Right after graduating from Virginia Commonwealth University, Darden Professor Greg Fairchild joined Saks Fifth Avenue, where he managed the couture dress department at Saks’ flagship store on Fifth Avenue in midtown Manhattan.
That initial job — managing eight employees and overseeing the sales of remarkably expensive dresses — gave him an insider’s glimpse into the iconic department store chain whose brand name is known throughout the world and whose stores serve as a home for the rich and stylish.
Years later, now a Darden professor, Fairchild decided to study how the luxury retailer reacted to its financial tumble in the early and mid-2000s, as it faced increasing competition from traditional competitors and from a new, more ominous type of challenger — well-capitalized Internet companies with little fixed costs and inventory.
The scrappy Internet companies sent a wave of confusion through the retail marketplace, Fairchild says. “Retailing as an industry is changing because of this convergence. Even venerable, well-known retailers like Saks have to rethink how to operate and succeed. And they have to spend time and money to get there.”
Experienced merchandisers, including Saks, sat on the sidelines as the no-profit startups made retail beachheads on the Internet beginning in the late 1990s, says Fairchild. Saks, with nearly 100 years of successful retailing, wrestled with the idea of an Internet presence. Saks worried that an online Saks store would simply cannibalize in-store sales — and Saks wasn’t selling $20 blue jeans. Its stores sold high fashion at high prices. Would customers really buy a Valentino textured silk midi dress for $10,500 or a pair of Bally Scribe Leather Derby dress shoes for $950 through an online portal?
Saks also had to fight a lot of brick and mortar tradition. Saks Fifth Avenue is the successor to a business founded by Andrew Saks in 1867 and incorporated in New York in 1902 as Saks & Company. Saks Fifth Avenue was started in 1923 by Horace Saks and Bernard Gimbel.
In the summer of 2000, Saks launched Saks.com, which offered the same quality merchandise found in stores, as well as web-exclusive products. Saks.com became wildly successful. The luxury retailer’s online division quickly built a reputation for strong margins, sales and growth. The Saks website became a key part of the future Saks.
However, the retail marketplace kept shifting. There was a growing belief that an online customer was not just an online customer, says Fairchild. Some managers believed that the online business benefited from the stores because some customers sought fashion advice at the store even if they eventually purchased online. A pilot study tracking the sales of women’s shoes suggested that a customer who shopped both online and in-stores spent much more than the average Saks customer, says Fairchild.
Saks CEO Steve Sadove pushed to merge the Saks stores with Saks.com. so customers could seamlessly shop the way they wanted — all-day, every day. That would be easier said than done. Saks.com had evolved into a separate entity, with its own organizational structure, merchandising, supply chain, marketing, pricing and even its own culture, says Fairchild. One top manager said the merger would kill Saks.com.
The company recognized that it was at a crossroads. “To maintain the status quo meant a slow death,” says Fairchild. “In the minds of some, the company was neither fish nor fowl and needed to morph into a new creature.” Others wanted the company to stay the same. Changing would mean the company would need to make a huge financial and organizational transformation.
“They had to compete against old retailers and new retailers and now this third way, with the stores and online merged together,” says Fairchild. “But to complicate matters, they had allowed two separate divisions to grow in the company, and it had to be unwound. Combining the two was not just a technology problem, but also a people problem.”
In the end, Sadove made the decision to merge the two divisions. In 2011, he launched his “Omni-Channel” initiative designed to create a ubiquitous shopping experience, says Fairchild. iPads were set up in stores, for example. Customers could buy merchandise online and have it shipped from a store. Saks also started adding select, store-only inventory to the Saks.com offerings. “The goal was to take care of the customer online or in the store for any task, on any device, at any time,” says Fairchild.
However, in 2013, before Sadove could implement the big change, the Toronto-based Hudson’s Bay Company bought Saks for $2.9 billion. Hudson’s Bay now operates 38 stores and five international licensed stores under the Saks Fifth Avenue name and 86 stores under the Saks Fifth Avenue OFF 5TH name. “The decision to merge Saks and Saks.com was made before the acquisition, and it probably enhanced Hudson’s Bay’s interest,” says Fairchild.
The lesson his research brought to light is that competitors and innovation threaten firms that sit on the sidelines. “You have to guard against complacency and quickly rethink how to operate. The biggest threat comes from the competition you don’t see coming,” says Fairchild.
Shahir Kassam-Adams, a Darden Ph.D. candidate, drafted the case Saks Fifth Avenue: Project Evolution (Darden Business Publishing) under Fairchild’s supervision.
A summary of the case also appeared in the article “Saks’ Lesson for Retailers: Be Nimble or Be Gone,” which appeared in the 7 February 2016 issue of The Washington Post as part of the Darden School of Business/Washington Post “Case in Point” series.