The (long?) Road to Expansion: Foot Locker

In a recent article written by Andria Cheng in the Wall Street Journal, Foot Locker Shoots for 7% Annual Profit Growth explains the goals management at Foot Locker, Inc. believes will boost the company’s revenue from $5.6 billion to $7.5 billion. The key lies within increasing gross margins and sales per square foot (an increased $500 in 5 years) rather than demanding more from vendors. Foot Locker aims for continued growth using organic action including varying marketing tactics, diversifying and expanding apparel, and capitalizing on external factors.

• Market to the four areas in which the greatest opportunity for growth and revenue exists: apparel, women, kids and athletic teams.
• Sensing opportunities: diversified options including color, utilizing IT for online ordering, sensing opportunities with women, partnerships with Nike, the European market and House of Hoops.
• Capitalize on external factors such as the upcoming London Summer Olympics and the recent popularity of New York’s point guard Jeremy Lin to bring in additional revenue.

Though sales have slowed globally due to worldwide economic problems, Foot Locker is still profitable and eagerly looking for ways to improve. Though the company closed more stores than it opened just last year, Chief Executive Ken Hicks plan of attack includes adding 60 to 70 stores each year. Additionally, Hicks believes there is a need to change the target customer from the 15-25 year old range to the 25-35 year old range to suit the current economic stage, suggesting that young adults will continue to spend money on shoes and athletic gear at Foot Locker while the younger generation may not.

I believe part of Foot Locker’s success has been their ability to sense what the customer wants. In our recent Jim Collins reading How the Mighty Fall, it can be inferred that companies may fail because they lose the mindset of “We’re successful because we understand why we do these specific things and under what conditions they would no longer work” and replace it with “We’re successful because we do these specific things”. Footlocker has realized and accepted external conditions and has acted accordingly in decision making. In particular, the plan to alter the target customer age group better aligns with the current economic situation and Hicks’ idea concerning young adults spending habits in this economy.

Honestly, I admit I am wary about Hicks’ idea to open 60 to 70 new stores a year. I cannot find an argument that would suggest it is anything except stage two of the five stages on decline in Collins’ reading: the undisciplined pursuit of more. Yes, expansion can be a really great thing- but only if the thing being expanded is in its own time. (In the Toll Brothers case we saw continuous expansion and all it left them with was tremendous debt and empty houses). Why would Foot Locker invest so heavily in new arenas where recent history proves that locations close at a faster rate than the open? It seems that Hicks is slightly veering off course and losing sight of his core purpose in pursuit of growth and expansion because they are so thirsty for greater revenues, they are willing to do almost anything. Expanding the customer base through utilization of celebrities such as Lin or events such as the London Summer Olympics provide opportunities to excel and increase revenue- Foot Locker should continue to focus on these values. With such a wide variety of products available online (online sales rose 20% from last year, contributing to 11% of total sales) it seems unnecessary and catastrophic to construct 60-70 new stores.

Foot Locker, Inc. locations Map (US)

Comparing Foot Locker to the Six Flags case discussed in class earlier this evening, many proposals for innovation exist though they are not all the right ones. Should Six Flags open more theme parks, expanding locations even further? I would argue no. Should Six Flags focus on each individual park, making each park the best park possible by incorporating local customs, history and food, under the solid brand of Six Flags? I would argue yes. Similarly, I believe Foot Locker would have the best opportunity to increase revenue by focusing on what is going on inside each of their individual stores- selling more per square unit. In our reading, Collins so eloquently phrased it, “But never give up on the principles that define your culture. Be willing to embrace loss, to endure pain, to temporarily lose freedoms, but never give up faith in your ability to prevail.” Foot Locker receives my praises for recognizing the difficult economic times and dealing with it accordingly, keeping their faith, perseverance, and strategy to be the leading global retailer of athletically inspired shoes consistent.

Why the Smart Car fell short

Sensing the need for a compact car in overly crowded cities around the world, Daimler Motor Company set out to develop the Smart car in 1998. Measuring a mere 106 inches long, Smart offered a Customer Value Proposition of being a reliable, two-door alternative to traditional bulky four-seaters—especially in an urban setting. However, as Chris Reiter argues in his Business Week article, How BMW's Mini Trumped Daimler's Smart Car, Daimler’s strategy fell miserably short. Three years after its introduction, Smart had been surpassed by BMW’s Mini—an auto of similar design that offered slightly more room (four seats and 146 inches long), while maintaining its label as a “compact car”. Following Mini’s domination of the compact car market, Smart incurred more than $5.3 billion in losses. What factors dictated such a miserable collapse? Here are the leading causes:

Miniscule Market

Although the demand for smaller, more gas-efficient cars is eminent, very few auto consumers are looking for a car with just two seats. Even the younger, single crowd finds it inconvenient being unable to accommodate more than one passenger at a time. As explained by Ferdinand Dudenhoeffer from the Center of Automotive Research at the University of Duisburg-Essen, “The niche for two-seaters isn’t that big.”

Elevated Costs

Smart’s unique production process requires specialized engineering—drastically increasing its costs compared to other compact cars. For comparison, the Toyota Yaris ($12,517) and Nissan Versa ($12,337) (both four-door, four-seaters) come in at almost exactly the same price as Smart ($12,490). Further, due to pricy features such as a semiautomatic gearbox, turbocharged engine and electronic stability system—Smart has all the makings of a luxury vehicle. Clearly, Daimler has strayed from Smart’s CVP as an inexpensive, simple vehicle. With a younger, less affluent target market such price markups can significantly damage sales.

Lack of Versatility

Until recently, Daimler has stuck with Smart’s original model, the “fortwo”, without offering any significant variation. In contrast with Mini, which by adding a roadster and coupe-like crossover this year will bring its arsenal up to seven different models, Daimler’s fortwo remains unchanged and boring in the eyes of consumers. With no option for an upgraded engine or accessories such as rear spoilers, many are turning away from Smart and looking towards Mini.

Although Daimler has finally addressed its lack of variety by introducing a battery powered car and electric bicycle set to launch in 2014, the company cannot justify its heavy annual losses for two more years. Given Mini’s recent domination, the Smart car has become completely obsolete and won’t stay afloat to see the launch of its two new concepts.

The Dark Side of Innovation

I recently read this very interesting article on the WSJ's SmartMoney blog. In relation to our discussion last Tuesday about sensing opportunity, the article discusses some of downsides of the entrepreneurial process, particularly those that have recently risen around the current economic context. For the sake of brevity, I will boil down the main points in a list and provide my respective perspectives:

• According to the Small Business Administration, half of start-ups will fail within their first five years, and only one-fifteenth survive to see their tenth anniversary. Investors who choose to back such faltering start-ups also have a high risk of going bankrupt, or losing everything - 40%.

Starting a business is hard. Really hard.

This seems to align with Gourville's Degree of Product Change matrix; the vast majority of new products or services are not sure hits, and therefore won't take off. A lot of these new businesses tend to be small service businesses like home painting or lawn cutting, which might provide a marginal improvement over local competition, but are ultimately financially unsustainable. Tech start-ups tend to be long hauls, in that their ideas usually require a good degree of behavioral change for a minor-to-moderate product change.

• Angel Investors have been lowering their rate of new investment. In 2011, 39% of angel deals came at the start-up stage as opposed to 75% in 2007. David Brophy, a colleague here at Ross, reportedly said that it's easier to raise money for companies which have already been developing and that "There's been a cloud over the whole early stage market."

The new angel investing paradigm.

A large part of this has to do with increased government regulation of business and stricter fiscal policy, which pressures lenders into pursuing higher interest rates because of the increased degree of risk associated with rough economic states. At the same time, I believe it is important for investments to be made in new start-ups because they are the ones who spur the national economy by spearheading the job market... Right?

• Jobs created by small businesses peaked at about 4.65 million a year in 1997 to 2000; in 2010, new companies created less than 2.5 million jobs. Compared to the past, young companies are also adding fewer employees as they grow.

Survival of the fittest?

This is a more systemic problem because it illustrates the steady decline of a major business philosophy - that start-ups are absolutely essential to the revitalization of a country's economic state and productivity. The fact that fewer jobs are created from new ventures can be attributed to several factors, among them greater technological automation and increased risk aversion from job seekers and employers. However, a deeper issue could very well be innovative stagnation, where we as a society have grown so complacent with what we have that we are now less inclined to hop on board potentially awesome ideas that would otherwise have taken off. What do you think?