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Retail Needs a Merchandising Genius

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July 16, 2013 – Comments (2) | RELATED TICKERS: BRK-A , JCP , KKR

Board: Berkshire Hathaway

Author: michaelservet

Ginzu knives, Kirby Vacuums, Fruit of the Loom...
To have a moat it should have a strong brand name, right?


Back in the 1980’s I had the remarkable fortune to meet a fellow, a retail merchandising executive, who back then dryly but good-naturedly quipped that he was responsible for ruining Fruit of the Loom brand. The context was probably to make some point about brands, but the take-away for me was that even the idea that one person could diminish a national brand might be a lesson.

At the time that of course sounded like a tall claim – if not an out-right boast. We would take a comment like that with more than a few grains of salt, right? And how do we prove that? What evidence might we see that could lend any credibility to something like that? (Hold those thoughts.)

Anyway, I filed a mental note, but certainly didn’t expect any follow-up.

Last year I posted some retail thoughts that included the proposition that successful retailers almost always have a top merchandising guru, and that this person perhaps more than anyone was critical to the company’s success. http://boards.fool.com/personally-i-dislike-shopping-and-avo...... This self-described Fruit-ruining person was one of these people. He had been the senior merchandising exec for a large regional, higher-end department store chain, and had apparently developed a really strong personal relationship with Fruit.

This was in the 1970’s and into the 1980’s, when Fruit of the Loom advertised extensively --in national media directly to consumers-- and was available in fine stores everywhere (there were more of those businesses back then than we could count). This fellow moved on from his senior position at one of those finer stores, to head up a good-sized regional discount chain. There he used his strong personal relationships with Fruit to persuade them – and it presumably took a lot of persuading – to let the discount stores he was running carry their brand. This was a new direction for Fruit.

Once that happened, though, most those ‘fine stores’ dropped Fruit like a rock. Fruit quickly went into a downward spiral, scaled back national advertising it couldn’t support any more, and essentially became a discount store brand that now had to compete on price. There it languished for a decade. No doubt this is an over-simplification of things, and perhaps only our fellow could fill in the details.

By the late 1990’s Fruit was headed into bankruptcy (they eventually filed) and in their darkest hour decided they needed to take some action to at least try to revive that once-valuable name. What steps did they take?

Here those remarks from over a decade earlier came roaring back. Fruit asked our very own good-natured fellow -- a fading memory here, but apparently not to the Fruit board -- to first join the Fruit board, and then to step up and lead them, running the company as CEO. The mission was to execute a complete turn-around -- including into and out of bankruptcy -- which he accomplished. Maybe he did know what he was talking about the decade before.

And was he successful in reviving that Fruit brand? Whatever magic he brought must have worked (the 1970’s retail paradigms certainly had dramatically changed, so he obviously didn't look backwards....for any actual lessons from this we’d probably need to ask the magician himself). The evidence that he succeeded? Well, Berkshire Hathaway stepped in as he was wrapping up his revival work and bought the newly turned-around business – Buffett sparing no praise for the (then just recently resuscitated) brand. Our fellow cashed out and moved on.

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Speaking of single-person influences on retailers and brands, is it too much to suggest that Berkshire recently paid $250 million to essentially acquire the services of one individual? We had some discussion here recently about Oriental Trading recently. This was a company that had been run into bankruptcy by previous management, and was acquired by KKR for something equivalent to $250 million, overall.

KKR installed a new CEO to turn the place around, which he apparently did, and within about 18 months KKR flipped the business to Berkshire Hathaway for $500 million. Omaha’s Oriental was worth $500 million to us with the fellow, and his year of magic behind him. However it was not worth $250 million the year or so earlier, before he was on board. True, we ‘don’t do turn-arounds’ -- but we can perhaps still learn some lessons about business value from them.

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In our retail discussions a year ago, most of us here also recognized that what Penney’s needed was a merchandising genius, not the ‘stores’ superstar they hired. They seem to be still fishing for that person.

Think anyone involved with Tesco misses their former world-class CEO Leahy (Barron’s perennial pick, alongside Buffett each year, as one of the planet’s most capable CEO’s)?

When evaluating retailers we always, always have to be able to identify the merchandising genius, that guiding light, within the organization. If we keep dropping hints maybe others will catch them, as well -- including those that should know best - the retailers' boards. 

2 Comments – Post Your Own

#1) On July 17, 2013 at 6:10 PM, Mega (99.95) wrote:

"In our retail discussions a year ago, most of us here also recognized that what Penney’s needed was a merchandising genius, not the ‘stores’ superstar they hired. They seem to be still fishing for that person."

That's not the takeaway I got from JCPenney. I thought they got a merchandizing genius, and he proved the limits of that role. Now you might need a genius CEO and a genius CMO.

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#2) On July 20, 2013 at 5:55 PM, michaelservet (< 20) wrote:

That's not the takeaway I got from JCPenney. I thought they got a merchandizing genius

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I'd be curious as to any 'merchandising genius' examples concerning Johnson.  I haven't seen any signs of it, at least in recent years.  He had virtually no merchandising repsonsibilities at Apple -- though he did make some waves with stores, in presentation and such.

 At Apple he looked smart - anybody would look like a 'retail genius' for that matter - because he had pretty much exclusive rights, including pretty much a 'right of first refusal' - to sell products that people would line up for no matter how and where they were being sold.  You and I - with the same exclusivity - could have broken retail records selling that steady barrage of blockbuster Apple products out of our car trunks, for that matter. 

 At Apple, Johnson did not have to source product, pick the winners, negotiate price, worry about getting the inventory right, worry about competition -- nothing.  He was spoon-fed killer product that the world was craving.  As for stores, he had by the retailing world's standards, an almost unlimited capital budget.

Conversely, if Apple did not have that steady stream of hits (that he had no part in developing) with his stores being pretty much the only outlet - and he had to independently source electronics products and sell them on price -the world might have had a very different view of his retail talents.

Johnson's fundamental problem at Penney's was not necessarily that he couldn't run a business, though that was likely also a problem - but that he didn't seem to grasp some fundamentals of retail merchandising.   Nobody could have executed the plan (if we want to call it that) that he concocted.

Sorry - I'm at risk of launching into a whole other post here, so let me first refer back to an earlier one.

 I apologize that this linked post is so lengthy, but at least in part it gets into the 'retail merchant' discussion a little more:

http://caps.fool.com/Blogs/more-retail-notes-identify/688929

Have a scan if you will, for a moment, andmaybe we can pick this up.

Thanks.

 

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