Focus On: Leonard M. Lodish

When Retailers Make Strange Bedfellows

The Neiman Marcus luxury retail chain announced a new partnership this week with discounter Target that will offer a limited collection of items from 24 American designers. According to an article in The Wall Street Journal, the items – ranging from clothing and accessories to leather goods and stationery — will be sold for the same price in both stores, and carry both company logos on their labels.

Neiman Marcus and Target are not two retailers one typically talks about in the same breath. But Wharton experts generally applaud the initiative and suggest it takes advantage of several shopping trends that have gained momentum since the economic downturn.

These days, “you can’t pigeonhole a customer into one store or type of retail experience,” says Wharton marketing professor Barbara Kahn, who is director of Wharton’s Jay H. Baker Retailing Center. “Neiman shoppers may also shop at Walmart or Target. People who stay at the Ritz Carlton for business may stay at Marriott when they are traveling with family. People who routinely shop at Walmart or Target may splurge for a special occasion at Neiman or Saks.”

Target has been partnering with many luxury brands “in hopes of continuing their own cache as a design-oriented retailer,” Kahn adds. “This partnership with Neiman Marcus follows in that stream. For Neiman Marcus, the idea is to lure customers who may not usually shop in Neiman to come into the store – particularly the younger consumer. Even Neiman’s core customer may buy at lower price points from time to time in other channels or retailers.”

Wharton marketing professor David Bell notes that shoppers are going to multiple retailers “and might be prepared to spread their patronage across seemingly very different types of stores. Segmentation is no longer completely ‘cut and dried.’ Target already has been able to attract a clientele that is more upscale than the stores’ product mix would imply. I doubt Neiman Marcus would do this kind of deal with J.C. Penney.”

According to the Journal article, the new collection will be available December 1 for three weeks at Target and Neiman stores and on-line. Target will be producing the 50 items being offered at a price range of $7.99 to $499.99 (with an average price of $60) and will feature such designers as Diane von Furstenberg, Derek Lam, Rodarte and Tory Burch, the article adds.

All this raises the question of what each store – and the individual designers – will be getting out of this partnership. For Target, the advantages are clear, says Erin Armendinger, managing director of the Baker Retailing Center. “It will bring a high-end feel and great designer brands to their customers – who tend to care about these things: Look at the Missoni deal last year.” As for Neiman, “it is hoping to bring in a new customer.”

Wharton marketing professor Stephen Hoch sees each retailer “borrowing brand equity from the other. Target borrows luxury and exclusivity from Neiman, and Neiman borrows affordable chic and democratization from Target.”

As for the designers themselves, they clearly stand to benefit from this deal. “It broadens their appeal and gets their name/designs better known,” says Kahn. “Although there was some reluctance earlier on by some designers, the Target promotions have been so successful and fun, and have not seemed to dilute the appeal of the designers who have participated, so I think people are less risk averse.” Hoch notes that “the designers want scale and more exposure beyond the cloistered world of haute couture. There have been many successful attempts like this one and I know of no disasters for the designer.”

And for whom does this experiment post the greater risk? “Definitely for Neiman Marcus,” says Armendinger. “They risk diluting their brand. The worst thing that could happen is that their customers perceive this as [the store] moving ‘down.’ On the other hand, in the best case, they will seem hip, young, fresh and a little bit more accessible.”

The biggest risk overall, adds Bell, is “brand dilution and erosion of positioning. Each store already has a pretty strong image, along with unique strengths and weaknesses, and the positioning could be disrupted by a ‘blending’ of the two stores. In addition, the risks and benefits might be asymmetric: Neiman could be seen as ‘cheap’ – or, in a better case, ‘good value’, while Target might be seen as ‘expensive,’ or, in a better case, ‘upscale.’”

The Journal article notes that the median household income for Neiman Marcus shoppers is $150,000 to $200,000 versus $64,000 for Target, while the median age is 48 at Neiman versus 40 at Target. Neiman has 77 stores versus 1,763 for Target.

Meanwhile, are there other retailer-combinations out there for whom such an experiment could work? Saks and H&M? or Nordstrom and T.J. Maxx or Walmart? According to Wharton marketing professor Leonard Lodish, “Target is different than the above retailers because Target has used design as part of its positioning since it was started. It will be harder for Walmart or T.J. Maxx to pull something like this off successfully.” Kahn, too, cites the design appeal that both chains have typically focused on: “The connection between Neiman and Target is that they both pride themselves on high-end design appeal, and they execute consistently to their own missions. They don’t try to be what they are not. That protects their brand when they experiment.”

Other “odd couple matchups” are possible, adds Hoch, although Target and Neiman “have a first mover advantage and a novelty effect.”

What could Neiman and Target do to ensure that this experiment is a success? “If they start doing things with these items that are not consistent with the designer image, it will mess things up — like sending out coupons or having temporary price reductions,” says Lodish. “They also need to very clearly differentiate the Target-Neiman [merchandise] from the Neiman-only [merchandise].”

One possible downside for Neiman, adds Kahn, is if the partnership “encourages too much traffic into their store at a busy time, which might chase away core customers. A temporary leave is bearable, but one hopes [customers] don’t translate this into never coming back. The other problem is if [the two retailers] haven’t put the collection together well and if it does not appeal to anyone, then there is excess inventory to get rid of.”

In the end, says Hoch, “the risks seem very minimal. It is an in-and-out promotion with minimal inventory commitment, like a flash sale. I am sure that they will produce [small] quantities and run out quickly. It is all about the buzz.”

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Food for Thought

With online grocer Peapod now expanding its shopping and home delivery service to consumers in the Philadelphia, Pa., area, the question again arises: Can this business model work? 

It certainly didn’t for Webvan, the Internet venture started during the dot-com boom by Louis H. Borders with the goal of revolutionizing the low-margin, intensely competitive grocery business. Armed with more than $122 million in initial funding from blue-chip companies and backing from top-notch Silicon Valley venture capital firms, Webvan opened for business in the San Francisco Bay area in 1999. After burning its way through more than $1.2 billion in two years, the company declared bankruptcy in 2001.

Peapod, however, is banking on a different market. According to a recent article in the Philadelphia Inquirer, the company is targeting young consumers who are comfortable ordering food on cellphones and iPads. The company is also relying on a logistics system that fills orders in a storage warehouse in Maryland, ships the goods to Philadelphia in temperature-controlled tractor-trailers, then moves them onto smaller delivery trucks and into people’s homes.

The company, which started in the late 1980s in Chicago, is now owned by Ahold, a Dutch retailer with several regional supermarket chains in the U.S., including Stop & Shop and Giant Food. Peapod currently offers online grocery shopping in more than 20 locations, including Baltimore, Boston, Chicago, Manhattan, Milwaukee and Washington, D.C.

According to the Inquirer article, consumers in the Philadelphia area will pay $9.95 for a minimum order of $60, $8.95 for orders over $75, and $7.95 for orders that total $100 and above.

“The biggest problem with these home-delivery grocery systems is that they are quite expensive to deliver to a specific home unless there is a lot of demand in a particular area,” says Wharton marketing professor Barbara E. Kahn, director of Wharton’s Jay H. Baker Retailing Center. “Manhattan has worked well because of the high density of consumers. When a delivery is made to an apartment building and there are several recipients in that building or the one next door, the fixed costs of delivery are covered. On the other hand, when the deliveries are far apart and there is only one at a time, the cost of delivery is a significant factor.”

Kahn agrees that young consumers these days have no problem ordering on line or through apps, but suggests that the minimum order of $60, with a $9.95 delivery fee, “seems steep. Also, people frequently think of grocery shopping as many quick, or fill-in, trips a week, rather than a single large major delivery. And [having to] be at home when the food is delivered may prove to be a trouble spot as well.”

“The business model is clearly a niche,” adds Wharton marketing professor Stephen J. Hoch.  ”Home delivery has apparently worked best in New York City. Fundamentally, the issue is that shopping at a supermarket is about as efficient an experience as it gets as long as you have transportation and don’t live in a densely packed urban environment where there is limited space for a big store. I don’t believe that Peapod’s ‘new’ business model of pulling from a central warehouse rather than stores is any different.”

As for how successful Peapod’s expansion into Philadelphia will be, Wharton marketing professor Leonard Lodish says “it depends on the cost of getting each new customer and the incremental profit stream from each new customer…. If this is enough of a positive number so that the fixed costs are eventually covered, then the business can be successful. If Peapod runs out of money before the fixed costs are covered, it won’t be.” Given that Peapod has a well-established corporate owner, he adds, it “may have quite a long leash.”

What would help Peapod make a go of it is whether “people love the service and tell their friends,” Lodish adds. “That will significantly lower the cost of getting each new customer. And if their logistics truly are innovative and [can deliver] at a much lower cost than the previous attempts, then that will be a big help. Peapod needs to have amazingly effective customer service to delight their customers. If they don’t, it will sink them.”

Lodish does not see the stagnating economy as a huge barrier for Peapod. “Not in their affluent target market,” he says. “The affluent are, in general, still doing pretty well.”

 

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Marketing Keds to a New Generation of Feet

If you were a kid anytime in the past century, you probably owned a pair of Keds. The ubiquitous canvas sneakers are undergoing their latest makeover in an effort to build buzz among a different constituency — 20-somethings.

To do that, a 32-foot trailer designed to look like a shoebox is hitting the road for stops at U.S. college campuses. The “How Do You Do?” campaign invites students to design their own shoes at a touch-screen kiosk and purchase them. Each stop will feature shoes inspired by that city — for example, the March stops in Austin, Texas feature shoes in denim, chambray and twill with Western details.

“As people go through identity crises, so do the brands,” Kristin Kohler Burrows, president of Keds Group told The New York Times. She said one of the goals of the campaign is to “awaken people to the fact that [Keds] is an iconic brand.”

Keds were first introduced in 1916. By 1930, the company had unveiled a line of high-heeled shoes — dubbed “Kedettes” — in an effort to appeal to women. The shoes have adorned the feet of Marilyn Monroe, Jackie Kennedy and Katherine Hepburn.

And this wouldn’t be the first time that Keds have been a trend among young people. In the 1980s and 1990s, they had a place in the closets of many teenage girls, alongside babydoll dresses, slouch socks and lace-trimmed bike shorts. Keds also tried to attract a similar audience in the mid-2000s, when actress Mischa Barton — then starring on young adult-centric mega-hit The O.C. — became the shoes’ spokesperson.

Now the company is trying to appeal to the millennial demographic by featuring artists and young people giving back to their communities in its ads. Keds is also running a design contest, and adopting a campaign Twitter hashtag. “We really feel that what’s important to this consumer is to engage with a brand” and experience it firsthand, Kohler told the Times.

Maintaining the “cool” factor of any product is a tricky proposition. In a past Knowledge@Wharton story, marketing professor Jonah Berger noted that fashion is fertile ground for fads because clothing is a way to communicate something about a person’s identity and style. “Styles often start with one group, and then another group starts to use it because they want to look like that first group,” Berger said. But when that second segment adopts the trend, “the meaning may be lost.”

He and other faculty said it is critical for brands to understand the potential value of a product before pouring money into keeping it current. The Times story reported that Keds spent $1.68 million on advertising from January to September of last year, compared to $450,000 during that same time in 2009. “You should only invest in things where you can do a credible job of forecasting that the perceived value of your offering compared to your competition will be sustainable,” Wharton marketing professor Leonard Lodish told K@W. “You need to understand the factors that will make that happen.”

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