Tag: Business strategy

What Caused the Plunge in Sales at Bed Bath & Beyond?

Photo from the Wall Street Journal.

In the Apply the Concept “Trying to Use the Apple Approach to Save J.C. Penney” in Chapter 10, Section 10.4 in both Microeconomics and Economics, we discussed how Ron Johnson had been successful as head of Apple’s retail stores but failed when he was hired as CEO of J. C. Penney.  Insights from behavioral economics indicate that Johnson made a mistake in eliminating Penney’s previous strategy of keeping prices high but running frequent sales. Although Penney’s “every day prices” under Johnson were lower than they had been under the previous management, many consumers failed to recognize that fact and began shopping elsewhere. 

            Johnson’s experience may indicate the dangers of changing a firm’s long-standing business model. Customers at brick-and-mortar retail stores fall into several categories: Some people shop in a number of stores, depending on which store has the lowest price on the particular product they’re looking for; some shop only for products such as televisions or appliances that they hesitate to buy from Amazon or other online sites; while others shop primarily in the store that typically meets their needs with respect to location, selection of products, and pricing. It’s the last category of customer that was most likely to stop shopping at Penney because of Johnson’s new pricing policy because they were accustomed to primarily buying products that were on sale.

            Bed Bath & Beyond was founded in 1971 by Warren Eisenberg and Leonard Feinstein. As the name indicates, it has focused on selling household goods—sometimes called “home goods”—such as small appliances, towels, and sheets. It was perhaps best known for mailing massive numbers of 20 percent off coupons, printed on thin blue cardboard and nicknamed Big Blue, to households nationwide. Although by 2019, the firm was operating more than 1,500 stores in the United States, some investors were concerned that Bed Bath & Beyond could be run more profitably. In March 2019, the firm’s board of directors replaced the current CEO with Mark Tritton who had helped make Target stores very profitable.

            In an approach similar to the one Ron Johnson had used at J.C. Penney, Tritton cut back on the number of coupons sent out, reorganized the stores to reduce the number of different products available for sale, and replaced some name brand goods with so-called private-label brands produced by Bed Bath & Beyond. Unfortunately, Tritton’s strategy was a failure and the firm, which had been profitable in 2018, suffered losses each year between 2019 and 2022. The losses totaled almost $1.5 billion. In June 2022, the firm’s board of directors replaced Tritton with Sue Grove who had been serving on the board.

            Why did Tritton’s strategy fail? Partly because in March 2020, the effects of the Covid-19 pandemic forced the closure of many Bed Bath & Beyond stores. Unlike some other chains, Bed Bath & Beyond’s web site struggled to fulfill online orders. The firm also never developed a system that would have made it easy for customers to order goods online and pick them up at the curb of their retail stores. That approach helped many competitors maintain sales during the pandemic. Covid-19 also disrupted the supply chains that Tritton was depending on to produce the private-label brands he was hoping to sell in large quantities.

            But the larger problems with Tritton’s strategy would likely have hurt Bed Bath & Beyond even if there had been no pandemic. Tritton thought the stores were too cluttered, particularly in comparison with Target stores, so he reduced the number of products for sale. It turned out, though, that many of Bed Bath & Beyond’s most loyal customers liked searching through the piles of goods on the shelves. One customer was quoted as saying, “I used to find so many things that I didn’t need, that I’d end up buying anyway, like July 4th-themed corn holders.” Customers who preferred to shop in less cluttered stores were likely to already be shopping elsewhere. And it turned out that many Bed Bath & Beyond customers preferred national brands and switched to shopping elsewhere when Tritton replaced those brands with private-label brands. Finally, many customers were accustomed to shopping at Bed Bath & Beyond shortly after receiving a Big Blue 20 percent off coupon. Sending out fewer coupons meant fewer trips to Bed Bath & Beyond by those customers.

            In a manner similar to what happened to Johnson in his overhaul of the Penney department stores, Tritton’s changes to Bed Bath & Beyond’s business model caused many existing customer to shop elsewhere while attracting relatively few new customers. An article in the Wall Street Journal quoted an industry analyst as concluding: “Mark Tritton entered the business and ripped up its playbook. But the strategy he replaced it with was not tested and nowhere near sharp enough to compensate for the loss of traditional customers.”

Sources:   Jeanette Neumann, “Bed Bath & Beyond Traced an Erratic Path to Its Current Crisis,” bloomberg.com, September 29, 2022;  Kelly Tyko, “What to expect at Bed Bath & Beyond closing store sales,” axios.com September 22, 2022; Inti Pacheco and Jodi Xu Klein, “Bed Bath & Beyond to Close 150 Stores, Cut Staff, Sell Shares to Raise Cash,” Wall Street Journal, August 31, 2022; Suzanne Kapner and Dean Seal, “Bed Bath & Beyond CEO Mark Tritton Exits as Sales Plunge,” Wall Street Journal, June 29, 2022; Suzanne Kapner, “Bed Bath & Beyond Followed a Winning Playbook—and Lost,” Wall Street Journal, July 23, 2022; and Ron Lieber, “An Oral History of the World’s Biggest Coupon,” New York Times, November 3, 2021. 

Cheesecake Factory Adopts a New Strategy

The restaurant industry was hit hard by the Covid-19 pandemic. Fast food restaurants like McDonalds and Taco Bell had their revenues hold up the best because many of their customers were experienced in using their drive-through windows, which typically remained open except during the worst of the pandemic in the Spring of 2020. Restaurants that rely on table service suffered steeper declines in revenue because even when local governments allowed them to be open, they were typically required to operate at reduced capacity. In addition, through most of 2021, some consumers were reluctant to spend an hour or more eating indoors for fear of contracting the virus.

In the years leading up to the pandemic, fast-casual restaurants like Chipotle, Panera Bread, and Cheesecake Factory had been increasing in popularity, drawing customers from both more formal table service restaurants and from fast food-food restaurants. But because of their reliance on indoor dining, many fast-casual restaurants suffered sharp declines in revenue. For instance, in the spring of 2020, Cheesecake Factory was losing $6 million per week and at one point had less than $100 million remaining on hand to meet its costs.

As we discuss in Chapter 13, Section 13.3, firms in a monopolistically competitive like restaurants have difficulty earning an economic profit in the long run. Normally, economic profit is eliminated by entry of new firms. But during the pandemic, the process was speeded up as what had been profitable business strategies suddenly no longer were.

Cheesecake Factory had been earning an economic profit by following a strategy that differentiated it from similar restaurant chains. At 10,000 square feet, the dining rooms in its restaurants are much larger than in other fast-casual restaurants and Cheesecake Factory has many more items on its menus.  Both these features turned into liabilities during the pandemic because before the pandemic Cheesecake Factory’s revenue would exceed its costs only if its restaurants were operated close to their capacity. In many cities, well into 2021, government restrictions required restaurants to operate at reduced capacity. In addition, like most other restaurants, as it reopened Cheesecake Factory had trouble attracting enough servers and cooks—a particular problem given the large number of items on its menus.

Cheesecake Factory returned to profitability in 2021 by adopting a new strategy of emphasizing delivering orders and having orders available for pickup at its restaurants (“to-go” orders). This strategy was successful in part because Cheesecake Factory executives made the decision during 2020 to continue to pay its 3,000 managers during the period when most of its restaurants were closed. Doing so meant having to raise $200 million from investors to pay the managers’ salaries. Keeping managers on payroll meant that the firm had the staff on hand to successfully manage the increase in to-go and delivery orders.

The success of the strategy was helped by the fact that cheesecake turned out to be a more popular delivery item than the firm had expected. An article in the Wall Street Journal quoted the firm’s president as saying that people were ordering it for a delivery throughout the day, including people “who are just getting slices at nine o’clock at night delivered to their house.” The firm has doubled its to-go orders compared with before the pandemic and its overall sales per restaurant have increased from an average of $11 million before the pandemic to $12 million in 2021.

Is Cheesecake Factory’s recent success sustainable? In emphasizing to-go and delivery orders, Cheesecake Factory initially had an advantage over its competitors because it had retained thousands of managers who could implement this new strategy. But this advantage may not last long for two reasons: 1) as the effects of the pandemic lessen, consumers may want to return to indoor dining, so the volume of to-go and delivery orders may decline; and 2) to the extent that consumers have permanently reduced their demand for indoor dining, competitors can copy Cheesecake Factory’s approach. Many competitors in fact have devoted more resources to to-go and delivery orders and the market for this type of dining is becoming as competitive as the market for in-door dining.

Cheesecake Factory has one other advantage: Cheesecake turned out to be a particularly popular food for delivery and cheesecake sales have become a larger percentage of the firm’s revenues since the beginning of the pandemic. Although, because the word “cheesecake” is in the firm’s name, it may retain some advantage among consumers who want to order a delivery of cheesecake, competitors can easily also add cheesecake to their delivery menus.

So, our general conclusion holds that it is very difficult for firms in a monopolistically competitive industry to earn an economic profit in the long run. 

Sources:  Heather Haddon, “How Cheesecake to Go Saved the Cheesecake Factory,” wsj.com, October 29, 2021; Teresa Rivas, “Cheesecake Factory Stock Is Falling Because Sales Took a Nose Dive,” barrons.com, July 29, 2020; Rick Clough, “Cheesecake Factory Settles SEC Charges over Covid Statements,” bloomberg.com, December 4, 2020; Tomi Kilgore, “Cheesecake Factory Stock Jumps after Upbeat Sales Update,” marketwatch.com, June 2, 2021.