Specialty Retail Industry

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---------------------------------Industry Overview
Some 400,000 specialty retail stores operate in the US with combined annual sales of $350 billion
CAGR 2002-06: 5%
Market is dominated by large players like Best Buy, Toys R Us, Gap, Sports Authority, etc
The market size of some major product categories:
o Shoes and clothing - $125 billion
o Electronics and appliances - $85 billion
o Jewelry - $25 billion
o Sporting goods - $25 billion
o Books - $25 billion
Other categories include Toys, Music, Luggage, Pet supplies, etc
Specialty retailers cater to a narrow or niche audience either by location, type of customer or
product mix. On a national level, specialty retailing is dominated by national chains, such as office
supply store Staples or electronics outlet Best Buy.
However, on the local level, specialty retailing is defined by independently owned, unique shops that
express the personalities of their owners. These small retail outlets -- shoe stores, food stores or book
stores -- have become the bedrock of downtown and urban redevelopment across the country.
Industry Statistics Dec 2007
Valuation Ratios
P/E(ttm) 22.80
P/Sales(ttm) 1.34
P/Book(mrq) 13.07
P/Cash Flow(mrq) 11.17
Profitability(ttm)
Gross Margin % 34.59%
Operating Margin % 9.54%
Net Profit Margin % 9.19%
Financial Strength (mrq)
Quick Ratio 0.49
Current Ratio 1.46
LT Debt/Equity 110.07
Total Debt/Equity 118.25
Mgt. Effectiveness (ttm)
Return on Invstmt % 13.23%
Return on Assets % 9.09%
Return on Equity % 25.77%

Key Issues
The growing popularity of online retailing is attracting competition from traditional and online multiretailers such as Wal-Mart and Amazon which are gaining considerable market shares in many of the
product segments included in the specialty retail sector.
Currently majority revenue is generated by store sales but online sales from the stores websites are
increasing. With US dollar getting weaker, international sales from these US based websites are
increasing too. This creates significant positive outlook for the large incumbent players but also acts
as a significant barrier of entry for new players.
Moreover, despite the presence of some large chains, specialty retail markets are highly fragmented.
Barnes & Noble, for example, with over 900 stores, is the largest US bookseller but has a market
share of only 15 percent.
With increasing transportation costs and tighter margins there is a possibility that some large specialty
retail players will consolidate assets, knowledge and outsourcing capabilities in order to generate
economies of scale and scope.
Key Opportunities
High-end and niche merchandise: With rising disposable incomes the demand for high-end goods in
increasing, which can best be catered by specialty retail stores. Large players can offer competitive
prices as they buy in bulk. Smaller players can differentiate themselves by offering niche products and
superior customer delight at a premium price.
Store environment: Specialty retailers can focus on shopping experiences by providing more
comfortable, ergonomic store environments. This way they will differentiate themselves within the
marketplace, especially against large discount retailers, within which such qualities are generally
lacking.
Emerging Landscape
Small and marginal players: Growing popularity of online retail has motivated people with novel
product concepts to start selling through standalone websites. Often these web-based stores are
owned by people who are passionate about the product they sell, which is either linked to a hobby or
to a field of expertise. Most of these businesses have small garage sized manufacturing. They sell
products like gelatin based colorful I-pod covers, remote-controlled toys, handicrafts, customized
digital displays, extra powerful blenders, etc. Many of these products are a hit and there is possibility
that some of these players will consolidate with other larger players to generate economies of scale.
The following website lists more than 250 such specialty retailers:
http://www.specialtyretail.com/advertise/linkdirectory.html
Some of these pioneering entrepreneurs have figured out how to boost their businesses by online
video ads. They have attracted millions of viewers on You Tube by making funny, outrageous and
remarkable videos. They are termed as viral videos as they are spread by friends, family and
relatives who want others to check those videos out. One such video can be seen at
http://www.youtube.com/profile_videos?user=Blendtec
Kiosk based franchise business: Many successful specialty retailers are dreaming of expanding
their businesses through franchising. Cart and kiosk based franchises are gaining popularity because
of less set-up and overhead costs.
Franchising contributes more than $1.5 trillion to the US economy and is also the source of jobs for
more than 18 million Americans, according to the International Franchise Association (IFA) a

Washington based organization that offers resources to the franchise community. There are more than
2500 franchise concepts in the US with 900 new concepts introduced since 2003. The fastest growing
category is specialty fast food and ethnic food.
There are already a number of cart and kiosk based franchises out there for specialty retailers who
not only want to be in business for themselves but also want the support of a franchisor who knows its
product inside-out and understands the most effective way to sell the product for maximum
profitability.
Some emerging Kiosk based franchise businesses:
Annapolis, Maryland, based Blue Heron bags has recently started offering franchises. The kioskbased company stocks designer handbags and totes in a range of styles and price points. The kiosks
offer monogramming services, available in 30 minutes, enabling customers to purchase on impulse a
gift that appears [as if] they thought about it. Though the franchise is in the final stages of formation,
the company itself has been around for more than 15 years and enjoys a healthy repeat-customer
base. The company offers customized software with templates to make monogramming easy. In
addition to five days of training, the company plans to provide on-site support during the franchisee's
first week of business and ongoing 24/7 monogramming support through its monogram equipment
vendor.
Cereality is a concept sure to please the cereal-loving crowd. Available as full cafs and kiosks,
Cereality provides an outlet where customers can choose from dozens of brand name hot and cold
cereals, more than 40 different toppings and a variety of milks (including soy and lactose-free) to make
their own perfect breakfastany time of day. Customers also can order proprietary parfaits, cereal
bars, granolas and smoothies. For those in a rush, the company offers leak-proof to-go containers that
resemble Chinese carryout cartons, complete with spoons that double as straws for milk-slurping
purposes, called "sloops."
Staff "Cereologists wear pajamas, and famous brand-name cereal logos take center stage in a "home
kitchen atmosphere." Last year Cereality was awarded the "Experience Stager of the Year" award, or
EXPY, presented by Joe Pine and Jim Gilmore, authors of the best-selling book, "The Experience
Economy."
Pensacola, Florida, baded Cuppys Coffee, Smoothies & More, is expecting significant growth in the
cart and kiosk franchise market. Cuppy's started franchising in 2006, and currently has 14 kiosks and
two carts. These kiosks are ideal for malls and college campuses, and carts are well suited for hotel
lobbies. Cuppy's is actively working with malls and other shopping centers to find qualified franchisees
as part of an aggressive growth strategy. Cuppy's in-house real estate department helps franchisees
find quality locations that meet specific demographic criteria, including high foot-traffic counts and
high-caliber neighboring stores.
Hispanic Grocery Stores: Hispanics consumer power is growing and so are the offerings to them.
As Spanish influences are flavoring US kitchens, entire supermarket chains are springing up to draw
Latino and Hispanic shoppers, as well as adventurous others, away from mainstream grocers.
Some key demographics of Hispanics in the US
14% of US population 44 million
Their US population is more than the entire populations of Argentina, Peru, Venezuela, Chile or
Bolivia
Nations fastest growing minority 102.6 million by 2050

 Purchasing power CAGR 7.7% between 1994 and 2004 more than 2.5 times overall US
population
Collective purchasing power - $1 trillion
Shop more frequently and spend more on groceries than the average US resident
Mainstream grocery retailers have largely ignored Hispanic consumers, forcing them to Americanize
their tastes or retreat to neighborhood bodegas and mercados. Although there is no one typical
Hispanic shopper, some generalizations are driving the design of the new Latino-theme stores. Many
have wider aisles because, research shows, grocery shopping is often a family outing. Hispanic
families tend to be larger, and more people cook from scratch, so produce and meat departments tend
to be bigger and better stocked. And loyalty to brands from the home country is strong. At Rancho
Liborio, a Californian Hispanic grocer, Tide is almost an afterthought. Mexican brands like Ariel
dominate the shelves.
Towns and cities across US are dotted with local Hispanic stores: Superior Super Warehouse in
Southern California, Mi Pueblo in Northern California, Fiesta in Houstons suburbs, Sedanos in South
Florida, El Pueblo in New Jersey.
In California, with the nations largest Latino population, Superior Grocers, which operates 28 stores
under the Superior Super Warehouse banner, is the largest chain. Rancho Liborio is another
Californian chain which has been there since 1966; it recently expanded into Colorado.
Among the other Hispanic chains operating at least 10 units in California are Vallarta Supermarkets,
with 24 locations, mostly in Los Angeles County, Cardenas Markets, which will open its 22nd store in
Moreno Valley, and Fiesta Foods, which recently opened a 50,000-sq.-ft. warehouse store in Fresno.
In the northern part of the state, Mi Pueblo has grown to 10 stores, including its first in Oakland.
In Arizona, Bashas has been around for 75 years and grown into a $2 billion business. It serves
Hispanic communities with its Food City stores.
Some large grocers have already started showing keen interest in the Hispanic consumers.
The 65-store Minyard chain, owned by private equity company Minyard Group, in the Dallas-Fort
Worth area is pumping money into its Latino-theme Carnival stores
Winn-Dixie, which runs 521 stores in the South, started a Hispanic neighborhood merchandising
program at 103 stores in Miami and Orlando, Fla. The hope is that store-sponsored dominoes
tournaments, Spanish-speaking employees and a product mix fine-tuned to each neighborhood will
help distance the chain from a recent bankruptcy. One offering is La Completa, a line of hot meals
featuring combinations like pork, rice and yuca to go
Publix, one of the biggest grocery chains in the country, is experimenting with Publix Sabor stores in
Florida
H-E-B, a $13 billion retailer, has ingratiated itself to a large swath of consumers by stocking produce
and cuts of meat familiar from home. It makes its own tortillas for sale in stores. It has around 300
stores in Texas, which, at 7.8 million, has the nations second largest Hispanic population
The Fry division of Kroger Co has developed a Hispanic format called Frys Mercado to experiment
with Hispanic grocery in Phoenix

Bigger families; higher average spending on food shopping; higher propensity for buying fresh meats,
produce and dairy products; greater emphasis on cooking from scratch plus an estimated collective
budget of $55 billion for food spending make Hispanic American families a highly sought after
audience for grocers. In spite of large number of players this industry is still marginalized and
localized. It presents a huge scope for consolidation and creation of a national brand.

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