American Apparel, Toys R Us, HMV, House of Fraser, Debenhams. On both sides of the Atlantic, the list of brick and mortar retailers to have faced serious challenges or gone bust is a long one. The growth of e-commerce and domination of online giants like Amazon and Walmart has left many retailers seemingly unable to adapt to the new environment. Often, what is needed to stay relevant in the face of such threats is the ability to challenge the norm and think outside the box. In the US, we have found a retailer doing just this.
With a market cap of just over $600m, apparel and footwear retailer Zumiez is no giant. But then again, it’s not trying to be. Zumiez is predominantly positioned to serve teens and youths, and has strong links to the skating and snow sports communities. It is a full-ticket priced retailer; it relies on customer experience and brand power, rather than price. What we find interesting about the company is its innovative business model and willingness to go against the grain of traditional retail strategy in the search for success.
Zumiez co-founder Thomas Campion was an employee of JC Penney in the 1970s. He was consistently frustrated by what he perceived as a lack of willingness from the company to innovate and try new strategies. Tired of being told things like ‘that’s not how things are done’, Campion left to start his own business, co-founding Zumiez in 1978.
As you might expect given Campion’s previous experiences, trust and engagement with staff are key to the strong culture at the company he helped to establish. Maintaining an environment where everyone can contribute in order to seek continual improvements is a central tenet of this culture. Store managers meet multiple times each year to learn from each other’s experiences and drive the company forward.
An excellent example of the company’s innovative thinking is the use of its stores. Marketing spend is low, as the company sees the shops themselves as the most important marketing tool – a belief that is backed by much higher website traffic in areas where they have a physical presence.
In 2015, Zumiez revolutionised the way these stores are used. In light of falling footfall, resulting in staff having excess spare time, management took the bold decision to close the company’s central fulfilment centre and instead fulfil online orders at local stores – doing the complete opposite of the conventional e-commerce strategy. The move made perfect sense though – staff were no longer twiddling their thumbs and the speed of delivery actually improved. What’s more, staff are encouraged to include hand written notes suggesting matching items in the orders they pack, helping to drive additional sales and develop that intimate link with customers that Zumiez strives for. Technology has also helped drive efficiency, as the company has developed an algorithm to ensure quieter stores fulfil more orders and busier ones are not overwhelmed, maintaining the customer experience. From a financial perspective, significant fixed costs have been saved and inventory management improved, boosting working capital and reducing the risk from the arch enemy of any retailer – inventory write downs.
Zumiez takes a long-term view and is patient when it comes to growth. Management would rather open fewer stores but get the quality and efficiency of each one right than dilute the brand by overextending and opening too many at one time. The company’s footprint in the North American market is more mature than in Europe and Australia (where they operate under the Blue Tomato and Fast Times brands, respectively), where there is likely to be greater unit growth over the next few years.
All in all, Zumiez’s innovative and differentiated approach to operating in what is a difficult sector is refreshing. The desire to challenge the norm and continually seek incremental improvements has brought steady growth over time and, we think, sets it up well for continued success in the future.
We currently hold Zumiez in portfolios.
Opinions and views from the Equities team at Kames Capital are not an investment recommendation, research or advice and should not be considered as such. Content discussing investment strategies and stocks is derived from and solely relates to the investment management activities of Kames Capital.