Rue21’s Small Town Strategy

Jun 01, 2010
Tom Ryan

By Tom Ryan

Rue21, the off-price teen fashion chain, added 88 stores last year
and looks to open another 100 this year — but you may not see them. The expansion
intentionally focuses on secondary markets such as Canton, Ohio, Greeneville,
TN, and Union Gap, WA.

“The further we go out from metropolitan areas, the more profit and the
more sales we achieve,” chief executive Robert Fisch told The Wall
Street Journal.
“The beauty of these under-served markets is there
is limited competition. They’re starved for fashion.”

The secondary market strategy also entails
lower operating costs. The retailer, which went public last November, focuses
on markets with fewer than 50,000 people and average household income of less
than $55,000. Stores typically cost $160,000 to set up, including inventory,
and start selling within six weeks of signing a lease. With a focus on low
prices and quick turns, stores are profitable within a year, Mr. Fisch said.

few other retailers — The Children’s Place and Maurices — likewise
are expanding rapidly in secondary or rural markets.

Hibbett Sporting Goods
targets county populations that range from 30,000 to 100,000. In its 10K, Hibbett
noted that targeting these smaller markets provides them with “important
strategic advantages,” including expansion opportunities,
comparatively low operating costs and a more limited competitive environment
than generally faced in larger markets. Added Hibbett, “In addition, we
establish greater customer, vendor and landlord recognition as the leading
sporting goods retailer in these local communities.”

One risk with
a secondary market strategy is competition from big-box retailers they often
sit alongside. Wal-Mart has an exclusive agreement to carry a line from teen
singer Miley Cyrus. Reality-television star Lauren Conrad launched a line at
Kohl’s. Target has been rolling out collections in collaboration with high-end
designers, including Zac Posen, and has a Converse fashion collection.

For some of these apparel stores, opening up next to these big boxes is strategic.
The hope is that customers go to discount stores for basics, such as plain
T-shirts, but look elsewhere for more current styles.

“They draw a lot of traffic,” David Jaffe, chief executive of Dress
Barn, which operates Maurices, told the Journal. “Everybody’s coming
for Wal-Mart, but at the same time they see our stores.”

Discussion Questions: What are the pros and cons of a secondary market expansion
focus such as the one employed by Rue21? How great a risk is competition
from big box retailers such as Wal-Mart or Kohl’s in the future?

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9 Comments on "Rue21’s Small Town Strategy"

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Lee Peterson
10 years 11 months ago

I think this is a brilliant move. It’s a fashion version of what Walmart did right from their inception: take your specialty to areas that are basically ‘retail deprived’ and wow them with your core offering. Lower costs, less or weak competition (esp for fashion!), a willing labor pool and the possibility of a very loyal customer base all point towards success.

The one potential downside to this strategy, however, is logistics. It’s one thing to ship to a major metro area where you can cover clusters of stores, and an entirely different thing to hit one store by itself out in the boonies. Having said that, perhaps logistics would be another place to look to what Walmart did as well, because, if 21 can figure that out . . . look out Express!

Dick Seesel
10 years 11 months ago

This appears to be a smart strategy; after all, Walmart built its business from the perimeter (small towns, exurbs) to the center. I’m not suggesting that Rue21 is the next Walmart, but clearly there is a niche for specialty apparel stores aimed at misses and juniors, in markets too small to support a Gap, AE or Forever 21 location. This kind of real estate plan also allows specialty stores to operate at higher margins (less competition “next door”) and at lower cost…provided, of course, that Rue21 provides the right merchandise content for its customers.

Bill Emerson
Bill Emerson
10 years 11 months ago

As covered in the article, a strategy of opening smaller markets with fewer competitors has many upsides, demonstrated definitively by Walmart’s experience. You basically own the market, which results in enhanced loyalty, price control, and, usually, much lower operating costs in key elements such as occupancy and store payroll.

There are a couple of challenges. The first is financial, in that you lose leverage in areas like marketing and logistics. The growth in social media mitigates the loss of leverage in marketing somewhat, particularly in a category like teen apparel, but logistics is tougher, particularly if you’re looking for fast turns.

The bigger challenge is that, in small markets, the local economy tends to be tied to one or two key industries. The obvious risk is that, should these industries go into decline, discretionary spending goes down and/or transfers to more basic commodities and you start competing with Walmart.

The key to success, like all retail, is to create a compelling reason to visit the store.

Cathy Hotka
10 years 11 months ago

The Rue21 store at the University of Pittsburgh is a little gold mine, despite the iffy quality of the merchandise. The lack of nearby competition gives them a near-monopoly, making it the go-to spot for college kids who are car-less. No reason why this strategy shouldn’t continue to work!

Ed Rosenbaum
10 years 11 months ago

Brilliant strategy by Rue21. Opening in secondary markets gives them increased visibility, marketing strength and an entry in an area where labor is more affordable and probably more reliable.

Think about the power of word of mouth advertising in a small market. The staff alone will bring in customers. RadioShack has been successful using this plan for many years.Even if you are the small fish in a small pond you will get more visibility and traffic than being in a major mall surrounded by many other buying options.

Once this growth in small markets takes hold; then moving to larger markets takes with it better name and brand recognition, thus easing the cost of the expansion quicker. Imagine opening within six weeks of signing the lease.

Ted Hurlbut
Ted Hurlbut
10 years 11 months ago

I think one of the outcomes of the recession is that we are going to see more expansion strategies like this. Rue21 understands that they are going to get the best return on their real estate investment by locating their stores very precisely to fit very specific demographics. This fit is unique to them, so their real estate strategy will be unique.

Contrast this with the generally accepted strategy prior to the recession of blanketing every conceivable market that could support a store, built around logistics and marketing economies. This led to a group of stores in every chain that significantly underperformed the average, both from a revenue and a profitability standpoint.

As pointed out above, Rue21 does have to make the logistics and marketing work. But that should be less costly than carrying a group of underperforming stores just because they needed the weight in a given metropolitan market.

I think we’re going to see more of this as we go forward.

Craig Sundstrom
10 years 11 months ago

“The beauty of these under-served markets is there is limited competition. They’re starved for fashion.”

I think that sums it up pretty well; and as some of these areas grow, Rue21 will have the advantage of an established presence in the market(s), though I’m not sure how much familiarity will count with the store’s likely (age) demographic.

Of course there’s a down side to everything as well: sometimes you don’t have competition because there really isn’t a market, and “secondary” seems like a generous term for some of these places named…tertiary or (less kindly) “nowheresville” might seems more appropriate.

Jerry Gelsomino
10 years 11 months ago

Perfect example of ‘blue water’ marketing; go where the others are not and splash around a lot (causing a local buzz) to catch all the fish you can catch.

Justin Time
10 years 11 months ago

Rue21 is definitely on to something. And if you think about it, it is a no-brainer.

With the departure of Goody’s, Mervyns, Steve and Barry and others from those markets, and the lack of interest by Kohl’s to enter these markets, there is a big opportunity for Rue21 to capture the hearts and pocketbooks of teens and young buyers in these underserved fashion apparel retail deserts.


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