Reference no: EM133039792

Please read the following case and answer the questions 

In March 2006, Robert (Bob) DiNicola, chief executive officer (CEO) of Linens 'n Things (LNT), needed a turnaround plan for LNT. The task of restoring the housewares retail chain to a leading position within the industry was a daunting one. The impact of competitors such as Bed Bath & Beyond (BBBY) coupled with encroachment from discount retailers like Target and Walmart had eroded LNT's stature as a housewares retailer. In February of 2006, private equity firm Apollo Management LP purchased Linens 'n Things for $1.3 billion in cash. That same month, Apollo replaced former LNT CEO Norm Axelrod with DiNicola, a turnaround specialist and former CEO of Zale Jewelry and of General Nutrition Center. NRDC Real Estate Advisors, a principal equity sponsor in the buyout along with Apollo, touted DiNicola's success in bringing Zale out of bankruptcy into an industry-leading position. As March drew to a close, the private equity partners expected DiNicola to soon outline his first steps in achieving the same turnaround success at LNT that he had achieved at Zale.

HOUSEWARES INDUSTRY

Housewares is a sector within the overall retail industry. In 2002, five-year sales growth for the sector was strong at 4.8 per cent.However, other retail sectors had outperformed housewares. Furniture, for example, experienced 10.4 per cent growth over the same period. Although certain retailers experienced advantages through sales volume or market place experience, access to the industry was largely unrestricted. As a result, the housewares segment was a fragmented and intensely competitive segment where "broadliners and specialists duke it out at home"; the Herfindahl index for home textiles retailers based on 2003 market share was 0.06. In contrast, there was a developing trend toward industry consolidation as the business environment became less favorable; the five largest firms captured approximately 60 per cent of total sales in 2004,5 up from approximately 50 per cent in 2003.

Firms within the housewares sector sought to differentiate themselves by carving out niches with unique appeal to consumers. Walmart, with its large revenue base, dominated the low end of the market, offering everything from groceries to furniture at low prices. Although stronger in design and quality, Target department stores also competed at the low-price end of the housewares market. Department stores, including Federated Department Stores (Macy's and Bloomingdale's), offered a full array of retail products but these stores sought to differentiate themselves through high levels of perceived quality and service. Williams Sonoma (Pottery Barn, Grande Cuisine, Hold Everything and Design Studio) pursued high-end sales focused on home and housewares goods. Other stores, like Pier 1, distinguished themselves by specializing in native crafts and import goods. Stores like IKEA, BBBY and LNT had blurred the lines between low- and high-end retailers by seeking out consumers who were willing to pay for quality but also understood the value of a good deal in a no-frills environment. The emergence of these firms had been especially damaging to department store revenues. According to Will Ander, a senior partner at the retail consulting firm McMillan/Doolittle: "Department Stores have been hurting for the last 10 years or so...sales per store have dropped and one issue is the specialty stores have almost become category killers here. Certainly Bed Bath & Beyond, Linens 'n Things and Williams Sonoma on the high end."

Responding to the success of this strategy, Walmart and Target had recently attempted to lure these mid- tier customers by offering better quality products and designer labels.

Housewares customers make frequent, small purchases. In common with other retailers, housewares merchants were working to integrate the Internet into their business operations. Web-based sales and marketing offered a potential competitive edge for innovative merchants. At the same time, the Internet provided customers with easy access to pricing information between competitors. Housewares consumers have always been price-sensitive, but the ability of consumers to compare prices online further heightened the awareness and importance of cost to consumers. Housewares was uniquely positioned among retail sectors to benefit from technology innovations in consumer electronics. For example, the introduction of flat screen TVs into homes was expected to inspire a new wave of housewares spending as the need for bulky media cabinets was removed.8 An even greater challenge for DiNicola and other retailers was the maturity of the U.S. market. Consumer demand for housewares was generally stable or declining; generating new business for LNT necessitated attracting customers from entrenched stores. Government policies designed to boost consumer spending, such as the Bush administration's 2003 tax relief act, were welcomed by the industry as a way to boost flagging demand. In addition, low interest rates had promoted a wave of home refinancing which placed additional dollars at consumers' disposal. The industry was now experiencing a trend toward consolidation as interest rates began to rise and the refinancing trend reversed. Government action beyond domestic policy had implications for housewares. The lifting of World Trade Organization import quotas opened retailer access to international suppliers. Feeling the squeeze, domestic suppliers used the courts to obtain restitution for illegal chargebacks. Legal action was a potentially significant development for the industry. For example, "during the third quarter of 2004, Linens 'n Things just barely made money - a skimpy $30,000 - without the $7.9 million in pretax cash it took from its suppliers." Lastly, firms within the industry, including BBBY, had been implicated in recent scandals associated with backdating of employee stock options.

Fashion, which influences where consumers chose to spend disposable income, was another important factor determining industry performance. Given the capricious nature of fashion, retailers were often frustrated in their attempt to predict and control consumer trends. For example, the September 11th terrorist attacks inspired a "nesting" trend among American consumers: "Simply stated, during those months after 9/11, it seemed more appropriate to be at home with family and friends than out on the town (looking good) living a party-all-night-long lifestyle."11 Events linked to setting up new homes such as real estate purchases and remodeling trends as well as marriage rates or, more specifically, weddings also impacted industry performance. In the United States, housing starts had increased over the last five years and were expected to continue growing until 2010. On the other hand, the number of married Americans as a percentage of the overall population had declined since 1990. In absolute numbers, however, the number of married Americans was still increasing. In addition, the number of weddings each year was expected to increase as echo boomers reached the age where most Americans married. In addition to trends affecting new households, housewares was benefiting from consumers' growing taste for "disposable fashion." Lead by IKEA, Americans were adopting the concept of cheap, stylish home décor that would be replaced before it wore out.

LNT HISTORY AND STRATEGY

From pillow talk to coffee talk, Linens 'n Things has it covered. The #2 US home goods chain (after Bed Bath & Beyond) sells bedding, towels, housewares, and other home accessories, such as bath items and window treatments. Linens 'n Things has some 560 superstores (35,000 sq. ft. and larger), emphasizing low-priced, brand-name merchandise, in 47 states and six Canadian provinces. Brands include Braun, Krups, Calphalon, Laura Ashley, Croscill, Waverly, and the company's own label. Linens 'n Things is expanding the "things" (non-linens) it sells, as well as opening stores in more US (especially western) markets and closing its smaller stores. Linens 'n Things was acquired by a private equity firm in 2006. Linens 'n Things was founded in 1975 by Eugene Kalkin, just four years after and sixteen miles away from the founding of Bed Bath & Beyond. Kalkin focused on a novel value proposition: provide consumers with high-quality houseware goods in a no-frills, value-priced environment. According to its 2004 annual report, LNT created loyal customers by offering good value on an appealing array of merchandise, through services such as electronic bridal registries and online shopping, and through superior customer service. LNT used low-cost promotions such as newspaper circulars and mailings to advertise its business. In addition, LNT stores were located as standalone buildings or in off-price malls. Both practices were consistent with a commitment to every-day low prices. In addition, as early as 1988 LNT furthered this commitment by investing heavily in infrastructure to support inventory management. In 1995, the company built a distribution center in Greensboro, North Carolina, then the heart of its vendor base. LNT followed this distribution center with a second in 1999. These decisions centralized LNT's operations and placed the company on a path toward efficiency. From its inception, LNT's growth strategy relied on store expansion and increasing market share; however, early in its development LNT sought to develop profitability through both expansion and efficiency.

LNT VERSUS BBBY

Bed Bath & Beyond has everything you need to play "house" for real. It's the #1 superstore domestics retailer in the US (ahead of Linens 'n Things), with more than 740 BBB stores in 46 states and Puerto Rico. The stores' floor-to-ceiling shelves stock better- quality (brand-name and private-label) goods in two main categories: domestics (bed linens, bathroom and kitchen items) and home furnishings (cookware and cutlery, small household appliances, picture frames, and more). Everyday low prices eliminate the need for sales. BBB relies exclusively on circulars, mailings, and word-of-mouth for advertising. New superstore openings - 70 or more per year - account for much of the firm's growth. Starting in 1971, BBBY opened two stores, one in New York City and one in New Jersey. BBBY's aim was to be "a customer's first choice" and to "achieve this objective through excellent customer service, an extensive breadth and depth of assortment, every day low prices, introduction of new merchandising offerings and development of its infrastructure." Co-founders Warren Eisenberg and Leonard Feinstein continued to serve on the board of directors of the company. LNT and BBBY shared a very similar customer value proposition. Both companies offered similar merchandise  and covered virtually the same geographic areas. In addition, both companies had grown through store expansion. Through the 1970s and 1980s, the number of LNT stores grew at a faster rate than BBBY. Starting in 1985, however, BBBY expanded its inventory and opened its first super store. With the capital raised in its Initial Public Offering in 1992, the pace of BBBY expansion increased dramatically. In 1990, LNT responded to the changes at BBBY by also expanding inventory and opening its own super store; for the next five years, LNT worked to expand all its stores into a super store format. Going beyond low-cost product promotion and modest store fronts, BBBY extended cost-saving measures through the implementation of specialized inventory systems and staffing. BBBY saved on the cost of warehousing inventory by shipping merchandise directly from manufacturers to store locations. BBBY carried no debt on its balance sheet and promoted only from within the company, while relying on store  Use outside these parameters is a copyright violation. managers for inventory control. This was consistent with another characteristic of the company - the ability to change and adapt. According to a BBBY spokesperson, "Flexibility is definitely an advantage we think we have." Store managers retained greater control over inventory, presentation and how items were sold, allowing the firm to remain aware and responsive to consumers. For example, a local manager switched to selling glasses individually instead of in packages - sales increased by 30 per cent and other BBBY stores soon implemented the same practice.As a retailer, BBBY's employee investment accrued benefits beyond simple cost savings. According to Kevin Hunt, an analyst with Piper Jaffray, "They [BBBY] stress service, every retailer tries to do that, but they are better at it than most."

More recently, BBBY had expanded into fine tabletop products (fine china, crystal, silver and silver plate flatware). After several years of testing, BBBY began to expand store locations offering fine tabletop products. BBBY's expansion into fine tabletops was especially timely because echo boomers were approaching their late twenties, the age when Americans typically married.

APOLLO ACQUISITION

In February 2006, attracted by a low purchase price , LNT was acquired by Apollo Management and National Realty and Development Corporation (NRDC) Equity Partners for $1.3 billion; at that time the market capitalization for BBBY was approximately $10.7 billion. The purchase made LNT a private venture once again. DiNicola's first mandate was to implement a new strategic vision: "Linens 'n Things is a business that should be operated at a much higher level, with high-quality products and perhaps with a little different demographic profile."DiNicola intended to differentiate LNT by providing higher benefits to customers and leaving cost leadership in the market to players like Walmart and Target. He was experiencing difficulty, however, working within LNT's existing structure. The ability to appeal to new customers was hampered by a limited advertising budget and product offerings. In addition, customer service was threatened by reductions in both the total number of employees and the number of full-time employees per store between 2003 and 2005.

Given these difficulties, LNT might have more freedom to make needed changes than a publicly traded firm. However, comparing the strengths and weaknesses of LNT and BBBY revealed how BBBY's agile structure created a formidable competitor. Could a similar culture be created at LNT? More importantly, could LNT's strengths be used to make a unique position for the company with consumers? DiNicola had only a few months to start to implement specific steps designed to set LNT on a path to long-term growth and profitability and even less time to convince management that LNT was ready to become an industry leader. What was the best course for LNT?

Complete these questions once you are done reading the case.

1. The last sentence in this case asks: "What is the best course for LNT?" 

-  Assume that you were Bob DiNicola: What would you recommend to turn around LNT? Provide a concise answer 

2. Industry 

• Define the industry that LNT and BBBY operate in.
• What do you think the Key Success Factors are in this industry? Explain. (Hint: First think like a customer, what is important to LNT and BBBY customer base?  Why do they shop at these stores?).