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Internet mini case Essay Williams-Sonoma (WSM) was a specialty retailer of products for the home. The company’s products were sold through two channels: the retail channel and the direct-to-customer channel. The retail segment comprised four retail concepts: Williams-Sonoma, Pottery Barn, Pottery Barn Kids, and Hold Everything. The direct-to-customer segment sold though eight retail catalogs: Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed + Bath, PB Teen, Hold Everything, West Elm, and Williams-Sonoma Home (which incorporated elements from the previously separate Chambers) as well as through four e-commerce sites. The catalogs reached customers throughout the United States, and the four retail businesses operated 522 stores in 42 states and Washington, DC. The retail segment accounted for 58.9% of total sales; the direct-to-customer segment accounted for 41.1% in fiscal 2003. Charles E. Williams, Director Emeritus of the company in 2003, founded Williams-Sonoma in 1956 to offer high-end culinary and serving equipment in an upscale retail environment. The company entered the direct-to-customer channel in 1972, with the introduction of its flagship catalog, â€Å"A Catalog for Cooks,† which marketed the Williams-Sonoma brand. In 1983, the company internally developed the Hold Everything catalog to offer innovative and stylish storage solutions for home and home office. The success of the catalog led to the opening of the first Hold Everything retail store in 1985. In 1986, the company acquired Pottery Barn, at that time a marginally successful retailer and direct-to-customer merchant featuring a large assortment of casual home furnishings and accessories including furniture, lamps and lighting fixtures, rugs, window treatments, linens, dinnerware, and glassware. In 1989, Williams-Sonoma created Chambers, a direct-to-customer merchandiser of high-quality, premium-priced linens, towels, robes, soaps, and accessories for bed and bath. This case was prepared by Professor Maryanne M. Rouse, MBA, CPA, University of South Florida. Copyright  © 2005 by Professor Maryanne M. Rouse. This case cannot be reproduced in any form without the written permission of the copyright holder, Maryanne M. Rouse. Reprint permission is solely granted to the publisher, Prentice Hall, for the books, Strategic Management and Business Policy – 10th and 11th Editions (and the International version of this book) and Cases in Strategic Management and Business Policy – 10th Edition by the copyright holder, Maryanne M. Rouse. This case was edited for SMBP and Cases in SMBP – 10th Edition. The copyright holder is solely responsible for case content. Any other publication of the case (translation, any form of electronics or other media) or sold (any form of partnership) to another publisher will be in violation of copyright law, unless Maryanne M. Rouse has granted an additional written reprint permission. In early 1999, the company launched both its Williams-Sonoma Internet wedding and gift registry web site and its Williams-Sonoma e-commerce site. Later that year, the company launched a separate Pottery Barn Kids catalog to offer well-made, stylish children’s furniture and decorative accessories. (Pottery Barn Kids was one of the first concepts to market in what is expected to be a major growth segment during the next decade, as birthrates in the United States. are expected to surpass rates achieved at any time in the past 30 years. Birthrates among older women are soaring, and older moms tend to be wealthier and more willing to splurge on their children.) Pottery Barn Kids stores were opened adjacent to Pottery Barn stores across the United States, and by September 2004, there were 78 stores. Edward Mueller, Williams-Sonoma CEO, expected Pottery Barn Kids to be the primary growth vehicle for the company over the next several years. Williams-Sonoma launched its Pottery Barn web site and created a separate Pottery Barn Bed + Bath catalog in 2000. In 2001, the company added a Pottery Barn Kids web site, and a Pottery Barn online gift and bridal registry, and it opened five new retail stores in Toronto, Ontario. In line with its related diversification growth strategy, Williams-Sonoma tested a new catalog in summer 2002, under the West Elm brand. This new brand targeted young, design-conscious customers seeking to furnish first homes/apartments/lofts with quality furniture and accessories at affordable price points. West Elm product categories included furniture, decorative accessories, and an extensive textiles collection. In 2003, Williams-Sonoma expanded its catalog mailings for West Elm, added a web site, and opened its first retail store. Williams-Sonoma launched PB Teen with a catalog and web site in late April 2003. PB Teen was intended to fill the market space between Pottery Barn and Pottery Barn Kids with hip, exclusively designed furniture, rugs, lighting, bedding, and accessories promoted with its catalog, interactive web site, special sales campaigns, and contests. The company’s newest concept, Williams-Sonoma Home, was introduced in third quarter 2004 to tap into what company Chairman William H. Lester noted had been an empty space between the Pottery Barn demographic and designer home furnishings. Lester hoped to position this brand extension as an upscale furniture concept that would be more classic and less fashion-forward than Pottery Barn. Dave DeMattei, Williams-Sonoma’s President of Emerging Brands, noted that the look of casual elegance was â€Å"aspirational,† using an industry term for a product that helps a consumer trade up without necessarily spending top dollar. This new home collection, put together by Steven Brady, former President for Home Design at Ralph Lauren Home, featured down-plumped sofas ranging from $2,200 to $5,800 and $3,000 leather headboards as well as crystal lamps, cashmere throws, and the upscale linens formerly featured in the company’s Chambers catalog. (The company planned to fold the Chambers catalog into the Williams-Sonoma Home catalog.) Although some industry watchers questioned whether consumers would be willing to buy somewhat pricey furnishing sight-unseen, the company’s alliances with decorators, who would get trade discounts, were expected to help overcome initial resistance. The first Williams-Sonoma Home retail stores were expected to open early in 2 005. Retail Stores As of September 2004, Williams-Sonoma operated a total of 522 retail stores located in 42 states, the District of Columbia, and Toronto, Ontario: 242 Williams-Sonoma, 176 Pottery Barn, 82 Pottery Barn Kids, 7 Hold Everything, 1 West Elm, and 14 outlet stores. The company leased rather than owned its retail space. As of September 2004, the company’s gross leased square feet totaled 4,292,000, with 2,705,000 â€Å"selling† square feet. Lease terms ranged from 3 to 23 years. The average square feet per retail location increased from 7,660 in 2002 to 8,200 by August 2004, as the company replaced older, smaller Pottery Barn stores with larger stores carrying a wider variety of merchandise, including furniture. Direct-to-Customer Operations The direct-to-customer segment sold a variety of products through eight catalogs and e-commerce web sites. The company sent its catalogs to addresses from its proprietary customer lists as well as to names it received in exchange (or purchases) from other mail-order merchandisers, magazines, and other companies. The direct-to-customer business complemented the retail business by building customer awareness of the brand and acting as an effective promotional vehicle. Williams-Sonoma also used its catalogs and e-commerce sites as a cost-efficient means of testing market acceptance of new products. As of 2004, of the eight merchandising concepts, the Pottery Barn brand and its extensions had been the major source of sales growth in this segment for the previous several years. A good deal of Pottery Barn’s success was attributed to its ability to create a â€Å"lifestyle brand.† A brand gained â€Å"lifestyle† status via style, innovation, and appeal to customers who wanted to lead a particular style of life; in short, it allowed the company to reach a higher level in terms of the connection it made with the customer. Facilities/Locations Williams-Sonoma leased centralized distribution facilities in Olive Branch, Mississippi (2,152,000 square feet), and Memphis, Tennessee (1,515,000 square feet), and call centers in Las Vegas, Oklahoma City, and Camp Hill, Pennsylvania (approximately 36,000 square feet in each location). Distribution centers served both the company’s retail locations and fulfillment operations. The company also leased office, warehouse, design/photo studio, and data center space in California, New York, and Florida. In February, Williams-Sonoma purchased headquarters offices in San Francisco. Suppliers The company’s sourcing strategy included relationships with manufacturers in over 40 countries. Approximately 58% of merchandise purchases were from non-U.S. vendors, most of which were located in Europe and Asia. Substantially all of the company’s foreign purchases of merchandise were negotiated and paid for in U.S. dollars. Any event causing a sudden disruption or delay of imports from foreign vendors, including the imposition of additional import restrictions, restrictions on the transfer of funds and/or increased tariffs or quotas, or both, against home-centered items could increase the cost or reduce merchandise availability. No supplier accounted for more than 4% of Williams-Sonoma’s total purchases. Finance In fiscal 2003 (fiscal year ended February 1, 2004), Williams-Sonoma reported a 16.7% increase in net revenues over the prior year, the highest pretax operating margin and earnings per share in the company’s history and an increasing return on assets. Williams-Sonoma’s profit for the quarter ended August 1, 2004, jumped 55% as sales surged at the company’s Pottery Barn and outlet stores. Revenue for second quarter 2004 increased 19%, to $689.6 million, with direct-to-customer sales up an impressive 27%. Pottery Barn and Pottery Barn Kids drove second quarter retail growth with same-store sales increases of 10.2%; however, same-store sales at the company’s Williams-Sonoma stores slid 1.6%. The closing price for Williams-Sonoma stock on October 14, 2004, was $36.33. (Note: Williams-Sonoma’s annual and quarterly reports and SEC filings are available via the company’s web site, www.williams-sonomainc.com, and www.wsj.com ) The Industry The specialty retail business was highly competitive and characterized by a number of challenges, including: Anticipating and quickly responding to changing consumer demands Maintaining favorable brand recognition and effectively marketing products to consumers in diverse market segments Developing innovative, high-quality products in colors and styles that appealed to consumers of varying age groups and tastes Competitively pricing products and achieving customer perception of value Providing strong and effective marketing support Specialty retail exhibited the low entry barriers characteristic of fragmented industries, barriers that may be all but eliminated with the increased popularity of the Internet. Favored products for online shopping included computers, books, CDs, electronics, toys, and housewares. Over time, industry analysts expected catalog retailing to merge with e-tailing as web sites become electronic catalogs. For successful companies with strong brand names, the combination of stores and web sites would be a powerful one; however, expenditures for e-commerce sites would hurt profitability in the short run. Competitors Williams-Sonoma’s specialty retail stores, mail-order catalogs, and Internet web sites competed with other retail stores, other mail-order catalogs, and other e-commerce web sites that marketed similar lines of merchandise. The company competed with national, regional, and local businesses as well as traditional furniture stores, department stores and specialty stores. The substantial sales growth in the direct-to-customer industry within the past decade had encouraged both the entry of new competitors and an increase in competition from established companies. Direct competitors included such national companies as Crate Barrel, Restoration Hardware, Pier 1 Imports, and Bombay Company, as well as regional companies such as the Door Store, Rolling Pin Kitchen Emporium, Home Elements, and Expressions. Crate Barrel A counterculture story of the 1960s, Crate Barrel opened its first store in Chicago’s Old Town in 1962 and mailed its first catalog in 1967. Privately held Crate Barrel prided itself on designing beautiful store displays that were difficult to copy and worked diligently to find products from smaller, out-of-the way factories that made beautiful products that consumers could afford. Although the company had significantly fewer brick-and-mortar locations (84 retail and outlet stores) than the Williams-Sonoma retail concepts with which it competed, Crate Barrel marketed nationwide via its catalogs and web site. Restoration Hardware Restoration Hardware grew from just 20 stores in 1997 to 104 at the end of 2001, barely 37 behind Pottery Barn in brick-and-mortar locations; however, the company had had a difficult time managing growth. Its aggressive expansion between 1998 and 2000 cost it two years of profits and sank the value of its stock to as low as $.50 a share in December 2000, from $37 a share in 1998, the year it went public. The closing price for its stock on May 19, 2002, was $10.19. Both Restoration Hardware and Pottery Barn sold high-dollar, vintage-style furniture and home furnishings and had many other characteristics in common, including significant growth in direct-to-customer sales. Industry observers estimated that while Pottery Barn targeted the wealthiest 20% of Americans, Restoration Hardware targeted the wealthiest 10%. Whimsical nostalgia had been a big seller for Restoration Hardware for several years, with such items as retro tools, steamer chairs that could have come straight from the set of Titanic, shot glasses decorated with optometrists’ eye charts, and down-filled â€Å"foot duvets† proving hugely popular with shoppers. Restoration Hardware’s not-so-secret weapon in the battle for upscale customers could well have been Gary Friedman. In spring 2001, Friedman, who managed Pottery Barn’s explosive growth in the 1990s, was named CEO of Restoration Hardware after having been passed over for the top job at Williams-Sonoma. Pier 1 Imports Pier 1 Imports comprised three chains of retail stores operating under the names Pier 1 Imports, The Pier, and Cargo. Products offered included a wide variety of furniture, decorative home furnishings, dining and kitchen goods, bath and bedding, and other specialty items for the home. During the fiscal year ended February 28, 2004 (fiscal 2003), it operated 1,015 Pier 1 stores in the United States and 68 Pier 1 stores in Canada, and it also supported 8 franchised stores in the United States. In addition, it operated 29 stores located in the United Kingdom under the name The Pier and 40 Cargokids stores located in the United States. Pier 1 also supplied merchandise, and it licensed the Pier 1 Imports name to Sears Mexico and Sears Puerto Rico, which sold Pier 1 merchandise in a store-within-a-store format in 20 Sears Mexico stores and in 7 Sears Puerto Rico stores. The Bombay Company The Bombay Company’s retail stores and catalog emphasized classic traditional furniture, wall decor, and accessories. Furniture included both wood and metal ready-to-assemble furniture designed for the bedroom, living room, dining room, and home office. Functional and decorative accessories included lamps, jewelry, baskets, candles, scents, ceramics, frames, and desktop items. Wall decor included prints and mirrors. On January 31, 2004, the company operated 415 stores in 42 states and 56 stores in 9 Canadian provinces, as well as 46 outlet stores. The company viewed the outlets as an opportunity to increase sales to a different customer base, to assist in the orderly clearance of merchandise, and to further capitalize on its strength in designing and sourcing proprietary products. Accessories, the broadest category offered by the company, accounted for 43% of sales in 2003, while large furniture accounted for 31%, and ready-to-assemble products 14%, with wall decor accounting for the remaining 12%. Door Store The privately held Door Store operated nine retail locations in New York, New Jersey, and Connecticut. Its products included contemporary and traditional case goods and upholstered furniture; it competed with both Pottery Barn and Hold Everything. The company’s product strategy was to anticipate trends in furniture and to make quality furniture available to style-conscious customers at â€Å"prices almost too good to be true.† The Door Store also marketed via its web site and shipped nationwide. Rolling Pin Kitchen Emporium This privately held franchise kitchen and housewares concept, with headquarters in Little Rock, Arkansas, had store locations in regional and upscale malls in Arkansas, North Carolina, South Carolina, and Florida. In addition to retail sales, the company marketed nationwide via catalogs and its web site. The Rolling Pin competed with Williams-Sonoma. Other Competitors Other competitors across retail concepts included local and regional furniture and specialty stores, department stores, and direct-ship manufacturers. Williams-Sonoma’s expansion from the kitchen into the rest of the home with its flagship brand via the new Williams-Sonoma Home concept was expected to reorder a landscape dominated by traditional retailers such as Ethan Allen and Room Board and by â€Å"tastemakers† such as Martha Stewart for Bernhardt and Ralph Lauren Home.