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WILLIAMS-SONOMA’S NEW BABY

WILL ITS THREADS BABY-WEAR CHAIN HELP OFFSET SAGGING KITCHENWARE SALES?

By Rodger Brown

When Williams-Sonoma opened its first Threads store in Bellevue, Wash., in October to sell baby clothes, the move represented more than just an attempt to capture part of the booming market for all things baby. The San Francisco–based high-end cookware and home furnishings retailer was testing a brand it hopes will help weather the downturn of the U.S. housing market, which has hit the home furnishings sector hard.

In a letter to shareholders, CEO Howard Lester bemoaned 2006 as a year in which growth rates fell far below the company’s expectations. Williams-Sonoma’s nearly $4 billion in net revenues last year notwithstanding, Lester complained about a drop in consumer demand, fierce price competition and what he called the “significant softening in the home-centered macro-economic environment” — which others more graphically describe as the carnage resulting from a tumultuous U.S. housing market.

Particularly hard hit was Pottery Barn, the division responsible for nearly half of Williams-Sonoma’s annual sales. This high-flying trendsetter of the 1990s, which was even mentioned in an episode of the Friends TV sitcom, has been flying lower the past few years. The Wall Street Journal reported in March that Pottery Barn had less to crow about since the likes of Restoration Hardware and even Target and Wal-Mart began offering similar products at lower prices.

In August Pottery Barn announced its first comparable-store sales gain in five straight quarters, but even this was attributable to heavy discounting and cuts in shipping costs.

Through it all, Williams-Sonoma had but one consolation: at least it was not The Bombay Company or Pier 1.

Fort Worth, Texas–based Bombay, established in 1978, was among the first retailers to build a mall-based, specialty home furnishings business on mahogany-stained British colonial furniture styles and replicas of such decorative artifacts as 19th century astrolabes and globes. In October Bombay finally succumbed to competitive pressures and shifting consumer tastes, announcing that it was closing the last of its 338 stores, even as its stock fell to 4 cents a share.

Pier 1, also based in Fort Worth, is fighting to avoid a similar fate. In April Pier 1 CEO Alex W. Smith decried 2006 as a “truly horrible” year. Forbes magazine lamented the erosion of this seller of fashionable furnishings into a “second-rate supplier of scented candles, frilly lampshades and chenille pillows.” Smith took the corner office in January, and by the spring he was cutting jobs and closing stores. By October Wall Street was rewarding these actions with a healthy share price, but the company’s identity remained a challenge. “They seem to be battling concept obsolescence,” said an article in Home Furnishings News. “They had a big niche in imported goods, but now every retailer has gotten into imported goods.”

At Williams-Sonoma, the response to this shake-up in the home furnishings sector can be summarized as, “There but for our brand portfolio and our multichannel growth drivers go we.” “There are several things which we believe differentiate us from anyone else serving the home-oriented consumer,” said Pat Connolly, Williams-Sonoma’s chief marketing officer, speaking at the Thomas Weisel Consumer Conference, in New York City, in September. “The first is the portfolio approach. We have a portfolio of brands that address large but relatively underserved segments of the market. The second is our multichannel marketing strategy.”

Williams-Sonoma began creating its brand portfolio in 1983 with a catalog of home-storage products called Hold Everything. Stores followed in 1985, but the Hold Everything brand has since been closed down, and the retail spaces have been given over to other Williams-Sonoma businesses. In 1986 the company bought Pottery Barn from Gap Inc. Williams-Sonoma launched a Pottery Barn Kids catalog in 1999 and opened stores the following year. Then the company created West Elm, a lower-price-point version of Pottery Barn, as a catalog in 2002, with an e-commerce site and stores rolled out in 2003. Additionally, Williams-Sonoma’s portfolio now includes Williams-Sonoma Home, PBteen and Pottery Barn Bed + Bath.

The strategy has paid off. Though Pottery Barn performed poorly last year, Pottery Barn Kids grew its revenues by 11.5 percent, and PBteen, West Elm and Williams-Sonoma Home boosted their revenues by a whopping 31.4 percent.

The multichannel approach has also helped Williams-Sonoma create a hedge against weakness in one or another sector. For fiscal 2006 (ended Jan. 28, 2007) direct-to-customer revenues — those generated by catalogs and e-commerce — accounted for 42.2 percent of the company’s business. The multiple channels have also enabled the company to test concepts, measure success and base business decisions on vast volumes of data. “They are, in my mind, the leader in multiple distribution channel retailing,” said Joan Storms, an analyst at Los Angeles–based Wedbush Morgan Securities. “They have an amazing database they’ve collected over the years with the catalogs, and the catalogs tell them where to locate the stores. They’re also a driver into the stores, and the Internet is seamless with the other two channels. They’ve really got it down.”

Connolly boasts of the power of that database, which covers 40 million households. “Over the past seven months, we have added over 500 million data elements to this database that allows us to pinpoint everything from the presence of children to housing values to length of residence — even the average credit score in the neighborhood in which the consumer lives,” Connolly said at the Weisel conference. “We know who is buying and who’s not, which is so important in this kind of economy.”

Which brings us back to Threads. Infant clothing is among the hottest markets currently. According to the CoStar Group, a commercial real estate research group based in Bethesda, Md., over 4 million babies are born in the U.S. annually. The number of children up to age 9 is projected to grow by about 5 percent between now and 2010. The members of this new baby boom spawned by the children of the original baby boomers — called “Echo boomers” in marketspeak — spend about five times as much as their parents, and they are highly brand-conscious and have high retail expectations, CoStar says.

This baby sector has spawned a rush of players. Babies ‘R’ Us leads the pack, with over 200 stores, up from only one a decade ago. Other successful kid-oriented retailers include Gymboree and BuyBuy Baby. Williams-Sonoma is entering a competitive environment, surely, but the company appears to brim with optimism. “They had rolled out some apparel in the Pottery Barn Kids catalog about two years ago to complete their baby registry,” said Storms. Dealing with apparel was not easy. “When they brought the apparel into the stores, they struggled with the merchandising at the store level,” said Storms. “But the stuff was selling like hotcakes.”

The company is opening a second Threads store, on New York City’s Upper East Side. Connolly points out that the stores are a test, not the beginning of a brand rollout. “[We] would not have talked about it publicly other than the fact that we have marketing to do for the stores. … [W]e really want to make sure that people understand that this is a test,” Connolly said at the Weisel conference. “It could eventually be into our existing stores, but we can’t argue with the fact that we are seeing a very strong consumer response to baby apparel in our catalog business.”

Storms, for one, seems to understand the strategy, to judge from the clarity with which she articulates it. “They’re not apparel people.” she said. “They’re learning how to merchandise apparel in these stores. They don’t want to tarnish Pottery Barn Kids.”