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Marketing Strategy of Cost Plus, Inc.

Marketing Strategy of Cost Plus, Inc.

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Marketing Strategy of Cost Plus, Inc.
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Anjali Khurana
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Marketing Strategy of Cost Plus, Inc. - December 16th, 2010

Cost Plus, Inc. (NASDAQ: CPWM) is the owner and operator of the chain of Cost Plus World Market specialty/import retail stores. The name originated from the initial concept, since abandoned, of selling items for "cost plus 10%".

Public Company
Incorporated: 1958
Employees: 2,114
Sales: $260.5 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: CPWM
SICs: 5331 Variety Stores

Company History:

One of the leading direct-import retailers in the United States, Cost Plus, Inc. operates approximately 70 Cost Plus World Market stores, which specialize in home furnishings imported from more than 50 countries in Europe, Asia, and Africa. With the inventory of a specialty retailer and the prices of a mass merchandiser, Cost Plus built its reputation in San Francisco before expanding into Southern California and finally eastward, where the bulk of the company's stores were opening in the late 1990s. The chain more than doubled in size during the 1990s after languishing during the late 1980s, when poor financial performance after a leveraged buyout prompted sweeping alterations to the Cost Plus concept. Cost Plus's flagship store, a 40,000-square-foot store located on San Francisco's Fisherman's Wharf, was supported by the chain's smaller stores, which measured between 16,000 square feet and 18,000 square feet.

Origins in the 1950s

Cost Plus's founder, William Amthor, did not intend to create a discount direct-import retail chain--or even to open a single store--but he discovered San Franciscans had a penchant for just that sort of merchandise. His discovery occurred by chance in 1958 when he sold some extra rattan furniture he had stored in a warehouse. At the time, Amthor operated a small family-owned furniture store in San Francisco, but instead of displaying the rattan furniture in his store, he rented 4,000 square feet of warehouse space in the Fisherman's Wharf area of San Francisco. The rattan furniture sold quickly, convincing Amthor to start importing merchandise as a new business. He opened his first store devoted exclusively to imported merchandise later in 1958 and began importing wicker by the shipload. Amthor took the name for his new store from his pricing strategy. The imported goods were sold at cost, plus ten percent, the inspiration for a chain of stores that would become known as Cost Plus.

Amthor took frequent trips to foreign countries looking for merchandise, hunting down the best bargains for an eclectic array of goods. During these trips he established business relationships with vendors that Cost Plus would use 30 years later. The frequency of Amthor's trips established the company's founder as a "world traveler," words invariably used to describe the peripatetic retailer, and established Cost Plus as a unique, exotic store, filled with an ever-changing selection of merchandise. Customers never knew what they might find at Cost Plus, and this mystery had a decided appeal, making a trip to Amthor's store similar to a treasure hunt. The store's bazaar-style merchandising proved to be highly popular, its success spawning the establishment of additional stores. For years, the location of these new stores was restricted to the greater Bay area, but the stores expanded, eventually, into Southern California. During this gradual expansion, which occurred during the 1960s and 1970s, the Cost Plus chain thrived, selling tiki torches, gauze dresses, wicker furniture, and a grab-bag of other imported goods, all at discount prices.

By the 1980s, two and one half decades of expansion had created a flourishing regional chain. Midway through the decade, there were 24 Cost Plus stores in California and one in Arizona. The anchor of the chain was the company's flagship store in Fisherman's Wharf, a 40,000-square-foot unit that, despite being ten times larger than Amthor's original store, still exuded the atmosphere created by the chain's founder. Inside, amid housewares, clothing, and furniture, customers picked their way through a broad collection of merchandise, everything from an inexpensive wire whisk to a $1,000 brass buddha from India. The merchandising mix was unique, representing the efforts of the company's seven buyers who, like Amthor before them, traveled the globe looking for items in Indonesia, China, Thailand, Portugal, France, and a host of other countries. The company's other stores were considerably smaller, averaging between 18,000 square feet and 20,000 square feet, but each contained as diverse a range of merchandise as the flagship store. The smaller stores, which averaged sales of $200 per square foot, were primarily located in shopping centers, next to other retail tenants whose customer-drawing power proved to be a boon to Cost Plus's business. The expansion strategy had worked well, providing a welcomed support system of sorts that eased Cost Plus's entry into new markets. By the end of 1986 the company was ready to open two more stores, one in San Dimas, California and the other in Bakersfield, but troubles had begun to surface. As Cost Plus exited the mid-1980s, its consistent record of success began to unravel, prompting changes that ultimately led to the creation of the modern version of Cost Plus, the nearly 100-unit chain that existed during the late 1990s.

Late 1980s Decline and Resurgence in the 1990s

The turning point in Cost Plus's financial performance occurred after a 1987 leveraged buyout engineered by Bechtel Investments (later renamed Fremont Group). In the wake of the ownership change, Cost Plus's formula for success was lost, and financial losses began to mount. The quality of the merchandise declined as the stores developed a reputation for being cluttered, rather than being rich in diversity. As time passed, the problems became more severe, leading to further, escalating losses. One industry pundit remarked that Cost Plus offered "too much hunt and too little treasure," characterizing the rapid deterioration of the chain's former strength. By the beginning of the 1990s the company had recorded five years of consecutive year-end deficits, an alarming record exacerbated by the $5.9 million loss posted for 1991. Clearly, changes needed to be made.

Help had arrived by the time the depressing financial figures for 1991 were released. Ralph D. Dillon, the former president and chief operating officer of Family Dollar Stores, had joined Cost Plus in 1990. It was Dillon's responsibility to muster a turnaround and revive the chain's former vitality. He began making changes in the way Cost Plus operated shortly after his arrival. The scope and the severity of the changes increased after control of the company was gained by Goldman Sachs and International Nederland Capital Corp. in 1994, but throughout the first half of the 1990s, the process of transforming Cost Plus into a healthy enterprise was under way. By the time the company entered the mid-1990s, it emerged as a different sort of retailer offering a subtly but significantly altered merchandise mix.

One of the first problems Dillon recognized was that Cost Plus had lost its focus on the proper merchandise for the stores to display. Accordingly, he launched a campaign to determine what product mix was most attractive to the chain's customers. Experiments with focus groups revealed that the typical Cost Plus customer, identified as a college-educated female between the ages of 25 and 55, desired a combination of home décor merchandise and gourmet food. Dillon reacted to the research by increasing the presence of home décor items, eliminating toys, and limiting the space devoted to jewelry and beverages. Along with these changes, the average square footage of the stores was decreased, reduced from 20,000 square feet to somewhere between the 16,000-square-foot and 18,000-square-foot range. Despite the smaller size, Cost Plus stores continued to display roughly the same amount of merchandise, using vertical merchandising to compensate for less retail space.

Once the proper merchandise mix was identified, Dillon refined the layout of the new, prototype Cost Plus, which was christened Cost Plus World Market. The objective was to eliminate the cluttered look that had developed during the late 1980s and create a more defined design, but the layout still had to retain the open-air market atmosphere that had characterized the chain since its birth. Cost Plus relied heavily on impulse purchases, so a balance had to be struck between an orderly design and one that was conducive to browsing. To orient the customer, Dillon and his staff designed three featured areas. At the back of the store, an assortment of gourmet food and beverages composed Cost Plus's Marketplace section. One side of the store, identified by a rug wall, displayed decorative home furnishings, including textiles, pillows, and baskets. On the other side of the store, beneath a chair hung on the wall, functional home furnishings were displayed, such as furniture, glassware, and tabletops. These areas provided an easily recognizable structure to Cost Plus, serving as landmarks amid the sea of imported merchandise, but not at the expense of reducing the number of impulse purchases. The average Cost Plus customer spent 45 minutes in the store, nearly twice the time spent in a typical home store.

The changes were important, but equally important were the characteristics that were left unchanged. Although the company greatly increased its reliance on home furnishings, until they accounted for nearly 70 percent of a store's total inventory, the emphasis continued to be on stocking imported items, one of the company's original strengths. Cost Plus imported 90 percent of the home furnishings it sold, buying the merchandise in more than 40 countries in Europe, Asia, and Africa. Placemats, napkins, and rugs were shipped from India and Turkey. Wood and rattan furniture arrived from Italy, Thailand, and the Czech Republic. Cost Plus buyers procured glassware and dinnerware from England and France, baskets from China, the Philippines, and Indonesia, and collectible home artifacts from Bali, Ghana, and Namibia. The diversity of the imported merchandise had not changed and neither had the grab-bag appeal of an ever-changing inventory--an integral part of the formula that created Cost Plus's "treasure hunt" attraction. Roughly 60 percent of the items on display were changed every 12-month period, while certain product types were changed more frequently, usually at a monthly rate. The interior of the store harkened back to Amthor's first years as well, retaining the warehouse "feel" of the earliest Cost Plus units. The floors were cement, ceilings were high, beams were exposed, and fixtures were plain, creating a Spartan environment for what the company described as an "upscale, organized version of the Third World central market-place."

Expansion Accelerates During the Late 1990s

After the Cost Plus concept was refined and profitability was restored, Dillon was ready to usher in an era of expansion--the most prolific in the company's history--and add to the 38 stores in operation when he joined the company. The company expanded beyond its home territory in California and began opening stores in neighboring states, with the pace of expansion increasing after Goldman Sachs and International Nederland Capital Corp. assumed majority control over the company in 1994. By the end of 1995 there were 50 stores composing the Cost Plus chain, including 13 in the Bay area, more than 30 stores in California, and more than a dozen scattered in a ten-state territory.

In early 1996, after maintaining profitability for a three-year period and expanding at a modest pace, Dillon was ready to take the company to new heights. His confidence in the Cost Plus World Market concept was resolute, prompting him to develop ambitious plans for the company. First, he completed the company's initial public offering of stock in April 1996, raising $29.8 million to pay for past and future expansion. Several weeks later, Dillon announced that Cost Plus would open eight additional Cost Plus World Markets by the end of 1996 and 12 units the following year, hoping to reach nearly 90 units by the end of the decade. His long-term plan was much grander, a 300-unit chain collecting $1.5 billion in sales, exponentially higher than the $182 million Cost Plus generated in sales in 1995. "We have worked the last five years developing a prototype Cost Plus World Market store," Dillon explained, "and we are constantly testing new things. With the markets we have already ID'd nationwide, we could be 300 stores."

By the time Cost Plus converted to public ownership, expansion was under way in a number of new markets. New stores were being developed in Texas, Illinois, Missouri, and Wisconsin, established, as they had been for decades, in shopping centers where the presence of other retail tenants assured a steady stream of customers. As the company expanded eastward, its progress was made easier not only by situating its stores in established shopping centers, but also by its decades of experience in the business. Other import retailers of Cost Plus's ilk--companies such as Bombay Company, Euromarket Designs, and Pier 1 Imports--had to contend with the often troublesome process of foreign-sourcing their merchandise, that is, coordinating supply and delivery of goods from distant markets. Delays and miscommunications were frequent, but Cost Plus avoided the problems with which less experienced retailers had to contend because of the company's long-established ties with overseas vendors, many of which stretched back two generations. This was one of Cost Plus's major strengths, enabling the company to expand eastward with relative ease. In October 1996 Dillon banked on this advantage when he announced plans for major expansion, projecting the opening of 35 stores by the end of the decade.

As Cost Plus entered the late 1990s, work was under way to reach Dillon's goal. Expansion pushed the company eastward into the Midwest, where Cost Plus World Market stores opened in Chicago, Detroit, and Cincinnati. By November 1997, when the company announced plans to open its first store in Indiana, the chain comprised 68 stores in a 12-state territory, including four stores in Chicago and three in Detroit. The company planned to open 15 stores in 1998, projecting an annual growth rate of between 15 percent and 20 percent as the end of the century approached. As the company prepared for the future, its record of success in the 1990s provided strong evidence that further expansion would yield substantial growth. Between 1992 and 1997, revenues more than doubled, jumping from $121 million to $260 million. Net income increased more dramatically, swelling from $151,000 to reach $10 million. With these figures demonstrating the strength of the Cost Plus World Market concept, the company's future expansion suggested equally robust gains in the years ahead.
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