01 Mar 2010
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Eric Schiffer

CEO, 99¢ Only Stores
by Julia Hanna

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Founded in 1982, 99¢ Only Stores is the oldest single-price retail chain in the country, with 273 locations in California, Texas, Arizona, and Nevada offering a mix of food, beverage, and household items. Eric Schiffer (MBA ’87) joined the company in 1991 and served in various managerial capacities before being named president in 2000 and CEO in 2005. Despite the chain’s strong showing in a down economy (with three new stores scheduled to open in March 2010), Schiffer expects he and 12,000 other “99ers” will continue their efforts to eliminate inefficiencies and waste in a business where every penny really does count.

Did you ever expect to be in the retail industry?

No, never. I was trained as an electrical design engineer and spent four years in venture capital after leaving HBS. Then my father-in-law, who was 99’s CEO, invited me to attend some board meetings at a time when the company was being approached by investors. I took a look at their P&L and balance sheet and told my wife’s family, “You’re rock solid. You don’t need any investors. And if you’re interested in going public, you could do that.” So, on the basis of that input they took in this guy who didn’t know much about retail at all and were quite patient in showing me the ropes. I’ve been very fortunate in that sense.

Your annual revenues for fiscal 2009 totaled $1.3 billion. It’s so interesting to think about that number when you consider it’s made pennies at a time.

Yes, that’s right — we have to sell a huge number of items to generate that figure. Our average price works out to be about 80 cents because we also price many items at well under a buck, so we sell around 1.5 billion items annually. It really is a transaction-intensive business, and our systems have to be able to deal with that. At a retailer like Gap, where the average price per item might be around $20, the number of items we sell would generate $30 billion in annual revenues. Every penny counts for us. If I add a penny of cost to an item, that’s 1 percent of my profit. If someone who sells something for $20 adds a penny cost, it’s meaningless. So we try to eliminate waste and increase productivity in every aspect, whether it’s compliance, shipping, handling, distribution, storage — we strive to find ways to deal with costs creatively. I recognize that continuous improvement is a mantra many companies repeat, but it takes on a different urgency since we must adhere to a low price point.

Would you ever raise your prices?

After 26 years, we actually did raise our prices in response to inflation. We let everyone know that we were going to be doing this in September 2008, but we didn’t say by how much. There was a one-month period when our customers were “pantry loading” because they thought prices would go up significantly. Instead, we held a press conference in our store and announced that the highest-priced items would now be 99.99 cents. Everyone laughed.

With that said, we are experimenting a bit in our Texas stores by selling produce by the pound. For example, there are only a few times a year when we can offer an entire pineapple for 99.99 cents, but we can sell it for 69.99 cents a pound year-round. Another example is a department in our Texas stores that we call “bigger values,” where you might find high-ticket items like a rolling suitcase for $4.99.

Explain how you’re able to offer name-brand products at such deep discounts.

Maybe an item wasn’t as successful as a company would have liked, or they overproduced it. Sometimes it’s a new and improved product that didn’t do well, or it could be something that the new product replaced. Or maybe it’s just a package or labeling change. These special buys, or closeouts, are about 50 percent of our products. Around 95 percent of what we buy is direct from the manufacturer, so we have wonderful connections with individuals from Kraft, Procter & Gamble, or almost any name-brand consumer goods company you’d care to name. Aside from our 99ers, these long-term relationships are probably our most valuable asset that is not on our balance sheet.

How do you foster those relationships?

When my father-in-law started the company in 1982, one of the founding principles was that although we need the lowest price from our suppliers, we will make every aspect of the transaction as easy as possible. We pay faster than anybody else, we don’t pass on any costs to our vendors, and we don’t complain if a shipment comes in a bit light or damaged. If we get an overshipment, we call right away and say, “You may not know this, but you sent us ten extra cases which you did not bill us for. We’ll gladly pay for them.” We don’t have buying committees, and we make decisions quickly. I also like to think that we offer an attractive retail environment to move a company’s products — a clean, well-organized store where a brand’s cachet isn’t damaged. One closeout we bought were sleeves of three Top-Flite golf balls. They’re the same high quality as all Top-Flite products, but each ball had the name and phone number of a company printed on the side. That company went out of business and canceled its order, so we bought all 400,000 packages. Those sold very quickly!

I’m sure the downturn in the economy hasn’t hurt your business.

No, it’s definitely helped us, particularly in markets like Texas, where our stores are a newer concept. These days you could be an upscale, middle-income individual and still need to stretch your dollar. Just this week our sales flyer featured a ten-pound bag of potatoes. That’s a pleasant surprise for a lot of people. So we see ourselves as a solution since we’re essentially a supermarket with nothing over a buck, even if our stores may not have every item or every brand. We came up with the slogan “Save More, Shop Us First!” by talking to customers who do just that — they come here, then fill in what they still need from other places.

Do you think that will continue when the economy comes back?

I think people’s mindsets have been changed by this recession. How long it will last, I don’t know. People who grew up during the Great Depression were frugal throughout their lives. We don’t know how that equates with 15 percent effective unemployment and people who have lost a third of their retirement funds. Saving is on everyone’s minds these days. It’s one of the factors that spurred people to come into our stores in Texas, where we initially had some difficulties when we entered the market in 2003.

What difficulties do you face in winning new customers?

Our biggest hurdle is getting someone to come into a store for the first time. They may be nervous: “Where’s this from? Did it fall off a truck?” No, it hasn’t — it’s a good quality product. So the first time they may only buy some cleaning items. On the second visit, maybe a name-brand shampoo. Next, they try some Arizona Iced Tea: “Well, it looks safe. I’ll buy it.” Then they buy some bananas. Pretty soon, they’re open to trying everything. Our sales are about 50 percent food and beverage, with perishables making up close to 20 percent of that amount.

I’ve heard that even a few celebrities shop the 99.

Yes, that’s true. Richard Gere picked up a case of Pellegrino from us, Barbara Bush purchased gift wrap, and Vanna White bought some toothpaste, believe it or not. Elizabeth Taylor even wore some very stylish reading glasses that she said she had purchased at our store when she was interviewed by Larry King on CNN. Our top-performing store, which did over $11 million last year, is on Wilshire Boulevard in Los Angeles, right next door to Beverly Hills.

Aside from everyday groceries, can you give a sense of other items you’ve offered for sale?

Everything from dog costumes to Bill Clinton masks to “Mr. Wonderful” talking picture frames. Left-handed baseball gloves, bare-root rosebushes, a leather holster for your iPhone…once we had such a good deal on jackets that a fight broke out over the last one. Of course, we’ve also made mistakes.

Tell me about those.

Early on, I purchased a large quantity of shrimp deveiners and clam knives from Ekco, which makes high-end kitchen implements. I grew up on the East Coast, and I knew these items were useful and a great value for a buck. But they sat on the shelves for many years. I would always walk by the section to remind myself that it doesn’t matter if I like something. Another time we bought bottled water that came in assorted flavors, all very unusual. To get the deal we had to buy all four flavors, one of which was bamboo. It tasted as bad as it sounds. We finally sold the whole case of 24 for a buck, just to get rid of it. I think people were emptying the bottles for the redemption value. However, a buyer who has never made a mistake is not a good buyer. You have to take chances in this business. We like to say we don’t have to go to Las Vegas because we buy for the 99.

— Julia Hanna

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