The Hottest Retail Trends
Neil Stern, a senior partner with McMillan|Doolittle, shares his take on last year’s retail trends and forecasts what will be hot this year.
Leah Sanders

Neil Stern.

SCB: Who were the hot retailers in 2005?

Stern: The hot retailers tend to be grouped into a couple of segments. Teen apparel retailers in general tended to stay very hot. That includes Abercrombie & Fitch and Hollister, their surf-wear look, which is probably the hottest of all. Retailers like American Eagle, Aeropostale — those tended to be the stores that performed very well in the segment [in 2005]. Beauty was a hot segment. Retailers like Sephora are very hot this year, as well as Victoria Secret Beauty, Victoria Secret and the more brand-oriented stuff. Then the final hot segment was the more mature-women retail, which is generally defined by Chico’s. They did very well, and they also operate White House| Black Market, which did well. They are sort of generating their own trend in moving forward.

SCB: What are the categories for this year?

Stern: I think the categories are staying pretty much the same. The players’ names may change a little bit. What happens is you have a category leader or a very successful chain, and then you have the trend that follows. What’s on the horizon? Aeropostale has a chain called Jimmy’Z that is like Hollister. Gap has a chain called Forth & Towne that is like Chico’s. Chico’s itself has Soma, which is hot and coming up. In the beauty category, you have a very successful chain like Sephora, and there are several chains that are trying to capitalize on that trend: Bigelo, which is run by the Limited; Blue Mercuries, which is a start-up; and Kiehl’s, which is owned by Loreal. Beauty is going to grow; teen apparel is going to grow; women over 35 — that’s growing. I think you see some of those categories doing very well. There are new categories out there which are still in the test stage. The segmentation of 25 to 34 year olds is one. They progress out of the teen retailer phase, and they go, ‘I’ve got a job and want to look hip and good.’ There are two concepts out there doing that. Abercrombie has Ruehl. On the west coast, there’s a company called Metropark. Upscaling, we call it — going after the people who have money — also continues to be an important trend.

SCB: Is there a trend toward generational marketing?

Stern: There is a clearly a trend toward generational marketing, and certainly it’s more niche-oriented than ever before. Segmenting those niches into finer and finer pieces, that is clearly a trend. There is a clearly a trend to going after the have and the have-nots — going after the high-end. Places like Coach are obviously the bell-weather for that. You’re seeing Williams-Sonoma Home. You’re seeing that kind of segmentation happening. At the same time, you’re seeing the segmentation on the lower end, the value end.

SCB: How quickly or slowly should a retailer grow?

Stern: If you look back at retailing from a long lens, one of the biggest mistakes retailers make is growing too fast. There’ s a race to get to the market before the other guy. What history says is the victory doesn’t go to the swift; it goes to the one who operates the best. You have to work at a rate that supports your operations. What retailers are finding is that you don’t have to grow and spread yourself too thin. What you have to do is grow at a pace that you can support, that your operations can support, that your capital can support. In general, I think it’s better to build out regionally, instead of spreading too far thin across the country. I think what Wall Street and most people look for is a good sustainable growth rate, and if you’re hot and growing fast that may be 20 to 30 percent.

SCB: Is there a “sweet spot” in terms of size of retailer or growth plans for a retailer to come under your radar?

Stern: Ideally we would like to catch the chain or concept at store one. There is in a sense nothing too small, and we focus on new prototypes from chains or start-up. Typically I’d say that if you look at a retail chain you watch a progression occur, and the progression goes something like you have one store and it works. Then you do a couple of stores in the same market and they’re successful. Then you prove that you can expand outside your market. It may be in the same region, but you go to a second market. Then you go to a different kind of market. You would go to California and Chicago. Really what we try to do is watch retailers go through that progression or hurdle. Each move through signals to us that you can make it through each one of those hurdles.

SCB: What characteristics do you think make a retailer attractive to a consumer?

Stern: What makes retailers attractive to consumers is that they fulfill something that somebody else isn’t and they do it better in some way. Consumers look at retailers with the point of view, ‘What do they do for my life? Are their prices cheaper than somewhere else? Can I get my stuff there cheaper?’ That’s compelling. ‘Do they have more stuff than anyone else? Can I find more of what I’m looking for?’ That’s compelling. ‘Do they have hot products faster? Are they on fashion?’ That’s a compelling characteristic. And are they unique from the service standpoint? ‘Are they providing a solution or service that I need?’

SCB: What is the single most important factor in a retailer’s success?

Stern: I don’t know that we can ever get it down to one. We look at a concept and we talk about hot idea or hot concept. They have to do four things well. One is that they have to be on consumer trends and on the right side of consumer demands. The second is that they have to be able to operate it. They have to play to their own internal competency. The third is that it has to be well-defined from the competition. And the fourth is that it has to present a model that works. It has to be something that can profit. Whenever you see a lot of ideas, if you pick those four screens, they usually tell if the concept is going to work or not. And obviously a great concept does all four of those things. You have to be able to have those going for you, and if you’re lacking one of those, the concept could fail.