a paradox as to why some specialty retailers have suffered (for example, Abercrombie & Fitch, -15%, Foot Locker, -7.3%) and some have succeeded. What is clear is that successful specialty retailers never deviated from the formula that made #1 within their respective categories.

The Other 90%
Simply put, in an economic downturn, you can’t focus on the consumers who don’t have money to spend.  With so much talk about the rising unemployment rate (10+%), manufacturers and retailers must focus on their most loyal customers – those who have purchased within the last three, six or nine months. It seems simple, but shopper segmentation in an economic downturn is your biggest asset. The more you know about the shoppers visiting your store – who they are and what keeps them coming back – the more you will be able to drive repeat store trips, higher spends and greater share of wallet.

Brand Differentiation
Retailers who provide differentiated, meaningful consumer brands give shoppers a reason to visit.  If they don’t, consumers will comparison shop, primarily online, only visiting if you provide the lowest price. For example, Nike is the #1 athletic shoe brand. Nike shoes are sold at Foot Locker as well as Famous Footwear, JCPenney, Kohl’s and other department stores. If a consumer can get Nike shoes (albeit a less expensive style) at a department store when they are also shopping for clothes or household items, why should they make a separate trip to Foot Locker?
 
On the flip side, there’s a reason consumers shop Whole Foods over grocery stores. It’s not price, given Whole Foods’ underground moniker, “whole paycheck.” Whole Foods provides brands, products and a promise (“Conscious Capitalism”) not offered by other grocery stores. To ensure it keeps its specialty shoppers, Whole Foods has addressed any recession-related hesitancy not by instituting storewide price cuts, but by refusing to deviate from its core belief of “purpose over profit,” a belief its loyal customers are willing to pay for – recession or no recession.

Retail Differentiation
Outdoor activity is an escape from the daily grind and pressure, economic orotherwise. Ask outdoorsmen which store they would rather shop in: a small section in mass, or the edutainment playground that is Cabela’s? It’s a no-brainier. Cabela’s store design and associate expertise is unmatched by mass outlets. Consumers visit Cabela’s with the intent to look, learn and relax. Once they are in-store, they become shoppers and emotion drives impulse purchases. Not an outdoorsman? How many consumers have walked into the new Apple stores with no intent to buy anything and have left with a new iPod?
 
Value Proposition
Specialty retailers cannot “coupon” their way out of a recession. They will only create a dollars-off expectation with consumers. If a shopper bought with a $5 coupon last time, they will want a $7 coupon next purchase. It erodes brand value. The better long-term solution is building value for the brand. It could come in the form of customer service, expertise, promotions, special events, special services, new pricing strategy or a unique shopping experience.

In the case of PetSmart, value is provided for shoppers by way of the ever-important convenience factor. PetSmart provides pet owners with a diversified assortment of pet-related products and services (grooming, hotel, and in some locations, veterinary services via Banfield). In short, when pet owners want to do the best for their pets, they want to go to a pet store that cares as much about their pets as they do. While PetSmart may use a coupon to get consumers in the door, they ultimately cross-sell all their other products and services. PetSmart simply consolidates the pet shopping list into a one-stop-shop for all their consumers' pet needs, a value that extends beyond price.

Most reports suggest that the economy will bounce back sometime in 2010. Do the numbers suggest the economy already has come back? It’s too early to tell. It’s clear, however, that the specialty channel can thrive in a down economy.

1. Making Sense of Consumers' Recession Behavior, Chief Marketer, Michael Kahn, July 12, 2009.