Strategic Marketing

Dr. Rajesh Verma

Case Study: Damaged

It is almost surprising to come across a chief executive of a minor chain of stores who talks
confidently about stepping up the number of store openings this year - especially when that
chain is in the seemingly unpromising business of distributing 'seconds' or 'reject' household
products. This is not just kitchenware, pottery and glass but also bulky inessentials like
basket-work furniture at bargain-basement prices. But Alan Naxos is a surprising
storekeeper, and Damaged Kitchen Reject Shops, of which he is also co-owner, a small
chain and a well-focused and vigorous enterprise.

With fewer than a score of stores under its banner, with sales of around $16 million,
Damaged is not a minnow but nor is it more than a mackerel among retailers. It is, however,
beginning to expand fast, which shows that the present conditions are good for some. In the
past 12 months three stores have been added. The coming year is set to see a further four
openings and maybe more. 'We are strong financially and managerially,' declares Alan
Naxos in the tones of one making a simple statement of fact, 'so plenty of sites are being
made available to us.'

In the New England towns in which it has already settled, Damaged has made a small but
perceptible mark. The merchandise may be, quite literally, run-of-the-mill, but the matter of
presentation is not. The shops are very bright and colourful with startling sculptural displays
suspended from the ceiling here and there, to act as focal points and offset the uniformity of
the well filled shelves. 'We set out to make it bright,' says Naxos of his first shop, opened in
New Haven 16 years ago, and visual excitement has been a Damaged hallmark every since.

Price is another distinguishing characteristic. Needless to say, the merchandise on display

does not consist largely of factory 'rejects'. A few lines are manufactured to Damaged's own
specification, although the company prefers to be offered a number of designs from which to
choose. It imports pottery direct from Italy, glass from France, wood from Portugal,
basketware from the Pacific. Approximately 70% of the range is regarded as core, and,
therefore, presumably repeatable. But there is also clearance stock from the manufacturer's
warehouses, and bankrupt stock. 'We sell it all as "seconds", the good, the bad and the
indifferent,' says Naxos. 'And we sell at very competitive prices. North American shopper
loves a bargain.'

Ever ready to spend lavishly on shopfitting and display, Damaged makes an effort to
minimise the cost of a purchase to the customer. There is no room for packaging, nor,
obviously, for delivery. Self service rules. 'We pile the goods up. People are at liberty to sift
through them...' Bar coding is similarly out, partly because Naxos believes that customers
still like prices to be marked on products, and partly because of the fractional addition it
would make to cost.

Turning to advertising, control of the creative and media strategies are highly centralized,
based on an advertising-sales ratio of 10%. The overall creative approach is a rational one
based on price, range, and location and is placed on TV and radio stations and community
newspapers, as well as in store displays and promotions. Copy and media placings are

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made on an ad hoc basis, sometimes involving consultants, sometimes simply produced in-
house.
Damaged, it should by now be abundantly clear, is a shopping concept as much as a chain
of shops. The formula inevitably invites comparison with others, particularly with IKEA (to
envisage Damaged, imagine IKEA without the furniture and a more eclectic North
American/Western European style). 'IKEA sets the price level in the sense that they make
us look ridiculously cheap,' remarks Naxos cheerfully. Perhaps fortunately, Damaged has
never made a speciality of furniture (other than of the conservatory variety), which is the
principal cause of many other chains current problems. It has not, in any case, had the
space to carry furniture.

It is clear that the Damaged formula works. Sales have doubled in four years to $16m, while
pre-tax profits have risen 10-fold. Profits of $1m last year represented a return on capital
employed of more than 40%. Last month, Naxos was predicting that Damaged' profits for
last year around the $2 million-mark.

What's most remarkable is that this sophisticated and (so far) successful store concept
appears to have been born in the mind not of an insouciant former racing driver who had
made himself unemployed and was casting round for something to do. He tried printing T-
shirts for a while, then became involved in the business of his girlfriend's parents, who
imported china and glass. This led towards retailing, for the firm had seconds to dispose of,
while one of his friends had opened a couple of giftware shops in west Manhattan. Naxos
confesses that 'I knew nothing about retailing' but nevertheless arranged to go into
partnership with the friend. He found a shop in New Haven, and everything was ready to go
when the partner withdrew, leaving him several thousand dollars short of the entry fee.

However, a friend whom he met in a bar, a merchant marine officer soon off back to sea, had
$4,000 going spare. With a similar sum of his own and $8,000 from the bank he was in
business. He took a truck up to Boston and bought his opening stock from one of the
clearance houses. These days he would have gone to the factory but at that time the
clearance house could hardly have been more helpful: 'They were wonderful. They gave me
what I should have and nothing more.' On opening day he sold as much as he had
estimated for the first week. 'We were just lucky,' he admits.

With the New Haven shop making encouraging profits, 'it seemed natural to have another'.
So Damaged opened in Hartford, then in New Bedford (since removed to a larger site), then
Rochester. But in the early days it was all very seat-of-the pants. One evening in a New
Haven restaurant, Naxos met a young man looking for work. He told him to take the truck up
to Boston the following morning to pick up a further load of stock. The vehicle was barely
roadworthy but the driver, David Steen stayed on to become buying director.

Gradually, the chain stretched across East, down as far as Brewer in Maine and up into
upper New York to Burlington. At the same time, management's confidence expanded in
line with its revenues and buying power. 'We'd become the fastest gun in the East.' That, at
any rate, is how Naxos saw it. 'We'd always done it our way,' he claims, and the basic
concepts hadn't changed. What was changed is the size of the stores, from a mere 750 sq.
ft. at New Haven to some 6,500 sq. ft in Cambridge, which has considerably enlarged the

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opportunities for display. 'We now have an extremely customer-friendly environment, an

exciting environment in which the customer can browse.'

A few of the bigger outlets are equipped with snack bar/restaurants, which help to absorb
some of the extra space. Cane furniture, Steen points out, also has a useful space-
consuming function, which can easily be expanded or contracted as need dictates.

The move into the Northern States has occurred mainly during the past couple of years. The
next opening is due to take place in Canada in Kingston, Ontario, early next year. London,
Windsor, Niagara Falls and Kitchener will follow shortly afterwards. Naxos is very optimistic
about trade in Ontario despite the recession. Leasing and fitting out much larger stores
admittedly involves new levels of expenditure. But Damaged has always done its own shop-
fitting; and in one or two instances lately it has been able to benefit from reverse premiums
offered by developers desperate to let their property. More openings are scheduled, but
Toronto rents and taxes constitute a barrier that Alan Naxos is happy to skirt at present (as
he did with New York.)

Damaged's mode of operation, is classic multiple retailing scaled down to the level of a small
company. 'We have very few people making decisions,' Naxos points out. These days he
tends to concentrate on site evaluations (I've become a professional streetwalker'), leaving
Steen a free hand at buying. A warehouse manager, personnel manager, display manager
and accountant, plus two area managers out on the road, make up most of the remaining
management team. Aside from secretaries and warehouse staff, the rest of the 315
employees are in the stores.

Inevitably, the power of the centre is absolute. Before the shopfitters move into any new
store the complete shelf plan is modelled on computer. The decision of what should be
offered and at what price belongs to Steen, and the range is kept under constant review.
'This is a fast moving business,' remarks Naxos: it is no place for leisurely buying decisions
and clearance sales to dispose of the mistakes.

The management designed its own operational controls, and put them on computer by sitting
down with a programmer. Naxos believes that the company has 'pretty sophisticated
systems', although he also claims that it is about to throw them out and begin again. 'In the
early days it was sufficient to know what the shops needed at the end of each week, and
we'd supply it...With hundreds of thousands of low-cost items, it wasn't cost effective to try to
keep track of each one.' Nor is it today. Yet against some standards of retail refinement,
Damaged's controls look fairly rudimentary. Management does not bother with calculating
figures like sales per square foot, for example. The important things to watch, Naxos
explains, are the overall performance of each branch, and its overheads.

Without doubt, Damaged does score well at the important things: like focusing on the
customer, whom some retailers seem to forget as they count the weekly take. It has lines
out to dozens of scattered suppliers, and is always on the alert for good ideas. Thus, Steen
is a constant traveller to Eastern-US and European trade fairs and other markets. The
company has a sense of style and it has been carefully managed financially. 'I have only
once asked for the overdraft to be extended,' says Naxos. 'I enjoy sleeping at nights'.

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'Some people would say I am not pushing the business fast enough,' he confesses. Since a
$2 million facility was arranged a year ago, finance has not been the principal restriction. 'I
don't see, as things stand, that we need finance for pure expansion.' The more important
constraints are sites and people. Damaged is no longer content with secondary sites; it
wants a prime downtown locations or a good position in a shopping mall. On the people
front, the company is not quite big enough to offer career progression. A few managers have
pushed their way through, but opening a new store generally means recruiting experienced
retailers locally. New staff are given a fairly thorough introduction: thus, managers and
assistant managers spend six weeks working in an existing shop before setting up their own
under close supervision.

People needs could well dictate the next step. 'As we grow, in order to attract quality staff,
we shall need to be publicly quoted....It's wrong to allow a thousand employees to be locked
up in a private family company.' Similarly, the desirability of making an acquisition may push
Damaged towards Wall Street, for Naxos is keen to see the company expand further in the
Eastern US and Canada. Also, there are sidelines that invite development. Increased
warehouse capacity may allow Damaged to grow a wholesaling arm, supplying non-
competing outlets to the benefit of its own buying power. Naxos also talks about offering the
company's shopfitting skills as a service to other fastidious retailers.

Without assistance from any marginal activities, or even from as yet unopened shops, Naxos
forecasts that Damaged' revenues will rise from over $16m in the current period to around
$26m next year, with profits moving in parallel. Naxos is the original boyish optimist. He
has, as he admits, been lucky. He was lucky to get his first shop more-or-less right, lucky to
have stayed out of furniture, perhaps lucky not to have been drawn into Manhattan. But he
has also guaranteed much of his own luck by assiduous attention to the things that make
shops work. Building up a chain of shops, he suggests, is like spinning plates on poles; you
have to keep running back to the earlier ones to keep them on the move. It will be very
interesting to see how long he can keep the trick going.

Questions

1. How might the Damaged mindset for pricing negatively affect its strategy?
2. What strategies can be used to enhance loyalty and repeat purchase?
3. How might convenience be used as an integral part of the strategy?