Monday, November 10, 2008

Circuit City Retrenchment delaying the inevitable

NOTE: This was written and turned into Gerson Lehrman News last Friday Nov 7, and published Yesterday, before the Bankruptcy filing of this morning.

1) Pulling out of Major markets a bad idea for long run outlook.
2) Last store remodel/refit wasn't successful
3)Tried to become like Best Buy(NYS:BBY), but didn't try to better them

The news the Circuit City was closing 155 stores and pulling out of major metropolitan areas came as no surprise to industry watchers.

The seeds for this were sown during the last major store remodel/refit, when the Circuit City stores were converted to essentially an imitation of Best Buy, eliminating any chance for Circuit City to differentiate itself in any way but price and advertising spend. Commission plans were eliminated from the sales floor, so the face-to-face knowledge and expertise of the customer service staff disappeared.

They never compensated for that loss of product knowledge to the consumer with the better POP informational regime that Best Buy has always employed.

Unfortunately for Circuit City, Best Buy is better at being themselves than Circuit City was at imitating them.

Saturday, November 8, 2008

Vote "Yes" for Good Customer Service!

In the Convenience Store field, our first name is “Convenience”. Convenience means being in a convenient location, having a selection of merchandise that allows people to fill their needs without additional trips somewhere else (making it convenient to stop there), and having multiple options to allow them to pay. What seems to be missing from many convenience settings is making it convenient to deal with your first-line associates. In other words, how many times has a friend or client with a store or stores had a half-hour discussion with you about how to arrange the cold vault, but shrugs their shoulders and dismisses staffing with “It’s hard to find good people”?

All the care and science that goes into everything from merchandise selection and mix, to how a store is designed and looks, to what fuel brand, if any, to select, can be of little effect if the customer/associate interaction isn’t a positive experience. The level of service in the US, in general, has gotten to the point that good friendly service is the exception rather than the norm. One of the big C-Store publications actually has a column where they talk about the good service they received when THEY are on the road.

That doesn’t mean we shouldn’t strive for a better level of customer assistance.

We don’t believe anecdotal evidence proves a norm or spots a trend, but we all know that, even with the rapid drop in fuel prices, our customers are hurting financially. Inside store merchandise and foodservice (if you have it) sales are the lifeblood of the business. The easiest way to increase inside sales is to concentrate on staffing and training. Raise your expectations of performance for your customer service associates, and reward them when they perform.

Your customers want to be served, promptly and with a smile. My blog is named “The Service Station” for a reason. Think of the category you’re in as “The Service Store” instead of “The Convenience Store” category, and both you and your customers will be much better off. Sales will go up, your associates will be happier and busier, and you’ll be providing a positive “service” to your bottom line in the end.

Condevco offers comprehensive customer service and operations consulting and manuals for your store/chain. The operations we have operated and consulted on have a long history of “famous” customer service. Let us help you.

Monday, November 3, 2008

Buffalo Wild Wings and dineEquity are both being built for the long run

Title: Buffalo Wild Wings and dineEquity are both being built for the long run, but with different operating models.


1) dineEquity is 6 times larger in location count than Buffalo Wild Wings

2) The two companies aspire to grow earnings in different ways.

3) dineEquity can market across the whole daypart with the brands they own.

dineEquity (DIN) and Buffalo Wild Wings (BWLD) both released third quarter results on October 27th. dineEquity posted a .47/share profit verses a .09/share expected loss, and Buffalo Wild Wings posted .25/share profit, missing the projected earnings by .06/share. We used the two firms Quarterly reports as the basis for our comments

The two companies are not similar in size or makeup, and while they are competitors where Applebee’s and Buffalo Wild Wings restaurants compete in the same market for casual dining dollars, they really market to two separate demographics. The differences are more marked than the similarities.

dineEquity is still consolidating Applebee’s into their operating system, having purchased an entity in Applebee’s that was larger than IHOP. While the wisdom of a massive expansion could be questioned in light of current market conditions, even the most conservative of forecasts missed the magnitude and speed of the slowdown in consumer spending and the dive in consumer confidence that has occurred.

Applebee’s experienced a decrease in same-store revenues, and the company acknowledged that their new value offerings didn’t perform. That’s a marketing/advertising, not an operational or management issue, and can be easily corrected.

IHOP, with several years of brand revitalization under its belt, is a much more capable competitor than they were when the exercise in refranchising and repositioning started. There is no reason to think Applebee’s won’t eventually get down the same track and move dineEquity towards its goal of being 100% franchisee locations. I believe that dineEquity’s management is building a firm for the long run, and will benefit favorably from lower interest rates as their debt instruments mature and are replaced with lower-cost debt. If dineEquity conservatively manages their financial side and continues to retire debt with free cash flows, the outlook continues to get better and better. dineEquity is out to be a marketing and franchisee management firm, creating their earnings through franchise and licensing fees.

Buffalo Wild Wings, on the other hand, experienced excellent same store sales growth, and is buying back franchisee properties as part of a program to expand company revenues and earnings. They obviously feel that their way to increased profits is to become a full line owner and operator, while still actively franchising where the deals make sense.

This is why comparing these stocks requires understanding that while it looks like they share a common operating model within the same consumer space; they are heading in opposite directions in operating structure and philosophy.

dineEquity has a very large unit count, and as it becomes more focused as franchisor/marketer on driving top-line revenues, with the advantage of having the two brands identified with different dayparts for less cannibalism of consumer marketing focus, they are building a system that will allow for ever more efficient use of capital as the Applebee’s company restaurants get moved out to franchisees.

Buffalo Wild Wings is taking the tried and true approach of picking a specific consumer segment and being the best competitor within it. Their management believing they can run restaurants as company ops more profitably than they can as being the franchisor has lead to the “Buy–back” of franchisee units.

Buffalo Wild Wings and dineEquity are two dissimilarly sized firms with completely opposite philosophies of how best to grow their specific companies. In economics, the example of bad analysis is comparing apples to oranges; in this case it would be comparing Applebee’s to Wings.