Grossman: A Tale Of Restructuring In The Face Of Competition

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gatorOn Route 1 in Saugus, Mass., the 38th Grossman’s store to be liquidated in 24 months beckons to customers: Everything Must Go. It’s part of a “save the company” restructuring at the 50-year-old home-improvement chain. For years, customers haven’t been there. They’ve been 2 miles down the road, at superstores Home Depot and Home Quarters Warehouse, where prices are lower, selection is greater, and the registers are roaring.

What went wrong? For one thing, Mike Bergman, Grossman Inc.’s director of MIS and replenishment, wishes his inventory buyers had spent more time shopping the competition in the late 1980s. If they had, the Braintree, Mass., company might have counterattacked the 400,000-foot giants harder and more quickly. “Denial can tend to be pretty blinding,” Bergman says.

Now, the once-profitable, $1 billion Grossman’s is hurting. In 1994, sales fell 10 percent, to $760 million, after a scant 1 percent rise the year before. Grossman’s lost $1.9 million in 1994, and in the past two years has closed 38 of 130 stores in its core Eastern Division as it funnels cash into new Contractors’ Warehouse stores in the Midwest and West. Its work force has been slashed in half, from 8,100 in 1988 to 4,100 now, and its stock is stuck in the $2- to $3-per-share range, down from as high as $5.50 per share three years ago.

Some of the blows, such as the severe recession that whipped the Northeast in the early ’90s, were out of Grossman’s control. But its sluggish response to encroaching rivals shows the danger of failing to focus quickly enough on a threat, marshal information technologies, and change an entrenched corporate culture.

Now, with its back against the wall, Grossman’s is refocusing its business on professional contractors, rather than competing head-to-head with superstores on price. The retailer last month slashed about 20 percent of its IT costs by outsourcing mainframe operations to Computer Sciences Corp., of El Segundo, Calif. To fully turn things around, Grossman’s will have to complete a centralized inventory system that already has store managers grumbling over such things as rose bushes and lost bonuses.

Driving forces

A leveraged buyout in the early 1980s and a hostile takeover attempt in 1990 left Grossman’s distracted and cash-poor by the time the superstores arrived. Between 1986 and 1989, Grossman’s closed about 100 of its approximately 250 stores. Meanwhile, Home Depot was boasting it would do $5 billion in sales per year in New England by the late 1990sfive times Grossman’s nationwide revenue. In 1990, Thomas Schwarz, Grossman’s newly named chairman, president, and CEO, commissioned a McKinsey & Co. study of th e industry to get a grip. But it wasn’t until the three-year study was completed that Grossman’s game plan to aim for professional contractors swung into high gear.

Bergman, a blunt-spoken retail veteran, didn’t sit on his hands while the McKinsey wizards went to work. Bergman joined Grossman’s in 1987 after a 16-year stint at retailer Montgomery Ward, and he knew it was only a matter of time before somebody asked him to centralize Grossman’s inventory management. He laid the groundwork with a series of low-level, low-cost projects, such as selecting elements of the new IT architecture and collecting historical data on the mainframe that would be needed for a new inventory system.

Despite these efforts, worsening business conditions hampered Grossman’s progress. The PC-based point-of-sale system, which captures data for the new inventory system, won’t be completed until this spring, partly because the cost of closing so many stores didn’t leave Grossman’s with enough money to revamp the older ones. Similarly, in 1993 Grossman’s boasted it was spending $11 million to build a new distribution center to feed the automatic replenishment system. The chain wound up closing more stores than

it expected, and last month announced it will sell the distribution site and use a smaller facility that matches the needs of the downsized Eastern Division.

Costly resistance

Contrast that with Home Quarters’ parent, Hechinger Co., which in the late 1980s looked like a mid-Atlantic version of Grossman’s: A $1 billion chain of traditional home-improvement stores, nervously watching the superstores edge closer. When it saw it couldn’t beat ’em, it joined ’em, buying Home Quarters in 1988. Hechinger has also taken its lumps, closing some older stores and even pulling Home Quarters out of the super-competive Carolinas. But due in large part to Home Quarters’ succ ess, Hechinger’s fourth-quarter 1994 profits rose 31 percent and sales climbed 10 percent, compared to the same period a year earlier.

Grossman’s failure to react as nimbly as Hechinger’s hit the corner office hard. Schwarz announced his retirement late last year, turning over the chairman’s job to board member Robert Swanson and the president and CEO posts to ex-Chief Financial Officer and Treasurer Sydney Katz. Neither Katz nor Swanson could be reached for comment.

Grossman’s corporate culturethe old habits of buyers, store managers, and executivesis also hampering Grossman’s efforts to change. Many store managers still see walking around and checking what merchandise to order as a key part of their jobs, even though the McKinsey study found that was eating up as much as 25 percent of each store’s personnel costs. Store managers are still resisting changes that took away some of their traditional high-volume items, including seasonal products such as plastic lawn fu rniture, bushes, and trees, which in the past helped them make their bonuses. They’re also not happy about a portion of the new point-of-sale system that assigns consistent discounts across the chain to specific contractors. “Those store managers are a little sore that they can’t steal business” from other stores, says John Christoffel, Grossman’s director of MIS operations.

Technology upgrade

The cultural resistance to change extends to information technology, where a minicomputer-based POS system has been Grossman’s anchor for years. The chain is only now equipping the first of 30 to 50 field salespeople with notebook computers, years after companies in other industries allowed their reps to confirm inventory levels, prices, and delivery time at the customer site. Bergman also envisions a system that would allow Grossman’s to show a customer more products than a store has in stock, but promi sing delivery within 48 hours.

The new inventory-replenishment system serves Grossman’s Eastern Division, while a separate replenishment system serves the Midwestern and Western stores. It links 486MHz PC-based registers to an in-store server, and from there to a mainframe at headquarters in Braintree. The mainframe application, written mainly with development tools from SAS Institute Inc., reviews how much each store sold of each product in its inventory over the last two years, and calculates how much more the store should receive to m eet 99.9 percent of that historical demand. In most cases, it then generates an EDI order direct to the supplier for the product.

But there’s a flaw in this strategy, says Tom Friedman, publisher of Retail Systems Alert, a Newton, Mass., newsletter on retail-automation trends. The Grossman’s system, for example, looked back over the past two snowy winters and ordered plenty of snow shovels and windshield-wiper fluid. Because of a relatively mild, dry winter this year, the stores wound up overstocked. More forward-thinking chains are using historical data to order products that sell as expected, Friedman says, but are singling out prod ucts that sell quickly or slowly for special consideration.

At $15 million, the replenishment system would have seemed a bitter pill for the Grossman’s board to swallow, but Bergman says it actually went down easily. The current minicomputer system was four to seven years old, getting harder to maintain, and fully depreciated. Moving to the PC environment saved $800,000 a year in maintenance. The OS/2-based front ends would save another $250,000 a year in cashier training, McKinsey estimated. Handheld Telxon Corp. devices for scanning incoming inventory and ringing up customers would save another $1 million a year. By making sure the right products are on the shelves at the right time, the system adds 1 percent to 2 percent in sales without added inventory costs. The board also liked two “soft” benefits. One was a reduction in the time required to process a credit-card transaction, from 40 to 50 seconds to 4 to 5 seconds. The second was an image boost: The colorful, 14-inch monitors on the new registers would at least make checkout look up-to-date at Grossman’s stores, which are, at best, not modern. “They’re antiquated, many of them,” says Bergman. “The registers say, ‘We are not in the 1920s. We are in an older building, [but] we are staying up with the times.’ ”

Centralized control

Like many retailers, Grossman’s is searching for the right balance between centralized and store-level control. Despite talk about moving decision-making closer to the customer, taking such power away from store managers is sound practice if done right, says Jim Dippold, vice president of global product management for Neilsen North America, a research firm in Dallas. Consider an average store with 30,000 SKUs. “If we exaggerate and say the manager knows the specifics of the top 200 and how they’re doing, th at still leaves the other 29,000 or so they still need information about,” Dippold says. In addition, store managers don’t talk to the major manufacturers and can’t factor in the effect of future price cuts and promotions.

Analysts say Grossman’s is on the right track, if it can execute. Its percentage of sales to professional contractors increased from 30 percent in the early 1990s to 40 percent last year, and Grossman’s expects a 50-50 split between professional and do-it-yourself sales this year. In the California and Midwest markets, its Contractors’ Warehouse stores are increasing revenues, showing they can steal sales from the superstores. Grossman’s is also experimenting with a chain that would franchise home-improveme nt services nationwide, offering the marketing and consistency of service promised by auto-repair chains such as Jiffy Lube.

But for now, the challenge remains to stanch the bleeding and win new customers before the competition. “Home Depot is set up for contractors and the inventory they carry is insurmountable,” says Bob Untracht, national director of retail-industry services at Ernst & Young. With sales and profit margins still falling, Bergman and his staff will have to fight hard to make sure more plywood goes out the door than over Grossman’s windows.

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