Is Hollywood Next?
FAO Schwarz keeps all options open
By Brent Felgner -- Gifts and Dec, 4/1/2007 12:00:00 AM
FAO Schwarz TV? It's not as far-fetched as it might seem.
Nineteen months after joining FAO to lead its turnaround and rebuilding, CEO Ed Schmults sees opportunities throughout the business.
Armed with volumes of market research and a year and a half of experience at the helm, Schmults is looking at such initiatives as an FAO media presence—yes, it might go Hollywood—the prospect of opening a few pocket stores in Manhattan, partnering to launch a handful of carefully placed international stores and expanding its Internet business. All of that is happening as he's updating FAO's logistics and systems infrastructure, and remerchandising large spaces in the store—and retooling others—to bring in new product categories.
It's all possible because the business is rebounding. By Schmults' own account, the privately held retailer is running ahead of his three–year plan. While hard numbers aren't publicly available, he says companywide sales were up 38 percent in December 2006 over the prior year's December, and the Internet business was up 62 percent—both admittedly from a small base. The Internet business now accounts for about 40 percent of the company's total sales base, according to Schmults, and could top the 50 percent mark in 2008.
Following the money
But is the company profitable yet? "We're strongly capitalized," Schmults replies. "We're generating a lot of cash and when my three-year plan comes to a close here, I think we're going to be a very formidable company from a variety of standpoints."
Schmults says that department by department, sales range from $200 per square foot to more than $9,000 per square foot. He's set a goal that every department rises above $1,000 per square foot. In the meantime, sales conversions—those who buy versus those who shop—are strong, falling in the range of 30 percent to 40 percent, Schmults says.
For a retailer that, a few years ago, wasn't sure it would ever open its doors again, the array of choices for rebuilding the 144-year-old brand constitutes almost an embarrassment of riches. Schmults has found himself in the unexpected position of being able to look at extending the FAO name even as he continues to repair the core business. He knows it's a seductive and potentially dangerous place to be.
"I am a firm believer in [business author] Andy Grove's maxim that 'only the paranoid survive,'" Schmults says. "So, I do know that this is only a first step. We had a good first year, which basically means nothing for 2007. We still have a lot of work to do, and even when things are going great, I'm always worried about what I might have missed or who's out there around the corner that I don't see yet."
Fundamental changes in infrastructure and merchandising will help FAO become more competitive, Schmults says. In the past year, the two-store chain has rationalized 10,000 SKUs and 200 vendors, essentially halving its merchandise assortment down to 10,000 to 12,000 items. That can be tightened further, Schmults says, in preparation for new departments coming over the next six months. Exactly what those are is still being kept under wraps, but witness the addition of new categories like apparel and bedding from LittleMissMatched or infant wear and gifts from Bunnies by the Bay for a hint at their direction.
Content rich
Consumer research, quite unexpectedly, also revealed that FAO shoppers want to see media content coming from the retailer. It's a response that piqued Schmults' interest in leveraging the retailer's brand.
"I recognize very clearly that this [store] is the golden goose," he says. "We are a toy business; I don't want to become a media company, like some of the dot-coms became. So, whatever we do has to support this overall business. If this fades and stumbles, our value to any partner also fades and stumbles."
Schmults says he's emphasized internally that no matter how exciting a licensing opportunity becomes, the core business must remain at the fulcrum. He's urged insiders to remain focused on that.
The move into media will be a longer term project, because it's new and requires a learning curve to master. Schmults notes that several colleagues have moved into Hollywood businesses in a significant way and they've reacted very positively to the FAO brand and its potential. While he's learning, Schmults is seeking a knowledgeable executive to help guide the company through the right choices.
As a result of such branding opportunites, Schmults has shelved a planned expansion into smaller neighborhood stores around New York until 2008 at the earliest. For one thing, the returns from licensing content are potentially higher. And that will also free up capital to be used for accelerating infrastructure and systems improvements. In the meantime, he does see opportunities to partner with foreign firms to run international stores in places such as Dubai, London, Paris, Moscow, Tokyo and Shanghai. Those stores could become brand outposts that would support the U.S. businesses as well as FAO's developing private label efforts. International market research, Schmults says, has found FAO to be "on a par with Neiman Marcus, in terms of brands that aren't internationally distributed, which is rather startling."
Infrastructure moves
In the past year, the company has made notable operational improvements, including consolidating warehousing to one location from three, through a third-party provider in New Jersey. That may also help to convert backroom space at the New York store into active selling space, a critical productivity driver.
Currently, the focus is on updating 10-plus-year-old systems, bringing in a "service-oriented architecture" and making substantial improvements in virtually every corner of the business without the need to add to the payroll, Schmults says. The effort is aimed specifically at optimizing supply chain management, store level execution and merchandise management. The retailer's POS systems are also on the fix list, but further down the road, he says.
"We've been able to make massive changes without a lot of capital commitment and with the support of the vendor community," Schmults offers. "Their belief in us as a business and their belief in the 2.5 million people coming through the doors—that's a powerful combination."
Want more with FAO's Ed Schmults? Visit www.playthings.com/schmults for additional insights on the company, including Schmults' upcoming merchandising plans.
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