Stage Stores Sizes Up Underserved Markets

Because the retailer Stage Stores focuses on specific markets, it is intent on understanding and serving those markets very well. You could describe its strategy as “Don’t underestimate small-town America.” With nearly 900 department stores in 40 states, Stage Stores provides family apparel at moderate prices in small and mid-sized towns — towns that were historically underserved when it comes to branded apparel and and related products.

Though the stores, which average about 18,000 square feet, operate under five different nameplates (Bealls, Goody’s, Palais Royal, Peebles and Stage), the names are simply legacies of once-independent store chains — Stage Stores grew through a series of mergers and acquisitions over several decades. The five chains operate in different parts of the United States, where each has long-standing name recognition, but, according to Steven Hunter, the company’s executive vice president and CIO, “If you go inside the stores, they look and feel pretty much the same. And we operate those stores similarly.”

Many towns across the United States are still underserved, and Stage Stores plans to remedy that condition by expanding its operations, adding up to 10 stores per year. Though a majority of current  stores tend to be in small to medium-sized towns with a 10-mile population of 20,000 to 50,000, Stage Stores is now beginning to open stores on the outskirts of major markets such as Louisville, San Antonio and Dallas.

Another growth area for Stage Stores is e-commerce. “We were fashionably late to e-commerce,” Hunter admits, explaining that previous company executives believed small-town America would not embrace e-commerce technology, in part because small towns were late in gaining access to broadband. In 2009, Hunter added high-speed connections to the stores and realized that if connectivity was now available for the stores, it was probably also available to customers at home.

A small pilot e-commerce project in 2010, using Magento software, proved extremely successful at attracting both existing and new customers. “We tripled the plan as far as both sales and traffic, and that told us we were onto something,” Hunter says. “It was an eye-opener for senior management and the board.”

Today, e-commerce — now based on a new software platform from Oracle Commerce — accounts for about 2 percent of the company’s sales and is growing at about 40 percent per year. Stage Stores expects it to reach 5 percent to 7 percent of sales — equivalent to its competitors — in the near future. E-commerce also enables the company’s Send program, based on NCR Retail Endless Aisle technology, which allows customers to have merchandise shipped directly to their homes from another store or distribution center if their size or color is not available in the store they are visiting.

Stage Stores has long differentiated itself by selling fashionable, name-brand clothing that isn’t typically available to its customers. Realizing that its customers were also lacking in cosmetics choices, it recently began expanding high-end cosmetics brands in stores and online, including Clinique, Lauder, and others. Customers were thrilled that these brands were now available to them, vendors were delighted to discover new markets, and Stage Stores was the happiest of all, because customers who came in to buy cosmetics were staying to buy clothes as well. Now the company plans to install high-end cosmetics counters in as many as 300 stores.

Improving profits with fewer markdowns
Stage Stores has a secret weapon that helps it understand customer behavior: the SAS Markdown Optimization product, implemented in 2012. The tool helps guide markdown and clearance pricing, based on its analysis of more than two years’ worth of sales and inventory data that has been output to a data warehouse. “Before we used SAS, there was minimal science used in regard to marking down items,” says Hunter. Buyers followed their intuitions in recommending markdown rates, and the company would mark down a style uniformly even when its sell-through rates varied from store to store.

“Markdown optimization takes the emotion out of it,” Hunter says. Using the product allows buyers to make markdown decisions at the store level, based on sell-through rates. If a style sells well at a particular store, it can remain at full price there even when it is marked down at another store. Occasionally, items may even be transferred from a store where they aren’t selling well to one where they are. As a result, margins are higher and inventory levels are lower.

Educating buyers to accept Markdown Optimization took time and effort. The company trained buyers ahead of time about the need for the software and how it would work; in addition, after implementation, it ran a side-by-side test with a group of styles. Buyers saw that applying the product’s recommendations yielded higher margins in many cases than their own expert knowledge. “That’s what convinced them to trust the system,” Hunter says. Today, instead of focusing on pricing, buyers spend more time searching for new brands and styles that customers will love — which is, of course, what buyers like to do in the first place. The result: higher conversion rates and more customers leaving the store with “a smile on the face and a bag in the hand.”  

Not every store needs small sizes
Recently, Stage Stores took a step that should reduce the number of items that even require markdown: It implemented the SAS Size Optimization program. “Not all sizes are needed everywhere,” Hunter says, explaining that customer heights and weights vary considerably across the country, based on both ethnic and lifestyle differences. He adds, “We’ve seen a stark contrast in sizes between the Upper Midwest, Southeast, and our Border Stores.”

By crunching sales and inventory data for each style and store, the program determines which sizes are winners at each store and which are also-rans. For example, in some stores, small sizes barely sell and are quickly marked down. Stage Stores’ strategy will be to work with vendors to match supply and demand, including only the best-selling sizes in the pack for each store and letting customers order other sizes through Send or e-commerce channels.

Says Hunter, “It’s tough to convince vendors that we don’t need a small, but when we come back to them with data about how long a small sits on the rack, it makes a lot more sense to them.” Ordering the right number of each size should help increase margins, turn rates, in-stock rates and sales.

Though Stage Stores has implemented the Size Optimization program, it hasn’t yet started applying the program’s recommendations. Hunter anticipates launching a pilot program in 2015 and then running new calculations three to four times a year so each major shipment can be optimized based on the latest data.

Looking ahead, Hunter says that assortment planning is the next strategic initiative for the company.  “Southwest customers seem to like brighter colors,” he says, “and Colorado likes earthy colors. An assortment planning tool will help us put the right customer-centric assortments in the right stores at the right times. Larger retailers, Hunter says, have allocated employees in the field to make these decisions. “We don’t have the boots on the ground, so we’d rather invest in technology than in people in the field.”

Masha Zager is a New York-based Apparel contributing writer specializing in business and retail technology.
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