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Bed Bath boxes in retail competition

With its entrepreneurial flair and decentralized culture, Bed Bath and Beyond has captured a place in retail history as its big-box format has become a standard of what is right in retail.

Now a public company for a decade, Bed Bath still continues to perform well despite the economic climate, and customers continue to flock to the one-stop shop, regardless of a proliferation of competition.

"Few, if any companies, have had the track record that Bed Bath & Beyond has had," said Alan Rifkin, analyst, Lehman Brothers. And despite being a chain with nearly 400 stores and estimated revenues of $3.5 billion this year, it still operates like a smaller chain, he added, as store managers have complete autonomy over their stores. "It's a large company when you look at the numbers, but they offer an unparalleled service level from employees."

Its delegation of power has also taught the industry that store managers are best suited to run the store, said Brian Postal, analyst, AG Edwards. "They have 400 executives out in the field getting down and dirty." They are familiar with their own markets, while other retailers have management dictate where the merchandise goes after coming off of the truck.

But store managers are not its only focus. "They showed that the customer can come first," Postal added, restoring consumer's confidence in retail.

By fulfilling its customers' needs, Postal said, Bed Bath believes that everything else will fall into place.

And what the customer wants is a great assortment in an easy-to-find layout. "The cornerstone of its format is merchandising," said Joan Bogucki, analyst, WedBush Morgan. "Bed Bath brought in great ideas of visual presentation in the home category and the organization of the box and its categories."

Over the past 10 years, the specialty store channel in general has chipped away at the market share previously owned by department stores, and there is still tremendous room to grow. Despite its numbers, Rifkin said, Bed Bath has only 4 percent market share, while department stores still hold around 30 percent. Department stores, however, "can't compete with Bed Bath & Beyond in pricing, merchandising and service level. We feel that its 4 percent share is poised to increase very significantly."

Rifkin noted the retailer's potential for growth as in the home improvement industry, The Home Depot has a market share of 16 percent, while in consumer electronics, Best Buy has 20 percent. "There's a very bright future for Bed Bath & Beyond."

However, other channels have made small inroads to capture market share, most notably discounters. Though AG Edwards' Postol agreed that specialty stores still have many more years of growth ahead of them, he added that they have to keep eye on discounters such as Target and Kohl's. "Bed Bath & Beyond is looking to keep steps ahead," he said, "Discounters are not going anywhere."

Bogucki agreed, especially since discounters have done a great job of bringing in brands, such as Kmart's Martha Stewart, though no one knows where that brand will end up, she added. Discounters are "innovative in the home while remaining value-oriented."

Though secretive and methodical in its strategy, Bed Bath is willing to tweak its format. Postal noted that the retailer is mixing smaller-size boxes into its store base, he said. Traditionally, the store is 40,000 to 45,000 square feet, he said, but some skus are no longer producing as much as they did initially. A smaller-size format of 30,000 to 33,000 square feet is appealing, since inventory turns quicker and fits into smaller markets.

The company's recent acquisition of health and beauty retailer Harmon also has added intrigue to the company's future objectives. Postal believes that this will not be Bed Bath's only acquisition, and that a few more will be added as it looks for future growth vehicles. Bed Bath has a good format, he said, but knows that it will need a new avenue for growth once it reaches a store base of around 900. It's possible that Bed Bath can acquire a few other businesses over the next several years and then choose one to develop, he said.

Rifkin, however, doesn't believe Bed Bath is "going on an acquisition binge." Instead, it will experiment with Harmon's HBA skus in hopes of boosting traffic and average ticket.

WedBush's Bogucki also saw Harmon as a learning tool. Harmon has a strong private-label brand and Bed Bath can learn about the consumable business, as well as opportunities to bring some of that into Bed Bath stores, she said.

"Bed Bath is constantly testing new categories and allocating the footage to the wants of the customers and managers," she said, matching square footage to demand on an individual store basis. "That's one of the keys to its success; it's more entrepreneurial."

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