Why Some Brands Can Stand Alone
More and more manufacturers are opening their own stores. Here's what allows some to thrive while others fail.
By Paul Sloan

(Business 2.0) – Shunned by kids for digital play alternatives and challenged by an onslaught of rivals, Lego has been under attack in recent years. Yet things may be turning around for the 73-year-old Danish toymaker. A Star Wars licensing deal has propelled sales of Lego sets based on the movies, and the construction-toy category has been hot. Another part of its business also offers hope: It's called the Lego Store, and it's boosting sales and luring customers in malls and well-to-do suburbs across the United States.

Lego's 18 so-called concept stores certainly don't look like department stores or mass merchants--they don't even look like other toy stores. Rather, they're Lego-packed playrooms, where kids (and often adults) spend hours building, dismantling, and getting to know all things Lego. With customers able to assemble their own creations from as many as 240 bins of pieces, each store is an opportunity to get customers interacting with the brand in a way that's not possible in the aisles of Wal-Mart or Target. "Mass merchants have only a finite amount of space, and they choose the lines they want," says Justin Tripp, Lego's global operations director. "Our stores are all about Lego."

In the late 1990s, as e-commerce began to take off, many predicted that manufacturers would begin selling directly to consumers through the Web, cutting out the brick-and-mortar retailers. To some degree that has happened. But at the same time, more and more brands are realizing that to differentiate their products, they need more than shelf space at big-box retailers and a snazzy website. As a result, many are turning to physical stores to connect with consumers. "The big challenge is, how do you stand out from the crowd," says Dave Sutton, CEO of Inforte, a firm that helps companies develop marketing strategies. "And the reality is, people still like to go to stores."

In part, manufacturers are simply catering to a growing consumer preference for smaller, more unique shopping environments: In apparel alone, sales at specialty shops rose 5 percent during the year ending in June, while those at department stores fell 1 percent. But stores also let a manufacturer control its own destiny, giving it the power to create its own image, train employees, set prices, and decide how and when to run promotions.

It's a strategy that takes finesse, however, since a manufacturer's existing distributors are unlikely to welcome the competition, at least at the beginning. But, like Niketown, a store can serve as a giant advertising vehicle that showcases a sweeping line of merchandise and spurs sales at other outlets. That's especially important with brands battling it out for consumers' attention through television commercials, online ads, and videogames. "Opening one's own stores is a growth strategy that's more important now because we're in a more competitive environment than ever," says Daniel Butler, vice president for merchandising and retail operations at the National Retail Federation. On the flip side, of course, if your products aren't offering something truly different or you don't have enough types of products to justify filling an entire store, you might find yourself repeating Levi's mistake, offering styles that are behind the fashion curve in an environment no more exciting than a standard department store.

Go-It-Alone Gets Going

Probably the most celebrated example of the trend is Apple. Its sleek stores--which offer training sessions, free Internet access, and cafe-type buzz--added $2.1 billion to the computer maker's top line during its past four quarters and helped reestablish its brand. But manufacturers of all stripes are setting up shop. In June, Hershey's opened a 3,600-square-foot candy store on Chicago's Michigan Avenue, the company's second retail shop outside its eponymous hometown in Pennsylvania. (The other, in Times Square, opened in the fall of 2002.) Apparel makers Lacoste and Puma have gone on store-building binges to remake their images, both with great success. Shoemaker Birkenstock sells through its own stores, and Bose has successfully used its branded outlets--complete with home theater demonstration rooms--to showcase its audio gear without getting drowned out by the competition at large electronics retailers.

For the trend's origins, marketing historians point to Coach. Established in 1941, the New York-based handbag and accessory company spent its first 40 years as a wholesale brand available only at department stores. Then, in 1981, it opened its first stand-alone shop, on Manhattan's upper east side. The move was risky: The store was only a few blocks from one of Coach's biggest customers, Bloomingdale's.

But with a staff whose sole mission was to promote Coach products, the store wound up boosting awareness of the brand, and sales of Coach bags at Bloomingdale's actually increased during the first year the shop was open. More than two decades later, Coach is again on a major growth spurt. It has opened about 20 stores a year since its 2000 IPO and now operates 195 retail locations (not including factory outlets). The shops have allowed the company to expand in ways that would have been impossible in traditional channels: A typical Coach store carries 650 products and styles, from shoes and scarves to eyeglasses and iPod cases. "No department store is going to carry that many," says Mike Tucci, president of North American retail at Coach. The upshot: Coach's sales have almost tripled to $1.7 billion in the past five years, with more than 75 percent of current revenue coming from its own shops in the United States and Japan. Most of the rest comes through still-friendly department stores like Bloomingdale's.

Something New in Store

Opening stores as an expansion strategy works best when a brand really has a new message it needs to get out. Take Lacoste and its once-ubiquitous alligator logo that stood for all things preppy. By early 2002, when Robert Siegel joined the French company as CEO of Lacoste USA, the brand and its icon had long since fallen out of favor in the States. The U.S. operation was losing money, and department stores everywhere had stopped promoting its clothing lines. "Stores would just put them on a table, put up a sign, and that was it," Siegel says.

Charged with reviving the company's image in America, Siegel knew that updating its products was the first priority. Lacoste's designers introduced midriff-baring Lycra tops, among other contemporary styles, and his marketing team dispatched the new clothes to celebrities. But to communicate that Lacoste had changed, Siegel focused on retail stores. The company had been operating 11 outlets in North America, but he embarked on a retail expansion, redesigning the existing stores and adding 25 new boutiques in tony neighborhoods around the country. (Every shop now has a common white look and airy feel.) He also pulled Lacoste from 110 of the 250 retail locations that carried the brand. The result: U.S. sales are up eightfold since Siegel took over, and he forecasts opening about a dozen stores annually for the next couple of years. "We just weren't able to create the right image through our wholesale customers," he says.

Make no mistake, though. The leap from manufacturing to retail is fraught with peril. For one thing, those new to selling direct might assume it's a no-brainer, discounting the enormous fixed costs of owning or leasing stores, the hassles of employee turnover, and the ever present threats of shoplifting and employee theft. And there's always a chance that the stores just won't catch on.

Differentiate or Die

The least successful stores typically fail to create an environment that itself delivers value. Remember Gateway's stores? The maker of personal computers built a strong brand in the 1990s by selling directly through a toll-free phone number. Then Gateway rolled out its Country Stores, designed to educate people about computers. The shops were really showrooms: The idea was that customers would try out Gateway products there, then go home and order over the phone or online.

Hindsight helps, of course, but the concept failed because consumers ultimately became so comfortable with PCs that they didn't need retailers to teach them how to use them. Furthermore, Gateway's offerings weren't substantially different from those of, say, Dell, which has stuck to its low-cost roots and refrained from opening stores. "Sometimes businesses get so enthusiastic about their own success that they forget very basic issues," says Bill Keep, professor of marketing at Quinnipiac University in Connecticut. By April 2004, Gateway had shuttered all of its 322 locations; today it sells direct and through retailers like Best Buy. In contrast, Apple has been successful because it offers something different--lines of iPods, accessories like speakers and headphones, non-Windows computers--and its stores are staffed with knowledgeable enthusiasts whose lectures go beyond how to use a mouse.

Of course, any manufacturer with delusions of retail grandeur has to deal with the fact that opening stores puts you in direct competition with your other distributors. It's what marketers call "channel conflict." So many of Apple's resellers feel betrayed by its stores that they've filed lawsuits accusing the company of improper business practices. They've also created a website called TellOnApple.org to gather evidence and vent.

Retail experts advise hitting channel conflict head-on. Gather all data possible to convince partners that the move will help both parties, since that's usually the goal. Coach, for instance, says its partners have learned that to have a Coach store nearby helps both channels; plus, it's found that shoppers at its stores tend to be younger than those at department stores. Lacoste has been so successful at reviving its brand that department stores like Macy's and Bloomingdale's are creating showcases that copy the look of the Lacoste shops. And elements of the Lego stores can now be found inside Toys R Us's flagship store in Manhattan.

As Lego's Tripp says, "We can live side by side." Even better, many manufacturers-turned-retailers are proving that they can thrive side by side as well.

Paul Sloan (psloan@business2.com) is an editor-at-large at Business 2.0.