Talking Shop

Hot Topic: Knowing Its Target to a T

It's 9 p.m. Do you know where your teenager is? If she's into punk or goth (short for gothic), she's probably hanging out at Hot Topic, the retailer for this fickle market. "Come in or you suck" challenges a welcome sign that lets you know you've entered a world targeted toward 12-to-22-year-olds. Surrounded by brands such as Morbid Threads and Vamp, excruciatingly loud music, racks upon racks of body jewelry and tons of insulting T-shirts (like "Wow, you're ugly" and "I know how you feel, I just don't care"), the stores exude attitude. More important, Hot Topic rings up big sales.

With 418 stores, annual sales of $443 million and consistent double-digit quarterly growth, clearly this chain has discovered a key retailing secret: Know your target better than anyone else. How does Hot Topic do it? By encouraging employees to report on trends, paying buyers to attend teen venues and events, religiously responding to the 1,400 e-mails it receives each week, and stuffing a Report Card (comment card) into every shopping bag. All managers, including CEO Betsy McLaughlin, read the scores and comments and make adjustments to the merchandise accordingly.

Since the teen scene is so heavily influenced by music, Hot Topic also sells CDs and patrols concert halls to discover the band of the moment. By working with U.S.-based suppliers, it can jump in and out of fads quickly.

One of this retailer's greatest strengths is its low markdown rate-less than 10 percent of sales. It's achieved, of course, by understanding its consumer. Teenagers are often spending someone else's money and are therefore less price-sensitive. Management smartly encourages the sale of gift cards in lieu of merchandise and has introduced licensed gift cards featuring images such as SpongeBob SquarePants and the rock group Korn. The cards act as collectibles, so the unredeemed rate surpasses the industry average of 5 to 10 percent, further contributing to profitability.

Starbucks: Creating a Destination Point
Starbucks CEO Howard Schultz often recalls the moment in Milan, Italy, when he knew he could turn his dream of great coffee within a cafe environment into a destination point selling $3 cups of java. He has created a brand so desirable and a customer base so loyal that the average Starbucks consumer visits a location 18 times per month! But how does Starbucks keep what it internally refers to as "enthusiastically satisfied customers"?

One way is through its friendly environment and comfortable seating, which encourages drinkers to visit with friends, catch up on reading or merely relax. The recent introduction of Wi-Fi, allowing users at 2,000 stores to connect to the Internet, not only encourages lingering, but is relevant to its cosmopolitan customers.

Just as important, Starbucks continually brews up new ideas. Earlier this year, the company announced a twist on the gift card: It teamed up with Bank One to create a Starbucks credit card that also functions as a rechargeable store card. Its debut of the Artist's Choice CD series, featuring musical talent from Tony Bennett to Sheryl Crow to the Rolling Stones, adds another revenue stream while honing its hip appeal.

Starbucks has adopted a saturation strategy to offer a convenient way to connect to the brand. It has licensing deals with Kraft for the production and distribution of its products to grocery stores and agreements with Albertson's Inc. for store-within-a-store concepts. The company also has arrangements with Host Marriott International for airport kiosks and is opening stores virtually next to each other to increase brand awareness, create operational efficiencies and provide faster customer service.

In addition, in every one of its 6,000 coffeehouses in 30 countries, Starbucks is committed to giving back to the community. With net earnings of $215 million for fiscal 2002, it follows in the footsteps of Ben & Jerry's, proving that you can do well by doing good.

Says Gary Wright, retail marketing consultant with direct marketing and fulfillment company GA Wright Marketing Denver, "Obviously, the brand has extended beyond the coffee; customers are willing to pay a premium for the experience."

Lighten Up Holiday Sales

It's not too late to implement changes to help your all-important fourth quarter. Try these quick fixes: FChange your window displays often. Research shows the more often your store highlights new merchandise, the more often a browser will turn into a buyer.

  • Introduce a gift card. Cards provide a guaranteed no-hassle, no-return gift option. And they often entice customers to spend more than the card. Plus, don't forget that 5 to 10 percent of cards are never redeemed.
  • Offer convenience services. Can you offer gift wrapping, shipping or coat check free or at a nominal charge? How about stocking holiday cards or free notecards?
  • Create inspired groupings of merchandise. Grouping multiple items together often encourages customers to buy exactly what they see.
  • Stock an array of impulse items. This is the time to load your front counter with little items customers often purchase at the last minute.
  • Offer an incentive. With every fixed price limit (for example, $100), offer a coupon good only during the slow January season.

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This article was originally published in the September 2003 print edition of Entrepreneur with the headline: Talking Shop.

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