Thinking Small at the Mall

To keep growing, chains have to keep chasing niches

Gymboree (GHMB ) a 530-store chain based in Burlingame, Calif., serves a narrow niche: It sells kids' clothes aimed at parents making more than $65,000 a year. Since there aren't enough of them to support more than another 120 stores or so, Lisa Harper, CEO of Gymboree Corp., opened Janie and Jack last year, a chain selling upscale baby gifts. "We thought we could spin off a separate design team and appeal to a different customer," she says. Since pricey baby gifts represent an even narrower niche, Harper already is working on the next idea. Eventually, she says, Gymboree could operate up to five niche chains.

From McDonald's (MCD ) Corp. to Gap (GPS ) Inc., one of the biggest conundrums in retailing is how to deal with the saturation problem. Once your store is in every mall, how do you get more growth -- especially if the chain is narrowly focused to begin with? Increasingly, retailers like Harper are attempting to deal with the problem by launching spin-offs that can cash in on an opportunity or a trend -- even if they have only a three- or four-year run. Rather than managing a single chain for long-term growth, these retailers are managing an ever-shifting portfolio of store brands.

Stroll through any mall, and you get the picture. Talbot's (TLB ) begat Talbot's Woman, Ann Taylor begat Ann Taylor Loft, and Chico's, a chain aimed at women in their 40s and 50s, begat a spin-off called Pazo for slightly younger working women.

The strategy is especially suitable for stores aimed at the ultra-fickle teen and twentysomething markets, where fads fade faster than boy bands. That's why teen fave bebe stores (BEBE ) inc. spun off Bebe Sport, while Hot Topic launched Torrid, catering to plus-size teens. "The days of the large, mass-merchandised specialty chain are over," says Thomas Rubel, president of consulting firm Retail Forward Inc. "Retailers will be employing a larger number of concepts, each with a smaller [target] population."

What's behind the trend? For starters, shoppers are spending less time at the mall: on average, 2.9 hours a month, down from 4 hours in 2000, according to consultant Stillerman Jones & Co. That means they're looking for smaller, more targeted stores, where they can get in, grab what they want, and get out fast. "People are very focused in their shopping, so stores have to be, too," says Rubel. Cheap space also helps. Years of overbuilding plus a weak economy mean retailers looking to try something new can get bargains on mall locations.

Still, the brand-portfolio strategy is full of pitfalls. If the spin-off isn't different enough from the original, the two chains will just end up stealing each other's sales, warns Kenneth A. Banks, CEO of consultancy KAB Marketing. That's what happened with Gap Inc., whose Old Navy chain siphoned customers from Gap stores by offering similar merchandise at a lower price.

Nor is it always easy to hit on the right idea. Quiksilver Inc., whose core stores sell surfing-inspired clothes for teens and young adults, figured it would be a snap to capitalize on the mania for skateboarding idol Tony Hawk with a Hawk chain offering skateboarding clothes. The concept hasn't taken off, though, partly because selling to kids and teens in the same store alienated both. Management has suspended expansion while it tries to fine-tune the idea. Getting it wrong can be a costly error, since each new chain requires its own marketing budget and often its own buying or design staff.

Slicing and dicing a successful store concept isn't entirely new. There is Gap Inc., of course, with its Gap, Banana Republic, and Old Navy stores. And Limited Brands (LTD ) Inc. over several decades has grown to include a family of seven brands and more than 4,000 locations ranging from Victoria's Secret lingerie shops to beauty chain Aura Science. If a brand stops working well, Limited does not hesitate to ditch it, as it did by selling off its Lane Bryant (CHRS ) stores and doing away with the Structure men's chain.

Since niche ventures by definition have limited markets, retailers who try to build a portfolio of narrow brands will have to keep launching new concepts to maintain growth. Chico's FAS (CHS ) Inc. figures that its original 360-store chain shouldn't expand beyond 550 or 650 stores. So last year it launched Pazo. The company is already planning a new project for next year: a chain selling lingerie and sleepwear for boomer women who find Victoria's Secret too racy. "It's a great niche," says Charles Kleman, Chico's chief financial officer.

Could well be. For retailers like Chico's, the question is how many great niches it will take to add up to a sustainable growth strategy.

By Louise Lee in San Mateo, Calif.

    Before it's here, it's on the Bloomberg Terminal.