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PART 1:

In this, our First Annual State of the Industry report, we have interviewed a variety of experts in various segments of the gift and specialty retailing industry: manufacturers rep group principals; Internet professionals; vendors; consultants; trade show producers, and others.

Because there are no true gathered statistics or reports for specialty retailing, it is difficult to assess what is really happening in the industry unless one talks to those on the battlefield.

Government and association statistics and numbers are available for Retailing (with a capital “R”), but they include sales figures and other information from the Big Box stores, department stores, chain stores and other retailing operations that may or may not reflect what’s really going on at the specialty level.

By talking with industry people “in the know,” we believe we can give you a truer picture of the past, present and future of specialty retailing.

Let’s start with a brief glimpse at the past and where we are today.

What Happened?

It wasn’t that many years ago, experts don’t agree on the number of years, that specialty retailing was doing quite well. Beanie Babies and collectibles, along with traditional giftware kept things moving along. All you really had to do was open your doors and the customers walked in. Maybe it wasn’t that easy, but it wasn’t as challenging as it is today.
Some say it was 9/11, others say it came a year or two later, but almost suddenly things changed; and not for the better.

What happened?

“Part of it is a natural consolidation,” says Doug Cofiell, president of the Ivystone Group. “This is a strange business, so it took a little longer than other industries. I think the shock of the monumental change of the Big Boxes has been talked about a lot, but it didn’t hit all the way downtown in all areas of the country at the same time.”

“I agree,” says Mike Steidle, vice president of Ivystone. “I think it’s a combination of things. There was an underlying illness in the independent retailers that Beanie Babies and collectibles sort of masked. Once eBay came along and leveled the collectibles field, and Beanie Babies died down, without those crutches it had a big impact on our retailers.

“Also the demographics of our independent store owners was skewed to older owners who said to themselves, ‘I’m 60, or 58, and I don’t want to keep pushing ahead,’ or they tried and it didn’t work and they made other plans. It wasn’t a young crowd owning stores.
Are we getting younger owners?

“I think there are some but I don’t think its enough,” says Cofiell.
“The store owner demographics are still high,” says Steidle, “and it’s a challenge for them to reach the younger demographic. It’s hard to buy for a group when there’s a 25-year age difference.”

“The retail industry in general is changing,” says Tom Ungrodt, owner of three retail gift shops and president of Ideation, a gift catalog/buying service. “This is due to shopping on the Web, more retail than we need for the next 10 years, and they keep building it—the dollars being spent are being divided up more than ever.”

“For the past 4 to 5 years,” says Randy Eller, industry consultant and CEO of Crazy Mountain, “until the recent explosion of Webkins from Ganz, the industry didn’t really have a hot product concept as it has had in the past. The peaks in the past have always been when some company had a one-hit wonder—Snow Village, Precious Moments, Beanie Babies. The best of times have always been when one or two companies have a big hit. And up until Webkins it has been awhile since the industry has had a big hit. When retailers have a hot product, their mood improves, their cash flow improves, and every thing else just rides up along with it.
“The late ’80s thru the ’90s, was a time when the big retailers, not just the box stores, whoever they were, were getting a lot of positive main stream press, and I think threw a big fear in a lot of people.

“This affected retailers in two ways: One, they didn’t continue to run the stores as they had in the past, and they lost confidence and it became a self-fulfilling prophecy and people decided to shop elsewhere. And two, what I think damaged the industry the most is that in the late ’80s and early ’90s a lot of vendors made a conscious decision to cater to the big stores and chains rather than continuing to concentrate on smaller retailers. As their attention went to that, it messed up the supply chain.
“Now history has shown that those vendors who did that made a big mistake, and we watched several of them go out business. Those two things are the big contributors to the changes.”

According to Rick Contino, CEO of Midwest, “There was a big retail shakeout after 9/11. A big change. Since then a weeding-out process took place for those who are committed and who are in it for the long haul. I see those people doing better and better, refining their business processes. People who aren’t really committed aren’t making it.
“We see a lot of retailers come and go, but that’s just part of the churn that’s in this business. Over the last two years, the same number that go equals the number that come to us.

“The better retailers keep getting better. No doubt there has been some consolidation. We’ve had people tell us that the reason they are doing well is that other retailers have gone out of business in their territory.”

“I believe the fundamental issue lies with the huge transition our industry has just gone through,” says Kelly Dierke, president of Ron Bauman & Associates and president of Gift & Home Trade Association. “By this I am referring to the decline in the number of traditional retailers and the new retail models taking their place — the Internet and Web-based businesses. Every facet of the industry has had to adapt their policies, procedures and distribution policies —it is a challenge too for vendors and rep agencies to know where to turn over new stones to get the business, but the business is out there. The good news is that the strong have survived, adapted and are now in the rebuilding process.”
How many specialty retailers did we lose over the past several years?

“It’s a big number, says Cofiel. “Between 30% and 40%. There are just so many fewer customers today.”

“Easily 40%,” says Alexis Bighley., president of Gift Creations Concepts. “Maybe more.”

“I have no idea how many retailers we’ve lost,” says Eller. “I wouldn’t want to guess. Regardless of the attrition rate, I have heard over and over for 30 years that the independent retailer is going to go away. One thing that people never take into consideration is what I call the churn rate, and I know of gift stores that have been there 20 years, but every four years or so they change hands. Vendors open hundreds of new accounts each month, but they may not be new stores, they are just new owners. There’s a big churn in this industry. No question that we’ve had a net loss of stores over the past few years, I just don’t believe the numbers are as big as some people would have you believe. Back in the mid-90s there were people predicting that by this time there would be no independent retailers left at all. Obviously that’s not true.”
Have we reached the bottom of this tough cycle?

“Do I think we are at the bottom?” asks Ungrodt. “Yes. I think the people in this business who are still in business will remain successful. Those who are marginal are either going away or have gone away. And that’s all the way down the line. It’s always been that people have gotten into the business thinking it would be fun, and now they’ve reached the end of the rope saying ‘I’ve used all my money. I’ve used all my husband’s money, and now I just can’t go on.’”

“We don’t see any of our stores going out of business any more unless the lease issue becomes a major issue,” says Bighley.

“Is the worst Over? I think we have seen the worst for the foreseeable future,” says Eller. “I think primarily because of Webkins, and Ganz has committed to selling it through the independent retail channel, and I think we are early into the cycle of it. The industry can get about three to five years out of that. But whether or not there will be a gap between Webkins and the next big thing only time will tell.”

Taking Stock

One of the major trends taking place at the specialty retail level is a change in inventory habits. Generally, retailers are keeping lower inventories and ordering more frequently. This has affected vendors, who have had to adjust to smaller, more frequent orders, and, as Internet retailing has grown, drop shipping from vendors has become an additional service.

“We’ve seen a steady drop in the inventory levels at retail,” says Cofiell. “It’s across the board, and their expectations of how orders need to come in from the vendor is making the business more difficult for the vendor. That has been steady over the years. What you see now is that the retailer will keep a certain number of lines and they will constantly keep those lines in stock and the vendor has to be able to keep up with the frequent orders. Otherwise, if you can’t deliver it in a timely manner, they’ll just forget about it. What’s a timely manner? Two to three weeks is the norm. This is of course taking out seasonal and Christmas orders.”

“Yes, we’re finding that across the board,” says Bighley. “There’s not a lot of commitment to depth and number of SKUs. Reorders are far more prevalent. That’s a long-term adjustment. Keep in mind that the independent retailer doesn’t begin to break even until the fourth quarter. People forget that. Retailers are working off cash that they had stored away from the last fourth quarter.”

Says Eller, “Every retailer knows that inventory is a large part of the cost of doing business, and any good retailer will try to keep it as low as possible. Now if we have been through a shakeout, we’re left with the better business people and those people are going to watch their inventory more than ever.

“If it means that vendors have to carry more inventory at their level of the chain, that’s capitalism at its best. It’s customer service, and if that’s what it takes, then so be it. In reality, a vendor should be willing to do anything to help a retailer stay in business. A retailer is the vehicle of delivery to the consumer for all these vendors.”

“Turn around time continues to get less and less as expectations [of fast delivery] rise and the level of performance is expected to be greater and greater,” says Contino.

“We invest in systems and processes internally and with our suppliers to make things get better every year. It’s a constant fine tuning process. But supply chain is critical for that. There’s not a lot of room for error by vendors that can’t deliver on time, or product development problems.

“It’s the price of doing business and times are probably going to get tighter and tighter. A customer trying a new product is going to order less and then expect a good turn around time on reorders.

“At Colonial Candle we do see smaller orders and they expect delivery in a week. But they may not be ordering every month. They’re not afraid to order a larger order. For seasonal merchandise they place big orders for delivery all at once.”

“The better retailers have definitely changed how they do business,” says Dierke. “First of all they are using POS systems to manage their inventory better and more efficiently. They are able to take less risk by carrying smaller inventories and ordering more frequently. They are keeping product that sells in their stores. In turn the sales agencies must employ the best road representatives to manage their call cycles more effectively, and the vendors must be able to ship quickly and complete. Additionally, many of our traditional retailers are now also selling via the Internet to compete better in the market place.

“That being said, the single biggest inventory issue most retailers are challenged by is under buying — not having enough inventory in the busiest months of their year. Building an ‘Open to Buy Plan’ is a skill that is a worthy topic for continued training.”

“Lower inventories are true in major corporate America, too,” says Ted Teele, CEO, OneCoast. “That’s ‘just-in-time inventory’ and has been around for years. It makes complete sense for a retailer to think like that. Retailers, in order to survive, are going to have to manage their businesses smarter.

“The other big trend is drop shipping. For the online retailers they don’t want to have any inventory. It comes down to adding value. If you are a vendor and you want to capitalize on the customer’s wants, you may have to invest to meet those needs, but that is a strategic opportunity.

When you go over to the Canton Fair, you do see smaller retailers, but no one in China is going to drop ship to a small retailer. So if a vendor here can do that, it is adding value. If you do drop shipping, you better believe that the retailers aren’t as price sensitive as if they are buying containers FOB Hong Kong.”

Casting the ‘Net’

“For retailers today there are two facets going on with the Internet,” says Ryp Walters of OverCoffee Productions. “One is consumer facing and the other is channel facing.

“On the consumer side the Internet has become a mandatory communication channel and a highly lucrative sales channel. It’s not required to sell online, but for a retailer it means they must be using it for communication, and that means e-mail, having a website with store hours, and a very basic brochure site with product samples.

“But the Internet is maturing independent of our industry and it is becoming more challenging to be a successful sales site. That’s because it takes more time and more sophistication for fulfillment and things are getting more competitive.

“There are constantly new forms of distribution coming online, suppliers selling direct, suppliers going through places like Amazon. So products a retailer might carry are showing up in more places. There used to be more undefended hills or niches, but as more and more retailers are coming online, and more and more Web-only retailers are coming online, the ability to find those niches is dwindling. The amount of effort to maintain good ranking and reassessing the strategies is getting to be a full time job.”

Can a retailer get by with a basic Web presence? “Absolutely,” says Walters. “The Internet is still basically a communication channel. The benefit is that more consumers in general are becoming more adept at having communication and appreciating it as good customer service.
“A 2006 survey showed that Internet consumers are concerned about fulfillability; concerned about online-only stores, and drop ship programs that fall flat because they still lack the common sense of a regular retailer which is good customer service— you sell what you have, and what’s there. So with the presentation of product as well as the deliverability, breakage and other service factors, the independent still has a leg up because they are already used to providing that level of service.

“More and more retailers are moving to shopping carts at their websites, we still see it being a step-by-step approach. Few that do not have a website come to us and want to go right to shopping cart capabilities, and that’s because of the technical issues.

“In general, Web sales are up for retailers who are using it and can afford the time. But it appears that more and more time needs to be invested in it. The typical independent retailer may have trouble making that commitment consistently.

“You can put up a static Website and leave it alone for a month or two, but not with e-commerce.”

“We really do see more people coming through the Internet and using it and feeling more comfortable with it,” says FarCountries’ Joyce Kesler. “We recently did a survey that shows they [retailers] are using it in two important ways. One, they are using it to get information about what’s happening out there, product information, etc., or, two, they’ve heard about a product or they’re looking for a specific product for a customer.”

How many specialty retailers are using the Internet?
“I’d say about 50% or maybe a little more,” says Kesler. “This is especially true of the new, younger retailer out there. It’s easier for them. What they are looking for is easy buying on a site that has all the information they need. They look for things that are new and different. They’re also out there looking for ways to improve their business whether it’s trends, business basics, or just better ways to run their businesses.

“Age isn’t a parameter. It’s the comfort level that matters.”

Show Business

While individual stores may run on product, the industry seems to run on shows. We frequently hear the remark from both buyers and vendors that there are just too many gift shows. Is that really the case?

“Everyone would like one big show” says GLM’s Alan Steel, “where we could go anytime we wanted. Unfortunately, that is not a reality. Shows exist because exhibitors want them. That’s where they sell. If exhibitors stop buying trade show space, the trade show will not exist.”

“It’s a marketplace driven economy,” says Craig Dooley of the Merchandise Mart Properties. “If there is not any defined need for any given show, the market place will correct that. Shows will go away and new shows will emerge. L.A. Mart is celebrating 50 years, and we launched 7 West just two years ago. So it’s about identifying a market need and delivering on it. As long as you are delivering value, you’re going to survive, just like any business.”

“Specialized shows are something we will see in the future,” says Mike Dean of Western Exhibitors. “It’s happening in other industries. Specific shows for specific categories. Vertical versus horizontal shows. Gift shows are horizontal. What is general gift, any more?”

It wasn’t that many years ago that, by all appearances, there were many more attendees at the shows than there are today. But, somewhat ironically, exhibitors are saying that traffic is down, but sales are up.

“ We’re not seeing a lot of growth,” says Steel, “but shows like the New York show are doing very well.

“What we’re doing now, and I’m sure others are doing it, we’re looking beyond the traditional base of gift stores and increasingly looking at those who would buy products traditionally found at a gift show, but who would usually not think of attending a gift show. So in the last several years we have reached into the garden center, with Ex*Tracts we’ve reached into pharmaceutical and day spa. As the retail climate changes we’re certainly seeing fewer gift stores, but we’re not seeing less distributed products, we’re just seeing it go through different outlets. So we’re having to switch some of our targets to make sure we’re reaching the people our exhibitors want to reach as they go to a more diverse customer base.”

Mike Dean agrees that the customer base is changing. “Today, the average orders are going down at the shows. People are trying new products, but they aren’t ordering deep because of all the fast delivery systems in place.

“All the shows really rely on that small independent retailer. The big ones are fun to have but it’s the small ones that really count.

“Another reason attendance is down is that it’s expensive to attend. You may get a great hotel rate, but then with taxes and parking it doesn’t look so cheap.

“Also, stores used to close on Sunday, and Sunday would be our biggest day. Now everyone is open seven days a week and they can’t afford to send someone to a show.

“Mainly it’s because people cut back on staffing in many of the smaller stores and there’s no one left to go to the shows.

In Dallas, at the Dallas Market Center, attendance has remained strong according to Bill Winsor, president and CEO, and Cindy Morris, Chief Operating Officer.

“By having everything in one market, we have set ourselves apart as the one and only market a buyer needs to shop,” says Winsor. “Our markets remain strong. With the Lighting Center, the florals, the apparel, general gift and more, it is all here.”

And it must work for a lot of buyers, because Winsor says that 70 percent of their buyers say that they do not shop anywhere else.

“The general impression is that attendance is down,” says Merchandise Mart’s Dooley, “but marginally at best. It’s changing, however. There may be fewer attendees, but there are more qualified buyers and more focused buyers. They are here with a mission.”

AMC’s Jeff Portman says, “Market attendance generally reflects prevailing economic and social conditions and concerns. The post-9/11 trade show pattern clearly illustrates that. We have enjoyed consistently strong traffic over the past several years with attendance at or exceeding historic levels, including our robust July 2007 Markets just completed.

“In our business, demand drives supply. Market frequency and variety extend naturally from that. We respond to our customers’ needs with a slate of shows designed to satisfy the product and timing needs of a highly diverse population of buyers and sellers. And as those needs change, so will our markets.”

And how will trade shows look in the future?

“The axiom that change is the only constant could not be more evidenced than in the industries we serve,” says Portman, “where fashion and the unquenchable consumer thirst for all things new are in perpetual motion. That means change is not optional. For us, harnessing the power of change continues to be the focus of all that we do. It’s the energy that drives our mission of continuous improvement, always and everywhere.”

“In the last two years there is nothing at the Chicago show that has remained unchanged,” says Dooley. “The name of the show, the messages we put out there, all the way through to the buyers’ experience when they get here and how they are treated when they get here, have all been tweaked.

“And of course the experience from a professional and educational perspective. Providing a focus group of educational opportunities not just a slew of seminars that distract buyers from their reason for being here which is buying. Our power lunches and keynotes are driven toward that—where a buyer can take an hour or so out of their long days for a very specific reason.

“And then networking is another aspect. Certainly with vendors but also with other retailers.”

“I think there will be fewer shows,” says Dean. A good model is the apparel industry. Look at Magic [the big apparel show]. Everyone who is anyone in apparel has to go to Magic. But they aren’t reaching the independents. So there will always been a need for regional business. We as show people have to find our niche. And unless you’re willing to make some dramatic changes, nothing is going to change.”

Steel, like Portman, says change is a constant. “At the New York show, for example, we are constantly trying to upgrade the quality of the product presented. And try to identify the uniqueness of resources so that when you come to New York you are going to see things you aren’t going to see anywhere else. There’s a need to provide a large number of resources, but there’s also a need to differentiate yourself from your competition.

“We’re trying to differentiate ourselves by moving to the higher-end, higher-margin business. Those gift retailers who need the higher-end products and higher margins they produce so they can stay in business will find those at the shows we produce.”

The China Question

There is no doubt that the move of manufacturing to China has affected the specialty retailer in many ways. And there are more changes on the horizon.

“It used to be that the winter shows were where manufacturers would show their new products for interim business and the summer shows were for ordering Christmas goods, and retailers bought deep,” says Dean “But when the manufacturing went to China that dynamic changed. Forget the summer shows. Those vendors had to have their orders to the factories in January, and if you didn’t get your orders in then, you didn’t get product.

“You never know about China,” says Teele. “It’s volatile. And with the problems with pet food and Mattel. . . .?”

“Right now there is a labor shortage. OneCoast is experiencing delayed shipments. China is a booming economy and when that happens in any economy, the labor goes to where the money is. And that’s not good for vendors in our industry who, let’s say, pay $5 per day. And the challenge is that the factory may have priced at $5 per day and suddenly they are losing their workforce to the electronics factory next store that is paying $10 a day.”

“Of the 15 factories I recently visited,” says Contino, “every one was down 30 to 50% of their workers. Because of that they are significantly behind with many manufacturers. I think we’re going to hear about a lot of people who got late or eliminated shipments this fall. Especially the small companies. I think there are going to be significant delivery problems from Asia this fall.

“And the people who make the samples for next year’s products are late in doing so because they are being required to work in the factories. With fewer workers, all these shipments are being pushed back.
Contino continues, “There are factories that have people who work 52 weeks a year going out into the provinces and trying to recruit workers. Even with increased pay they are having problems getting workers.”
“In China, change is going on all the time,” says David Moses of Next Step Strategies, a consulting firm which in part helps U.S. importers. “It is very fluid.

“Recent changes that will have an impact on U.S. vendors and retailers include the VAT, value added tax.

“To explain this a little more fully, the VAT is a Chinese government program to help the factories in the export market. Once the products leave China, the factory earns a percentage of that sale back from the Chinese government. It’s a rebate. If the rebate is large enough it can affect the price a U.S. importer pays; it can cost a lot less.

“Large vendors and retailers have been able to buy products from China at very reasonable prices because of a subsidized VAT the factories received. (See chart above.) In some instances that VAT is greater than the margin the factory earned selling to a U.S. Importer.
Moses continues, “The VAT has been decreasing, and some experts think it might be eliminated in the future. That is due in part to the U.S. political pressure to reduce the trade imbalance with China.

“Now, Chinese factories are thinking that they are going to have to raise prices, and that means retailers will have to pay more and ultimately the consumer will have to pay more.

“So there’s all this pressure over there, whether it’s to improve quality, or to raise the value of the yuan.

“One of the other concerns” says Moses, “is that with so much product coming from Asia that it can log jam at the U.S. ports and cause delivery delays. And that’s not just for this year, but for the future as well.

“There are more concerns,” he continues. “In southern China and around Shanghai, the cost of living has gone up and workers have more job choices. So there are investments being made in non-traditional areas, areas where factories haven’t been before, and where workers are available and the cost of living is low. But the infrastructure of China is poor, so there aren’t a lot of finished roads. The Chinese government is under pressure to improve the roads and the railway connections, so that as factories are built in outlying areas the goods can get to port in a cost-effective manner.

“There are other changes taking place in China around logistics and supply chain management. There is a trend toward third-party logistics companies that provide shipping services in China. And this could benefit small U.S. retailers. Traditionally, it was only large retailers who could get the ‘China price’ by going directly and being able to bring in container loads of merchandise. But I believe in the next 10 years, as laws on third-party logistics change, that small retailers will be able to place small orders just as they do now with their vendors or reps. And by consolidating orders from different factories into containers, the factories could handle smaller orders, and this would help U.S. retailers earn higher margins.

“Also,” says Moses, “the factories want to get closer to U.S. independent retailers. They want to get new customers, and third-party logistics will help the factories do that. Some Chinese factories are already trying to make inroads into the U.S., and that is going to grow as the years go by. As Chinese factories become more savvy on product design trends that U.S. retailers desire, I think they will start to participate in trade shows and work with reps trying to get closer to the smaller retailers in the U.S.

“Imagine this scenario: A small retailer places her several hundred dollar order with a Chinese factory rep here in the U.S. In China, the factory has a warehouse and can pick and pack those small orders and then fill up a container of individual small orders, from one factory or more than one factory, and ship it to the U.S. When the container reaches a port and clears Customs, the orders are treated in the normal way for ground transportation by UPS or FedEx or other service and delivered directly to the retailer’s door.

“Another trend in Asia,” continues Moses, “is that it is not only China producing our products. The entire Asian landscape is in play. A lot of products are coming from India, but other countries such as Viet Nam have really come into play recently. And as U.S. importers realize that there are challenges in China, particularly potentially rising prices, they have been scouting all of Asia for alternative producers. We’re getting product from Thailand and Malaysia. Viet Nam is one that is a real success story. They don’t have the scale that China has, but it is good quality and the cost of labor is actually lower than it is in China.”

“I think that China and the supply side of this industry is going to be the best thing that’s ever happened to this industry,” says Eller. “Here’s what’s happening: China right now is trying to do business directly with any large chain in America. The factories are hiring sales reps, they’re advertising in trade magazines, they’re at shows, and they are even opening showrooms. What’s going to happen over the next 2 to 4 years is that any chain of any size is going to deal directly with China. The effect of that is all the vendors that are here who are trying to do business the old-fashioned way by buying product in China then trying to sell it to stores aren’t going to have a lot of choices. About the only people they will have left to sell product to will be the independent retailers. And when that happens to them they are going to do a lot better job of catering to the independent, or tailoring their product line and their terms to fit the independent.

“The chain store business for the vendors is going to go away,” says Eller. “You will see a lot of vendors turn back to the independent retailers. I get a lot of phone calls in my consulting business from vendors who don’t have a strong relationship with independents asking me how they can change their companies to serve the independent retailers, because they see this change coming.

“That’s a world changer.”

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