Monday Marketing Memo: Cost-Plus World Market Restructuring: We Think Specialty Foods and Beverages Can be the Key to a Successful Repositioning

Cost Plus World Market, with corporate headquarters in Oakland, California, and 299 stores throughout the U.S., is a national leader in specialty food and drink merchandising, although that leadership has diminished considerably in recent years from its once top-level standing.

World Market stores, which are positioned as an international retail bazaar under one roof, and sell everything from furniture, household items and imported, upscale kitchen supplies, to specialty and natural foods, wines and craft beers, coffee, teas, toys, garden supplies and more, were among some of the first retailers in the U.S. to offer extensive selections of imported and domestic packaged specialty foods, confections, quality coffees and teas, wines and craft beers.

World Market's eclectic mix of retailing with an international flair began in the 1960's with one store located in San Francisco's famed Fisherman's wharf area. The store sold whole bean premium coffee before Starbucks was even a vision, and offered specialty and natural packaged foods before Whole Foods Market, Inc. existed. The store also offered little known premium wines from the Napa Valley, and throughout the world, when most people were still drinking Gallo Hearty Burgundy.

Cost-Plus (its original name for decades until it changed it to Cost-Plus World Market in the late 1980's) also was one of the first retailers to introduce craft beers for sale on a large scale in the U.S., and is partly responsible for bringing the micro-brews to the attention of consumers nationally.

The retailer also is a pioneer in selling imported specialty, gourmet and ethnic packaged foods from all over the globe. Before specialty foods were sold in even upscale supermarkets, Cost-plus offered them. Brands like Knorr (soups, dips, sauces) and Lindt (chocolates) were first introduced nationally in the USA through Cost-Plus before they eventually became popular in major supermarkets much later on.

Specialty foods and beverages, wines and craft beers as a department are the number one sales category in Cost-Plus World Market stores.

Despite this legacy, Cost-Plus World Market has fallen on some hard times of late. This is largely do to the slumping housing market in the U.S. Much of the retailer's sales come from furniture, household goods, upscale kitchen supplies and the like. And, most of these goods are premium, fetching higher prices at retail than discount store furniture, which in the current economic climate isn't proving to be a winning merchandising scheme.

On Thursday, Cost-Plus executives announced the chain would layoff 10% of its entire workforce and would close about 18 stores located in underperforming markets. The retailer also announced it has been conducting a restructuring for the last 18 months, which is designed to streamline retail operations and change some of its positioning.

Among these changes we've learned will be lower prices throughout the store, offering more lower-priced furniture and other household goods, and a significant reduction across the board in the amount of inventory the retailer holds at any given time. This inventory reduction includes foods, beverages, wines and craft beers.

Cost-Plus is already known in the trade as a retailer that keeps a close eye on inventory and uses automatic replenishment systems in its specialty food and beverage categories. This further reduction will put suppliers on notice, and require them to be much more responsive in terms of meeting the retailer's strict inventory and replenishment standards. It's likely going to cost vendors and distributors more money as they will have to deliver less product, more often to the retailer's distribution centers.

In terms of Cost-Plus World Markets' specialty foods/beverages, wine and craft beers focus, we don't expect to see any radical changes in terms of the type of items the stores sell. However, we do know the retailer's buyers have been negotiating hard with vendors, asking for price reductions and more promotional buys.

We do expect to see Cost-Plus offer more lower-priced, or value-priced specialty foods items in its stores however. The retailer already has it's own private label brands of specialty and natural foods, mineral waters and other beverages, and we expect to see more of these, which offer higher margins for the company. We also expect to see more store square footage devoted to specialty foods, beverages and wines.

Gross margins have never been a problem though for Cost-Plus in the specialty foods and beverage categories. On average, the retailer wants to earn a minimum of a 43% -to- 45% gross margin on branded domestic and imported specialty foods items. It will take less on high-volume items, but not often. However, as a way to help steer a more profitable overall course, we see the retailer trying to increase its gross margins on food and drink items by a couple percentage points, largely through making better deals with vendors.

We believe specialty foods and beverages, wines, and craft beers will in fact be the categories Cost Plus World Market relies on to help get it out of its sales and profit slump. Even in recessionary times, specialty food and beverage items tend to do well in the U.S. By offering more items, at lower prices, and making-up the margin in part on the back of the vendor, the retailer can boost sales without lowering margins. Cost-Plus is a publicly-traded company, and its stock price has fallen considerably since mid-2007, so it also has to show results to Wall Street, as well as main street.

In the coming months, we expect to see less extremely high-end specialty foods like imported oils and vinegars on store shelves, although we aren't saying they will eliminate higher-end gourmet items completely. Instead, we expect to see more specialty items in fast growing categories like confections (especially chocolate), coffees, teas, natural and organic foods and the like. These will be domestic and imported quality items selling at more affordable prices, in order to grow sales while keeping gross margins about steady with where we described them historically.

Look for specialty foods, beverages, wines and craft beers to play a major--if not the major--role as the retailer attempts to steer a new path in the retail marketplace. Its origins are in these categories, and despite the fact that overall sales have come largely from an expanded mix of furniture, housewares and the like over the last three or four decades, food and drink have always remained the top categories on a store-sales basis.

We see a "back to its specialty foods and drinks origins" move being key for Cost-Plus as a way to rapidly increase sales and profits in light of its declining furniture and related goods sales, especially in the current economic climate where the housing market looks to not be improving for some time.

Some sharp food and drink category buying, along with some smart pricing and savvy marketing, could go a long way towards helping the retailer reposition itself--still as an international retailer, but one with a renewed focus on being a specialty foods and beverages, wine and craft beers category leader nationally.