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“ Why Be Open Seven Days When Only Four Are Profitable?” A Case Study in Creative Crisis Management

presented by
Patricia M. Johnson & Richard F. Outcalt
Retail Strategists
Co-Founders, The Retail Owners Institute ®

honoring Lynn Becraft & John Whisler Co-Owners, Kitchen Kaboodle 5 Store Chain • Portland, Oregon

5 Stores • Portland, Oregon

Northeast Portland

Northwest Portland

Southwest Portland

Clackamas Town Center

Orenco Station, Hillsboro

Meet Kitchen Kaboodle Summer 2008
Independently-owned, 30 year business
High-end cookware, tableware & furniture
$13.0 Million volume
120 (loyal!) employees
Continuing to expand
Profitable for 30 straight years!

One store’s move to much larger space at regional mall delayed by General Growth
IKEA and Crate & Barrel and Sur La Table entered market
Economy was softening
Presidential Election year; uncertainty
Their local banker was let go; term loan and revolving line now handled out of Seattle

July-Aug-Sept 2008 Oct-Nov-Dec 2008 Jan-Feb-Mar 2009 Apr-May-June 2009 Oops! FYE 9/30/08 would be first loss ever

July-Aug-Sept 2008 Oct-Nov-Dec 2008 Jan-Feb-Mar 2009 Apr-May-June 2009 By October, 95% of Holiday merchandise has been received

July-Aug-Sept 2008 Oct-Nov-Dec 2008 Jan-Feb-Mar 2009 Apr-May-June 2009 Economic disaster strikes! Worldwide economic meltdown begins

July-Aug-Sept 2008 Oct-Nov-Dec 2008 Jan-Feb-Mar 2009 Apr-May-June 2009 U.S. Congress passes “bailout bill”; Confidence plummets!

July-Aug-Sept 2008 Oct-Nov-Dec 2008 Jan-Feb-Mar 2009 Apr-May-June 2009 Holiday Season 2008: Shoppers stay home! All retailers suffer. Media hypes free-fall.

July-Aug-Sept 2008 Oct-Nov-Dec 2008 Jan-Feb-Mar 2009 Apr-May-June 2009 By December 15, like most retailers in 2008... Kitchen Kaboodle’s sales were off drastically

July-Aug-Sept 2008 Oct-Nov-Dec 2008 Jan-Feb-Mar 2009 Apr-May-June 2009 Then, more disaster December 14 AND 21-22-23 Portland has record snowfall & ice storms City shuts down! “ Snowmygawd”

July-Aug-Sept 2008 Oct-Nov-Dec 2008 Jan-Feb-Mar 2009 Apr-May-June 2009 1Q Results: Grim! Sent to Bank, per their request, mid-January

Meanwhile, across the U.S.
Retail bankruptcies are rampant
Banks begin to report their own problems
No economic turnaround was in sight
Wall Street: the new villain
All credit vanishes

July-Aug-Sept 2008 Oct-Nov-Dec 2008 Jan-Feb-Mar 2009 Apr-May-June 2009 February 3 Bank calls the loans! Wants $2.2 Million paid off by March 31

Feb. 5 Advised Bank of work on turnaround plan Feb. 4 Owners meet with bankruptcy attorneys Feb. 4 Owners meet with outside accountants Feb. 5 Owners meet with potential funding sources: landlords, private investors, others

Feb. 6 Owners confirm: respective homes are pledged to Bank Feb. 6 Owners discover that Chapter 7 – liquidation - would not only dissolve the company, but also would require all of their personal assets

“ We Need a ‘Plan B’...Now!” Liquidation Outcome: Everybody Loses ???

Feb. 6 brutal facts
Merchandise was not selling well at any price other than a GOB environment
Other retailers were frantically liquidating excess inventory
Landlords reputed to be steadfast
Vendors were panicking nationally

The 120 employees had been promised expanded health benefits
Spouse of one of the owners was terminally ill
Both owners had sensitive teenage children
Even the Portland Trailblazers were losing
Feb. 6 brutal facts

Owners must believe in it
Avoid liquidation; preserve jobs
Preserve Owners’ personal assets
Most important: Bank must believe it
The “Golden Rule”
$1.5M line of credit must decline – fast!
“ Plan B” musts...

9:30 am Saturday, Feb. 7
“ Can this patient be saved?”
Anguish
Tears
“ Shall we give up?”
“ We’re emotionally drained!”

10 am Saturday, Feb. 7 Consider “What if...?” Ideas
Use financial modeling for each scenario
Does it “pencil out”?
“ Will the Bank believe it?

10 am Saturday, Feb. 7 Scenarios
Stay the course; wait for economic crisis to pass?
Get concessions from landlords?
Reduce expenses: cut healthcare benefits?
Move offices/warehouse to smaller space?

Get Cash Flow, OTB, P&L – All in One!

(a) Stay the course; Wait out the financial crisis Loss of ($855.0)...

Requires MORE money from the Bank! That won’t work

(b) Concessions from Landlords Cuts loss to ($495.0)...

Still need $2.4M from Bank. That won’t work either.

(c) Cut expenses, health benefits Loss now down to ($114.0)...

Still need $2.2M! Bank would say “No!”

2 pm, Saturday Feb. 7 “We Still Need a ‘Plan B’!” Liquidation Outcome: Everybody Loses ???

2 pm Saturday, Feb. 7 “What would thrill our customers?” A discount on 100% of our merchandise, every day!

How can we do that ?? Cut expenses dramatically, pass the savings on! How do we cut expenses that dramatically?

“ Why be open seven days when only four are profitable?” “ Are you out of your frigging mind?!?”

Open just 4 days/week – the best days
Cut prices on every item in all 5 stores
Zero ad costs : email “4 Day Hot Sheet” every Wednesday (9K recipients)
Our best people will be in the stores fulltime, four 10-hour days
Serve our best customers better when they mostly come in: Thurs, Fri, Sat & Sunday

4 – 6:15 pm, Saturday Feb. 7 “Does it pencil out?”
Sales down, $9.7M vs. $12.7M
Margins down, 38% vs 44.6%
Selling expenses , 13.9% of sales vs. 20%
Occupancy expenses down by one-third
Admin expenses: cut in half
Turns up: 3.5 vs 2.5

Made those changes to inputs

...and for the OTB

...and for the Cash Flow

Shows a PROFIT!

Slashes Line of Credit : $70K, $127K, $144K, $99K, etc Positive cash as of December “ Wow! This the Bank really might accept!”

7:30 pm, Saturday Feb. 7 “We have 2 choices.” Liquidation Outcome: Everybody loses “ Four Days. For Savings. For You” Outcome: Survival

“ Four Days. For Savings. For You!” Effective Thursday, March 5 (less than 4 weeks away)

25 days to make it happen!

7:50 pm, Saturday Feb. 7 “ It’s been a long time since breakfast.” “ I’m having wine with my dinner.”

Announced plan to staff; managed fear, tears & much doubt
Located much smaller warehouse; vacated current warehouse
Closed current offices; assigned buyers and owners to separate stores
Terminated 45 of 120 employees
Starting Monday Feb. 9.. .

Convinced remaining store staff to work 4 ten-hour days & every weekend
Convinced landlords to tolerate plan, at least in short term
Launched “guerrilla marketing” campaign, fueled by PR for this outrageous idea
And during February.. .

“ Shockingly good news!”
Created a unique Kitchen Kaboodle-esque email flyer to distribute to their 9,000+ “Kaboodle Insiders”
First one sent out Wednesday, March 4

Four Day Hot Sheet
sent via e-mail each Wednesday
9K “Kaboodle Insiders”
features specials for the ensuing 4 days

Press Coverage: Local & National

And, the “experts”
“ There’s bold steps and then silly ideas; this is a silly idea.”
“ Can’t sell anything when the doors are locked.”
“ A strategy of competing on price by sacrificing customer convenience doesn’t make sense.”

And what did the “experts” predict?
“ I would expect that Kitchen Kaboodle will be re-thinking their approach before too long.”
“ I’m guessing that there will be 5 retail locations available for lease soon in Portland.”

“ The owners need to search inward to understand their company’s value proposition to the customer.”
“ Is this for real? Why on earth when things get slow would you make it more difficult for people to buy things from you?”

“ I would suggest learning to fail – fast!”
“ A bewildering and terrible idea.”

March 2 email to Outcalt & Johnson
“ Ouch! As a retailer I have my doubts, and as a consumer I have doubts and questions. Tell them they should just start closing frigging stores!”

So...what happened??
Monday, Tuesday, Wednesday March 2- 4: Kitchen Kaboodle closed for 3 days in a row for first time ever
Friday, March 6, presented their plan – and results to date – to the Bank

So...what happened??
First 4 days (March 5, 6, 7 & 8) beat LY !!!
Customers love it! “ Same great stuff! Same great people!! Lower prices!!”

So...then what??
On March 6, Bank extended the line from March 31 to June 30 (“pending further results”)
April & May results exceeded plan
In June, Bank extended the line to September 30
In November, Bank extended again

Anything else??
Fall 2009, Kitchen Kaboodle was nominated by their vendors for a Global Innovation Award
March 2010, Kitchen Kaboodle was honored as the United States winner, Global Innovation Award

“ National Champions!!” United States winner, Global Innovation Award

What’s happening now?? Please welcome John Whisler Co-Owner, Kitchen Kaboodle 5 Store Chain • Portland, Oregon

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