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Posted Date: 2/9/2011

Chico's Comeback

By Masha Zager
The fortunes of Chico’s FAS, the women’s specialty retailer, have had enough twists, turns, ups, and downs to keep even jaded moviegoers on the edges of their seats. Long ago (in 1983) and far away (on Sanibel Island, Florida), Marvin and Helene Gralnick opened a tiny store, Chico’s Folk Art Specialties, to sell the art they were importing from Mexico. They named the store for a friend’s parrot, Chico. Their first surprise: Customers loved the cotton sweaters they had added as an afterthought.

Chico’s quickly became a boutique. Focusing on relaxed, quirky clothing that the Gralnicks designed themselves and sourced in Mexico, the company grew to about 60 resort-area stores — many of them franchised — before going public in 1993. The Gralnicks retired after the company went public, but returned the following year to set the company back on course after it detoured, disastrously, into selling oversized clothing in malls.
 
By 1997, Chico’s had once again found its niche — the aging baby boomer — and was achieving consistently high rates of store growth as well as double-digit growth in existing stores. In 2004, it acquired the White House | Black Market brand, which appeals to younger women, and launched a third brand, Soma Intimates. Its success made the company a Wall Street darling, and its stock rose to dizzying levels, peaking in 2006.

At the end of 2006, the Gralnicks retired again — this time for good — and the company once again encountered difficult times. It began to experience serious operational and performance problems, and the recession arriving soon afterward hit it with a double whammy. At the end of 2008, the board of directors recruited retail veteran David Dyer as CEO and president; Dyer in turn brought in several former colleagues from Lands’ End to help restructure the company.

Overhauling the technology infrastructure
Arriving on the scene in early 2009, Dyer quickly realized that Chico’s rapid growth had outstripped its technology infrastructure. Even though a major technology overhaul had begun in 2007 with the implementation of the ATG e-commerce suite and the SAP enterprise resource planning system, more work remained to be done. The company would require significant additional investment in technology to effectively manage 1,000-plus stores along with a burgeoning direct-to-consumer business.

During 2010, the company invested more than $30 million, or more than a third of its total capital budget, in new systems, and since then it has continued working to integrate and leverage these new systems.

The JDA Merchandising suite, which Chico’s has integrated with SAP, helps planners get the right products to the right places at the right time. It also helps minimize the number of physical moves for products. Gary King, Chico’s executive vice president and CIO, explains, “Together with the work we did in the distribution network, it allows us to hold as much product as possible in the distribution centers till the last minute, so we don’t overwhelm the back room of the store and have to mark it down or move it to outlet stores to liquidate it. … Selling online is a much more profitable way to handle slow-moving items. We only move product to the stores that have a high probability of selling.”

Another JDA product implemented at the same time — almost as a “gift with purchase,” King quips — was the workforce management solution, which “moved store operators from paper and pencil to a sophisticated labor planning and optimization capability.” At the same time, all the stores were broadband-enabled and outfitted with large, user-friendly touchscreen computers that store personnel use not just for labor scheduling but for tracking shipments, processing home deliveries, locating merchandise and even training new staff.
 
The new management team also believed Chico’s was missing a huge opportunity to serve customers through its direct-to-consumer channels, and resolved to grow those channels in spite of the recession. For the online channel, the groundwork had already been laid with the new e-commerce system, with its improved image management capabilities and more compelling shopping experience. Over the past two years, the company has made an effort to drive traffic to the site through customer communications and digital marketing; the results have paid off with large annual increases in online revenues.
 
Building customer loyalty
Another major initiative beginning in 2009 was implementing SAS OnDemand: Marketing Automation. This analytics program builds on Chico’s long-standing customer loyalty program, which over the years amassed a huge database of customer contact information that enables the company to tie most transactions to specific customers. Using the SAS software to plumb that database, Chico’s can add to traditional hierarchical merchandising (based on brands and categories) and store clustering a “third layer” based on clustering of customers. Understanding the behavior of specific customer segments lets the company tailor its merchandising and marketing to focus on the most profitable segments.

Charlie White, vice president for customer relationship marketing, says that SAS brought about a cultural shift: “It changed our focus from executing campaigns to looking at the data … and deciphering what really had an impact on profitability and customer behavior.” Jeff Jones, Chico’s COO, puts it even more succinctly: “Our job is to make a merchant’s dream become reality.”

Profiling customers based on overall lifetime spend led to some surprising findings, White says. For example, a typical customer in the Northeast proved to be more distractable — “we’re just one of many options for her” — compared with customers in other regions, who tend to commit more of their disposable income to Chico’s. Holding the interest of customers in the Northeast requires stocking of a greater variety of merchandise in the stores there.

Another finding was that Soma Intimates, originally introduced as a sister brand to Chico’s, was also attracting customers more like White House | Black Market customers (that is, younger) and generating enormous growth in online traffic. This led the company to invest more in the Soma brand, both by expanding the store fleet and strengthening the direct-to-customer channels. Swimwear and sleepwear lines were added, and additional line extensions are under
consideration.

Analysis of customer data also highlighted the interplay between the frontline stores and the Internet business. White says, “We’ve been able to show the value of the online customers to the organization as a whole and to the frontline stores. … The majority of our customers go online first [to investigate what styles are available] and then go into the store to shop. That wasn’t true five or 10 years ago.” The relationship can work in the other direction, too — store personnel will often help a customer round out a new outfit with an accessory that is available only online, and then have it shipped to her home.

To align the efforts of the store and online divisions and to reduce potential competition between them, the company’s CEO moved the reporting of direct-to-customer sales into the relevant brand businesses. “It gets everyone on the same page,” White says. In addition, most inventory is no longer attributed to specific channels until it is actually moved. Instead, there is one “virtual” inventory, and “the customer who wants to buy it first, gets it first.”

White adds, “We have tried to integrate the data so we can see it across all channels and see the influence of activity in one channel translate into activity in other channels.”

Looking ahead
After all the IT investments of the past few years, King says he feels “very comfortable with the systems infrastructure from the point where a purchase order is created all the way through the end of the product life cycle.” But that doesn’t mean nothing is left to be done.

In addition to optimizing the solutions already in place, a major focus for 2011 is finishing the implementation of the PTC product lifecycle management system. This software will track the development of products all the way from the gleam in the designer’s eye to the creation of a purchase order. As a private-label retailer, Chico’s designs all its products in-house, so product lifecycle management has the potential to yield significant operational efficiencies.

A pilot project for RFID item-level tagging will also get under way early in the year. In order to evaluate this new technology, Chico’s will tag samples rather than actual merchandise, tracking them through development, design, catalog photo shoots and so forth. If the technology appears promising, a store pilot could be next. Still other initiatives are in exploratory stages — more POS automation, applications for customers’ mobile devices and evaluation of customer feedback through social media.

While Chico’s transformation was spurred by the company’s need to get back on its feet financially — and the numbers are heading back in the right direction — its core values remain customer-centered. In the end, all the innovations are in the service of creating a great customer experience. As COO Jeff Jones says, “It starts with the merchants, who have the talent of finding the right merchandise, the right fashion. … Chico’s is about over-the-top satisfaction with the look, the outfit — something special and unique, at a price point that’s affordable.”

Masha Zager is a New-York-based Apparel contributing writer specializing in business and technology.


systems at a glance

Campaign Management: SAS OnDemand: Marketing Automation
E-commerce: ATG Commerce
Enterprise Resource Planning: SAP ERP
Labor Scheduling: JDA Workforce Management
Planning, Assortment, Allocation: JDA Merchandising Suite
PLM: PTC

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