14 May 2009Nine West Case Analysis I. Central IssueChairman of the Board Jerome Fisher saw that changes were needed in themerchandising organization within NWRS, the retailing division. He believed this wascritical to the success of the company. NWRS’s main objective was to decide whatproducts to carry at which location. Fisher predicted that the role of retail director would change in the near future, due to technology, sales growth, competition, and the addition of new product lines. The company’s sales growth complicated merchandising decisions since this now included a broad geographic area with variations in fashion preferences. This was expected to become even more complicated as leading specialty stores were planning on launching footwear brands, which gave the NWRS a new source of competition. Merchandising had become even more difficult, due to the decision to diversify product to include sunglasses, jewelry, legwear, and apparel. Fisher wanted to expand the company to a complete lifestyle brand. Also, he planned to launch an online division. II. Key Factors for Consideration a. The retail footwear industry The footwear industry had seen little real growth from 1990 on. From 1990 to 1995, the industry only saw a compound growth of 0.44%. Footwear represented 46% of the total retail market in 1995, yet sales were expected to rise only 3-5% over the next five years. Most shoe segments only experienced a small increase in sales in the early 90s. The basis for differentiation was most often quality, style, and sometimes manufacturing location (esp. France, Italy.) b. Shoe Design and Construction A creative team first searched for inspiration, which resulted in a series of sketches. Designers then visited raw materials suppliers and tanneries to view the colors offered for a season. Sketches were then produced for all classifications of footwear, and then proposed for the wholesale line. Because a shoe consisted of numerous parts, which needed to be assembled together, the production process was complex, often
consisting of 130 stages. Manufacturing lead-time could take up to 10 days. The shoe then had to be held on the last for an additional 5.c. Company Background Named for its early office location at 9 West 57th Street in New York City, the Nine West Group, Inc. was founded by Jerome Fisher, and the current chairman of the board and chief executive officer, Vincent Camuto. The company started in 1977 as a manufacturer and wholesaler of women’s footwear, and by 1998 had expanded to include fashion footwear and accessories for fourteen brands, including Nine West and Easy Spirit. The wholesale division was present in more than 40 countries worldwide. It also distributed product to over 7000 department, specialty, and independent retail stores. By 1997, retail division represented about 49% of the total company revenues. This division was formed in 1983. By the end of 1997, the Nine West group operated 1,459 stores, 429 of which belonged to NWRS. Nine West saw significant growth since its conception, reaching sales of $1.6 billion in 1996, which was achieved with rapid expansion in domestic and foreign markets, with significant presence in Asia, Europe, Canada, and Australia. The company strategized the aggressive acquisition of other footwear companies, including Amalfi, Easy Spirit, and Selby. Nine West also created the footwear concept of, “a shop within a department store.” Nine West plans to increase product diversification to one day evolve into a lifestyle brand with every aspect of the business being integrated.d. Merchandising Organization Structure The “retail directors” of NWRS were similar to both the buyers and merchandisers of other retail companies. However, retail directors, who were each responsible for 50 to 60 stores, managed style selections, purchasing, pricing, and display. They reported to a merchandise manager who in turn reported to the president of NWRS. The president was responsible for allocating decisions for creating a “point of view” across the entire organization. He or she was also to oversee the compliance of retail directors with company goals.
NWRS, unlike traditional retail organizations, was divided by region. They held the view that product could be customized to the regions specific demographic, market trends, and eliminated competition between retail directors. NWRS did not believe in having extensive “planners,” rather, they expected buyers to be artistic and creative. Buyers and planners frequently worked together as a team.e. Merchant Incentive Structure Retail directors were rewarded based on performance and year-end bonuses. Since the outcomes of a regional director were easier to monitor then the actions themselves, compensation and performance based rewards were tied to outcomes. A retail director was capable of earning up to 15% of their annual salary for such rewards. To be eligible, he or she had to exceed both goals and plans.f. Store Organization and Incentive Structure Field organization was crucial to day-to-day operations. Because of the NWRS’s centralization, retail directors relied on regional sales managers to be their “eyes and ears.” Regional sales managers qualified for bonuses of up to 15%. 5 or 6 area sales managers, who could occur bonuses of up to 10%, would report to one regional sales manager. Each store employed a store manager, and several assistant managers. The store manager was responsible for producing weekly business analysis and highlighting the store’s successes and failures. They were reviewed based on annual sales, expenses, turnover, and shrinkage Field employees were rewarded based on the achievement of sales and by reviews by corporate EPS. Promotion for field employees were present, but infrequent.g. Demand Forecasting Retail directors broke this down by store and SKU, and used a combination of historical data, exogenous variables, and intuition. They relied heavily on historical variables to forecast demand. Their product portfolios consisted of “safe” and “risky” styles. Each “risky” style was evaluated based on rick and potential reward, and also considered in product diversification.
Fashion trend forecasting consisted of input from designers and NWRS merchandise managers who would travel to Europe to view the fashion and new materials. These inputs were combined with the prediction of consumer tastes and likely success of a theme.h. Seasonal Budgeting This process allocated capitol for inventory decisions to various product categories, and created sales and gross margin plans for each retail director. The plans were created during a three-month process ten months prior to the merchandise hitting stores. These plans acted as guidelines for the way retail directors managed business. Exact figures were derived from historical data, analytical monitoring, and strategic direction to project a six-month merchandising plan. Ultimately, the president “holds the key to all funding and, hence, is central to merchandising decision.” To set the financial budget, a retail director submitted a formal request, attempting to make an argument as to why the stores should have increased funding. Regional directors then determined appropriate levels of merchandise and created an aggregate total budget for their region. The merchandise manager and president developed category level forecasts. They had to be both effective managers and competent merchants. The ultimate objective was to make certain the most promising opportunities underwent the planning process when the final budget was approved.i. Merchant Product Selection After the completion of seasonal budgets in December, retail directors visited the wholesale division’s “shoe week show” to preview the upcoming fall collection. Within a week, retail directors were required to project the styles that would be represented in their stores. They also had to forecast initial store quantity commitments, which represented 40-50% of the entire season’s buy. The other 50-60% was set aside for reorder merchandise, and to buy new products which had appeared on the market.
By this time, many trends had surfaced, and the direction became apparent. Retail directors used the seasonal budget to ensure that they didn’t overbuy. They also used historical data and intuition. Because NWRS is vertically integrated, merchants were able to postpone some decisions.j. Rolling Financial Forecasting Once the formal budget and purchase orders are finalized, retail directors continue to warehouse and additional information and apply this knowledge to updated financial forecasts. Forecasts would be updated if a major event, such as production problems or competitor going out of business, occurred. It also allowed for showcasing successes and supported funding for specific products or locations.k. Merchandise Display Decisions Merchandise display recommendations were created by retail directors and visual marketing directors, and were communicated to the store in the form of “planagrams.” Merchandise was put together in “groups,” to be aesthetically pleasing. Retail directors had to make sure that shipments arrived in the correct order so the store could implement the displays, and also needed to ensure that specific regional preferences were satisfied.l. Retail Pricing The NWRS, who again controlled pricing, dictated a “suggested retail price” to products purchased from their wholesale division to ensure consistency in pricing. For the wholesale division, NWRS sourced the best costs, and chose to either pass the savings on to the customer, or to keep it within the company. But merchandise sold to department stores was often discounted, forcing regional directors to match the new lower price to drive sales. 40 – 50% of merchandise was generally secured at regular price. Promotions and markdowns were developed to arrive at profitability requirements. After a product’s lifestyle, which lasted about 12 weeks, the product was often sold to off-price retailers through merchandise jobbers to ensure brand integrity.m. Tough Decisions
Because Fisher planned to expand into lifestyle products, he realized the forthcoming few years would be the company’s most crucial. Success, changes in merchant organizational structure, market competition, efficiency, possible incentive modifications, were major issues. In addition, the use of IT was increasing in the market, yet the organization lacked familiarity with computer techniques and capabilities, and with computer oriented merchandising.n. Alternative Courses of Action The first milestone would be creating an online store for the company. Nine West could either train or hire new employees to create and maintain this new division, or they could source to a different company. Instead of vertically integrating this new product, Nine West may either choose to license select product, or, or acquire small companies altogether. With the latter, they would be able to alter the new company to fit into the Nine West vision. It would be greatly beneficial for the acquired company to already have a strong sourcing department, as existing Nine West employees would most likely be unfamiliar with manufacturing this new product. However, this would be a case of vertical integration or expansion, and may change the dynamics of the company. However, a synergy would still exist between management in NWRS and new companies. If Nine West so chooses, vertical integration would require much more work, but would allow the company to maintain total control over all aspects of products. Nine West would have to hire new product designers, production specialists, market researchers, etc. to ensure the success of the brand.o. Conclusion and Recommendation The company faces two issues – creating an online division andexpanding into the lifestyle market. Because the company’s distribution of product is divided into regions, Nine West would need to research sales as a whole for their new online division. Because Nine West distributes to many department and specialty stores, they may choose to research which styles they are selling on their websites, and which are making the
most profit. Because Nine West is vertically integrated, manufacturingwould only need to be increased on select styles, or on onlineexclusive styles. Because Nine West chooses to offer different widthsof shoes in their stores, the ones that are the least performing maybecome online exclusive items. Instead of maintaining prices regionally, the company wouldnow need to maintain stronger company standards on pricing becausea customer from any region could now buy the item online. Process benchmarking is the most crucial marketing techniquefor the company at this time. Nine West would need to do extensiveresearch on other companies who have also expanded to include fulllifestyle brands. Instead of immediately introducing additional merchandise toall stores, select high-traffic high-performance in key areas shouldbegin to carry test merchandise. This merchandise could also becarried on their new website. It would be less time consuming and require much less trainingfor Nine West to acquire new companies to produce new products.Also, because Nine West employees are unfamiliar in general withtechnology, a company should be sourced to create and maintain theonline division. A new department of the NWRS could be created tomaintain synergy between all companies.