The Godfather Strategy
First quoted by Sun Tzu, the Chinese general and author of The Art of War, an ancient treatise on military strategy, the statement was given more contemporary relevance in the 1974 film The Godfather Part II when spoken by Al Pacino’s character Michael Corleone.
The point? Know your enemies even better than your friends, because in battle, while wanting your friends alongside you, knowing your enemy’s strategies and next moves provides the ability to launch a preemptive strike or at least to plan counter strategies to their next move on the battlefield.
Not to get carried away with the metaphor, but the advice is in fact smart strategy for the retail battlefield as well. But, what if we were to envision a different scenario, one in which the “Godfathers” of retailing develop a strategy that goes beyond simply understanding the enemy, or keeping them close, to literally bringing them into their “camps,” or stores? Better yet, why not flip the battlefield on its head and turn the enemies into friends, the competitors into collaborators?
Those of you have read last October’s issue of The Robin Report and the article sub-headed: “Department Stores as Mini-Malls,” already know where I’m going with this.
Lately, every Tom, Dick and Harry journalist has been randomly and anecdotally referring to “stores within stores.” The great irony here is that many of them, like Forever 21 within Sears (SHLD), Brooks Brothers in Nordstrom (JWN), MNG by Mango inside JC Penney (JCP), and others, with many more to come, were in fact, the “enemy” for many years. In the apparel sector, in the forty years since their inception, branded retail specialty apparel chains have literally stolen the number one share spot from department stores.
In other recent moves: Target (TGT) has inked a leasing arrangement with RadioShack (RSH) to staff and operate RadioShack phone kiosks within Target stores; Sunglass Hut, Lush toiletries and Destination Maternity (DEST) in Macy’s (M); Sephora cosmetics and Aldo shoes in JC Penney; Apple (AAPL) boutiques within Best Buy (BBY); and, not to be outdone, Sears has opened Edwin Watts Golf Shops, Work ‘N Gear uniform apparel shops and Whole Foods stores within their walls (I must check if this is a Mr. Lampert retail or “cash” strategy.) Through all this, the “Godfather strategy” begins to make sense. And, the potential synergies to be achieved here suggest a strategy that is bigger and more powerful than originally thought, a true gamechanger, deserving serious, long term strategic planning, as opposed to just tactically seizing opportunities as they arise.
Beyond Tzu and Pacino : If You Can ’t Beat ‘Em, Join ‘Em
FIT graduate students Suchi Singh and Mehreen Danish conducted extensive qualitative and quantitative research, some of which is shown in the charts here, in support of the thesis of department stores as “enclosed mini-malls.” My coauthor Michael Dart and I had earlier championed this notion in New Rules. Using department stores to exemplify the rationale for the strategy as well as the synergies created, it is easily translatable to all other sectors.
First, who are the enemies the department stores might pursue for collaboration? Given the breadth of product categories, brands and distribution platforms these department stores include, the list of enemies is endless. However, I will focus on apparel, since it accounts for such a large percentage of sales at each of the key players in the department store sector (see Chart 1).
Supported by the extensive research of Singh and Danish is the fact that the branded retail apparel sector is “enemy number one” for the department stores, and has been for many “share stealing” years.
Between 1992 and 2009, department stores lost a staggering 15 percentage points of apparel share, while apparel specialty chains gained 19 points of share (see Chart 2).
The reasons for this are numerous, ranging from the specialty stores’ superior shopping experience to better control over their value chains. Further proof of the encroachment on the department stores’ apparel turf is evidenced by the sales growth of the specialty sector during most of those years compared to department stores’ declining sales (see Chart 3).
Finally, to add insult to injury, using the measure of sales per square feet across a representative group of department and specialty store retailers, the specialists are over twice as productive as department stores (see Chart 4).
Fight to the Finish , or Change the Game
So, even though the department stores are fighting the good fight and probably slowing share loss with exclusive and private brands, why not flip the battlefield, change the game and turn competitors into collaborators?
Why not convert the heated “share wars” into synergy, so that, rather than expending energy fighting to steal share from each other, each could provide more value for consumers through sharing space. At the risk of overdoing the well-worn sayings here, the whole would be greater than the sum of its parts, since it would lead to fundamental vs. just incremental growth, allowing both players to gain new customers and get their existing customers to buy more. And, guess what? For both, this is “investment-lite,” a term I coined in October for low-risk low-cost growth strategies.
And, in case you’re wondering why the “enemy,” who is winning the “share wars,” would want to collaborate, consider this: for little or no capital investment (depending on the deal), the specialty brands get a multitude of new, high traffic locations virtually overnight. And, again, as a part of the synergy, they will achieve new, fundamental growth.
The Godfather Synergy
Let’s look at the synergy potential between JCPenney and its arrangement with Mango. The young “go-to” Mango loyalist who finds a JCPenney location more convenient, becomes new traffic for JCPenney.
Mango, on the other hand, gets “investment-lite” additional real estate in malls, with the added kick from JCPenney’s vibrant store traffic.
The synergy occurs when this new young consumer seeking Mango also buys a pair of Arizona jeans as she walks through the store. Mango gets national coverage, quickly and less capital intensively, and will likely attract JCPenney customers they would not otherwise have gotten. Further, the combined brands enhance the shopping experience, thereby strengthening each brand’s consumer connections.
The same synergy works for Sephora, and for the brands leasing space in Macy’s, Nordstrom or Sears.
“Godfathers” Lundgren and Ullman, and now Blake Nordstrom, who is welcoming Brooks Brothers into his stores, and even Lampert (depending on what he’s really doing), have all been nibbling on the edges of this strategy, by leasing space, or some other hybrid arrangements to retail specialty brands. The question: who will be first to turn this model into a full-blown strategy? My speculation is that Molly Langenstein, EVP of Fashion and New Business Development at Macy’s, who now has responsibility for procuring lease business opportunities, specifically specialty brands in niche categories that can fill their “white space,” might very well morph what sounds like the pursuit of ad hoc opportunities into such a long term strategy for Macy’s.
So, going beyond Michael Corleone’s understanding of Tzu’s Art of War, this new generation of department store Godfathers is starting from an even higher knowledge base. They are not only bringing their enemies into their camps, but are turning them into friends, indeed, collaborative partners, and an important source of business synergy.